Table of Contents
SECURITIES AND EXCHANGE COMMISSION
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
DELAWARE | 04-2958132 | |
(State or other jurisdiction of | (I.R.S. employer identification no.) | |
incorporation or organization) | ||
935 FIRST AVENUE, KING OF PRUSSIA, PA | 19406 | |
(Address of principal executive offices) | (Zip Code) |
Large accelerated filero | Accelerated filerþ | Non-accelerated filero | Smaller reporting companyo | |||
(Do not check if a smaller reporting company) |
FORM 10-Q
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 27, 2008
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Exhibit 10.2 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 |
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(In thousands, except share data)
(unaudited)
December 29, | September 27, | |||||||
2007 | 2008 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 231,511 | $ | 45,053 | ||||
Accounts receivable, less allowance for doubtful accounts of $1,833 and $1,980 | 64,285 | 66,352 | ||||||
Inventory | 47,293 | 53,907 | ||||||
Deferred tax assets | 14,114 | 12,391 | ||||||
Prepaid expenses and other current assets | 12,459 | 13,096 | ||||||
Total current assets | 369,662 | 190,799 | ||||||
Property and equipment, net | 156,774 | 167,617 | ||||||
Goodwill | 82,757 | 173,868 | ||||||
Intangible assets, net of accumulated amortization of $4,972 and $14,600 | 16,476 | 50,902 | ||||||
Long-term deferred tax assets | 45,234 | 67,591 | ||||||
Other assets, net of accumulated amortization of $14,545 and $16,764 | 22,737 | 21,412 | ||||||
Total assets | $ | 693,640 | $ | 672,189 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 85,667 | $ | 58,228 | ||||
Accrued expenses | 98,179 | 76,946 | ||||||
Deferred revenue | 17,588 | 23,221 | ||||||
Current portion of long-term debt | 2,406 | 4,790 | ||||||
Total current liabilities | 203,840 | 163,185 | ||||||
Convertible notes | 207,500 | 207,500 | ||||||
Long-term debt | 27,245 | 73,640 | ||||||
Deferred revenue and other long-term liabilities | 5,634 | 6,929 | ||||||
Total liabilities | 444,219 | 451,254 | ||||||
Commitments and contingencies (Note 8) | ||||||||
Stockholders’ equity: | ||||||||
Preferred stock, $0.01 par value, 5,000,000 shares authorized; 0 shares issued and outstanding as of December 29, 2007 and September 27, 2008 | — | — | ||||||
Common stock, $0.01 par value, 90,000,000 shares authorized; 46,847,919 and 47,557,405 shares issued as of December 29, 2007 and September 27, 2008 respectively; 46,847,716 and 47,557,202 shares outstanding as of December 29, 2007 and September 27, 2008, respectively | 468 | 475 | ||||||
Additional paid in capital | 366,400 | 379,221 | ||||||
Accumulated other comprehensive loss | (156 | ) | (106 | ) | ||||
Accumulated deficit | (117,291 | ) | (158,655 | ) | ||||
Total stockholders’ equity | 249,421 | 220,935 | ||||||
Total liabilities and stockholders’ equity | $ | 693,640 | $ | 672,189 | ||||
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Table of Contents
(in thousands, except per share data)
(unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 29, | September 27, | September 29, | September 27, | |||||||||||||
2007 | 2008 | 2007 | 2008 | |||||||||||||
Revenues: | ||||||||||||||||
Net revenues from product sales | $ | 91,298 | $ | 102,139 | $ | 289,053 | $ | 332,314 | ||||||||
Service fee revenues | 45,987 | 84,655 | 125,780 | 243,232 | ||||||||||||
Net revenues | 137,285 | 186,794 | 414,833 | 575,546 | ||||||||||||
Costs and expenses: | ||||||||||||||||
Cost of revenues from product sales | 65,258 | 73,089 | 207,843 | 236,950 | ||||||||||||
Marketing | 10,329 | 11,412 | 32,259 | 40,141 | ||||||||||||
Account management and operations, inclusive of $774, $1,373, $2,084 and $3,818 of stock-based compensation | 36,992 | 58,732 | 100,543 | 175,339 | ||||||||||||
Product development, inclusive of $395, $705, $1,026 and $1,788 of stock-based compensation | 15,925 | 25,736 | 44,737 | 73,356 | ||||||||||||
General and administrative, inclusive of $1,006, $2,473, $2,708 and $6,721 of stock-based compensation | 11,198 | 17,487 | 31,014 | 51,820 | ||||||||||||
Depreciation and amortization | 9,129 | 16,868 | 23,744 | 49,503 | ||||||||||||
Total costs and expenses | 148,831 | 203,324 | 440,140 | 627,109 | ||||||||||||
Loss from operations | (11,546 | ) | (16,530 | ) | (25,307 | ) | (51,563 | ) | ||||||||
Other (income) expense: | ||||||||||||||||
Interest expense | 2,075 | 2,594 | 3,842 | 7,118 | ||||||||||||
Interest income | (3,342 | ) | (190 | ) | (7,025 | ) | (1,397 | ) | ||||||||
Other expense, net | 28 | 480 | 51 | 833 | ||||||||||||
Total other (income) expense | (1,239 | ) | 2,884 | (3,132 | ) | 6,554 | ||||||||||
Loss before income taxes | (10,307 | ) | (19,414 | ) | (22,175 | ) | (58,117 | ) | ||||||||
Benefit for income taxes | (4,221 | ) | (6,575 | ) | (8,711 | ) | (16,753 | ) | ||||||||
Net loss | $ | (6,086 | ) | $ | (12,839 | ) | $ | (13,464 | ) | $ | (41,364 | ) | ||||
Basic and diluted loss per share | $ | (0.13 | ) | $ | (0.27 | ) | $ | (0.29 | ) | $ | (0.88 | ) | ||||
Weighted average shares outstanding — basic and diluted | 46,567 | 47,488 | 46,320 | 47,259 | ||||||||||||
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Table of Contents
(in thousands)
(unaudited)
Nine Months Ended | ||||||||
September 29, | September 27, | |||||||
2007 | 2008 | |||||||
Cash Flows from Operating Activities: | ||||||||
Net loss | $ | (13,464 | ) | $ | (41,364 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Depreciation | 22,560 | 39,805 | ||||||
Amortization | 1,184 | 9,698 | ||||||
Stock-based compensation | 5,818 | 12,327 | ||||||
Foreign currency exchange rate remeasurement | — | 841 | ||||||
Loss on impairment of investment and sales of marketable securities | 80 | — | ||||||
Loss (gain) on disposal of equipment | 36 | (359 | ) | |||||
Deferred tax assets | (8,783 | ) | (14,783 | ) | ||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable, net | 9,063 | 5,623 | ||||||
Inventory | (5,930 | ) | (6,614 | ) | ||||
Prepaid expenses and other current assets | (5,228 | ) | 510 | |||||
Other assets, net | 995 | 924 | ||||||
Accounts payable and accrued expenses | (45,056 | ) | (54,937 | ) | ||||
Deferred revenue | 3,052 | 6,064 | ||||||
Net cash used in operating activities | (35,673 | ) | (42,265 | ) | ||||
Cash Flows from Investing Activities: | ||||||||
Payments for acquisitions of businesses, net of cash acquired | (92,889 | ) | (145,001 | ) | ||||
Cash paid for property and equipment, including internal use software | (40,301 | ) | (46,007 | ) | ||||
Proceeds from disposition of assets | — | 1,500 | ||||||
Purchases of marketable securities | (263,640 | ) | — | |||||
Sales of marketable securities | 304,051 | — | ||||||
Net cash used in investing activities | (92,779 | ) | (189,508 | ) | ||||
Cash Flows from Financing Activities: | ||||||||
Proceeds from convertible notes | 150,000 | — | ||||||
Borrowings on revolving credit loan | — | 60,000 | ||||||
Repayments on revolving credit loan | — | (20,000 | ) | |||||
Proceeds from lease financing obligations | — | 7,901 | ||||||
Issuance costs paid for convertible notes | (5,080 | ) | (561 | ) | ||||
Repayments of capital lease obligations | (342 | ) | (2,142 | ) | ||||
Repayments of mortgage note | (135 | ) | (152 | ) | ||||
Proceeds from exercise of common stock options | 6,544 | 1,342 | ||||||
Net cash provided by financing activities | 150,987 | 46,388 | ||||||
Effect of exchange rate changes on cash and cash equivalents | 26 | (1,073 | ) | |||||
Net (decrease) increase in cash and cash equivalents | 22,561 | (186,458 | ) | |||||
Cash and cash equivalents, beginning of period | 71,382 | 231,511 | ||||||
Cash and cash equivalents, end of period | $ | 93,943 | $ | 45,053 | ||||
Supplemental Cash Flow Information | ||||||||
Cash paid during the period for interest | $ | 2,222 | $ | 5,614 | ||||
Cash paid during the period for income taxes | 564 | 628 | ||||||
Noncash Investing and Financing Activities: | ||||||||
Accrual for purchases of property and equipment | 3,840 | 2,047 | ||||||
Equipment financed under capital lease | 14,563 | 2,497 |
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Table of Contents
(in thousands, except per share data)
(unaudited)
• | to amortization, $1,184 for the nine months ended September 29, 2007, which was previously reported in depreciation and amortization on its Condensed Consolidated Statement of Cash Flows; |
• | to other assets, net, $6,202 as of December 29, 2007, which was previously reported in equity investments on its Condensed Consolidated Balance Sheet. |
6
Table of Contents
(in thousands, except per share data)
(unaudited)
7
Table of Contents
(in thousands, except per share data)
(unaudited)
8
Table of Contents
(in thousands, except per share data)
(unaudited)
9
Table of Contents
(in thousands, except per share data)
(unaudited)
Fair Value Measurements on September 27, 2008 | ||||||||||||
Quoted Prices in | ||||||||||||
Active Markets | Significant | |||||||||||
for Identical | Significant Other | Unobservable | ||||||||||
Assets | Observable Inputs | Inputs | ||||||||||
(Level 1) | (Level 2) | (Level 3) | ||||||||||
Assets | ||||||||||||
Cash and cash equivalents: | ||||||||||||
Money market funds | $ | — | $ | 37,289 | $ | — | ||||||
Other assets: | ||||||||||||
Cash surrender value of life insurance policies | — | 1,082 | — | |||||||||
$ | — | $ | 38,371 | $ | — | |||||||
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Table of Contents
(in thousands, except per share data)
(unaudited)
December 29, | September 27, | |||||||
2007 | 2008 | |||||||
Computer hardware and software | $ | 148,091 | $ | 181,460 | ||||
Building and building improvements | 44,213 | 44,704 | ||||||
Furniture, warehouse and office equipment, and other | 38,916 | 40,231 | ||||||
Land | 7,889 | 7,889 | ||||||
Leasehold improvements | 4,200 | 4,478 | ||||||
Capitalized leases | 17,403 | 27,802 | ||||||
Construction in progress | 1,528 | 1,710 | ||||||
262,240 | 308,274 | |||||||
Less: Accumulated depreciation | (105,466 | ) | (140,657 | ) | ||||
Property and equipment, net | $ | 156,774 | $ | 167,617 | ||||
Interactive | ||||||||||||
E-Commerce | Marketing | |||||||||||
Services | Services | Consolidated | ||||||||||
December 29, 2007 | $ | 82,757 | $ | — | $ | 82,757 | ||||||
Purchase price adjustments | (1,945 | ) | — | (1,945 | ) | |||||||
e-Dialog acquisition (see Note 6) | — | 92,214 | 92,214 | |||||||||
Foreign currency translation | 842 | — | 842 | |||||||||
September 27, 2008 | $ | 81,654 | $ | 92,214 | $ | 173,868 | ||||||
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Table of Contents
(in thousands, except per share data)
(unaudited)
Weighted- | ||||||||||||
December 29, | September 27, | Average | ||||||||||
2007 | 2008 | Life | ||||||||||
Gross carrying value of intangible assets subject to amortization: | ||||||||||||
Customer contracts | $ | 17,282 | $ | 38,773 | 2.5 | |||||||
Non-compete agreements | 3,838 | 3,838 | 3.0 | |||||||||
Purchased technology | — | 4,493 | 4.0 | |||||||||
Trade name | 82 | 470 | 1.1 | |||||||||
Foreign currency translation | — | (192 | ) | |||||||||
21,202 | 47,382 | 2.5 | ||||||||||
Accumulated amortization: | ||||||||||||
Customer contracts | (4,570 | ) | (12,246 | ) | ||||||||
Non-compete agreements | (320 | ) | (1,279 | ) | ||||||||
Purchased technology | — | (768 | ) | |||||||||
Trade name | (82 | ) | (341 | ) | ||||||||
Foreign currency translation | — | 34 | ||||||||||
(4,972 | ) | (14,600 | ) | |||||||||
Net carrying value: | ||||||||||||
Customer contracts | 12,712 | 26,527 | ||||||||||
Non-compete agreements | 3,518 | 2,559 | ||||||||||
Purchased technology | — | 3,725 | ||||||||||
Trade name | — | 129 | ||||||||||
Foreign currency translation | — | (158 | ) | |||||||||
Total amortized intangible assets, net | 16,230 | 32,782 | ||||||||||
Indefinite life intangible assets: | ||||||||||||
Trade name | 246 | 18,120 | ||||||||||
Total intangible assets | $ | 16,476 | $ | 50,902 | ||||||||
Fiscal 2008 | $ | 3,889 | ||
Fiscal 2009 | 9,712 | |||
Fiscal 2010 | 7,892 | |||
Fiscal 2011 | 5,641 | |||
Fiscal 2012 | 2,538 | |||
Thereafter | 3,268 | |||
$ | 32,940 | |||
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Table of Contents
(in thousands, except per share data)
(unaudited)
Total current assets | $ | 17,068 | ||
Property, plant and equipment | 4,530 | |||
Goodwill | 92,214 | |||
Identifiable intangible assets: | ||||
Customer contracts | 19,470 | |||
Internal-developed software | 4,493 | |||
Trade name | 17,874 | |||
Total assets acquired | 155,649 | |||
Total current liabilities | (6,258 | ) | ||
Total non-current liabilities | (75 | ) | ||
Total liabilities assumed | (6,333 | ) | ||
Net assets acquired | $ | 149,316 | ||
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Table of Contents
(in thousands, except per share data)
(unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 29, | September 27, | September 29, | September 27, | |||||||||||||
2007 | 2008 | 2007 | 2008 | |||||||||||||
Net revenues | $ | 147,137 | $ | 186,794 | $ | 441,317 | $ | 580,517 | ||||||||
Net loss | $ | (6,630 | ) | $ | (12,839 | ) | $ | (16,281 | ) | $ | (44,572 | ) | ||||
Basic and diluted loss per share: | $ | (0.14 | ) | $ | (0.27 | ) | $ | (0.35 | ) | $ | (0.94 | ) |
Total current assets | $ | 9,830 | ||
Property, plant and equipment | 3,281 | |||
Goodwill | 1,093 | |||
Identifiable intangible assets: | ||||
Customer contracts | 2,155 | |||
Trade name | 388 | |||
Total assets acquired | 16,747 | |||
Total liabilities assumed | (6,827 | ) | ||
Net assets acquired | $ | 9,920 | ||
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Table of Contents
(in thousands, except per share data)
(unaudited)
Total current assets | $ | 16,802 | ||
Property, plant and equipment | 9,197 | |||
Identifiable intangible assets: | ||||
Customer contracts | 15,008 | |||
Employee non-compete agreements | 3,838 | |||
Goodwill | 61,916 | |||
Other assets | 8,638 | |||
Total assets acquired | 115,399 | |||
Total current liabilities | (14,962 | ) | ||
Total non-current liabilities | (1,837 | ) | ||
Total liabilities assumed | (16,799 | ) | ||
Net assets acquired | $ | 98,600 | ||
December 29, | Other | September 27, | ||||||||||||||||||
2007 | Additions | Payments | Adjustments | 2008 | ||||||||||||||||
Severance payments | $ | 2,667 | $ | 45 | $ | (2,209 | ) | $ | (343 | ) | $ | 160 | ||||||||
Lease payments | 2,824 | 59 | (234 | ) | (2,279 | ) | 370 | |||||||||||||
$ | 5,491 | $ | 104 | $ | (2,443 | ) | $ | (2,622 | ) | $ | 530 | |||||||||
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Table of Contents
(in thousands, except per share data)
(unaudited)
December 29, | September 27, | |||||||
2007 | 2008 | |||||||
Convertible notes | $ | 207,500 | $ | 207,500 | ||||
Notes payable | 12,858 | 12,708 | ||||||
Capital lease obligations | 16,793 | 25,722 | ||||||
Credit facilities | — | 40,000 | ||||||
237,151 | 285,930 | |||||||
Less: Current portion of notes payable | (193 | ) | (180 | ) | ||||
Less: Current portion of capital lease obligations | (2,213 | ) | (4,610 | ) | ||||
$ | 234,745 | $ | 281,140 | |||||
16
Table of Contents
(in thousands, except per share data)
(unaudited)
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Table of Contents
(in thousands, except per share data)
(unaudited)
September 27, | ||||
2008 | ||||
Gross capital lease obligations | $ | 30,377 | ||
Less: imputed interest | (4,655 | ) | ||
Total present value of future minimum lease payments | 25,722 | |||
Less: current portion | (4,610 | ) | ||
Long-term portion | $ | 21,112 | ||
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Table of Contents
(in thousands, except per share data)
(unaudited)
Payments due by fiscal year | ||||||||||||||||||||||||||||
2008 | 2009 | 2010 | 2011 | 2012 | Thereafter | Total | ||||||||||||||||||||||
Operating lease obligations(1) | $ | 4,556 | $ | 16,465 | $ | 14,308 | $ | 10,943 | $ | 7,660 | $ | 17,979 | $ | 71,911 | ||||||||||||||
Purchase obligations(1) | 91,039 | 5,953 | 5,953 | 992 | — | — | 103,937 | |||||||||||||||||||||
Advertising and media agreements(1) | 37 | — | — | — | — | — | 37 | |||||||||||||||||||||
Client revenue share payments(1) | 3,773 | 24,836 | 27,190 | 27,683 | 20,818 | 62,557 | 166,857 | |||||||||||||||||||||
Debt interest(1) | 3,940 | 7,631 | 6,613 | 5,881 | 5,869 | 15,969 | 45,903 | |||||||||||||||||||||
Debt obligations | 45 | 399 | 57,695 | 209 | 220 | 201,640 | 260,208 | |||||||||||||||||||||
Capital lease obligations, including interest(2) | 1,782 | 6,038 | 5,897 | 5,814 | 5,493 | 5,353 | 30,377 | |||||||||||||||||||||
Total | $ | 105,172 | $ | 61,322 | $ | 117,656 | $ | 51,522 | $ | 40,060 | $ | 303,498 | $ | 679,230 | ||||||||||||||
(1) | Not required to be recorded in the Condensed Consolidated Balance Sheet as of September 27, 2008 in accordance with accounting principles generally accepted in the United States of America. | |
(2) | Capital lease obligations, excluding interest, are recorded in the Condensed Consolidated Balance Sheets. |
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Table of Contents
(in thousands, except per share data)
(unaudited)
Weighted | ||||||||||||||||
Weighted | Average | |||||||||||||||
Number of | Average | Remaining | Aggregate | |||||||||||||
Shares | Exercise | Contractual | Intrinsic | |||||||||||||
(in thousands) | Price | Life (in years) | Value | |||||||||||||
Outstanding at December 29, 2007 | 4,163 | $ | 9.94 | |||||||||||||
Granted | — | — | ||||||||||||||
Exercised | (114 | ) | $ | 11.27 | ||||||||||||
Forfeited/Cancelled | (10 | ) | $ | 13.58 | ||||||||||||
Outstanding at September 27, 2008 | 4,039 | $ | 9.90 | 3.97 | $ | 23,112 | ||||||||||
Vested and expected to vest at September 27, 2008 | 4,039 | $ | 9.90 | 3.97 | $ | 23,111 | ||||||||||
Exercisable at September 27, 2008 | 4,035 | $ | 9.90 | 3.97 | $ | 23,095 | ||||||||||
Weighted | ||||||||||||||||
Weighted | Average | |||||||||||||||
Number of | Average | Remaining | Aggregate | |||||||||||||
Shares | Exercise | Contractual | Intrinsic | |||||||||||||
(in thousands) | Price | Life (in years) | Value | |||||||||||||
Outstanding at December 29, 2007 | 230 | $ | 3.01 | |||||||||||||
Granted | — | $ | — | |||||||||||||
Exercised | (8 | ) | $ | 7.63 | ||||||||||||
Forfeited/Cancelled | (5 | ) | $ | 7.19 | ||||||||||||
Outstanding at September 27, 2008 | 217 | $ | 2.76 | 2.48 | $ | 2,731 | ||||||||||
Vested and expected to vest at September 27, 2008 | 217 | $ | 2.76 | 2.48 | $ | 2,731 | ||||||||||
Exercisable at September 27, 2008 | 17 | $ | 5.78 | 2.02 | $ | 164 | ||||||||||
20
Table of Contents
(in thousands, except per share data)
(unaudited)
Weighted | ||||||||
Number of | Average | |||||||
Shares | Grant Date | |||||||
(in thousands) | Fair Value | |||||||
Nonvested shares at December 29, 2007 | 1,870 | $ | 23.40 | |||||
Granted | 2,546 | $ | 14.18 | |||||
Vested | (596 | ) | $ | 13.04 | ||||
Forfeited/Cancelled | (240 | ) | $ | 18.68 | ||||
Nonvested shares at September 27, 2008 | 3,580 | $ | 18.89 | |||||
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Table of Contents
(in thousands, except per share data)
(unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 29, | September 27, | September 29, | September 27, | |||||||||||||
2007 | 2008 | 2007 | 2008 | |||||||||||||
Net loss for basic and diluted earnings per share | $ | (6,086 | ) | $ | (12,839 | ) | $ | (13,464 | ) | $ | (41,364 | ) | ||||
Weighted average shares outstanding — basic and diluted | 46,567 | 47,488 | 46,320 | 47,259 | ||||||||||||
Net loss per common share — basic and diluted | $ | (0.13 | ) | $ | (0.27 | ) | $ | (0.29 | ) | $ | (0.88 | ) | ||||
September 29, | September 27, | |||||||
2007 | 2008 | |||||||
Stock units and awards | 1,753 | 3,881 | ||||||
Stock options and warrants | 4,624 | 4,256 | ||||||
Convertible notes | 8,229 | 8,229 | ||||||
14,606 | 16,366 | |||||||
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Table of Contents
(in thousands, except per share data)
(unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 29, | September 27, | September 29, | September 27, | |||||||||||||
2007 | 2008 | 2007 | 2008 | |||||||||||||
Net loss | $ | (6,086 | ) | $ | (12,839 | ) | $ | (13,464 | ) | $ | (41,364 | ) | ||||
Other comprehensive income (loss): | ||||||||||||||||
Net unrealized gain on available-for-sale securities, net of tax | (88 | ) | — | 10 | — | |||||||||||
Reclassification adjustment for losses realized in net income | 80 | — | 80 | — | ||||||||||||
Cumulative translation adjustment | 46 | (6 | ) | 32 | 50 | |||||||||||
Other comprehensive income (loss) | 38 | (6 | ) | 122 | 50 | |||||||||||
Comprehensive loss | $ | (6,048 | ) | $ | (12,845 | ) | $ | (13,342 | ) | $ | (41,314 | ) | ||||
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Table of Contents
(in thousands, except per share data)
(unaudited)
Three Months Ended September 29, 2007 | ||||||||||||||||
E-Commerce | Interactive | Intersegment | ||||||||||||||
Services | Marketing Services | Eliminations | Consolidated | |||||||||||||
Net revenues | $ | 134,121 | $ | 7,127 | $ | (3,963 | ) | $ | 137,285 | |||||||
Costs and expenses before depreciation, amortization and stock-based compensation expense | 135,621 | 5,869 | (3,963 | ) | 137,527 | |||||||||||
Operating (loss) income before depreciation, amortization and stock-based compensation expense | (1,500 | ) | 1,258 | — | (242 | ) | ||||||||||
Depreciation and amortization | 9,129 | |||||||||||||||
Stock-based compensation expense | 2,175 | |||||||||||||||
Loss from operations | (11,546 | ) | ||||||||||||||
Interest expense | 2,075 | |||||||||||||||
Interest income | (3,342 | ) | ||||||||||||||
Other expense, net | 28 | |||||||||||||||
Loss before income taxes | $ | (10,307 | ) | |||||||||||||
Three Months Ended September 27, 2008 | ||||||||||||||||
E-Commerce | Interactive | Intersegment | ||||||||||||||
Services | Marketing Services | Eliminations | Consolidated | |||||||||||||
Net revenues | $ | 168,097 | $ | 23,132 | $ | (4,435 | ) | $ | 186,794 | |||||||
Costs and expenses before depreciation, amortization and stock-based compensation expense | 166,082 | 20,258 | (4,435 | ) | 181,905 | |||||||||||
Operating income before depreciation, amortization and stock-based compensation expense | 2,015 | 2,874 | — | 4,889 | ||||||||||||
Depreciation and amortization | 16,868 | |||||||||||||||
Stock-based compensation expense | 4,551 | |||||||||||||||
Loss from operations | (16,530 | ) | ||||||||||||||
Interest expense | 2,594 | |||||||||||||||
Interest income | (190 | ) | ||||||||||||||
Other expense, net | 480 | |||||||||||||||
Loss before income taxes | $ | (19,414 | ) | |||||||||||||
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(in thousands, except per share data)
(unaudited)
Nine Months Ended September 29, 2007 | ||||||||||||||||
E-Commerce | Interactive | Intersegment | ||||||||||||||
Services | Marketing Services | Eliminations | Consolidated | |||||||||||||
Net revenues | $ | 407,065 | $ | 18,040 | $ | (10,272 | ) | $ | 414,833 | |||||||
Costs and expenses before depreciation, amortization and stock-based compensation expense | 404,808 | 16,042 | (10,272 | ) | 410,578 | |||||||||||
Operating income before depreciation, amortization and stock-based compensation expense | 2,257 | 1,998 | — | 4,255 | ||||||||||||
Depreciation and amortization | 23,744 | |||||||||||||||
Stock-based compensation expense | 5,818 | |||||||||||||||
Loss from operations | (25,307 | ) | ||||||||||||||
Interest expense | 3,842 | |||||||||||||||
Interest income | (7,025 | ) | ||||||||||||||
Other expense, net | 51 | |||||||||||||||
Loss before income taxes | $ | (22,175 | ) | |||||||||||||
Nine Months Ended September 27, 2008 | ||||||||||||||||
E-Commerce | Interactive | Intersegment | ||||||||||||||
Services | Marketing Services | Eliminations | Consolidated | |||||||||||||
Net revenues | $ | 531,632 | $ | 56,746 | $ | (12,832 | ) | $ | 575,546 | |||||||
Costs and expenses before depreciation, amortization and stock-based compensation expense | 528,834 | 49,277 | (12,832 | ) | 565,279 | |||||||||||
Operating income before depreciation, amortization and stock-based compensation expense | 2,798 | 7,469 | — | 10,267 | ||||||||||||
Depreciation and amortization | 49,503 | |||||||||||||||
Stock-based compensation expense | 12,327 | |||||||||||||||
Loss from operations | (51,563 | ) | ||||||||||||||
Interest expense | 7,118 | |||||||||||||||
Interest income | (1,397 | ) | ||||||||||||||
Other expense, net | 833 | |||||||||||||||
Loss before income taxes | $ | (58,117 | ) | |||||||||||||
• | the Company’s E-Commerce Services segment generates revenues by selling information technology services to our Interactive Marketing Services segment | ||
• | the Company’s Interactive Marketing Services segment generates revenues by selling online marketing, advertising, email and design services to our E-Commerce Services segment |
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(in thousands, except per share data)
(unaudited)
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• | We are a leading provider of services for e-commerce and interactive marketing services to large business-to-consumer enterprises, which we call clients. Beginning in the first quarter of fiscal 2008, we changed the way the business is managed and now operate in two reportable business segments: e-commerce services and interactive marketing services. For e-commerce services, we deliver customized solutions to clients through an integrated platform, which is comprised of three components: technology, fulfillment and customer care. We offer each of the platform’s components on a modular basis, or as part of an integrated, end-to-end solution. For interactive marketing services, we offer a full suite of online interactive marketing, advertising, e-mail and design services. | ||
• | We derive virtually all of our revenues from sales of products by us through our clients’ e-commerce businesses, service fees earned by us in connection with the development and operation of our clients’ e-commerce businesses, and service fees earned by us through our provision of interactive marketing services. | ||
• | We generate the majority of our cash from operating activities in our fourth fiscal quarter due to the seasonality of our business. In our first fiscal quarter, we typically use cash from operating activities to satisfy accounts payable and accrued expenses incurred in the fourth fiscal quarter of our prior fiscal year. We typically have not generated any cash from operating activities in our second and third fiscal quarters. |
• | In January 2008, we entered into a revolving secured bank line of credit with an initial borrowing availability of $75 million, which may be increased to $150 million subject to certain conditions. In May 2008 we increased the line of credit by $15 million, which expanded the total borrowing availability to $90 million. The five-year, revolving secured line of credit is available to us for working capital and general corporate purposes, including possible acquisitions, and contains certain financial and negative covenants with which we must comply. As of September 27, 2008, $40 million was outstanding under the line of credit. | ||
• | In February 2008, we acquired e-Dialog, Inc., a Lexington, Mass.—based market-leading provider of advanced e-mail marketing services and solutions to more than 100 companies in the U.S. and Europe for $149.3 million, including acquisition costs. We expect the acquisition to expand the breadth and depth of our interactive marketing services capabilities, our reach into existing and new vertical markets, and our growing European presence. | ||
• | In October 2008, we entered into an Agreement and Plan of Merger with Innotrac Corporation, a Duluth, GA.-based e-commerce fulfillment and customer care services provider for approximately $52 million, consisting of cash of $22 million and shares of our common stock valued at $30 million, which is subject to adjustment. We believe the acquisition will strengthen our position in the e-commerce industry and enhance our stockholder value by expanding our fulfillment and customer care capacity and increasing our client base. |
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• | While we expect the opportunity for e-commerce to continue to grow, we also anticipate continuing intense competition. We compete with in-house solutions and a variety of third-party vendors that provide one or more components of an e-commerce solution. To satisfy our existing clients and to continue to attract new clients, we offer a complete integrated solution designed to increase efficiencies and improve integration. This includes a high level of direct-to-consumer expertise and infrastructure. Through our solution, we help our clients grow their e-commerce businesses and use their e-commerce businesses as a channel to complement and enhance their offline businesses. Our solution is provided to clients on an integrated platform that includes shared technology, logistics and customer care, supporting infrastructure and interactive marketing services. To differentiate our solution in the marketplace, we continually add new services and functions to our platform. As part of our continuing efforts to add value to our platform, we evaluate opportunities to acquire complementary or new businesses or assets. | ||
• | Our objective is to grow our business by expanding the e-commerce businesses of our existing clients, by adding new clients, by expanding internationally, by generating incremental revenue from interactive marketing and other services, and selectively through acquisitions. |
Third Qtr Fiscal 2008 | ||||||||||||||||||||||||
vs. | ||||||||||||||||||||||||
Third Qtr Fiscal 2007 | ||||||||||||||||||||||||
Third Qtr Fiscal 2007 | Third Qtr Fiscal 2008 | Change | Change | |||||||||||||||||||||
Net Revenues by Type: | ||||||||||||||||||||||||
Net revenues from product sales | $ | 91.3 | 66 | % | $ | 102.1 | 55 | % | $ | 10.8 | 12 | % | ||||||||||||
Service fee revenues | 46.0 | 34 | % | 84.7 | 45 | % | 38.7 | 84 | % | |||||||||||||||
Total net revenues | $ | 137.3 | 100 | % | $ | 186.8 | 100 | % | $ | 49.5 | 36 | % | ||||||||||||
Net Revenues by Segment: | ||||||||||||||||||||||||
E-Commerce services | $ | 134.2 | 98 | % | $ | 168.1 | 90 | % | $ | 33.9 | 25 | % | ||||||||||||
Interactive marketing services | 7.1 | 5 | % | 23.1 | 12 | % | 16.0 | 225 | % | |||||||||||||||
Intersegment eliminations | (4.0 | ) | (3 | %) | (4.4 | ) | (2 | %) | (0.4 | ) | 10 | % | ||||||||||||
Total net revenues | $ | 137.3 | 100 | % | $ | 186.8 | 100 | % | $ | 49.5 | 36 | % | ||||||||||||
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Third Quarter of Fiscal 2008 | ||||||||||||||||||||||||
Third Quarter | Third Quarter | vs. | ||||||||||||||||||||||
of Fiscal 2007 | of Fiscal 2008 | Third Quarter of Fiscal 2007 | ||||||||||||||||||||||
% of | % of | |||||||||||||||||||||||
Net | Net | |||||||||||||||||||||||
$ | Revenues | $ | Revenues | $ Change | % Change | |||||||||||||||||||
Cost of revenues from product sales | $ | 65.3 | 47.6 | % | $ | 73.1 | 39.1 | % | $ | 7.8 | 11.9 | % | ||||||||||||
Marketing | 10.3 | 7.5 | % | 11.4 | 6.1 | % | 1.1 | 10.7 | % | |||||||||||||||
Account management and operations | 37.0 | 26.9 | % | 58.7 | 31.4 | % | 21.7 | 58.6 | % | |||||||||||||||
Product development | 15.9 | 11.6 | % | 25.7 | 13.8 | % | 9.8 | 61.6 | % | |||||||||||||||
General and administrative | 11.2 | 8.2 | % | 17.5 | 9.4 | % | 6.3 | 56.3 | % | |||||||||||||||
Depreciation and amortization | 9.1 | 6.6 | % | 16.9 | 9.0 | % | 7.8 | 85.7 | % | |||||||||||||||
Total costs and expenses | $ | 148.8 | 108.4 | % | $ | 203.3 | 108.8 | % | $ | 54.5 | 36.6 | % | ||||||||||||
Third Qtr | Third Qtr | |||||||
Fiscal 2007 | Fiscal 2008 | |||||||
Cost of revenues from product sales | $ | 65.3 | $ | 73.1 | ||||
As a percentage of net revenues from product sales | 71.5 | % | 71.6 | % |
Third Qtr | Third Qtr | |||||||
Fiscal 2007 | Fiscal 2008 | |||||||
Marketing | $ | 10.3 | $ | 11.4 | ||||
As a percentage of net revenues from product sales | 11.3 | % | 11.2 | % |
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First Nine Months of Fiscal 2008 | ||||||||||||||||||||||||
vs. | ||||||||||||||||||||||||
First Nine Months | First Nine Months | First Nine Months of Fiscal 2007 | ||||||||||||||||||||||
of Fiscal 2007 | of Fiscal 2008 | Change | Change | |||||||||||||||||||||
Net Revenues by Type: | ||||||||||||||||||||||||
Net revenues from product sales | $ | 289.0 | 70 | % | $ | 332.3 | 58 | % | $ | 43.3 | 15 | % | ||||||||||||
Service fee revenues | 125.8 | 30 | % | 243.2 | 42 | % | 117.4 | 93 | % | |||||||||||||||
Total net revenues | $ | 414.8 | 100 | % | $ | 575.5 | 100 | % | $ | 160.7 | 39 | % | ||||||||||||
Net Revenues by Segment: | ||||||||||||||||||||||||
E-Commerce services | $ | 407.1 | 98 | % | $ | 531.6 | 92 | % | $ | 124.5 | 31 | % | ||||||||||||
Interactive marketing services | 18.0 | 4 | % | 56.7 | 10 | % | 38.7 | 215 | % | |||||||||||||||
Intersegment eliminations | (10.3 | ) | (2 | %) | (12.8 | ) | (2 | %) | (2.5 | ) | 24 | % | ||||||||||||
Total net revenues | $ | 414.8 | 100 | % | $ | 575.5 | 100 | % | $ | 160.7 | 39 | % | ||||||||||||
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First Nine Months of Fiscal 2008 | ||||||||||||||||||||||||
First Nine Months | First Nine Months | vs. | ||||||||||||||||||||||
of Fiscal 2007 | of Fiscal 2008 | First Nine Months of Fiscal 2007 | ||||||||||||||||||||||
% of | % of | |||||||||||||||||||||||
Net | Net | |||||||||||||||||||||||
$ | Revenues | $ | Revenues | $ Change | % Change | |||||||||||||||||||
Cost of revenues from product sales | $ | 207.9 | 50.1 | % | $ | 237.0 | 41.2 | % | $ | 29.1 | 14.0 | % | ||||||||||||
Marketing | 32.3 | 7.8 | % | 40.1 | 7.0 | % | 7.8 | 24.1 | % | |||||||||||||||
Account management and operations | 100.5 | 24.2 | % | 175.3 | 30.5 | % | 74.8 | 74.4 | % | |||||||||||||||
Product development | 44.7 | 10.8 | % | 73.4 | 12.7 | % | 28.7 | 64.2 | % | |||||||||||||||
General and administrative | 31.0 | 7.5 | % | 51.8 | 9.0 | % | 20.8 | 67.1 | % | |||||||||||||||
Depreciation and amortization | 23.7 | 5.7 | % | 49.5 | 8.6 | % | 25.8 | 108.9 | % | |||||||||||||||
Total costs and expenses | $ | 440.1 | 106.1 | % | $ | 627.1 | 109.0 | % | $ | 187.0 | 42.5 | % | ||||||||||||
First Nine Months | First Nine Months | |||||||
of Fiscal 2007 | of Fiscal 2008 | |||||||
Cost of revenues from product sales | $ | 207.8 | $ | 237.0 | ||||
As a percentage of net revenues from product sales | 71.9 | % | 71.3 | % |
First Nine Months | First Nine Months | |||||||
of Fiscal 2007 | of Fiscal 2008 | |||||||
Marketing | $ | 32.3 | $ | 40.1 | ||||
As a percentage of net revenues from product sales | 11.2 | % | 12.1 | % |
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As of | ||||||||
December 29, | September 27, | |||||||
2007 | 2008 | |||||||
(in millions) | ||||||||
Cash and cash equivalents | $ | 231.5 | $ | 45.1 | ||||
Percentage of total assets | 33.4 | % | 6.7 | % |
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Any investment in our securities involves a high degree of risk. You should carefully consider the following information about these risks, together with the other information contained in this Quarterly Report onForm 10-Q. If any of the following risks occur, our business financial position and operating results could be materially harmed. In these circumstances, the market price of our securities could decline, and you may lose all or part of the money you paid to buy our securities. The risks described below are not the only ones facing our company. Additional risks not necessarily known to us or that we currently deem immaterial may also impair our business operations.
GSI’s future success cannot be predicted based upon GSI’s limited operating history.
Compared to certain of GSI’s current and potential competitors, GSI has a relatively short operating history. In addition, the nature of GSI’s business and the e-commerce industry in which GSI operates has undergone rapid development and change since GSI began operating in e-commerce. Accordingly, it is difficult to predict whether GSI will be successful. Thus, GSI’s chances of financial and operational success should be evaluated in light of the risks, uncertainties, expenses, delays and difficulties associated with operating a business with limited history in a relatively rapidly changing industry. If GSI is unable to address these issues, GSI may not be financially or operationally successful.
GSI’s failure to manage growth and diversification of its business could harm GSI.
GSI is continuing to grow and diversify its business both in the United States and internationally. As a result, GSI must expand and adapt its operational infrastructure and increase the number of its personnel in certain areas. To effectively manage GSI’s growth, GSI will need to continue to improve its operational, financial and management controls and GSI’s reporting systems and procedures. These enhancements and improvements are likely to be complex and will require significant capital expenditures and allocation of valuable management resources. If GSI is unable to adapt its systems in a timely manner to accommodate its growth, GSI’s business may be adversely affected.
GSI has an accumulated deficit and may incur additional losses.
Although GSI recorded net income in the last three fiscal years, GSI incurred net losses in the previous four fiscal years while operating its business. As of the end of the third quarter of fiscal 2008, GSI had an accumulated deficit of $158.7 million. GSI may not generate sufficient revenue and gross profit from its existing clients, add an appropriate number of new clients or adequately control its expenses. If GSI fails to do this, GSI may not be able to maintain profitability.
GSI will continue to incur significant operating expenses and capital expenditures as it seeks to:
• | launch new partners; |
• | expand internationally; |
• | enhance its fulfillment capabilities and increase fulfillment capacity; |
• | develop new technologies and features to improve its clients’ e-commerce businesses; |
• | enhance its customer care center capabilities to better serve customers’ needs and increase customer care capacity; |
• | expand its marketing services business; |
• | increase its general and administrative functions to support its growing operations; |
• | continue its business development, sales and marketing activities; and |
• | make strategic or opportunistic acquisitions of complementary or new businesses or assets or internally develop new business initiatives. |
If GSI incurs expenses at a greater pace than it generates revenues, GSI could incur additional losses.
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GSI’s success is tied to the success of the clients for which GSI operates e-commerce businesses.
GSI’s success is substantially dependent upon the success of the clients for which GSI operates e-commerce businesses. The retail business is intensely competitive. If GSI’s clients were to have financial difficulties or seek protection from their creditors or if they were to suffer impairment of their brands, it could adversely affect GSI’s ability to maintain and grow GSI’s business or to collect client receivables. GSI’s business could also be adversely affected if GSI’s clients’ marketing, brands or retail stores are not successful or if GSI’s clients reduce their marketing or number of retail stores. Additionally, a change in management at GSI’s clients could adversely affect GSI’s relationship with those clients and GSI’s revenue from GSI’s agreements with those clients. As a result of GSI’s relationship with certain of its clients, these clients identify, buy, and bear the financial risk of inventory obsolescence for their corresponding web stores and merchandise. As a result, if any of these clients fail to forecast product demand or optimize or maintain access to inventory, GSI would receive reduced service fees under the agreements and GSI’s business and reputation could be harmed.
The uncertainty regarding the general economy may reduce GSI’s revenues.
GSI’s revenue and rate of growth depends on the continued growth of demand for the products offered by GSI’s clients, and GSI’s business is affected by general economic and business conditions. A decrease in demand, whether caused by changes in consumer spending or a weakening of the U.S. economy or the local economies outside of the United States where GSI sells products, may result in decreased revenue or growth or problems with GSI’s ability to collect customer receivables. Terrorist attacks and armed hostilities could create economic and consumer uncertainty that could adversely affect GSI’s revenue or growth.
GSI relies on access to the credit and capital markets to finance a portion of its working capital requirements and support its liquidity needs. Access to these markets may be adversely affected by factors beyond GSI’s control, including turmoil in the financial services industry, volatility in securities trading markets and general economic downturns.
GSI relies upon access to the credit and capital markets as a source of liquidity for the portion of our working capital requirements not provided by cash from operations. Market disruptions such as those currently being experienced in the United States and abroad may increase GSI’s cost of borrowing or adversely affect GSI’s ability to access sources of liquidity upon which GSI relies to finance its operations and satisfy its obligations as they become due. These disruptions may include turmoil in the financial services industry, including uncertainty surrounding lending institutions with which GSI does business or wishes to do business. If GSI is unable to access credit at competitive rates, or if GSI’s short-term or long-term borrowing costs dramatically increase, GSI’s ability to finance its operations, meet its short-term obligations and implement its operating strategy could be adversely affected.
GSI’s substantial indebtedness could adversely affect GSI’s financial condition.
GSI currently has and will continue to have a significant amount of indebtedness. On June 1, 2005, GSI completed an offering of $57.5 million aggregate principal amount of GSI’s subordinated convertible notes due 2025. On July 5, 2007, GSI completed an offering of $150 million aggregate principal amount of GSI’s subordinated convertible notes due 2027. In addition, GSI has a secured revolving bank credit facility with a borrowing capacity of $90 million, which, subject to certain conditions, may be increased to $150 million. $40 million of borrowings were outstanding under GSI’s secured revolving bank credit facility as of September 27, 2008. Including the notes, borrowings under the credit facility and capital leases, GSI has approximately $285.9 million of indebtedness outstanding as of September 27, 2008.
GSI’s indebtedness could have important consequences to you. For example, it could:
• | increase GSI’s vulnerability to general adverse economic and industry conditions; |
• | limit GSI’s ability to obtain additional financing; |
• | require the dedication of a substantial portion of GSI’s cash flow from operations to the payment of interest and principal on GSI’s indebtedness, thereby reducing the availability of such cash flow to fund GSI’s growth strategy, working capital, capital expenditures and other general corporate purposes; |
• | limit GSI’s flexibility in planning for, or reacting to, changes in its business and the industry; |
• | place GSI at a competitive disadvantage relative to competitors with less debt; and |
• | make it difficult or impossible for GSI to pay the principal amount of the subordinated convertible notes at maturity, thereby causing an event of default under the subordinated convertible notes. |
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In addition, GSI’s secured revolving bank credit facility contains financial and other restrictive covenants that will limit GSI’s ability to engage in activities that may be in GSI’s long-term best interests. In the event of default under the notes or the secured revolving bank credit facility, GSI’s indebtedness could become immediately due and payable and could adversely affect GSI’s financial condition.
The terms of GSI’s secured revolving credit facility impose financial and operating restrictions.
GSI’s secured revolving credit facility contains restrictive covenants that limit GSI’s ability to engage in activities that may be in GSI’s long-term best interests. These covenants limit or restrict, among other things, GSI’s ability to:
• | incur additional indebtedness; |
• | pay dividends or make other distributions in respect of GSI’s equity securities; |
• | sell assets, including the capital stock of GSI’s subsidiaries; |
• | enter into certain transactions with GSI’s affiliates; |
• | transfer any capital stock of any subsidiary or permit any subsidiary to issue capital stock; |
• | create liens; |
• | make certain loans or investments; and |
• | effect a consolidation or merger or transfer of all or substantially all of GSI’s assets. |
These limitations and restrictions may adversely affect GSI’s ability to finance its future operations or capital needs or engage in other business activities that may be in GSI’s best interests. In addition, GSI’s ability to borrow under the secured revolving credit facility is subject to compliance with covenants. If GSI breaches any of the covenants in its secured revolving credit facility, GSI may be in default under its secured revolving credit facility. If GSI defaults, the lenders under GSI’s secured revolving credit facility could declare all borrowings owed to them, including accrued interest and other fees, to be due and payable.
GSI may in the future need additional debt or equity financing to continue its growth. Such additional financing may not be available on satisfactory terms or it may not be available when needed, or at all.
GSI has funded the growth of its e-commerce business primarily from the sale of equity securities and through the issuance of subordinated convertible notes. If GSI’s cash flows are insufficient to fund GSI’s growth, GSI may in the future need to seek additional equity or debt financings or reduce costs. GSI’s secured revolving credit facility contains restrictive covenants restricting GSI’s ability to incur additional indebtedness. Further, GSI may not be able to obtain financing on satisfactory terms or it may not be available when needed, or at all. GSI’s inability to finance its growth, either internally or externally, may limit GSI’s growth potential and GSI’s ability to execute its business strategy. If GSI issues securities to raise capital, GSI’s existing stockholders may experience dilution or the new securities may have rights senior to those of GSI’s common stock. In addition, the terms of these securities could impose restrictions on GSI’s operations.
If GSI fails to manage its exposure to global financial and securities market risk successfully, GSI’s operating results and financial statements could be materially impacted.
The primary objective of most of GSI’s investment activities is to conservatively invest excess cash in highly rated liquid securities. To achieve this objective, a majority of GSI’s cash and cash equivalents are held in institutional money market mutual funds and bank deposit accounts. If the carrying value of GSI’s investments exceeds the fair value, and the decline in fair value is deemed to be other-than-temporary, GSI will be required to write down the value of its investments, which could materially harm GSI’s results of operations and financial condition. These investments are subject to general credit, liquidity, market, and interest rate risks, which may be directly or indirectly impacted by the U.S. sub-prime mortgage defaults that have affected various sectors of the financial markets causing credit and liquidity issues. With the current unstable credit environment, GSI might incur significant realized, unrealized or impairment losses associated with these investments.
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Seasonal fluctuations in sales cause wide fluctuations in GSI’s quarterly results.
GSI has experienced and expects to continue to experience seasonal fluctuations in its revenues. These seasonal patterns have caused and will continue to cause quarterly fluctuations in GSI’s operating results. GSI’s results of operations historically have been seasonal primarily because consumers increase their purchases on GSI’s clients’ e-commerce businesses during the fourth quarter holiday season.
GSI’s fourth fiscal quarter has accounted for and is expected to continue to account for a disproportionate percentage of GSI’s total annual revenues. For fiscal 2007, fiscal 2006 and fiscal 2005, 44.7%, 42.2% and 39.1% of GSI’s annual net revenues were generated in GSI’s fiscal fourth quarter, respectively. Since fiscal 1999, GSI has not generated net income in any fiscal quarter other than a fiscal fourth quarter. If GSI’s revenues are below seasonal expectations during the fourth fiscal quarter or if GSI does not execute operationally, GSI’s operating results could be below the expectations of securities analysts and investors. In the future, GSI’s seasonal sales patterns may become more pronounced, may strain GSI’s personnel, customer care operations, fulfillment operations, IT capacity and shipment activities and may cause a shortfall in revenues compared to expenses in a given period.
In addition, if too many consumers access GSI’s clients’ e-commerce businesses within a short period of time due to increased holiday or other demand or if GSI inaccurately forecasts consumer traffic, GSI may experience system interruptions that make GSI’s clients’ e-commerce businesses unavailable or prevent GSI from transmitting orders to its fulfillment operations, which may reduce the volume of goods GSI sells as well as the attractiveness of GSI’s clients’ e-commerce businesses to consumers. In anticipation of increased sales activity during GSI’s fourth fiscal quarter, GSI and its clients increase their respective inventory levels. If GSI and its clients do not increase inventory levels for popular products in sufficient amounts or are unable to restock popular products in a timely manner, GSI and its clients may fail to meet customer demand which could reduce the attractiveness of GSI’s clients’ e-commerce businesses. Alternatively, if GSI overstocks products, GSI may be required to take significant inventory markdowns or write-offs, which could reduce profits.
Consumers are constantly changing their buying preferences. If GSI fails to anticipate these changes and adjust its inventory accordingly, GSI could experience lower sales, higher inventory markdowns and lower margins for the inventory that it owns.
GSI’s success depends, in part, upon GSI’s ability and its clients’ ability to anticipate and respond to consumer trends with respect to products sold through the e-commerce businesses GSI operates. Consumers’ tastes are subject to frequent and significant changes. In order to be successful, GSI and its clients must accurately predict consumers’ tastes and avoid overstocking or understocking products. If GSI or its clients fail to identify and respond to changes in merchandising and consumer preferences, sales on GSI’s clients’ e-commerce businesses could suffer and GSI or its clients could be required to mark down unsold inventory. This would depress GSI’s profit margins. In addition, any failure to keep pace with changes in consumers’ tastes could result in lost opportunities which could reduce sales.
High merchandise returns or shrinkage rates could adversely affect GSI’s business, financial condition and results of operations.
GSI cannot be assured that inventory loss and theft, or “shrinkage,” and merchandise returns will not increase in the future. If merchandise returns are significant, or GSI’s shrinkage rate increases, GSI’s revenues and costs of operations could be adversely affected.
GSI’s growth depends, in part, on GSI’s ability to add and launch new clients on a timely basis and on favorable terms and to extend the length of existing client agreements on favorable terms.
Key elements of GSI’s growth strategy include adding new clients, extending the length of existing client agreements on favorable terms and growing the business of GSI’s existing clients. If GSI is unable to add its targeted amount of new business, add clients with good reputations or add new clients on favorable terms, GSI’s growth may be limited. If GSI is unable to add and launch new clients within the time frames projected by it, GSI may not be able to achieve its targeted results in the expected periods. In addition, GSI’s ability to add new clients and retain and renew existing clients depends on the quality of the services GSI provides and GSI’s reputation. To the extent that GSI has difficulties with the quality of the services it provides or has operational issues that adversely affect its reputation, it could adversely impact GSI’s ability to add new clients, retain and renew existing clients and grow the business of GSI’s existing clients. Because competition for new clients is intense, GSI may not be able to add new clients on favorable terms, or at all. Further, GSI’s ability to add new clients on favorable terms is dependent on GSI’s success in building and retaining its sales organization and investing in infrastructure to serve new clients.
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GSI enters into contracts with its clients. In fiscal 2007, GSI derived 45.3% of its revenue from five clients’ e-commerce businesses. If GSI does not maintain good working relationships with its clients, or perform as required under these agreements, it could adversely affect GSI’s business.
The contracts with GSI’s clients establish complex relationships between GSI’s clients and GSI. GSI spends a significant amount of time and effort to maintain its relationships with its clients and address the issues that from time to time may arise from these complex relationships. For fiscal 2007, sales to customers through one of GSI’s client’s e-commerce businesses accounted for 13.2% of GSI’s revenue, and sales to customers through another one of GSI’s client’s e-commerce businesses accounted for 11.9% of GSI’s revenue. For fiscal 2007, sales through GSI’s top five clients’ e-commerce businesses accounted for 45.3% of GSI’s revenue. For fiscal 2006, sales to customers through one of GSI’s client’s e-commerce businesses accounted for 14.9% of GSI’s revenue, and sales to customers through another one of GSI’s client’s e-commerce businesses accounted for 13.9% of GSI’s revenue. For fiscal 2006, sales through GSI’s top five clients’ e-commerce businesses accounted for 52.9% of GSI’s revenue. For fiscal 2005, sales to customers through one of GSI’s client’s e-commerce businesses accounted for 25.6% of GSI’s revenue, and sales through another one of GSI’s client’s e-commerce businesses accounted for 12.8% of GSI’s revenue. For fiscal 2005, sales through GSI’s top five clients’ e-commerce businesses accounted for 61.3% of GSI’s revenue. GSI’s clients could decide not to renew their agreements at the end of their respective terms. Additionally, if GSI does not perform as required under these agreements, GSI’s clients could seek to terminate their agreements prior to the end of their respective terms or seek damages from GSI. Loss of GSI’s existing clients, particularly GSI’s major clients, could adversely affect GSI’s business, financial condition and results of operations.
GSI and its clients must develop and maintain relationships with key manufacturers to obtain a sufficient assortment and quantity of quality merchandise on acceptable commercial terms. If GSI or its clients are unable to do so, it could adversely affect GSI’s business, results of operations and financial condition.
For the e-commerce businesses for which GSI owns inventory, GSI primarily purchases products from the manufacturers and distributors of the products. For the e-commerce businesses for which GSI’s clients own inventory, GSI’s clients typically purchase products from the manufacturers and distributors of products or source their own products. If GSI or its clients are unable to develop and maintain relationships with these manufacturers, distributors or sources, GSI or its clients may be unable to obtain or continue to carry a sufficient assortment and quantity of quality merchandise on acceptable commercial terms and GSI’s clients’ e-commerce businesses and GSI’s business could be adversely impacted. GSI does not have written contracts with some of its manufacturers, distributors or sources. During fiscal 2007, GSI purchased 18.0% of the total amount of inventory it purchased from one manufacturer. During fiscal 2006 and fiscal 2005, GSI purchased 28.6% and 40.0%, respectively, of the total amount of inventory it purchased from the same manufacturer. While GSI has a contract with this manufacturer, this manufacturer and other manufacturers could stop selling products to GSI or its clients and may ask GSI or its clients to remove their products or logos from GSI’s clients’ web stores. If GSI or its clients are unable to obtain products directly from manufacturers, especially popular brand manufacturers, GSI or its clients may not be able to obtain the same or comparable merchandise in a timely manner or on acceptable commercial terms.
GSI relies on its ability to enter into marketing and promotional agreements with online services, search engines, comparison shopping sites, affiliate marketers and other web sites to drive traffic to the e-commerce businesses GSI operates. If GSI is unable to enter into or properly develop these marketing and promotional agreements, GSI’s ability to generate revenue could be adversely affected. In addition, new technologies could block GSI’s ads and manipulate web search results, which could harm GSI’s business.
GSI has entered into marketing and promotional agreements with search engines, comparison shopping sites, affiliate marketers and other web sites to provide content, advertising banners and other links to GSI’s clients’ e-commerce businesses. GSI relies on these agreements as significant sources of traffic to GSI’s clients’ e-commerce businesses and to generate new customers. If GSI is unable to maintain these relationships or enter into new agreements on acceptable terms, GSI’s ability to attract new customers could be harmed. Further, many of the parties with which GSI may have online advertising arrangements provide advertising services for other marketers of goods. As a result, these parties may be reluctant to enter into or maintain relationships with GSI. In addition, technologies may be developed that can block the display of GSI’s ads and could harm GSI’s ability to contact customers. Further, “index spammers” who develop ways to manipulate web search results could reduce the traffic that is directed to GSI’s clients’ e-commerce businesses. Failure to achieve sufficient traffic or generate sufficient revenue from purchases originating from third parties may limit GSI’s clients’ and GSI’s ability to maintain market share and revenue.
In addition, GSI contacts customers through e-mail. GSI’s ability to contact customers through e-mail could be harmed and GSI’s business may be adversely affected if GSI mistakenly ends up on SPAM lists, or lists of entities that have been involved in sending unwanted, unsolicited e-mails.
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If GSI experiences problems in GSI’s fulfillment operations, GSI’s business could be adversely affected.
Under some of GSI’s client agreements, GSI maintains the inventory of GSI’s clients in GSI’s fulfillment centers. GSI’s failure to properly handle and protect such inventory could adversely affect GSI’s relationship with its clients.
In addition, because it is difficult to predict demand, GSI may not manage GSI’s fulfillment centers in an optimal way, which may result in excess or insufficient inventory or warehousing, fulfillment, and distribution capacity. GSI may be unable to adequately staff its fulfillment centers. As GSI continues to add fulfillment and warehouse capability or add new clients with different fulfillment requirements, GSI’s fulfillment network becomes increasingly complex and operating it becomes more challenging. In addition, GSI’s financial systems and equipment are complex and any additions, changes or upgrades to these systems or equipment could cause disruptions that could harm GSI’s business.
Although GSI operates its own fulfillment centers, GSI relies upon multiple third parties for the shipment of GSI’s products. GSI also relies upon certain vendors to ship products directly to consumers. As a result, GSI is subject to the risks associated with the ability of these vendors and other third parties to successfully and in a timely manner fulfill and ship customer orders. The failure of these vendors and other third parties to provide these services, or the termination or interruption of these services, could adversely affect the satisfaction of consumers, which could result in reduced sales by GSI’s clients’ e-commerce businesses. In addition, if third parties were to increase the prices they charge to ship GSI’s products, and GSI passed these increases on to consumers, consumers might choose to buy comparable products locally to avoid shipping charges.
A disruption in GSI’s operations could materially and adversely affect GSI’s business, results of operations and financial condition.
Any disruption to GSI’s operations, including system, network, telecommunications, software or hardware failures, and any damage to GSI’s physical locations, could materially and adversely affect GSI’s business, results of operations and financial condition.
GSI’s operations are subject to the risk of damage or interruption from:
• | fire, flood, hurricane, tornado, earthquake or other natural disasters; |
• | power losses and interruptions; |
• | internet, telecommunications or data network failures; |
• | physical and electronic break-ins or security breaches; |
• | computer viruses; |
• | acts of terrorism; and |
• | other similar events. |
If any of these events occur, it could result in interruptions, delays or cessations in service to customers of GSI’s clients’ e-commerce businesses and adversely impact GSI’s clients’ e-commerce businesses. These events could also prevent GSI from fulfilling orders for its clients’ e-commerce businesses. GSI’s clients might seek significant compensation from GSI for their losses. Even if unsuccessful, this type of claim likely would be time consuming and costly for GSI to address and damaging to GSI’s reputation.
GSI’s primary data centers are located at two facilities of a third-party hosting company. GSI does not control the security, maintenance or operation of these facilities, which are also susceptible to similar disasters and problems.
GSI’s insurance policies may not cover GSI for losses related to these events, and even if they do, they may not adequately compensate GSI for any losses that GSI may incur. Any system failure that causes an interruption of the availability of GSI’s clients’ e-commerce businesses could reduce the attractiveness of GSI’s clients’ e-commerce businesses to consumers and result in reduced revenues, which could materially and adversely affect GSI’s business, results of operations and financial condition.
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If GSI does not respond to rapid technological changes, GSI’s services and proprietary technology and systems may become obsolete.
The internet and e-commerce are constantly changing. Due to the costs and management time required to introduce new services and enhancements, GSI may be unable to respond to rapid technological changes in a timely enough manner to avoid GSI’s services becoming uncompetitive. To remain competitive, GSI must continue to enhance and improve the functionality and features of GSI’s clients’ e-commerce businesses. If competitors introduce new services using new technologies or if new industry standards and practices emerge, GSI’s clients’ existing e-commerce businesses and GSI’s services and proprietary technology and systems may become uncompetitive and GSI’s ability to attract and retain customers and new clients may be at risk.
Developing GSI’s e-commerce platform offering, GSI’s clients’ e-commerce businesses and other proprietary technology entails significant technical and business risks. GSI may use new technologies ineffectively or fail to adapt GSI’s e-commerce platform, GSI’s clients’ e-commerce businesses and GSI’s technology to meet the requirements of clients and customers or emerging industry standards. In addition, the new technologies may be challenging to develop and implement and may cause GSI to incur substantial costs. Additionally, the vendors GSI uses for GSI’s clients’ e-commerce businesses may not provide the level of service GSI expects or may not be able to provide their product or service to GSI on commercially reasonable terms, if at all.
GSI’s success is tied to the continued growth in the use of the internet and the adequacy of the internet infrastructure.
GSI’s future success is substantially dependent upon continued growth in the use of the internet. The number of users and advertisers on the internet may not increase and commerce over the internet may not continue to grow for a number of reasons, including:
• | actual or perceived lack of security of information or privacy protection; |
• | lack of access and ease of use; |
• | congestion of traffic on the internet; |
• | inconsistent quality of service and lack of availability of cost-effective, high-speed service; |
• | possible disruptions, computer viruses or other damage to internet servers or to users’ computers; |
• | governmental regulation; |
• | uncertainty regarding intellectual property ownership; |
• | lack of access to high-speed communications equipment; and |
• | increases in the cost of accessing the internet. |
As currently configured, the internet may not support an increase in the number or requirements of users. In addition, there have been outages and delays on the internet as a result of damage to the current infrastructure. The amount of traffic on GSI’s clients’ web stores could decline materially if there are outages or delays in the future. The use of the internet may also decline if there are delays in the development or adoption of modifications by third parties that are required to support increased levels of activity on the internet. If any of the foregoing occurs, the number of GSI’s clients’ customers could decrease. In addition, GSI may be required to spend significant capital to adapt GSI’s operations to any new or emerging technologies relating to the internet.
Consumers may be unwilling to use the internet to purchase goods.
GSI’s future success depends heavily upon the general public’s willingness to use the internet as a means to purchase goods. The failure of the internet to continue to develop as an effective commercial tool would seriously damage GSI’s future operations. If consumers are unwilling to use the internet to conduct business, GSI’s business may not continue to grow. The internet may not continue to succeed as a medium of commerce because of security risks and delays in developing elements of the needed internet infrastructure, such as a reliable network, high-speed communication lines and other enabling technologies. In addition, anything that diverts GSI’s users from their customary level of usage of GSI’s websites could adversely affect GSI’s business.
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Third parties may have the technology or know-how to breach the security of customer transaction data and confidential information stored on GSI’s servers. Any breach could cause customers to lose confidence in the security of GSI’s clients’ e-commerce businesses and choose not to purchase from those businesses. GSI’s security measures may not effectively prevent others from obtaining improper access to the information on GSI’s clients’ e-commerce businesses. If someone is able to circumvent GSI’s security measures, he or she could destroy or steal valuable information or disrupt the operation of GSI’s clients’ e-commerce businesses. Concerns about the security and privacy of transactions over the internet could inhibit GSI’s growth.
GSI and/or its clients may be unable to protect GSI’s and their proprietary technology and intellectual property rights or keep up with that of competitors.
GSI’s success depends to a significant degree upon the protection of GSI’s intellectual property rights in the core technology and other components of GSI’s e-commerce platform including GSI’s software and other proprietary information and material, and GSI’s ability to develop technologies that are as good as or better than GSI’s competitors. GSI may be unable to deter infringement or misappropriation of GSI’s software and other proprietary information and material, detect unauthorized use or take appropriate steps to enforce GSI’s intellectual property rights. Additionally, the laws of some foreign countries do not protect GSI’s proprietary rights to the same extent as do the laws of the U.S. In addition, the failure of GSI’s clients to protect their intellectual property rights, including their trademarks and domain names, could impair GSI’s operations. GSI’s competitors could, without violating GSI’s intellectual property rights, develop technologies that are as good as or better than GSI’s technology. Protecting GSI’s intellectual property and other proprietary rights can be expensive. Any increase in the unauthorized use of GSI’s intellectual property could make it more expensive to do business and consequently harm GSI’s operating results. GSI’s failure to protect GSI’s intellectual property rights in GSI’s software and other information and material or to develop technologies that are as good as or better than GSI’s competitors’ could put GSI at a disadvantage to its competitors. These failures could have a material adverse effect on GSI’s business.
GSI may be subject to intellectual property claims or competition or trade practices claims that could be costly and could disrupt GSI’s business.
Third parties may assert that GSI’s business or technologies infringe or misappropriate their intellectual property rights. Third parties may claim that GSI does not have the right to offer certain services or products or to present specific images or logos on GSI’s clients’ e-commerce businesses, or GSI has infringed their patents, trademarks, copyrights or other rights. GSI may in the future receive claims that GSI is engaging in unfair competition or other illegal trade practices. GSI may be unsuccessful in defending against these claims, which could result in substantial damages, fines or other penalties. The resolution of a claim could also require GSI to change how it does business, redesign its service offering or clients’ e-commerce businesses or enter into burdensome royalty or license agreements. These license or royalty agreements, if required, may not be available on acceptable terms, if at all, in the event of a successful claim of infringement. GSI’s insurance coverage may not be adequate to cover every claim that third parties could assert against GSI. Even unsuccessful claims could result in significant legal fees and other expenses, diversion of management’s time and disruptions in GSI’s business. Any of these claims could also harm GSI’s reputation.
GSI may not be able to compete successfully against current and future competitors, which could harm GSI’s margins and GSI’s business.
The market for the development and operation of e-commerce businesses and interactive marketing services is continuously evolving and is intensely competitive. Increased competition could result in fewer successful opportunities to obtain clients, price reductions, reduced gross margins and loss of market share, any of which could seriously harm GSI’s business, results of operations and financial condition. In the development and operation of e-commerce businesses, GSI often competes with in-house solutions promoted and supported by internal information technology staffs, marketing departments, merchandising groups and other internal corporate constituencies. In these situations, GSI competes with technology and service providers, which supply one or more components of an e-commerce solution primarily to allow the prospect or others to develop and operate the prospect’s e-commerce business in-house. In addition, GSI competes with the online and offline businesses of a variety of retailers and manufacturers in GSI’s targeted categories.
Many of GSI’s current and potential competitors have longer operating histories, larger customer bases, greater brand recognition and significantly greater financial, marketing and other resources than GSI has. They may be able to secure merchandise from vendors on more favorable terms and may be able to adopt more aggressive pricing policies. They may also receive investments from or enter into other commercial relationships with larger, well established companies with greater financial resources. Competitors in the retail, e-commerce services and interactive marketing services industries also may be able to devote more resources to technology development and marketing than GSI does.
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Competition in the e-commerce industry may intensify. Other companies in GSI’s industries may enter into business combinations or alliances that strengthen their competitive positions. Additionally, there are relatively low barriers to entry into the e-commerce services and interactive marketing services markets. As various internet market segments obtain large, loyal customer bases, participants in those segments may expand into the market segments in which GSI operates. In addition, new and expanded web technologies may further intensify the competitive nature of online retail and interactive marketing. The nature of the internet as an electronic marketplace facilitates competitive entry and comparison shopping and renders it inherently more competitive than conventional retailing formats. This increased competition may reduce GSI’s sales, GSI’s ability to operate profitably, or both.
GSI may be subject to product liability claims that could be costly and time-consuming.
GSI sells products manufactured by third parties, some of which may be defective. GSI also sells some products that are manufactured by third parties for GSI. If any product that GSI sells were to cause physical injury or injury to property, the injured party or parties could bring claims against GSI as the retailer or manufacturer of the product. These claims may not be covered by insurance and, even if they are, GSI’s insurance coverage may not be adequate to cover every claim that could be asserted. Similarly, GSI could be subject to claims that customers of GSI’s clients’ e-commerce businesses were harmed due to their reliance on GSI’s product information, product selection guides, advice or instructions. If a successful claim were brought against GSI in excess of GSI’s insurance coverage, it could adversely affect GSI’s business. Even unsuccessful claims could result in the expenditure of funds and management time and adverse publicity and could have a negative impact on GSI’s business.
GSI may be liable if third parties misappropriate GSI’s customers’ personal information. Additionally, GSI is limited in its ability to use and disclose customer information.
Any security breach could expose GSI to risks of loss, litigation and liability and could seriously disrupt GSI’s operations. If third parties are able to penetrate GSI’s network or telecommunications security or otherwise misappropriate GSI’s customers’ personal information or credit card information or if GSI gives third parties improper access to its customers’ personal information or credit card information, GSI could be subject to liability. This liability could include claims for unauthorized purchases with credit card information, impersonation or other similar fraud claims. They could also include claims for other misuses of personal information, including unauthorized marketing purposes. These claims could result in litigation. Liability for misappropriation of this information could be significant. In addition, the Federal Trade Commission and state agencies regularly investigate various companies’ uses of customers’ personal information. GSI could incur additional expenses if new regulations regarding the security or use of personal information are introduced or if government agencies investigate GSI’s privacy practices. Further, any resulting adverse publicity arising from investigations would impact GSI’s business negatively.
Changes to credit card association fees, rules, or practices could harm GSI’s business.
GSI must rely on banks or payment processors to process transactions, and must pay a fee for this service. From time to time, credit card associations may increase the interchange fees that they charge for each transaction using one of their cards. GSI’s credit card processors have the right to pass any increases in interchange fees on to GSI as well as increase their own fees for processing. These increased fees increase GSI’s operating costs and reduce GSI’s profit margins. GSI is also required by GSI’s processors to comply with credit card association operating rules, and GSI will reimburse its processors for any fines they are assessed by credit card associations as a result of any rule violations by GSI. The credit card associations and their member banks set and interpret operating rules related to their credit cards. The credit card associations and/or member banks could adopt new operating rules or re-interpret existing rules that GSI might find difficult or even impossible to follow. As a result, GSI could lose GSI’s ability to give customers the option of using credit cards to fund their payments. If GSI were unable to accept credit cards, GSI’s business would be seriously damaged.
Credit card fraud could adversely affect GSI’s business.
The failure to adequately control fraudulent transactions could increase GSI’s expenses. To date, GSI has not suffered material losses due to fraud. However, GSI may in the future suffer losses as a result of orders placed with fraudulent credit card data. Under current credit card practices, GSI is liable for fraudulent credit card transactions because GSI does not obtain a cardholder’s signature. With respect to checks and installment sales, GSI generally is liable for fraudulent transactions.
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If one or more states successfully assert that GSI should collect or should have collected sales or other taxes on the sale of GSI’s merchandise, GSI’s business could be harmed.
GSI currently collects sales or other similar taxes only for goods sold by GSI and shipped into certain states. One or more local, state or foreign jurisdictions may seek to impose historical and future sales tax obligations on GSI or its clients and other out-of-state companies that engage in e-commerce. In recent years, certain large retailers expanded their collection of sales tax on purchases made through affiliated web sites. GSI’s business could be adversely affected if one or more states or any foreign country successfully asserts that GSI should collect sales or other taxes on the sale of merchandise through the e-commerce businesses GSI operates.
GSI may have exposure to greater than anticipated tax liabilities.
GSI is subject to income, payroll and other taxes in both the United States and foreign jurisdictions. In the ordinary course of GSI’s business, there are many transactions and calculations where the ultimate tax determination is uncertain. Moreover, significant judgment is required in evaluating GSI’s worldwide provision for income taxes. GSI’s determination of its tax liability is always subject to review by applicable tax authorities. Any adverse outcome of such a review could have a negative effect on GSI’s operating results and financial conditions. Although GSI believes its estimates are reasonable, the ultimate tax outcome may differ from the amounts recorded in GSI’s financial statements and may materially affect GSI’s financial results in the period or periods for which such determination is made.
GSI relies on insurance to mitigate some risks and, to the extent the cost of insurance increases or GSI is unable or chooses not to maintain sufficient insurance to mitigate the risks facing GSI’s business, GSI’s operating results may be diminished.
GSI contracts for insurance to cover certain potential risks and liabilities. In the current environment, insurance companies are increasingly specific about what they will and will not insure. It is possible that GSI may not be able to get enough insurance to meet GSI’s needs, may have to pay very high prices for the coverage it does get, have very high deductibles or may not be able to acquire any insurance for certain types of business risk. In addition, GSI has in the past and may in the future choose not to obtain insurance for certain risks facing its business. This could leave GSI exposed to potential claims. If GSI were found liable for a significant claim in the future, its operating results could be negatively impacted. Also, to the extent the cost of maintaining insurance increases, GSI’s operating results will be negatively affected.
Existing or future laws or regulations could harm GSI’s business or marketing efforts.
GSI is subject to international, federal, state and local laws applicable to businesses in general and to e-commerce specifically. Due to the increasing growth and popularity of the internet and e-commerce, many laws and regulations relating to the internet and online retailing are proposed and considered at the country, federal, state and local levels. These laws and regulations could cover issues such as taxation, pricing, content, distribution, access, quality and delivery of products and services, electronic contracts, intellectual property rights, user privacy and information security.
For example, at least one state has enacted, and other states have proposed, legislation limiting the uses of personal information collected online or requiring collectors of information to establish procedures to disclose and notify users of privacy and security policies, obtain consent from users for use and disclosure of information, or provide users with the ability to access, correct and delete stored information. Even in the absence of such legislation, the Federal Trade Commission has settled several proceedings resulting in consent decrees in which internet companies have been required to establish programs regulating the manner in which personal information is collected from users and provided to third parties. GSI could become a party to a similar enforcement proceeding. These regulatory and enforcement efforts could also harm GSI’s ability to collect demographic and personal information from users, which could be costly or adversely affect GSI’s marketing efforts.
The applicability of existing laws governing issues such as property ownership, intellectual property rights, taxation, libel, obscenity, qualification to do business and export or import matters could also harm GSI’s business. Many of these laws may not contemplate or address the unique issues of the internet or online retailing. Some laws that do contemplate or address those unique issues, such as the Digital Millennium Copyright Act and The Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003, or the “CAN-SPAM,” Act, are only beginning to be interpreted by the courts and their applicability and reach are therefore uncertain. These current and future laws and regulations could reduce GSI’s ability to operate efficiently.
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GSI’s e-Dialog e-mail marketing solutions business is dependent on the market for e-mail marketing solutions and there may be changes in the market that may harm GSI’s business.
In GSI’s e-Dialog e-mail marketing solutions business, GSI derives revenue from e-mail marketing solutions. The market for e-mail marketing solutions is at a relatively early stage of development, making this business and future prospects difficult to evaluate. GSI’s current expectations with respect to areas of growth within the market may not prove to be correct.
Should GSI’s clients lose confidence in the value or effectiveness of e-mail marketing, the demand for GSI’s products and services will likely decline. A number of factors could affect GSI’s clients’ assessment of the value or effectiveness of e-mail marketing, including the following:
• | growth in the number of e-mails sent or received on a daily or regular basis; |
• | the ability of filters to effectively screen for unwanted e-mails; |
• | the ability of smart phones or similar communications to adequately display e-mail; |
• | continued security concerns regarding internet usage in general from viruses, worms or similar problems affecting internet and e-mail utilization; and |
• | increased governmental regulation or restrictive policies adopted by internet service providers, or “ISPs,” that make it more difficult or costly to utilize e-mail for marketing communications. |
Any decrease in the use of e-mail by businesses would reduce demand for GSI’s e-mail marketing products or services and the business and results of operation for GSI’s e-mail marketing business would suffer.
In addition, it is uncertain whether GSI’s e-mail marketing solutions will achieve and sustain the high level of market acceptance that is critical to the success of GSI’s business. If the market for e-mail marketing solutions fails to grow or grows more slowly than GSI currently anticipates, demand for GSI’s e-mail marketing solutions may decline and GSI’s revenue would suffer. GSI may not be able to successfully address any of these challenges, risks and difficulties, including the other risks related to GSI’s business and industry described below. Failure to adequately do so could adversely affect GSI’s business, results of operations or financial condition.
Existing federal, state and international laws regulating e-mail marketing practices impose certain obligations on the senders of commercial e-mails and could expose GSI to liability for violations, decrease the effectiveness of GSI’s e-mail marketing solutions, and expose GSI to financial, criminal and other penalties for non-compliance, which could increase GSI’s operating costs.
The CAN-SPAM Act establishes certain requirements for commercial e-mail messages and specifies penalties for commercial e-mail that violates the CAN-SPAM Act. The CAN-SPAM Act, among other things, obligates the sender of commercial e-mails to provide recipients with the ability to opt out of receiving future commercial e-mail messages from the sender. As a result, in the event GSI’s products and services were to become unavailable or malfunction for any period of time for any reason, GSI’s clients could violate the provision of the CAN-SPAM Act. Moreover, non-compliance with this and other aspects of the CAN-SPAM Act carries significant financial penalties. Many states have also passed laws regulating commercial e-mail practices that typically provide a private right of action and specify damages and other penalties, which in some cases may be substantial. Some of these laws are significantly more punitive and difficult to comply with than the CAN-SPAM Act. It is not settled whether all or a portion of certain state laws may be preempted by the CAN-SPAM Act. In addition, certain foreign countries have enacted laws that regulate sending e-mail, and some of these laws are more restrictive than U.S. laws. For example, some foreign laws prohibit sending unsolicited e-mail unless the recipient has provided the sender advance consent to receipt of such e-mail, or in other words has “opted-in” to receiving it. If GSI were found to be in violation of the CAN-SPAM Act, applicable state laws not preempted by the CAN-SPAM Act, or foreign laws regulating the distribution of e-mail, whether as a result of violations by GSI’s clients or if GSI were deemed to be directly subject to and in violation of these requirements, GSI could be exposed to one or more of the following consequences:
• | payment of statutory, actual or other damages; |
• | criminal penalties; |
• | actions by state attorneys general; |
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• | actions by private citizens or class actions; and |
• | penalties imposed by regulatory authorities of the U.S. government, state governments and foreign governments. |
Any of these potential areas of exposure would adversely affect GSI’s financial performance, could preclude GSI from doing business in specific jurisdictions, and significantly harm GSI’s business. GSI also may be required to change one or more aspects of the way it operates its business, which could impair GSI’s ability to attract and retain clients or increase GSI’s operating costs.
Private spam blacklists may interfere with GSI’s ability to communicate with GSI’s e-commerce customers and the ability of the clients of e-Dialog to effectively deploy GSI’s e-mail marketing products or services which could harm GSI’s business.
In operating the e-commerce businesses of GSI’s clients, GSI depends on e-mail to market to and communicate with customers, GSI’s clients also rely on e-mail to communicate with their customers and e-Dialog provides e-mail marketing solutions to its clients. In an effort to regulate the use of e-mail for commercial solicitation, various private companies maintain “blacklists” of companies and individuals (and the websites, ISPs and internet protocol addresses associated with those companies or individuals) that do not adhere to standards of conduct or practices for commercial e-mail solicitations that the blacklisting entity believes are appropriate. If a company’s internet protocol addresses are listed by a blacklisting entity, e-mails sent from those addresses may be blocked if they are sent to any internet domain or internet address that subscribes to the blacklisting entity’s service or purchases its blacklist. It is possible that this sort of blacklisting or similar restrictive activity could interfere with GSI’s ability to communicate with customers of its clients’ e-commerce businesses or to market its clients’ products or services and could undermine the effectiveness of GSI’s clients’ e-mail marketing campaigns, all of which could damage GSI’s business.
ISPs can also block e-mails from reaching their users. Recent releases of ISP software and the implementation of stringent new policies by ISPs make it more difficult to deliver GSI’s clients’ e-mails. If ISPs materially limit, delay or halt the delivery of GSI’s or its clients’ e-mails, or if GSI fails to deliver GSI’s or its clients’ e-mails in a manner compatible with ISPs’ e-mail handling or authentication technologies, then the demand for GSI’s products or services could be reduced and GSI’s clients may seek to terminate their agreements with GSI.
From time to time, GSI may acquire or invest in other companies. There are risks associated with potential acquisitions and investments and GSI may not achieve the expected benefits of future acquisitions and investments.
GSI has recently completed several acquisitions and if GSI is presented with opportunities that GSI considers appropriate, GSI may make investments in complementary companies, products or technologies or GSI may purchase other companies. GSI may not realize the anticipated benefits of any investment or acquisition. GSI may be subject to unanticipated problems and liabilities of acquired companies. While GSI attempts in its acquisitions to determine the nature and extent of any pre-existing liabilities, and to obtain indemnification rights from the previous owners for acts or omissions arising prior to the date of acquisition, resolving issues of liability between the parties could involve a significant amount of time, manpower and expense. If GSI or any of its subsidiaries were to be unsuccessful in a claim for indemnity from a seller, the liability imposed on GSI or its subsidiary could have a material adverse effect on GSI. GSI may not be able to assimilate successfully the additional personnel, operations, acquired technology or products or services into its business. Any acquisition may strain GSI’s existing financial and managerial controls and reporting systems and procedures. If GSI does not successfully integrate any acquired business, the expenditures on integration efforts will reduce GSI’s cash position without GSI being able to realize the expected benefits of the acquisition. In addition, key personnel of an acquired company may decide not to work for GSI. These difficulties could disrupt GSI’s ongoing business, distract GSI’s management and employees and increase GSI’s expenses. Further, the physical expansion in facilities that could occur as a result of any acquisition may result in disruptions that could seriously impair GSI’s business. Finally, GSI may have to use its cash resources, incur debt or issue additional equity securities to pay for other acquisitions or investments, which could increase GSI’s leverage or be dilutive to GSI’s stockholders.
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GSI plans to continue to expand its business internationally which may cause GSI’s business to become increasingly susceptible to numerous international business risks and challenges. GSI has limited experience in international operations.
GSI ships certain products to Canada and other countries. In addition, in January 2006, GSI completed the acquisition of Aspherio S.L., a Barcelona, Spain-based provider of outsourced e-commerce solutions now known as GSI Commerce Solutions International. In December 2007, GSI completed the acquisition of Zendor.com Ltd., a Manchester, United Kingdom-based provider of outsourced e-commerce solutions now known as Zendor/GSI Commerce Ltd. In February 2008, GSI completed the acquisition of e-Dialog, Inc. with operations in London, England. Because GSI’s growth strategy involves expanding GSI’s business internationally, GSI intends to continue to expand GSI’s international efforts. However, GSI has limited experience in international business, and GSI cannot assure you that GSI’s international expansion strategy will be successful. To date, however, GSI’s international business activities have been limited. GSI’s lack of a track record outside the United States increases the risks described below. In addition, GSI’s experience in the United States may not be relevant to establishing a business outside the United States. Accordingly, GSI’s international expansion strategy is subject to significant execution risk, as GSI cannot assure you that GSI’s strategy will be successful. For fiscal 2007, substantially all of GSI’s net revenues, operating results and assets were in the United States.
International expansion is subject to inherent risks and challenges that could adversely affect GSI’s business, including:
• | the need to develop new supplier and manufacturer relationships, particularly because major manufacturers may require that GSI’s international operations deal with local distributors; |
• | compliance with international legal and regulatory requirements and tariffs; |
• | managing fluctuations in currency exchange rates; |
• | difficulties in staffing and managing foreign operations; |
• | greater difficulty in accounts receivable collection; |
• | potential adverse tax consequences; |
• | uncertain political and economic climates; |
• | potentially higher incidence of fraud; |
• | price controls or other restrictions on foreign currency; and |
• | difficulties in obtaining export and import licenses and compliance with applicable export controls. |
Any negative impact from GSI’s international business efforts could negatively impact GSI’s business, operating results and financial condition as a whole. In addition, gains and losses on the conversion of foreign payments into U.S. dollars may contribute to fluctuations in GSI’s results of operations and fluctuating exchange rates could cause reduced revenues and/or gross margins from non-dollar-denominated international sales.
In addition, if GSI further expands internationally, GSI may face additional competition challenges. Local companies may have a substantial competitive advantage because of their greater understanding of, and focus on, the local customer. In addition, governments in foreign jurisdictions may regulate e-commerce or other online services in such areas as content, privacy, network security, copyright, encryption, taxation, or distribution. GSI also may not be able to hire, train, motivate and manage the required personnel, which may limit GSI’s growth in international market segments.
In addition, compliance with foreign and U.S. laws and regulations that are applicable to GSI’s international operations is complex and may increase GSI’s cost of doing business in international jurisdictions and GSI’s international operations could expose GSI to fines and penalties if GSI fails to comply with these regulations. These laws and regulations include import and export requirements, U.S. laws such as the Foreign Corrupt Practices Act, and local laws prohibiting corrupt payments to governmental officials. Any violations of such laws could subject GSI to civil or criminal penalties, including substantial fines or prohibitions on GSI’s ability to offer its products and services to one or more countries, and could also materially damage GSI’s reputation, international expansion efforts, business and operating results.
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GSI’s success is dependent upon GSI’s executive officers and other key personnel.
GSI’s success depends to a significant degree upon the contribution of GSI’s executive officers and other key personnel, particularly Michael G. Rubin, chairman of the board, president and chief executive officer. GSI’s executive officers and key personnel could terminate their employment with GSI at any time despite any employment agreements GSI may have with these employees. Due to the competition for highly qualified personnel, GSI cannot be sure that GSI will be able to retain or attract executive, managerial or other key personnel. GSI has obtained key person life insurance for Mr. Rubin in the amount of $9.0 million. GSI has not obtained key person life insurance for any of GSI’s other executive officers or key personnel.
GSI may be unable to hire and retain skilled personnel which could limit GSI’s growth.
GSI’s future success depends on its ability to continue to identify, attract, retain and motivate skilled personnel which could limit GSI’s growth. GSI intends to continue to seek to hire a significant number of skilled personnel. Due to intense competition for these individuals from GSI’s competitors and other employers, GSI may not be able to attract or retain highly qualified personnel in the future. GSI’s failure to attract and retain the experienced and highly trained personnel that are integral to GSI’s business may limit GSI’s growth. Additionally, GSI has experienced recent growth in personnel numbers and expects to continue to hire additional personnel in selected areas. Managing this growth requires significant time and resource commitments from GSI’s senior management. If GSI is unable to effectively manage a large and geographically dispersed group of employees or to anticipate GSI’s future growth and personnel needs, GSI’s business may be adversely affected.
There are limitations on the liabilities of GSI’s directors and executive officers. Under certain circumstances, GSI is obligated to indemnify GSI’s directors and executive officers against liability and expenses incurred by them in their service to GSI.
Pursuant to GSI’s amended and restated certificate of incorporation and under Delaware law, GSI’s directors are not liable to GSI or GSI’s stockholders for monetary damages for breach of fiduciary duty, except for liability for breach of a director’s duty of loyalty, acts or omissions by a director not in good faith or which involve intentional misconduct or a knowing violation of law, dividend payments or stock repurchases that are unlawful under Delaware law or any transaction in which a director has derived an improper personal benefit. In addition, GSI has entered into indemnification agreements with each of its directors and executive officers. These agreements, among other things, require GSI to indemnify each director and executive officer for certain expenses, including attorneys’ fees, judgments, fines and settlement amounts, incurred by any such person in any action or proceeding, including any action by GSI or in GSI’s right, arising out of the person’s services as one of GSI’s directors or executive officers. The costs associated with actions requiring indemnification under these agreements could be harmful to GSI’s business.
If GSI fails to maintain an effective system of internal controls, GSI may not be able to accurately report GSI’s financial results or prevent fraud. As a result, current and potential stockholders and clients could lose confidence in GSI’s financial reporting, which could harm GSI’s business, the trading price of GSI’s common stock and GSI’s ability to retain GSI’s current clients and obtain new clients.
Section 404 of the Sarbanes-Oxley Act of 2002 requires GSI’s management to report on the effectiveness of GSI’s internal control over financial reporting. GSI has expended significant resources to comply with its obligations under Section 404 with respect to fiscal 2007. If GSI fails to correct any issues in the design or operating effectiveness of internal control over financial reporting or fails to prevent fraud, current and potential stockholders and clients could lose confidence in GSI’s financial reporting, which could harm GSI’s business, the trading price of GSI’s common stock and GSI’s ability to retain its current clients and obtain new clients.
Risks Related to GSI’s Common Stock
GSI may enter into future acquisitions and take certain actions in connection with such acquisitions that could affect the price of GSI’s common stock.
As part of GSI’s growth strategy, GSI expects to review acquisition prospects that would offer growth opportunities and GSI may acquire businesses, products or technologies in the future. In the event of future acquisitions, GSI could:
• | use a significant portion of GSI’s available cash; |
• | issue equity securities, which would dilute current stockholders’ percentage ownership; |
• | incur substantial debt; |
• | incur or assume contingent liabilities, known or unknown; |
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• | incur amortization expenses related to intangibles; and |
• | incur large, immediate accounting write-offs. |
Such actions by GSI could harm GSI’s results from operations and adversely affect the price of GSI’s common stock.
GSI’s operating results have fluctuated and may continue to fluctuate significantly, which may cause the market price of GSI’s common stock to be volatile.
GSI’s annual and quarterly operating results have and may continue to fluctuate significantly due to a variety of factors, many of which are outside of GSI’s control. Because GSI’s operating results may be volatile and difficult to predict, period-to-period comparisons of GSI’s operating results may not be a good indication of GSI’s future performance. GSI’s operating results may also fall below GSI’s published expectations and the expectations of securities analysts and investors, which likely will cause the market price of GSI’s common stock to decline significantly.
Factors that may cause GSI’s operating results to fluctuate or harm GSI’s business include but are not limited to the following:
• | GSI’s ability to obtain new clients or to retain existing clients in GSI’s e-commerce and marketing services businesses; |
• | the performance of one or more of GSI’s client’s e-commerce businesses; |
• | GSI’s and its clients’ ability to obtain new customers at a reasonable cost or encourage repeat purchases; |
• | the number of visitors to the e-commerce businesses operated by GSI or GSI’s ability to convert these visitors into customers; |
• | GSI’s and its clients’ ability to offer an appealing mix of products or to sell products that GSI purchases; |
• | GSI’s ability to achieve effective results for its marketing services clients; |
• | GSI’s ability to adequately develop, maintain and upgrade its clients’ e-commerce businesses or the technology and systems GSI uses to process customers’ orders and payments; |
• | the timing and costs of upgrades and developments of GSI’s systems and infrastructure; |
• | the ability of GSI’s competitors to offer new or superior e-commerce businesses, services or products or new or superior marketing services; |
• | price competition that results in lower profit margins or losses; |
• | the seasonality of GSI’s business, especially the importance of GSI’s fiscal fourth quarter to GSI’s business; |
• | GSI’s inability to obtain or develop specific products or brands or unwillingness of vendors to sell their products to GSI; |
• | unanticipated fluctuations in the amount of consumer spending on various products that GSI sells, which tend to be discretionary spending items; |
• | the cost of advertising and the amount of free shipping and other promotions GSI offers; |
• | increases in the amount and timing of operating costs and capital expenditures relating to expansion of GSI’s operations; |
• | GSI’s inability to manage GSI’s shipping costs on a profitable basis or unexpected increases in shipping costs or delivery times, particularly during the holiday season; |
• | inflation of prices of fuel and gasoline and other raw materials that impact GSI’s costs; |
• | technical difficulties, system security breaches, system downtime or internet slowdowns; |
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• | GSI’s inability to manage inventory levels or control inventory shrinkage; |
• | GSI’s inability to manage fulfillment operations or provide adequate levels of customer care or GSI’s inability to forecast the proper staffing levels in fulfillment and customer care; |
• | an increase in the level of GSI’s product returns or GSI’s inability to effectively process returns; |
• | government regulations related to the internet or e-commerce which could increase the costs associated with operating GSI’s businesses, including requiring the collection of sales tax on all purchases through the e-commerce businesses GSI operates; and |
• | unfavorable economic conditions in general or specific to the internet or e-commerce, which could reduce demand for the products sold through GSI’s clients’ e-commerce businesses. |
Future sales of GSI’s common stock in the public market or the issuance of securities senior to GSI’s common stock could adversely affect the trading price of GSI’s common stock and GSI’s ability to raise funds in new securities offerings.
Future sales of GSI’s common stock, the perception that such sales could occur or the availability for future sale of shares of GSI’s common stock or securities convertible into or exercisable for GSI’s common stock could adversely affect the market prices of GSI’s common stock prevailing from time to time and could impair GSI’s ability to raise capital through future offerings of equity or equity-related securities. In addition, GSI may issue common stock or equity securities senior to GSI’s common stock in the future for a number of reasons, including to finance GSI’s operations and business strategy, to adjust GSI’s ratio of debt to equity, to satisfy GSI’s obligations upon the exercise of stock options or for other reasons.
As of October 13, 2008, there were 2,893,841 shares available for new awards under GSI’s 2005 Equity Incentive Plan, referred to as the “2005 plan.” Additionally, as of October 13, 2008 there were 3,931,054 shares of common stock that were subject to outstanding awards granted under the 2005 plan and 3,989,211 shares of common stock that were subject to outstanding awards granted under GSI’s 1996 Equity Incentive Plan. In the event of the cancellation, expiration, forfeiture or repurchase of any of these shares, such shares would become available for issuance under the 2005 plan. In order to attract and retain key personnel, GSI may issue additional securities, including stock options, restricted stock grants and shares of common stock, in connection with GSI’s employee benefit plans, or may lower the price of existing stock options. No prediction can be made as to the effect, if any, that the sale, or the availability for sale, of substantial amounts of common stock by GSI’s existing stockholders pursuant to an effective registration statement will have on market prices of GSI’s common stock.
GSI has never paid dividends on its common stock and does not anticipate paying dividends in the foreseeable future.
GSI has never paid cash dividends on its common stock and does not anticipate that any cash dividends will be declared or paid in the foreseeable future. In addition, the terms of GSI’s secured revolving credit facility prohibit GSI from declaring or paying dividends on GSI’s common stock. As a result, holders of GSI’s common stock will not receive a return, if any, on their investment unless they sell their shares of GSI’s common stock.
GSI is controlled by certain principal stockholders.
As of October 2, 2008, Michael G. Rubin, GSI’s chairman, president and chief executive officer, beneficially owned 15.6%, funds affiliated with SOFTBANK Holdings Inc., or SOFTBANK, beneficially owned 17.2%, and Liberty Media Corporation, or Liberty, through its subsidiary QVC, Inc. and QVC’s affiliate QK Holdings, Inc. beneficially owned approximately 19.5% of GSI’s outstanding common stock. If they decide to act together, any two of Mr. Rubin, SOFTBANK, and Liberty would be in a position to exercise considerable control, and all three would be in a position to exercise complete control, over most matters requiring stockholder approval, including the election or removal of directors, approval of significant corporate transactions and the ability generally to direct GSI’s affairs. Furthermore, pursuant to stock purchase agreements, SOFTBANK and Liberty each have the right to designate up to one member of GSI’s board of directors. This concentration of ownership and the right of SOFTBANK and Liberty to designate members to GSI’s board of directors may have the effect of delaying or preventing a change in control of GSI, including transactions in which stockholders might otherwise receive a premium over prevailing market prices for GSI’s common stock. Furthermore, Mr. Rubin has entered into voting agreements with each of SOFTBANK and Liberty, and SOFTBANK and Liberty have entered into voting agreements with each other. The parties to these voting agreements have agreed to support the election of the directors designated by each of the other parties.
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It may be difficult for a third-party to acquire GSI and this could depress GSI’s stock price.
Certain provisions of GSI’s amended and restated certificate of incorporation, bylaws, stockholder rights agreement and Delaware law may have the effect of discouraging, delaying or preventing transactions that involve any actual or threatened change in control. The rights issued under GSI’s stockholder rights agreement may be a substantial deterrent to a person acquiring beneficial ownership of 20% or more (or, in the case of any stockholder that as of April 2, 2006 beneficially owned 19% or more of the outstanding shares of common stock, 25.1% or more) of GSI’s common stock without the approval of GSI’s board of directors. The stockholder rights agreement would cause extreme dilution to such person.
In addition, GSI is subject to Section 203 of the Delaware General Corporation Law which, subject to certain exceptions, restricts certain transactions and business combinations between a corporation and a stockholder owning 15% or more of the corporation’s outstanding voting stock for a period of three years from the date the stockholder becomes a 15% stockholder. In addition to discouraging a third party from seeking to acquire control of GSI, the foregoing provisions could impair the ability of existing stockholders to remove and replace GSI’s management and/or GSI’s board of directors.
Because many investors consider a change of control a desirable path to liquidity, delaying or preventing a change in control of GSI’s company may reduce the number of investors interested in GSI’s common stock, which could depress GSI’s stock price.
See “— GSI is controlled by certain principal stockholders.”
The price of GSI’s common stock may fluctuate significantly.
The price of GSI’s common stock on the Nasdaq Global Select Market has been volatile. From December 30, 2007, the first day of GSI’s fiscal 2008, through October 28, 2008, the high and low sales prices of GSI’s common stock ranged from$19.75 to $8.00 per share. During fiscal 2007, the high and low sale prices of GSI’s common stock ranged from $29.27 to $16.09 per share. During fiscal 2006, the high and low sale prices of GSI’s common stock ranged from $19.52 to $10.67 per share. During fiscal 2005, the high and low sale prices of GSI’s common stock ranged from $21.25 to $12.21 per share. GSI expects that the market price of GSI’s common stock may continue to fluctuate.
GSI’s common stock price can fluctuate as a result of a variety of factors, many of which are beyond GSI’s control. These factors include, among others:
• | GSI’s performance and prospects; |
• | the performance and prospects of GSI’s clients; |
• | the depth and liquidity of the market for GSI’s common stock; |
• | the vesting of GSI equity awards resulting in the sale of large amounts of GSI common stock during concentrated trading windows; |
• | investor perception of GSI and the industry in which GSI operates; |
• | changes in earnings estimates or buy/sell recommendations by analysts; |
• | general financial and other market conditions; and |
• | general economic conditions. |
In addition, the stock market in general has experienced extreme volatility that has often been unrelated to the operating performance of a particular company. These broad market fluctuations may adversely affect the market price of GSI’s common stock.
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Holders of GSI’s common stock will be subordinated to GSI’s secured revolving credit facility, convertible notes and other indebtedness.
In the event of GSI’s liquidation or insolvency, holders of common stock would receive a distribution only after payment in full of all principal and interest due under GSI’s secured revolving credit facility, due to holders of GSI’s convertible notes and due to other creditors, and there may be little or no proceeds to distribute to holders of common stock at such time.
Conversion of GSI’s subordinated convertible notes would dilute the ownership interest of existing stockholders.
In June 2005, GSI issued $57.5 million principal amount of GSI’s subordinated convertible notes due 2025, referred to as the “3% convertible notes,” and in July 2007 GSI issued $150.0 million principal amount of GSI’s subordinated convertible notes due 2027, referred to as the “2.5% convertible notes,” which are all convertible into shares of GSI’s common stock. Under certain circumstances, a maximum of 6,157,635 shares of GSI common stock could be issued upon conversion of the 2.5% convertible notes and a maximum of 3,874,661 shares of GSI common stock could be issued upon conversion of the 3% convertible notes, in each case, subject to adjustment for stock dividends, stock splits, cash dividends, certain tender offers, other distributions and similar events. The conversion of some or all of these notes will dilute the ownership interest of existing GSI stockholders. Any sales in the public market of the common stock issuable upon such conversions could adversely affect prevailing market prices of GSI’s common stock. In addition, the existence of these notes could encourage short selling by market participants because the conversion of the notes could depress the price of GSI’s common stock.
Future changes in financial accounting standards or practices or existing taxation rules or practices may cause adverse unexpected revenue and/or expense fluctuations and affect GSI’s reported results of operations.
A change in accounting standards or practices or a change in existing taxation rules or practices can have a significant effect on GSI’s reported results and may even require retroactive or retrospective application. New accounting pronouncements and taxation rules and varying interpretations of accounting pronouncements and taxation practice have occurred and may occur in the future. Changes to existing rules or the questioning of current practices may adversely affect GSI’s reported financial results or the way GSI conducts its business.
In May 2008, the FASB issued FASB Staff Position (“FSP”) APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement),” (“FSP APB 14-1”), which changes the accounting treatment for convertible debt instruments that allow for either mandatory or optional cash settlements. FSP APB 14-1 will require the issuer of convertible debt instruments with cash settlement features to separately account for the liability and equity components of the instrument. GSI’s $207.5 million of subordinated convertible notes will be subject to the provisions of this proposal because under the notes GSI has the ability to elect cash settlement of the conversion value of the notes. The debt will be recognized at the present value of GSI’s cash flows discounted using its nonconvertible debt borrowing rate. The equity component will be recognized as the difference between the proceeds from the issuance of the note and the fair value of the liability. The FSP will also require an accretion of the resultant debt discount over the expected life of the debt. The transition guidance requires retrospective application to all periods presented and does not grandfather existing instruments. FSP APB 14-1 is effective for fiscal years beginning after December 15, 2008. GSI believes that the FSP will result in a material decrease to GSI’s liabilities and a material increase to GSI’s stockholders’ equity on the Consolidated Balance Sheets. It will also result in a material decrease to net income as a result of a material non-cash increase to interest expense to accrete the value of the debt from its fair value to its principle amount over the term of the subordinated convertible notes in the Consolidated Statements of Operations. These changes will not impact the GSI’s cash flows from operating activities, investing activities or financing activities.
In December 2007, the FASB issued SFAS 141(R). SFAS 141(R) establishes principles and requirements for an acquirer in a business combination relating to recognition and measurement of the identifiable assets acquired, the liabilities assumed and any non controlling interest in the entity acquired in the acquirer’s financial statements. In addition, SFAS 141(R) provides guidance on the recognition and measurement of goodwill acquired in the business combination or a gain from a bargain purchase as well as the information required to be disclosed to enable users of the financial statements to evaluate the nature and financial impact of the business combination. FAS 141(R) also requires recognition of assets and liabilities of non controlling interests acquired, fair value measurement of consideration and contingent consideration, expense recognition for transaction costs and certain integration costs, recognition of the fair value of contingencies, and adjustments to income tax expense for changes in an acquirer’s existing valuation allowances or uncertain tax positions that result from the business combination. FAS 141(R) is effective for fiscal years beginning on or after December 15, 2008 and shall be applied prospectively. If the acquisition of Innotrac closes in fiscal 2009, the adoption of SFAS 141(R) in GSI’s first fiscal quarter of 2009 may result in a materially different recorded purchase price than under the provisions of FAS 141 and/or an increase in GSI’s general and administrative expense line item within its Consolidated statements of Operations for direct acquisition-related expenses and transaction costs which would have been included in the acquisition price under the provisions of SFAS 141.
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GSI has included risk factors related to its acquisition of Innotrac in its Registration Statement on Form S-4 filed with the SEC on November 4, 2008 (the “Registration Statement”). For a description of such merger-related risks, see “Risk Factors” beginning on page 17 of the Registration Statement.
2.1 | Agreement and Plan of Merger, dated as of October 5, 2008, by and among GSI Commerce, Inc., Bulldog Acquisition Corp., and Innotrac Corporation. (The schedules and exhibits (other than exhibits A, B and C) to the Agreement and Plan of Merger are omitted pursuant to Item 601(b)(2) of Regulation S-K. GSI agrees to furnish supplementally to the SEC, upon request, a copy of any omitted schedule or exhibit) (filed with GSI Commerce, Inc.’s Current Report on Form 8-K filed on October 6, 2008 and incorporated herein by reference). | |||
10.1 | Michael Rubin Form of Restricted Stock Unit Agreement (filed with GSI Commerce, Inc.’s Current Report on Form 8-K filed on August 7, 2008 and incorporated herein by reference). | |||
10.2 | Form of Restricted Stock Unit Grant Notice (Basic) Under the GSI Commerce, Inc. 2005 Equity Incentive Plan. | |||
31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 | |||
31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 | |||
32.1 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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GSI COMMERCE, INC. | ||||
By: | /s/ MICHAEL G. RUBIN | |||
Michael G. Rubin | ||||
Chairman, President and Chief Executive Officer | ||||
By: | /s/ MICHAEL R. CONN | |||
Michael R. Conn | ||||
Executive Vice President, Finance and Chief Financial Officer (principal financial officer & principal accounting officer) |
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Exhibit No. | Description | |||
2.1 | Agreement and Plan of Merger, dated as of October 5, 2008, by and among GSI Commerce, Inc., Bulldog Acquisition Corp., and Innotrac Corporation. (The schedules and exhibits (other than exhibits A, B and C) to the Agreement and Plan of Merger are omitted pursuant to Item 601(b)(2) of Regulation S-K. GSI agrees to furnish supplementally to the SEC, upon request, a copy of any omitted schedule or exhibit) (filed with GSI Commerce, Inc.’s Current Report on Form 8-K filed on October 6, 2008 and incorporated herein by reference). | |||
10.1 | Michael Rubin Form of Restricted Stock Unit Agreement (filed with GSI Commerce, Inc.’s Current Report on Form 8-K filed on August 7, 2008 and incorporated herein by reference). | |||
10.2 | Form of Restricted Stock Unit Grant Notice (Basic) Under the GSI Commerce, Inc. 2005 Equity Incentive Plan. | |||
31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 | |||
31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 | |||
32.1 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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