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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934. FOR THE QUARTERLY PERIOD ENDED JUNE 29, 2002.
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934. FOR THE TRANSITION PERIOD FROM __________
TO__________ .
Commission File Number 0-16611
-----------------
GSI COMMERCE, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-2958132
------------------------- -------------------------
(State or other (I.R.S. Employer
jurisdiction of Identification Number)
incorporation or
organization)
1075 First Avenue, King 19406
of Prussia, PA -------------------------
-------------------------
(Address of principal (Zip Code)
executive offices)
610-265-3229
---------------------
(Registrant's telephone number,
including area code)
---------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of July 31, 2002:
Common Stock,
$.01 par value 38,703,925/(1)/
------------------------- -------------------------
(Title of each class) (Number of Shares)
- --------
/(1)/ Excludes approximately 3,500 shares of the registrant's Common Stock
which are issuable to former shareholders of Ashford.com, Inc. in
connection with the registrant's acquisition of Ashford.com, but which,
as of July 31, 2002, had not yet been issued.
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FORM 10-Q
FOR THE QUARTER ENDED JUNE 29, 2002
TABLE OF CONTENTS
Page
----
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of December 29, 2001 and June 29, 2002 (Unaudited). 3
Condensed Consolidated Statements of Operations for the three- and six-month periods ended
June 30, 2001 and June 29, 2002 (Unaudited)............................................... 4
Condensed Consolidated Statements of Cash Flows for the three- and six-month periods ended
June 30, 2001 and June 29, 2002 (Unaudited)............................................... 5
Notes to Unaudited Condensed Consolidated Financial Statements.............................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................ 36
PART II--OTHER INFORMATION
Item 1. Legal Proceedings..................................................................... 37
Item 2. Changes in Securities and Use of Proceeds............................................. 37
Item 3. Defaults Upon Senior Securities....................................................... 37
Item 4. Submission of Matters to a Vote of Security Holders................................... 37
Item 5. Other Information..................................................................... 37
Item 6. Exhibits and Reports on Form 8-K...................................................... 38
SIGNATURES..................................................................................... 39
For all years prior to 1999, our fiscal year ended on December 31. Effective
for 1999, we changed our fiscal year from the last day of December to the
Saturday nearest the last day of December. Accordingly, references to fiscal
1999, fiscal 2000, fiscal 2001 and fiscal 2002 refer to the years ended January
1, 2000, December 30, 2000, December 29, 2001 and the year ending December 28,
2002.
Although we refer to the retailers, branded manufacturers, media companies,
television networks and professional sports organizations for which we develop
and operate e-commerce businesses as our "partners," we do not act as an agent
or legal representative for any of our partners. We do not have the power or
authority to legally bind any of our partners. Similarly, our partners do not
have the power or authority to legally bind us. In addition, we do not have the
types of liabilities for our partners that a general partner of a partnership
would have.
In May 2002, we changed our name from Global Sports, Inc. to GSI Commerce,
Inc. In connection with our name change, we also changed our Nasdaq symbol from
"GSPT" to "GSIC".
2
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GSI COMMERCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
December 29, June 29,
2001 2002
------------ ---------
ASSETS
Current assets:
Cash and cash equivalents................................................... $ 105,896 $ 57,850
Short-term investments...................................................... 842 2,269
Marketable securities....................................................... -- 9,547
Accounts receivable, net of allowance of $239 and $648, respectively........ 6,973 6,971
Inventory................................................................... 17,779 26,857
Prepaid expenses and other current assets................................... 1,502 3,780
--------- ---------
Total current assets.................................................... 132,992 107,274
Property and equipment, net.................................................... 28,929 42,212
Goodwill, net.................................................................. 13,453 19,531
Other assets, net of accumulated amortization of $377 and $810, respectively... 15,391 17,663
--------- ---------
Total assets............................................................ $ 190,765 $ 186,680
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................ $ 22,356 $ 11,984
Accrued expenses and other.................................................. 8,196 12,026
Deferred revenue............................................................ 8,193 13,267
Current portion--note payable............................................... 39 40
Current portion--capital lease obligations.................................. 506 317
--------- ---------
Total current liabilities............................................... 39,290 37,634
Note payable................................................................... 5,208 5,187
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value, 5,000,000 shares authorized; 400 shares
issued as mandatorily redeemable preferred stock and outstanding, as of
December 29, 2001 and June 29, 2002, respectively......................... -- --
Common stock, $0.01 par value, 90,000,000 shares authorized; 37,673,808 and
38,761,768 shares issued as of December 29, 2001 and June 29, 2002,
respectively; 37,672,598 and 38,760,558 shares outstanding as of
December 29, 2001 and June 29, 2002, respectively......................... 377 388
Additional paid in capital.................................................. 277,628 285,628
Accumulated other comprehensive income...................................... -- 53
Accumulated deficit......................................................... (131,738) (142,210)
--------- ---------
146,267 143,859
Less: Treasury stock, at par................................................... -- --
--------- ---------
Total stockholders' equity.............................................. 146,267 143,859
--------- ---------
Total liabilities and stockholders' equity.............................. $ 190,765 $ 186,680
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
GSI COMMERCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended Six Months Ended
---------------- ------------------
June 30, June 29, June 30, June 29,
2001 2002 2001 2002
-------- -------- -------- --------
Revenues:
Net revenues from product sales............................... $16,803 $28,293 $ 33,018 $ 57,943
Service fee revenue........................................... 150 4,776 150 7,051
------- ------- -------- --------
Net revenues.............................................. 16,953 33,069 33,168 64,994
Cost of revenues from product sales.............................. 11,697 20,399 22,846 40,754
------- ------- -------- --------
Gross profit.............................................. 5,256 12,670 10,322 24,240
------- ------- -------- --------
Operating expenses:
Sales and marketing, exclusive of $31, $(251), $94 and
$1 reported below as stock-based compensation,
respectively................................................ 6,793 9,743 14,234 18,935
Product development, exclusive of $0, $(118), $0 and
$(44) reported below as stock-based compensation,
respectively................................................ 2,084 3,067 4,454 5,403
General and administrative, exclusive of $886, $(381), $1,276
and $(175) reported below as stock-based compensation,
respectively................................................ 2,577 3,747 5,117 7,049
Stock-based compensation...................................... 917 (750) 1,370 (218)
Depreciation and amortization................................. 1,543 2,272 3,170 4,107
------- ------- -------- --------
Total operating expenses.................................. 13,914 18,079 28,345 35,276
------- ------- -------- --------
Other (income) expense:
Other income.................................................. (300) -- (300) --
Interest expense.............................................. 183 130 330 262
Interest income............................................... (723) (372) (1,839) (826)
------- ------- -------- --------
Total other (income) expense.............................. (840) (242) (1,809) (564)
------- ------- -------- --------
Net loss......................................................... $(7,818) $(5,167) $(16,214) $(10,472)
======= ======= ======== ========
Losses per share--basic and diluted:
Net loss...................................................... $ (0.24) $ (0.13) $ (0.51) $ (0.27)
======= ======= ======== ========
Weighted average shares outstanding--basic and diluted........... 32,002 38,674 31,964 38,362
======= ======= ======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
GSI COMMERCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended
------------------
June 30, June 29,
2001 2002
-------- --------
Cash Flows from Operating Activities:
Net loss.................................................................... $(16,214) $(10,472)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization........................................... 3,170 4,107
Stock-based compensation................................................ 1,370 (218)
Changes in operating assets and liabilities:
Accounts receivable, net................................................ 1,072 2,171
Inventory............................................................... 3,341 2,912
Prepaid expenses and other current assets............................... 456 (1,727)
Accounts payable and accrued expenses and other......................... (21,177) (14,684)
Deferred revenue........................................................ 69 4,761
-------- --------
Net cash used in operating activities................................... (27,913) (13,150)
-------- --------
Cash Flows from Investing Activities:
Acquisition of property and equipment, net.................................. (2,733) (15,617)
Reductions to goodwill and other assets, net................................ 169 857
Net cash paid for acquisition of Ashford.................................... -- (8,889)
Purchases of marketable securities.......................................... -- (9,494)
(Purchases) sales of short-term investments................................. 978 (27)
-------- --------
Net cash used in investing activities................................... (1,586) (33,170)
-------- --------
Cash Flows from Financing Activities:
Repayments of capital lease obligations..................................... (99) (189)
Payment on revolving credit facility........................................ -- (3,123)
Repayments of mortgage note................................................. (18) (19)
Purchases of treasury stock................................................. (4) --
Proceeds from sales of common stock......................................... 237 314
Proceeds from exercises of common stock options and warrants................ 168 1,291
-------- --------
Net cash provided by (used in) financing activities..................... 284 (1,726)
-------- --------
Net decrease in cash and cash equivalents...................................... (29,215) (48,046)
Cash and cash equivalents, beginning of period................................. 92,012 105,896
-------- --------
Cash and cash equivalents, end of period....................................... $ 62,797 $ 57,850
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
GSI COMMERCE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--BASIS OF PRESENTATION
GSI Commerce, Inc. ("GSI" or the "Company"), a Delaware corporation,
develops and operates e-commerce businesses, including online retail stores and
direct response television campaigns, for retailers, branded manufacturers,
media companies, television networks and professional sports organizations. The
Company currently derives virtually all of its revenues from sales of goods
through its partners' online stores and direct response television campaigns,
toll-free telephone number sales, bulk sales, business-to-business and group
sales and related outbound shipping charges, net of allowances for returns and
discounts, as well as from fixed and variable fees earned in connection with
the development and operation of its partners' e-commerce businesses and the
provision of marketing and other services. Each of the Company's partners owns
the URL address of its Web site. Based upon the terms of the agreements with
its partners, the Company owns certain components of the Web sites and the
partners own other components.
The accompanying condensed consolidated financial statements of GSI have
been prepared in accordance with accounting principles generally accepted in
the United States of America for interim financial information and in
accordance with the instructions for Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all information and footnotes required by
accounting principles generally accepted in the United States of America for
complete financial statements.
The accompanying financial information is unaudited; however, in the opinion
of the Company's management, all adjustments (consisting solely of normal
recurring adjustments and accruals) necessary to present fairly the financial
position, results of operations and cash flows for the periods reported have
been included. The results of operations for the periods reported are not
necessarily indicative of those that may be expected for a full year.
This quarterly report should be read in conjunction with the financial
statements and notes thereto included in the Company's audited financial
statements presented in the Company's Annual Report on Form 10-K filed with the
Securities and Exchange Commission on April 4, 2002.
Certain reclassifications have been made to the prior year condensed
consolidated financial statements to conform to those used in the current
period.
NOTE 2--ACCOUNTING POLICIES
Marketable Securities: Marketable securities, which consist of investments
in debt securities, are classified as available-for-sale and are reported at
fair value, with unrealized gains and losses recorded in stockholders' equity.
The Company does not intend to hold its marketable securities for more than one
year from the most recent balance sheet date and has therefore classified them
as a current asset. Realized gains or losses and declines in value judged to be
other than temporary, if any, on available-for-sale securities are reported in
other income or loss. As of June 29, 2002, the Company recorded net unrealized
gains on its marketable securities of $53,000.
Change in Useful Life of Property and Equipment: During the three-month
period ended March 31, 2001, the Company increased its estimate of the useful
lives of its computer hardware and software from two years to four years. This
change had the effect of decreasing the net loss for the three- and six-month
periods ended June 30, 2001 by $1.5 million, or $0.05 per share, and $2.9
million, or $0.09 per share, respectively, and for the three- and six-month
periods ended June 29, 2002 by $403,000, or $0.01 per share, and by $941,000,
or $0.02 per share, respectively. The increase in estimated useful lives was
based on the Company's then-current analysis of its historical operating
experience, which indicated that the original estimate was no longer
appropriate.
6
GSI COMMERCE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Change in Accounting for Goodwill and Certain Other Intangibles: The
Company adopted Statement of Financial Accounting Standards ("SFAS") No. 141,
"Business Combinations" as of July 1, 2001. The Company accounted for its
acquisition of Ashford.com, Inc. ("Ashford") under SFAS No. 141 (see Note 3).
Effective December 30, 2001, the Company adopted the provisions of SFAS, No.
142, "Goodwill and Other Intangible Assets." SFAS No. 142 changes the
accounting for goodwill from an amortization method to an impairment-only
approach. Under an impairment-only approach, goodwill and certain intangibles
are not amortized into results of operations, but instead reviewed for
impairment and written down and charged to results of operations only in the
periods in which the recorded value of goodwill and certain intangibles is more
than its fair value. SFAS No. 142 requires the Company to complete a two-step
impairment test of goodwill. The first step determines if an impairment exists
and was required to be completed by June 29, 2002. The second step (if
necessary) measures the impairment and is required to be completed by December
28, 2002. The Company completed the first step of the impairment test during
the three-month period ended June 29, 2002 and found no instances of impairment
of its recorded goodwill. Therefore, the second step of the impairment test is
not necessary during fiscal 2002, unless future indicators of impairment are
found. In addition, upon adoption of SFAS No. 142, the Company evaluated its
goodwill and intangibles acquired prior to June 30, 2001 using the criteria in
SFAS No. 141, and determined that no change in previously recognized goodwill
was required.
The following is a reconciliation of reported net loss to net loss adjusted
to reflect the impact of the discontinuance of the amortization of goodwill for
the three- and six-month periods ended June 30, 2001 and June 29, 2002:
Three Months Ended Six Months Ended
---------------- ------------------
June 30, June 29, June 30, June 29,
2001 2002 2001 2002
-------- -------- -------- --------
(in thousands) (in thousands)
Net loss:
Reported net loss.................................... $(7,818) $(5,167) $(16,214) $(10,472)
Goodwill amortization................................ 178 -- 351 --
------- ------- -------- --------
Adjusted net loss................................ $(7,640) $(5,167) $(15,863) $(10,472)
======= ======= ======== ========
Losses per share--basic and diluted:
Reported net loss per share.......................... $ (0.24) $ (0.13) $ (0.51) $ (0.27)
Goodwill amortization................................ 0.01 -- 0.01 --
------- ------- -------- --------
Adjusted losses per share--basic and diluted..... $ (0.23) $ (0.13) $ (0.50) $ (0.27)
======= ======= ======== ========
Other Assets, Net: Other assets, net consists primarily of deferred partner
revenue share charges, resulting from the exercise of a right to receive
1,600,000 shares of the Company's common stock in lieu of future cash partner
revenue share payments. The 1,600,000 shares of GSI common stock issued are
subject to restrictions, including the prohibition of the transfer of such
shares. These restrictions lapse as to 10% of such shares on December 31, 2002
and as to an additional 10% of such shares on the last day of each quarter
thereafter, becoming free of all such transfer restrictions on March 31, 2005.
Deferred partner revenue share charges were $14.1 million and $13.7 million as
of December 29, 2001 and June 29, 2002, respectively, and are being amortized
as stock-based compensation expense as the partner revenue share expense is
incurred. The partner revenue share expense incurred is based on actual
revenues recognized in a given period and the imputed partner revenue share
percentage, which is based on the value of the Company's common stock that was
issued upon exercise of the right. Stock-based compensation expense related to
the amortization of deferred partner revenue share charges was $0 for the
three- and six month periods ended June 30, 2001, respectively, and $183,000
and $341,000 for the three- and six-month periods ended June 29, 2002,
respectively.
7
GSI COMMERCE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Other assets, net also consists of other intangibles acquired in connection
with the Company's acquisition of Ashford that have been recorded separate from
Goodwill (see Note 3).
Service Fee Revenue: The Company derives its service fee revenue from fixed
and variable fees earned in connection with the development and operation of
its partners' e-commerce businesses and the provision of marketing and other
services. The Company recognizes revenues from services provided when the
following revenue recognition criteria are met: persuasive evidence of an
arrangement exists, services have been rendered, the selling price is fixed or
determinable and collectibility is reasonably assured. If the Company receives
payments for services in advance, these amounts are deferred and then
recognized over the service period. Costs relating to service fee revenue
consist primarily of personnel and other costs associated with its engineering,
production and creative departments which are included in product development
expense, as well as fulfillment costs and personnel and other costs associated
with its marketing and customer service departments which are included in sales
and marketing expense.
Shipping and Handling Costs: The Company defines shipping and handling
costs as only those costs incurred for a third-party shipper to transport
products to the customer and these costs are included in cost of revenues from
product sales. In some instances, shipping and handling costs exceed shipping
charges to the customer and are subsidized by the Company. Additionally, the
Company selectively offers promotional free shipping whereby it ships
merchandise to customers free of all shipping and handling charges. The cost of
promotional free shipping and subsidized shipping and handling was $275,000 and
$833,000 for the three-and six-month periods ended June 30, 2001, respectively,
and $506,000 and $647,000 for the three- and six-month periods ended June 29,
2002, respectively, and was charged to sales and marketing expense.
Fulfillment Costs: The Company defines fulfillment costs as personnel,
occupancy and other costs associated with its Kentucky and Texas fulfillment
centers, personnel and other costs associated with its logistical support and
vendor operations departments and third-party warehouse and fulfillment
services costs. Fulfillment costs were $2.3 million and $5.0 million for the
three-and six-month periods ended June 30, 2001, respectively, and $2.7 million
and $5.1 million for the three- and six-month periods ended June 29, 2002,
respectively, and are included in sales and marketing expense.
NOTE 3--ACQUISITION
On March 14, 2002, the Company completed its acquisition of all of the
outstanding common stock of Ashford pursuant to a definitive merger agreement
executed on September 13, 2001. The Company's primary reason for the
acquisition was to extend its outsource business model into the jewelry, luxury
goods and corporate gifts categories. The primary factors that contributed to
recognition of goodwill were the reduction of the book value of Ashford's net
assets from the measurement date to the date the merger was completed, and the
adjustment of Ashford's inventory and certain liabilities to fair value.
As consideration for the purchase, the Company issued to the stockholders of
Ashford $7.2 million and approximately 435,000 shares of the Company's common
stock valued at $7.0 million based on a value of $16.00 per share, which is the
average closing price of the Company's common stock for the period from
September 6, 2001 to September 18, 2001.
The acquisition has been accounted for under SFAS No. 141 as a purchase, and
the acquisition cost of $15.9 million has been allocated to the assets acquired
and the liabilities assumed based upon estimates of their respective fair
values. A total of $6.1 million, representing the excess of the purchase price
over fair value of the net assets acquired, has been allocated to goodwill.
8
GSI COMMERCE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During the three-month period ended June 29, 2002, the Company obtained a
third-party valuation relating to intangible assets acquired from Ashford that
were initially classified as goodwill pending receipt of the valuation. The
Company has reclassified certain other intangible assets from goodwill and
included them in other assets, net. These other intangible assets acquired from
Ashford consisted of the following:
June 29, 2002
------------------------------------
Gross Accumulated Other
Amount Amortization Intangibles, net
------ ------------ ----------------
(in thousands)
Customer Base................. $1,470 $(74) $1,396
Trademarks.................... 1,570 -- 1,570
------ ---- ------
$3,040 $(74) $2,966
====== ==== ======
The customer base acquired has an estimated useful life of five years and
amortization is provided using the straight-line method. The Company recognized
amortization of $0 for the three- and six-month periods ended June 30, 2001,
respectively, and $74,000 for the three- and six-month periods ended June 29,
2002, respectively. The estimated amortization expense to be recognized for the
acquired customer base is as follows:
Estimated
Amortization
Expense
--------------
(in thousands)
Six Months Ending December 28, 2002..... $ 159
2003.................................... 294
2004.................................... 294
2005.................................... 294
2006.................................... 294
2007.................................... 61
------
$1,396
======
The trademarks acquired have an indefinite useful life, and therefore, under
SFAS No. 142, they will not be amortized into results of operations but instead
will be reviewed for impairment and written down and charged to results of
operations only in periods in which their recorded value is more than their
fair value.
The Company is in the process of obtaining additional information for
certain assets acquired and liabilities assumed. The allocation of the purchase
price for the acquisition is subject to refinement pending receipt of this
additional information.
The Company's consolidated results of operations incorporates Ashford's
results of operations commencing on the March 14, 2002 acquisition date.
9
GSI COMMERCE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The unaudited pro forma combined information below presents the combined
results of operations of the Company as if the acquisition had occurred at the
beginning of the respective periods presented. The unaudited pro forma combined
information, based upon the historical consolidated financial statements of the
Company and Ashford, is based on an acquisition cost of $15.9 million and
assumes that an estimated $6.1 million of acquisition cost over the book value
of Ashford's net tangible assets is allocated to goodwill.
Three Months Ended Six Months Ended
-------------------- --------------------
June 30, June 29, June 30, June 29,
2001 2002 2001 2002
-------- -------- -------- --------
(in thousands, except (in thousands, except
per share amounts) per share amounts)
Revenues................ $ 29,059 $33,069 $ 59,602 $ 71,531
Net loss................ $(22,287) $(5,167) $(47,720) $(16,145)
Net loss per share /(1)/ $ (0.69) $ (0.13) $ (1.47) $ (0.42)
- --------
/(1)/ Net loss per share is calculated using the weighted average number of
common shares outstanding, including the issuance of approximately
435,000 shares to stockholders of Ashford as if such event had occurred
at the beginning of the respective periods presented.
The unaudited pro forma combined information is not necessarily indicative
of the results of operations of the combined company had the acquisition
occurred at the beginning of the periods presented, nor is it necessarily
indicative of future results.
NOTE 4--MARKETABLE SECURITIES
Marketable securities, at estimated fair value, consist of the following as
of June 29, 2002:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
(in thousands)
Corporate bonds.................. $ 561 $-- $(1) $ 560
U.S. government agency securities 8,933 54 -- 8,987
------ --- --- ------
$9,494 $54 $(1) $9,547
====== === === ======
The amortized cost and estimated fair value of investments in debt
securities as of June 29, 2002, by contractual maturity, are as follows:
Amortized Estimated
Cost Fair Value
--------- ----------
(in thousands)
Due within one year................. $6,992 $7,018
Due after one year through two years 2,502 2,529
------ ------
$9,494 $9,547
====== ======
10
GSI COMMERCE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 5--CHANGES IN STOCKHOLDERS' EQUITY
The following table summarizes the changes in stockholders' equity for the
three-month periods ended June 30, 2001 and June 29, 2002:
Accumulated Treasury
Common Stock Additional Other Stock
-------------- Paid in Accumulated Comprehensive Comprehensive -------------- --------
Shares Dollars Capital Deficit Loss Loss Shares Dollars Total
------ ------- ---------- ----------- ------------- ------------- ------ ------- --------
(in thousands)
Consolidated balance at
March 31, 2001....................... 31,927 $319 $217,584 $(109,539) $ -- -- $-- $108,364
Net loss.............................. (7,818) $(7,818) (7,818)
Net unrealized gains on available-for-
sale securities...................... -- -- --
-------
Comprehensive loss.................... $(7,818)
=======
Issuance of options and warrants to
purchase common stock in exchange
for services......................... 921 921
Issuance of common stock upon exercise
of options and warrants.............. 100 1 164 165
Issuance of common stock under
Employee Stock Purchase Plan......... 67 1 237 238
Purchase of treasury stock............ (4) 1 (4)
------ ---- -------- --------- ---- -- --- --------
Consolidated balance at June 30, 2001. 32,094 $321 $218,902 $(117,357) $ -- 1 $-- $101,866
====== ==== ======== ========= ==== == === ========
Consolidated balance at
March 30, 2002....................... 38,532 $385 $285,737 $(137,043) $ (2) 1 $-- $149,077
Net loss.............................. (5,167) $(5,167) (5,167)
Net unrealized gains on available-for-
sale securities...................... 55 55 55
-------
Comprehensive loss.................... $(5,112)
=======
Issuance of options and warrants to
purchase common stock in exchange
for services......................... (933) (933)
Issuance of common stock upon exercise
of options and warrants.............. 144 2 511 513
Issuance of common stock under
Employee Stock Purchase Plan......... 86 1 313 314
------ ---- -------- --------- ---- -- --- --------
Consolidated balance at June 29, 2002. 38,762 $388 $285,628 $(142,210) $ 53 1 $-- $143,859
====== ==== ======== ========= ==== == === ========
NOTE 6--STOCK OPTIONS AND WARRANTS
The Company maintains incentive and non-incentive stock option plans for
certain employees, directors and other persons (the "Plans"). Under the terms
of the Plans, the Company may grant incentive and non-incentive options and
restricted stock awards to purchase up to 8,092,571 shares of common stock to
employees, directors, and others. The options vest at various times over
periods ranging up to five years. The options, if not exercised, generally
expire up to ten years after the date of grant. Stock appreciation rights
("SARs") may be granted under the Plans either alone or in tandem with stock
options. Generally, recipients of SARs are entitled to receive, upon exercise,
cash or shares of common stock (valued at the then fair market value of the
Company's common stock) equal to such fair market value on the date of exercise
minus such fair market value on the date of grant of the shares subject to the
SAR, although certain other measurements also may be used. A SAR granted in
tandem with a stock option is exercisable only if and to the extent that the
option is exercised. No SARs have been granted to date under the Plans.
11
GSI COMMERCE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes the stock option activity for the three-month
periods ended June 30, 2001 and June 29, 2002:
Three Months Ended
-----------------------------------------------
June 30, 2001 June 29, 2002
----------------------- -----------------------
Weighted Weighted
Average Average
Number of Exercise Number of Exercise
Shares Price Shares Price
-------------- -------- -------------- --------
(in thousands) (in thousands)
Outstanding, beginning of period.... 6,045 $7.45 5,662 $ 8.59
Granted.......................... 201 6.40 191 14.42
Exercised........................ (100) 1.74 (94) 4.34
Cancelled........................ (434) 8.32 (454) 13.26
----- -----
Outstanding, end of period.......... 5,712 7.63 5,305 8.51
===== =====
Exercisable, end of period.......... 2,054 8.36 2,221 8.20
===== =====
The following table summarizes the warrant activity for the three-month
periods ended June 30, 2001 and June 29, 2002:
Three Months Ended
-----------------------------------------------
June 30, 2001 June 29, 2002
----------------------- -----------------------
Weighted Weighted
Average Average
Number of Exercise Number of Exercise
Shares Price Shares Price
-------------- -------- -------------- --------
(in thousands) (in thousands)
Outstanding, beginning of period.... 7,251 $9.50 7,183 $9.15
Granted.......................... 460 2.99 -- --
Exercised........................ -- -- (50) 2.50
Cancelled........................ (393) 9.21 (50) 2.50
----- -----
Outstanding, end of period.......... 7,318 9.06 7,083 9.25
===== =====
Exercisable, end of period.......... 6,917 9.44 6,883 9.44
===== =====
During the three-month period ended June 29, 2002, the Company granted to
employees options to purchase an aggregate of 190,700 shares of the Company's
common stock at prices ranging from $12.75 to $14.98 per share. The weighted
average fair value and the weighted average exercise price of the options
granted with exercise prices at the then-current market prices of the
underlying stock during the three-month period ended June 29, 2002 was $10.20
and $14.42 per share, respectively. For the three- and six-month periods ended
June 29, 2002, the Company recorded $933,000 and $612,000 reductions in
stock-based compensation expense, respectively, relating to options and
restricted stock.
During the three-month period ended June 30, 2001, the Company granted to
employees options to purchase an aggregate of 200,775 shares of the Company's
common stock at prices ranging from $4.45 to $6.80 per share. The weighted
average fair value and the weighted average exercise price of the options
granted with exercise prices at the then-current market prices of the
underlying stock during the three-month period ended June 30, 2001 was $4.38
and $6.40 per share, respectively. For the three- and six-month periods ended
June 30, 2001, the Company recorded $782,000 and $1.3 million of stock-based
compensation expense, respectively, relating to options and restricted stock.
12
GSI COMMERCE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During the three-month period ended June 30, 2001, the Company modified the
vesting schedule of 127,150 options. Because these options were accelerated,
they are subject to variable accounting. The Company recognized $61,000 of
stock-based compensation expense relating to these modified options for the
three- and six-month periods ended June 30, 2001, respectively, which amounts
are included in the amounts of stock-based compensation expense relating to
options described above. The Company recognized $0 of stock-based compensation
expense for the three- and six-month periods ended June 29, 2002, respectively,
and the amount of stock-based compensation expense to be recognized in future
periods is $0 as there is no future vesting or service period for the modified
options.
During the three-month period ended June 30, 2001, the Company granted to
partners warrants to purchase an aggregate of 460,000 shares of the Company's
common stock at prices ranging from $2.50 to $6.27 per share. The weighted
average fair value and the weighted average exercise price of the warrant
granted with an exercise price at the then-current market price of the
underlying stock during the three-month period ended June 30, 2001 was $2.25
and $6.27 per share, respectively. The weighted average fair value and the
weighted average exercise price of the warrants granted with exercise prices
below the then-current market prices of the underlying stock during the
three-month period ended June 30, 2001 was $2.77 and $2.50 per share,
respectively. For the three- and six-month periods ended June 30, 2001, the
Company recorded $135,000 and $53,000 of stock-based compensation expense,
respectively, relating to warrants.
The following table summarizes information regarding options and warrants
outstanding and exercisable as of June 29, 2002:
Outstanding Exercisable
------------------------------------------------ -------------------------------
Weighted Average
Remaining
Range of Exercise Number Contractual Life Weighted Average Number Weighted Average
Prices Outstanding In Years Exercise Price Exercisable Exercise Price
- ----------------- -------------- ---------------- ---------------- -------------- ----------------
(in thousands) (in thousands)
$ 0.59-$ 6.00 3,219 7.65 $ 4.69 1,489 $ 4.75
$ 6.13-$ 8.15 3,032 4.56 7.87 2,445 8.02
$ 9.00-$10.00 4,492 2.95 9.91 4,370 9.93
$10.60-$25.00 1,625 6.65 15.96 782 15.37
$30.56-$74.54 20 3.75 37.69 18 37.25
------ -----
$ 0.59-$74.54 12,388 5.05 8.92 9,104 9.12
====== =====
As of June 29, 2002, 1,428,207 shares of common stock were available for
future grants under the Plans.
13
GSI COMMERCE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company accounts for stock options granted to employees under the Plans
in accordance with APB Opinion No. 25 and, therefore, recognizes compensation
cost using the intrinsic method for those options. If compensation cost for
such awards had been determined consistent with SFAS No. 123, the Company's pro
forma net loss and losses per share for the three- and six-month periods ended
June 30, 2001 and June 29, 2002 would have been as follows:
As Reported Pro Forma
----------- ---------
(in thousands)
Three Months Ended June 30, 2001
Net loss................................ $ (7,818) $ (9,282)
======== ========
Losses per share--basic and diluted..... $ (0.24) $ (0.29)
======== ========
Three Months Ended June 29, 2002
Net loss................................ $ (5,167) $ (6,931)
======== ========
Losses per share--basic and diluted..... $ (0.13) $ (0.18)
======== ========
Six Months Ended June 30, 2001
Net loss................................ $(16,214) $(20,447)
======== ========
Losses per share--basic and diluted..... $ (0.51) $ (0.64)
======== ========
Six Months Ended June 29, 2002
Net loss................................ $(10,472) $(13,892)
======== ========
Losses per share--basic and diluted..... $ (0.27) $ (0.36)
======== ========
The fair value of options granted under the Plans during the three-month
periods ended June 30, 2001 and June 29, 2002 were estimated on the date of
grant using the Black-Scholes multiple option pricing model, with the following
weighted average assumptions:
Three Months Ended
--------------------------
Assumption June 30, 2001 June 29, 2002
---------- ------------- -------------
Dividend yield.......................... None None
Expected volatility..................... 98.00% 102.00%
Average risk free interest rate......... 4.00% 3.84%
Average expected lives.................. 3.95 years 4.03 years
14
GSI COMMERCE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
No warrants were granted or issued by the Company during the three-month
period ended June 29, 2002. The fair value of warrants granted and issued
during the three-month period ended June 30, 2001 were estimated on the date of
grant using the Black-Scholes multiple option pricing model, with the following
weighted average assumptions:
Three Months
Ended
Assumption June 30, 2001
---------- ---------------
Dividend yield.......................... None
Expected volatility..................... 99.00%-119.00%
Average risk free interest rate......... 3.58%-3.98%
Average expected lives.................. 1.00-1.75 years
NOTE 7--LOSSES PER SHARE
Losses per share for all periods have been computed in accordance with SFAS
No. 128, "Earnings Per Share." Basic and diluted losses per share are computed
by dividing net loss by the weighted average number of shares of common stock
outstanding during the period. Outstanding common stock options and warrants
have been excluded from the calculation of diluted losses per share because
their effect would be antidilutive.
The amounts used in calculating losses per share data are as follows:
Three Months Ended Six Months Ended
---------------- ------------------
June 30, June 29, June 30, June 29,
2001 2002 2001 2002
-------- -------- -------- --------
(in thousands) (in thousands)
Net loss................................ $(7,818) $(5,167) $(16,214) $(10,472)
======= ======= ======== ========
Weighted average shares
outstanding--basic and diluted........ 32,002 38,674 31,964 38,362
======= ======= ======== ========
Outstanding common stock options having
no dilutive effect.................... 5,712 5,305 5,712 5,305
======= ======= ======== ========
Outstanding common stock warrants
having no dilutive effect............. 7,318 7,083 7,318 7,083
======= ======= ======== ========
NOTE 8--COMPREHENSIVE LOSS
The following table summarizes the components of comprehensive loss:
Three Months Ended Six Months Ended
---------------- ------------------
June 30, June 29, June 30, June 29,
2001 2002 2001 2002
-------- -------- -------- --------
(in thousands) (in thousands)
Net loss................................ $(7,818) $(5,167) $(16,214) $(10,472)
Other comprehensive income:
Net unrealized gains on
available-for-sale securities...... -- 55 -- 53
------- ------- -------- --------
Other comprehensive income.............. -- 55 -- 53
------- ------- -------- --------
Comprehensive loss...................... $(7,818) $(5,112) $(16,214) $(10,419)
======= ======= ======== ========
15
GSI COMMERCE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 9--SIGNIFICANT TRANSACTIONS/CONCENTRATIONS OF CREDIT RISK
Net revenues included $412,000 for the three- and six-month periods ended
June 30, 2001 and $2.1 million for the three- and six-month periods ended June
29, 2002 related to bulk sales to one entity. As of June 29, 2002, the amount
included in accounts receivable related to these bulk sales was $2.1 million.
Net revenues included $1.5 million and $1.9 million for the three- and
six-month periods ended June 30, 2001, respectively, and $0 and $8.3 million
for the three- and six-month periods ended June 29, 2002, respectively, from
sales of one of the Company's partner's products sold primarily through its
direct response television campaigns in addition to Web site and toll-free
number sales. As of June 29, 2002, the amount included in accounts receivable
related to these sales was not significant.
As of June 29, 2002, included in accounts receivable was $1.5 million
related to service fees earned during the three-month period ended June 29,
2002 in connection with the provision of other services.
As of June 29, 2002 the Company had $10.2 million of operating cash and
$57.2 million of cash equivalents and marketable securities invested with four
financial institutions, which are potentially subject to credit risk. The
composition of these investments are regularly monitored by management of the
Company.
NOTE 10--COMMITMENTS AND CONTINGENCIES
Legal Proceedings
The Company is involved in various litigation relating to its business,
including litigation relating to Ashford. The Company believes that the
disposition of these matters will not have a material adverse effect on the
financial position or results of operations of the Company.
Employment Agreements
As of June 29, 2002, the Company had employment agreements with several of
its employees for an aggregate annual base salary $2.6 million plus bonuses and
increases in accordance with the terms of the agreements. Remaining terms of
such contracts range from one to five years.
Advertising and Media Agreements
As of June 29, 2002, the Company was contractually committed for the
purchase of future advertising totaling approximately $516,000 through the
fiscal year ending December 28, 2002. The expense related to these commitments
will be recognized in accordance with the Company's accounting policy related
to advertising.
Partner Revenue Share Payments
As of June 29, 2002, the Company was contractually committed to minimum cash
revenue share payments of $375,000 per fiscal quarter through July, 2011 and
annual minimum cash revenue share payments of $150,000 in February, 2003,
$200,000 in February, 2004 and $250,000 in February, 2005.
16
GSI COMMERCE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Concluded)
NOTE 11--SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Six Months Ended
-----------------
June 30, June 29,
2001 2002
-------- --------
(in thousands)
Cash paid during the period for interest.................... $330 $ 262
Acquisition of Ashford:
Fair value of assets acquired (including goodwill)....... $ -- $ 27,433
Liabilities assumed...................................... -- (11,583)
Stock issued............................................. -- (6,961)
---- --------
Cash paid................................................ -- 8,889
Cash acquired............................................ -- --
---- --------
Net cash paid for acquisition of Ashford............. $ -- $ 8,889
==== ========
Noncash Investing and Financing Activities:
Net unrealized gains on available-for-sale securities....... $ -- $ 53
Issuance of common stock upon exercises of options granted
to employees of the discontinued operations............... $ -- $ 4
NOTE 12--RELATED PARTY TRANSACTIONS
The Company has entered into a strategic alliance to provide procurement and
fulfillment services for QVC, Inc., which along with its majority stockholder,
Comcast Corporation, owns Interactive Technology Holdings, LLC, which is a
principal shareholder of the Company. The Company recognized net revenues of
$382,000 and $652,000 on sales to this related party for the three- and
six-month periods ended June 30, 2001, respectively, and $263,000 and $466,000
for the three- and six-month periods ended June 29, 2002, respectively. The
terms of these sales are comparable to those with other partners of the
Company. The amount included in accounts receivable as a result of these sales
was $155,000 as of June 29, 2002.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-Looking Statements
All statements made in this Quarterly Report on Form 10-Q, other than
statements of historical fact, are forward-looking statements. The words
"anticipate", "believe", "estimate", "expect", "intend", "may", "plan", "will",
"would", "should", "guidance", "potential", "continue", "project", "forecast"
and similar expressions typically are used to identify forward-looking
statements. Forward-looking statements are based on then-current expectations,
beliefs, assumptions, estimates and forecasts about our business and the
industry and markets in which we operate. These statements are not guarantees
of future performance and involve risks, uncertainties and assumptions which
are difficult to predict. Therefore, actual outcomes and results may differ
materially from what is expressed or implied by these forward-looking
statements. Factors which may affect our business, financial condition and
operating results include the effects of changes in the economy, consumer
spending, the stock market and the industries in which we operate, changes
affecting the Internet, online retailing and direct response marketing, our
ability to maintain relationships with strategic partners and suppliers, our
ability to timely and successfully develop, maintain and protect our technology
and product and service offerings and execute operationally, our ability to
attract and retain qualified personnel and our ability to successfully
integrate our acquisitions of other businesses, including our recent
acquisition of Ashford.com, Inc. More information about potential factors that
could affect us are described under the heading "Risk Factors." We expressly
disclaim any intent or obligation to update these forward-looking statements,
except as otherwise specifically stated by GSI Commerce.
Overview
We develop and operate e-commerce businesses, including online retail stores
and direct response television campaigns, for retailers, branded manufacturers,
media companies, television networks and professional sports organizations. We
enable our partners to capitalize on their existing brands to exploit
e-commerce opportunities. We customize the design of our partners' e-commerce
businesses with a broad range of characteristics that includes differentiated
user interfaces on partners' Web sites, partner-specific content, an extensive
electronic catalog of product descriptions and images, partner specific
products for direct response television campaigns and partner specific customer
service and fulfillment. We currently derive virtually all of our revenues from
the sale of goods through our partners' online stores and direct response
television campaigns, toll-free telephone number sales, bulk sales,
business-to-business and group sales and related outbound shipping charges, net
of allowances for returns and discounts, as well as from fixed and variable
fees earned in connection with the development and operation of partners'
e-commerce businesses and the provision of marketing and other services.
Financial Presentation
Our financial statements present:
. net revenues from product sales, which are derived from sales of goods
through our partners' online stores and direct response television
campaigns, toll-free telephone number sales, bulk sales,
business-to-business and group sales and related outbound shipping
charges, net of allowances for returns and discounts. Net revenues from
product sales include the revenues of Ashford from March 14, 2002, the
date our acquisition of Ashford was completed.
. service fee revenue, which is derived from fixed and variable fees earned
in connection with the development and operation of partners' e-commerce
businesses and the provision of marketing and other services.
. cost of revenues from product sales, which include the cost of products
sold and inbound freight related to these products, as well as outbound
shipping and handling costs, other than those related to promotional free
shipping and subsidized shipping and handling which are included in sales
and marketing expense.
18
. sales and marketing expenses, which include advertising and promotional
expenses, including promotional free shipping and subsidized shipping and
handling costs, online marketing fees, commissions to affiliates,
fulfillment costs, customer service costs, credit card fees,
merchandising costs and payroll and related expenses. These expenses also
include partner revenue share charges, which are royalty payments made to
our partners in exchange for the use of their brands, the promotion of
our partners' URLs, Web sites and toll-free telephone numbers in their
marketing and communications materials, the implementation of programs to
provide incentives to customers to shop through the e-commerce businesses
that we operate and other programs and services provided to the customers
of the e-commerce businesses that we operate.
. product development expenses, which consist primarily of expenses
associated with planning, maintaining and operating our partners'
e-commerce businesses and payroll and related expenses for engineering,
production, creative and management information systems.
. general and administrative expenses, which consist primarily of payroll
and related expenses associated with executive, finance, human resources,
legal and administrative personnel, as well as bad debt expense and
occupancy costs for our headquarters and other offices.
. stock-based compensation expense, which consists of the amortization of
deferred compensation expense for options granted to employees and
certain non-employees, the value of the options or warrants granted to
certain partners and investors and amortization of deferred partner
revenue share charges.
. depreciation and amortization expenses, which relate primarily to the
depreciation of our corporate headquarters, the depreciation and
amortization of the capitalized costs for our technology, hardware and
software and the depreciation of improvements, furniture and fixtures at
our corporate headquarters and our fulfillment centers.
. other income and expense, which consists primarily of interest income
earned on cash, cash equivalents, short-term investments and marketable
securities, interest expense paid primarily in connection with the
mortgage on our corporate headquarters and interest expense on capital
leases and income earned pursuant to the terms of a lease termination
agreement.
Results of Operations
Comparison of the three- and six-month periods ended June 29, 2002 and June
30, 2001
Net Revenues From Product Sales. Net revenues from product sales increased
$11.2 million from $17.0 million for the three-month period ended June 30, 2001
to $28.2 million for the three-month period ended June 29, 2002. Of this
increase, $3.6 million was due to an increase in sales from our company owned
online stores, $3.4 million was due to the net addition of online retail stores
that were not operated for the entirety of both periods, $2.3 million was due
to sales from partners' online retail stores that were operated for the
entirety of both periods and $1.7 million was due to an increase in bulk sales.
Net revenues from product sales increased $24.7 million from $33.2 million for
the six-month period ended June 30, 2001, to $57.9 million for the six-month
period ended June 29, 2002. Of this increase, $8.8 million was due to an
increase in sales through direct response television campaigns primarily from
the sale of one of our partner's products, $7.8 million was due to the net
addition of online retail stores that were not operated for the entirety of
both periods, $3.3 million was due to sales from partners' online retail stores
that were operated for the entirety of both periods, $3.1 million was due to an
increase in sales from our company owned online stores and $1.7 million was due
to an increase in bulk sales.
Service Fee Revenue. Service fee revenue increased $4.6 million from
$150,000 for the three-month period ended June 30, 2001 to $4.8 million for the
three-month period ended June 29, 2002 and increased $6.9 million from $150,000
for the six-month period ended June 30, 2001 to $7.1 million for the six-month
period ended June 29, 2002. These increases were due to the addition of new
partners in the third quarter of fiscal
19
2001 and the second quarter of fiscal 2002 from which we earned fixed and
variable fees relating to the development and operation of their e-commerce
businesses and the provision of other services.
Cost of Revenues From Product Sales. We had cost of revenues from product
sales of $20.4 million and $40.8 million for the three- and six-month periods
ended June 29, 2002 and $11.7 million and $22.8 million for the three- and
six-month periods ended June 30, 2001, respectively. As a percentage of net
revenues from product sales, cost of revenues from product sales was 72.1% and
70.3% for the three- and six-month periods ended June 29, 2002 and 69.6% and
69.2% for the three- and six-month periods ended June 30, 2001, respectively.
The increases in cost of revenues from product sales as a percentage of net
revenues from product sales for the three- and six-month periods ended June 29,
2002 compared to the comparable periods in fiscal 2001 were due primarily to
lower margins associated with a bulk sale in the three-month period ended June
29, 2002.
Gross Profit. We had gross profit of $12.7 million and $24.2 million for
the three- and six-month periods ended June 29, 2002 and $5.3 million and $10.3
million for the three- and six-month periods ended June 30, 2001, respectively.
As a percentage of net revenues, gross profit was 38.3% and 37.3% for the
three- and six-month periods ended June 29, 2002 and 31.0% and 31.1% for the
three- and six-month periods ended June 30, 2001, respectively. The increases
in gross profit dollars and gross profit percentage for the three- and
six-month periods ended June 29, 2002 compared to the comparable periods in
fiscal 2001 were due primarily to the $4.6 million and $6.9 million increases
in service fee revenue for the three- and six-month periods ended June 29,
2002, respectively.
Sales and Marketing Expenses. Sales and marketing expenses increased $2.9
million from $6.8 million for the three-month period ended June 30, 2001 to
$9.7 million the three-month period ended June 29, 2002. This increase was
primarily due to a $1.7 million increase in personnel and related costs
associated with our merchandising, marketing and customer service departments,
a $428,000 increase in credit card fees, a $377,000 increase in fulfillment
costs, a $231,000 increase in subsidized shipping and handling costs and a
$181,000 increase in partner revenue share charges, offset, in part, by a
$335,000 decrease in advertising costs. Sales and marketing expenses increased
$4.7 million from $14.2 million for the six-month period ended June 30, 2001 to
$18.9 million the six-month period ended June 29, 2002. This increase was
primarily due to a $2.4 million increase in personnel and related costs
associated with our merchandising, marketing and customer service departments,
a $1.0 million increase in partner revenue share charges due to increased sales
volume primarily related to one of our direct response television campaign
partners, a $702,000 increase in advertising costs and a $555,000 increase in
credit card fees, offset, in part, by a $219,000 decrease in professional fees
and a $186,000 decrease in subsidized shipping and handling costs.
Product Development Expenses. Product development expenses increased $1.0
million from $2.1 million for the three-month period ended June 30, 2001 to
$3.1 million for the three-month period ended June 29, 2002. This increase was
primarily due to a $268,000 increase in equipment and software maintenance
costs associated with the increased number of e-commerce businesses that we
operated and maintained, a $220,000 increase in personnel and related costs, a
$175,000 increase relating to the closing of our West Coast technology services
office and a $143,000 increase in costs relating to our use of temporary
technical professionals. Product development expenses increased $900,000 from
$4.5 million for the six-month period ended June 30, 2001 to $5.4 million for
the six-month period ended June 29, 2002. This increase was primarily due to a
$596,000 increase in equipment and software maintenance costs associated with
the increased number of e-commerce businesses that we operated and maintained,
a $175,000 increase relating to the closing of our West Coast technology
services office and a $137,000 increase in costs relating to our use of
temporary technical professionals, offset, in part, by a $78,000 decrease in
personnel costs.
General and Administrative Expenses. General and administrative expenses
increased $1.1 million from $2.6 million for the three-month period ended June
30, 2001 to $3.7 million for the three-month period ended June 29, 2002. This
increase was primarily due to a $458,000 increase in insurance related office
and other administrative costs, a $325,000 increase in personnel costs and a
$315,000 increase in legal and other
20
professional fees. General and administrative expenses increased $1.9 million
from $5.1 million for the six-month period ended June 30, 2001 to $7.0 million
for the six-month period ended June 29, 2002. This increase was primarily due
to an $839,000 increase in bad debt and chargeback activity primarily as a
result of higher direct response television campaign activity and its
associated higher bad debt rate and, to a lesser extent, higher chargeback
activity related to the increased sales volume through our partners online
stores, a $542,000 increase in insurance related expenses and other
administrative costs and a $332,000 increase in legal and other professional
fees.
Stock-Based Compensation Expense. Stock-based compensation expense
decreased $1.7 million from $917,000 for the three-month period ended June 30,
2001 to $(750,000) for the three-month period ended June 29, 2002. This
decrease was primarily due to a decrease of $1.6 million in charges related to
options subject to variable accounting, offset, in part, by an increase of
$183,000 related to the amortization of deferred partner revenue share charges.
Stock-based compensation expense decreased $1.6 million from $1.4 million for
the six-month period ended June 30, 2001, to $(218,000) for the six-month
period ended June 29, 2002. This decrease was primarily due to a decrease of
$1.7 million in charges related to options subject to variable accounting,
offset, in part, by an increase of $341,000 related to the amortization of
deferred partner revenue share charges. As of June 29, 2002, we had an
aggregate of $1.5 million of deferred stock-based compensation remaining to be
amortized. We had stock-based compensation expense related to the amortization
of deferred partner revenue share charges of $183,000 and $341,000 for the
three- and six-month periods ended June 29, 2002, respectively, and $0 for the
three- and six-month periods ended June 30, 2001, respectively.
Depreciation and Amortization Expenses. Depreciation and amortization
expenses increased $800,000 from $1.5 million for the three-month period ended
June 30, 2001 to $2.3 million for the three-month period ended June 29, 2002.
The increase in depreciation and amortization expenses was due to a $542,000
increase in depreciation expense related to our corporate headquarters, our
Kentucky fulfillment center and the assets purchased to build, manage and
operate our e-commerce business and a $365,000 increase in depreciation and
amortization related to assets acquired from Ashford, offset, in part, by a
$178,000 decrease in amortization of goodwill associated with our acquisition
of Fogdog, Inc. The decrease in amortization is due to the discontinuance of
amortization of goodwill in accordance with Statement of Financial Accounting
Standards, or SFAS, No. 142, "Goodwill and Other Intangible Assets."
Depreciation and amortization expenses increased $900,000 from $3.2 million for
the six-month period ended June 30, 2001 to $4.1 million for the six-month
period ended June 29, 2002. The increase in depreciation and amortization
expenses was due to an $862,000 increase in depreciation expense related to our
corporate headquarters, our Kentucky fulfillment center and the assets
purchased to build, manage and operate our e-commerce business and a $426,000
increase in depreciation and amortization related to assets acquired from
Ashford, offset, in part, by a $351,000 decrease in amortization of goodwill
associated with our acquisition of Fogdog.
Other income. We had other income of $0 for the three- and six-month
periods ended June 29, 2002, respectively, and $300,000 for the three- and
six-month periods ended June 30, 2001, respectively. This income related to
fees earned pursuant to the terms of a lease termination agreement.
Interest (Income) Expense. We had interest income of $372,000 and interest
expense of $130,000 for the three-month period ended June 29, 2002 compared to
interest income of $723,000 and interest expense of $183,000 for the
three-month period ended June 30, 2001. The decrease in interest income of
$351,000 was due to lower interest rates, offset by higher average balances of
cash, cash equivalents, short-term investments and marketable securities during
the three-month period ended June 29, 2002 compared to the three-month period
ended June 30, 2001. We had interest income of $826,000 and interest expense of
$262,000 for the six-month period ended June 29, 2002 compared to interest
income of $1.8 million and interest expense of $330,000 for the six-month
period ended June 30, 2001. The decrease in interest income of $1.0 million was
due to lower interest rates, offset by higher average balances of cash, cash
equivalents, short-term investments and marketable securities during the
six-month period ended June 29, 2002 compared to the six-month period ended
June 30, 2001.
Income Taxes. Since the sales of our discontinued operations, we have not
generated taxable income. Net operating losses generated have been carried back
to offset income taxes paid in prior years. The remaining net operating losses
will be carried forward. The use of certain net operating loss carryforwards
are subject to annual
21
limitations based on ownership changes of our stock, as defined by Section 382
of the Internal Revenue Code. We expect that net operating losses of
approximately $34.1 million will expire before they can be utilized. Any
otherwise recognizable deferred tax assets have been offset by a valuation
allowance for the net operating loss carryforwards.
Certain Related Party Transactions
We have entered into a strategic alliance to provide procurement and
fulfillment services for QVC, Inc., which along with its majority stockholder,
Comcast Corporation owns Interactive Technology Holdings, LLC, which is one of
our principal shareholders. We recognized net revenues of $382,000 and $652,000
on sales to this related party for the three- and six-month periods ended June
30, 2001, respectively, and $263,000 and $466,000 for the three- and six-month
periods ended June 29, 2002, respectively. The terms of these sales are
comparable to those with our other partners, and the amount included in
accounts receivable as a result of these sales was $155,000 as of June 29, 2002.
Liquidity and Capital Resources
Our principal source of liquidity is our cash and cash equivalents and
marketable securities. Our cash and cash equivalents and marketable securities
balances totaled $67.4 million and $105.9 million as of June 29, 2002 and
December 29, 2001, respectively.
We raised an aggregate of $176.3 million in gross proceeds through equity
financings in fiscal 1999, fiscal 2000 and fiscal 2001, as well as $5.3 million
in gross proceeds through a mortgage financing in fiscal 2000. We received an
aggregate of $23.5 million in proceeds from the sales of our discontinued
operations in fiscal 1999 and fiscal 2000, as well as $35.7 million in net cash
from the acquisition of Fogdog in fiscal 2000. We used the proceeds of these
transactions to finance our e-commerce business.
We have incurred substantial costs to develop our e-commerce businesses and
to recruit, train and compensate personnel for our creative, engineering,
business development, marketing, merchandising, customer service, management
information systems and administrative departments. In addition, during fiscal
2000, we invested in the required technology, equipment and personnel to make
our Kentucky fulfillment center fully operational, and in April 2002, we
purchased for $8.8 million in cash our Kentucky fulfillment center, which we
previously leased. During the second quarter of fiscal 2002, we spent $3.9
million on upgrades to our server, storage and telecommunications hardware, as
well as on technical enhancements to our existing software and on new software
solutions including a customer service and marketing package, a financial
management system, a merchandising planning package, fraud detection software
and an enhanced search engine. In addition, during the second quarter of fiscal
2002, we spent $1.7 million on the installation of a second, fully redundant
data center to increase both our capacity as well as our reliability. In July
2002, we spent approximately $1.0 million on the expansion of our Kentucky
fulfillment center and we acquired for $800,000 the assets of a 500-seat call
center in Melbourne, Florida to expand our customer service capabilities. We
expect capital expenditures for the remainder of fiscal 2002 to be between
$11.0 million and 13.0 million as we continue to enhance and upgrade our
technology infrastructure and expand our Kentucky fulfillment center. As of
June 29, 2002, we had cash and cash equivalents and marketable securities of
$67.4 million, working capital of $69.6 million and an accumulated deficit of
$142.2 million.
We used approximately $13.2 million and $27.9 million in net cash for
operating activities during the six-month periods ended June 29, 2002 and June
30, 2001, respectively. Net cash used for operating activities during the
six-month period ended June 29, 2002 was primarily the result of net losses and
changes in stock-based compensation, prepaid expenses and other current assets,
accounts payable and accrued expenses and other, offset, in part, by changes in
accounts receivable, inventory, deferred revenue and depreciation and
amortization. Net cash used for operating activities during the six-month
period ended June 30, 2001 was primarily the result of net losses and changes
in accounts payable and accrued expenses and other, offset, in part, by changes
in accounts receivable, inventory, prepaid expenses and other current assets,
deferred revenue, stock-based compensation and depreciation and amortization.
22
Our investing activities during the six-month period ended June 29, 2002
consisted primarily of capital expenditures of $15.6 million. Also during the
six-month period ended June 29, 2002, we purchased $9.5 million of marketable
securities and paid $8.9 million for the acquisition of Ashford including
acquisition costs. During the six-month period ended June 30, 2001, we made
capital expenditures of $2.7 million and received $978,000 in cash proceeds
from sales of short-term investments.
Our financing activities during the six-month period ended June 29, 2002
consisted primarily of a $3.1 million repayment of a revolving credit facility
with Congress Financial Corporation, a unit of First Union National Bank, that
had been maintained by Ashford prior to our acquisition of Ashford.
We had the following commitments as of June 29, 2002 concerning our debt
obligations, lease obligations, employment agreements, advertising and media
agreements and partner revenue share payment obligations.
Six Months Ending Fiscal Year
December 28, ----------------------------------------------
2002 2003 2004 2005 2006 Thereafter Total
----------------- ------ ------ ------ ------ ---------- -------
(in thousands)
Mortgage principal.............. $ 19 $ 42 $ 44 $ 50 $ 54 $ 5,018 $ 5,227
Mortgage interest............... 225 447 444 439 435 1,446 3,436
Capital leases.................. 317 -- -- -- -- -- 317
Operating leases................ 1,020 740 307 314 259 778 3,418
Employment agreements........... 1,279 2,531 1,664 720 525 -- 6,719
Advertising and media agreements 516 -- -- -- -- -- 516
Partner revenue share payments.. 750 1,650 1,700 1,750 1,500 6,750 14,100
------ ------ ------ ------ ------ ------- -------
Total commitments............ $4,126 $5,410 $4,159 $3,273 $2,773 $13,992 $33,733
====== ====== ====== ====== ====== ======= =======
To date, we have financed our e-commerce operations primarily from the sale
of equity securities. Management expects that our current cash and the
collection of accounts receivable will be sufficient to meet our anticipated
cash needs for the foreseeable future. While in the fourth quarter of 2001 we
realized income from continuing operations of $260,000 and income from
continuing operations, excluding non-cash charges for stock based compensation
and depreciation and amortization, of $3.3 million, we do not expect to realize
income from continuing operations in fiscal 2002. In order to fund our
anticipated operating expenses and realize income from continuing operations,
our revenues must increase significantly. If cash flows are insufficient to
fund these expenses, we may need to raise additional funds in future periods
through public or private debt or equity financings or other arrangements to
fund our operations until we achieve profitability. Failure to raise future
capital when needed could seriously harm our business and operating results. If
additional funds are raised through the issuance of equity securities, the
percentage ownership of our current stockholders would be reduced. Furthermore,
these equity securities might have rights, preferences or privileges senior to
our common stock.
Seasonality
We expect to experience seasonal fluctuations in our revenues. These
seasonal patterns will cause quarterly fluctuations in our operating results.
In particular, we expect that the fourth fiscal quarter will account for a
disproportionate percentage of our total annual revenues. We believe that
results of operations for a quarterly period may not be indicative of the
results for any other quarter or for the full year.
23
Risk Factors
Any investment in our common stock or other 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 on Form 10-Q. If any of the following risks occur, our business could be
materially harmed. In these circumstances, the market price of our common stock
could decline, and you may lose all or part of the money you paid to buy our
common stock.
All statements made in this Quarterly Report on Form 10-Q, other than
statements of historical fact, are forward-looking statements. The words
"anticipate", "believe", "estimate", "expect", "intend", "may", "plan", "will",
"would", "should", "guidance", "potential", "continue", "project", "forecast"
and similar expressions typically are used to identify forward-looking
statements. Forward-looking statements are based on then-current expectations,
beliefs, assumptions, estimates and forecasts about our business and the
industry and markets in which we operate. These statements are not guarantees
of future performance and involve risks, uncertainties and assumptions which
are difficult to predict. Therefore, actual outcomes and results may differ
materially from what is expressed or implied by these forward-looking
statements. Factors which may affect our business, financial condition and
operating results include the effects of changes in the economy, consumer
spending, the stock market and the industries in which we operate, changes
affecting the Internet, online retailing and direct response marketing, our
ability to maintain relationships with strategic partners and suppliers, our
ability to timely and successfully develop, maintain and protect our technology
and product and service offerings and execute operationally, our ability to
attract and retain qualified personnel and our ability to successfully
integrate our acquisitions of other businesses, including our recent
acquisition of Ashford. More information about potential factors that could
affect us are described below. We expressly disclaim any intent or obligation
to update these forward-looking statements, except as otherwise specifically
stated by GSI.
Our future success cannot be predicted based upon our limited e-commerce
operating history.
Although we commenced operations in 1987, we did not initiate our e-commerce
business until the first quarter of 1999 and did not begin operating our
e-commerce business until the fourth quarter of 1999. Prior to the fourth
quarter of 1999, when we launched the e-commerce businesses we operate for our
partners, 100% of our revenues had been generated by our discontinued
operations. The sale of the discontinued operations was completed in May 2000.
Accordingly, 100% of our revenues are currently generated through our
e-commerce business. In addition, the nature of our e-commerce business has
undergone rapid development and change since we began operating it. Based on
our limited experience with our e-commerce business, it is difficult to predict
whether we will be successful. Thus, our chances of financial and operational
success should be evaluated in light of the risks, uncertainties, expenses,
delays and difficulties associated with operating a business in a relatively
new and unproven market or a new business in an existing market, many of which
may be beyond our control. If we are unable to address these issues, we may not
be financially or operationally successful.
We expect increases in our operating expenses and continuing losses.
We incurred substantial losses in fiscal 1999, fiscal 2000 and fiscal 2001,
and as of June 29, 2002, we had an accumulated deficit of $142.2 million.
Except for the fourth quarter of fiscal 2001, we have not achieved
profitability from our continuing operations, and we do not expect to achieve
profitability in fiscal 2002. We may not obtain enough customer traffic or
viewers or a high enough volume of purchases from the e-commerce businesses
that we operate to generate sufficient revenues to achieve profitability. We
could continue to incur operating and net losses. There can be no assurances
that we will be able to achieve profitability from our continuing operations.
We will continue to incur significant operating expenses and capital
expenditures as we:
. enhance our distribution and order fulfillment capabilities;
. further improve our order processing systems and capabilities;
. develop enhanced technologies and features to improve our partners'
e-commerce businesses;
24
. enhance our customer service capabilities to better serve customers'
needs;
. increase our general and administrative functions to support our growing
operations; and
. continue our business development, sales and marketing activities.
Because we will incur many of these expenses before we receive any revenues
from our efforts, our losses will be greater than the losses we would incur if
we developed our business more slowly. In addition, we may find that these
efforts are more expensive than we currently anticipate, which could further
increase our losses. Also, the timing of these expenses may contribute to
fluctuations in our quarterly operating results.
We have recently expanded our operations into other categories. If we do not
successfully expand our operations into these new categories, our growth could
be limited.
Until last year, our business was limited to the sporting goods industry.
Today, our operations have expanded into other categories, including consumer
electronics, home products, jewelry, luxury goods, corporate gifts, toys,
books, music and beauty products. In addition, through the establishment of our
media and entertainment division, we have begun to create and work with third
parties to manufacture unique products related to direct response television
programming. In order to successfully expand our business into these
categories, we must develop and maintain relationships with manufacturers and
other sources of product in these categories and hire and retain skilled
personnel to help manage these areas of our business. Our failure to
successfully expand our business into these categories could limit our ability
to increase revenues and attract new partners.
Our success is tied to the success of the retail industry and the partners
for which we operate e-commerce businesses.
Our future success is substantially dependent upon the success of the retail
industry and the partners for which we operate e-commerce businesses. From time
to time, the retail industry has experienced downturns. Any downturn in the
retail industry could adversely affect our revenues. In addition, if our
partners were to have financial difficulties or seek protection from their
creditors, or if we are unable to replace our partners or obtain new partners,
it could adversely affect our ability to grow our business.
We have an e-commerce agreement with Bluelight.com, a subsidiary of Kmart,
pursuant to which we operate the Bluelight.com Web site. Kmart's recent
bankruptcy filing may mean that we may not realize all of the economic benefits
of that agreement.
Kmart, as well as Bluelight.com, recently filed for bankruptcy protection.
The bankruptcy court permitted Bluelight.com to pay us all amounts due prior to
the bankruptcy filing and to continue business as usual with us. While
Bluelight.com has paid us all amounts owed to us since the bankruptcy filing,
we have agreed to extend certain payments from Bluelight.com to us by three
months. Bluelight.com may cease making future payments and/or reject its
agreement with us, thereby terminating our relationship with Bluelight.com. If
Bluelight.com ceases making payments, rejects the e-commerce agreement or does
not emerge from bankruptcy, we will not realize all of the economic benefits of
that agreement.
We enter into contracts with our partners. Some of these partners' online
retail stores account for a significant portion of our revenue. If we do not
maintain good working relationships with our partners or perform as required
under these agreements, it could adversely affect our business. Additionally,
if our partners terminate their contracts with us, it could negatively affect
our business.
The contracts with our partners establish new and complex relationships
between us and our partners. We spend a significant amount of time and effort
to maintain our relationships with our partners and address the issues that
from time to time may arise from these new and complex relationships. For
fiscal 2001, sales to customers through one of our partner's e-commerce
business accounted for 25% of our revenue, sales to customers through another
of our partner's e-commerce business accounted for 19% of our revenue and sales
to our top five partners' e-commerce businesses accounted for 62% of our
revenue. For fiscal 2000, sales to customers through one of our partner's
e-commerce business accounted for 45% of our revenue, sales to customers
through another of our partner's e-commerce business accounted for 20% of our
revenue and sales to customers through our top three partners' e-commerce
businesses accounted for 71% of our revenue. If we do not
25
maintain a good working relationship with our partners or perform as required
under these agreements, our partners could seek to terminate the agreements
prior to the end of the term or they could decide not to renew the contracts at
the end of the term. This could adversely affect our business, financial
condition and results of operations. Moreover, our partners could decide not to
renew these contracts for reasons not related to our performance.
Our operating results are difficult to predict. If we fail to meet the
expectations of public market analysts and investors, the market price of our
common stock may decline significantly.
Our annual and quarterly operating results may fluctuate significantly in
the future due to a variety of factors, many of which are outside of our
control. Because our operating results may be volatile and difficult to
predict, quarter-to-quarter comparisons of our operating results may not be a
good indication of our future performance. In some future quarter, our
operating results may fall below the expectations of securities analysts and
investors. In this event, the trading price of our common stock likely will
decline significantly.
Factors that may harm our business or cause our operating results to
fluctuate include the following:
. our inability to retain existing partners or to obtain new partners;
. our inability to obtain new customers at a reasonable cost, retain
existing customers or encourage repeat purchases;
. decreases in the number of visitors to or viewers of the online retail
stores and direct response television campaigns operated by us or the
inability to convert these visitors and viewers into customers;
. our failure to offer an appealing mix of products;
. our inability to adequately maintain, upgrade and develop our partners'
Web sites or the technology and systems we use to process customers'
orders and payments;
. the ability of our competitors to offer new or superior e-commerce
businesses, services or products;
. price competition that results in lower profit margins or losses;
. our inability to obtain or develop specific products or brands or
unwillingness of vendors to sell their products to us;
. unanticipated fluctuations in the amount of consumer spending on various
products that we sell, which tend to be discretionary spending items;
. increases in the cost of advertising;
. increases in the amount and timing of operating costs and capital
expenditures relating to expansion of our operations;
. unexpected increases in shipping costs or delivery times, particularly
during the holiday season;
. technical difficulties, system security breaches, system downtime or
Internet slowdowns;
. seasonality;
. our inability to manage inventory levels or control inventory theft;
. our inability to manage distribution operations or provide adequate
levels of customer service;
. an increase in the level of our product returns;
. government regulations related to the Internet, online retailing or
direct response marketing, which could increase the costs associated with
operating our businesses; and
. unfavorable economic conditions specific to the Internet, online
retailing, direct response marketing or the industries in which we
operate, which could reduce demand for the products sold through the
businesses operated by us.
Seasonal fluctuations in sales could cause wide fluctuations in our
quarterly results.
We expect to experience seasonal fluctuations in our revenues. These
seasonal patterns will cause quarterly fluctuations in our operating results.
In particular, we expect that our fourth fiscal quarter will account for a
disproportionate percentage of our total annual revenues. In anticipation of
increased sales activity during our fourth fiscal quarter, we may hire a
significant number of temporary employees to supplement our permanent staff and
significantly increase our inventory levels. For this reason, if our revenues
were below seasonal expectations during the fourth fiscal quarter, our
operating results could be below the expectations of securities analysts and
investors.
26
Due to the limited operating history of our e-commerce business, it is
difficult to predict the seasonal pattern of our sales and the impact of this
seasonality on our business and financial results. In the future, our seasonal
sales patterns may become more pronounced, may strain our personnel, product
distribution and shipment activities and may cause a shortfall in revenues as
compared to expenses in a given period.
We have been unable to fund our e-commerce operations with the cash
generated from our business. If we do not generate cash sufficient to fund our
operations, we may in the future need additional financing to continue our
growth or our growth may be limited.
Because we have not generated sufficient cash from operations to date, we
have funded our e-commerce businesses primarily from the sale of equity
securities. Cash from revenues must increase significantly for us to fund
anticipated operating expenses internally. If our cash flows are insufficient
to fund these expenses, we may in the future need to fund our growth through
additional debt or equity financings or reduce costs. Further, we may not be
able to obtain financing on satisfactory terms. Our inability to finance our
growth, either internally or externally, may limit our growth potential and our
ability to execute our business strategy. If we issue securities to raise
capital, our existing stockholders may experience additional dilution or the
new securities may have rights senior to those of our common stock.
We must develop and maintain relationships with key manufacturers to obtain
a sufficient assortment and quantity of quality merchandise on acceptable
commercial terms. If we are unable to do so, it could adversely affect our
business, results of operations and financial condition.
We primarily purchase the products we offer directly from the manufacturers
of the products. If we are unable to develop and maintain relationships with
these manufacturers, we may be unable to obtain or continue to carry a
sufficient assortment and quantity of quality merchandise on acceptable
commercial terms and our business could be adversely impacted. We do not have
written contracts with most of our manufacturers. In addition, during fiscal
2001, we purchased 23% and 16% of the total amount of inventory we purchased
during fiscal 2001 from two manufacturers. Manufacturers could stop selling
products to us and may ask us to remove their products or logos from our
partners' Web sites. In some circumstances, our partners purchase products
directly from manufacturers for sale on their Web sites. If we or our partners
are unable to obtain products directly from manufacturers, especially popular
brand manufacturers, we may not be able to obtain the same or comparable
merchandise in a timely manner or on acceptable commercial terms. For example,
we currently are not authorized to offer some popular brands of sporting goods,
such as Nike, although we are authorized to sell the remaining Nike inventory
held by Fogdog on the fogdog.com Web site. There can be no assurance that we
will be able to offer these brands in the future or that we will continue to be
able to offer brands we currently offer. If we are unable to offer a sufficient
assortment and quantity of quality products at acceptable prices, we may lose
sales and market share.
We may not be successful in finding, developing and marketing products that
consumers of the direct response television campaigns we operate will want to
purchase.
For the direct response television campaigns we operate, our success depends
on our ability to select products that consumers will want to purchase. We
promote these products on our partners' Web sites as well as through direct
response television programming. If we do not select products that consumers
want to purchase, this could result in lost opportunities which could reduce
sales.
We may be unable to source product for direct response television campaigns
on favorable terms. Additionally, the products we are able to source may not be
profitable.
For direct response television campaigns, our financial performance depends
on our ability to develop products or acquire the rights to products that will
be appealing to consumers. We select products based on management's retail
experience. We may not be successful in finding, developing and marketing
products that
27
consumers will want to purchase. Any failure to meet consumers' desires could
result in lost opportunities and excess inventory which could reduce our
revenues. Additionally, we may select products that are not profitable which
could result in lower margins.
Capacity constraints or system failures could materially and adversely
affect our business, results of operations and financial condition.
Any system failure, including network, telecommunications, software or
hardware failure, that causes interruption of the availability of our partners'
online retail stores or direct response television campaigns could result in
decreased usage of these stores or access to these campaigns. If these failures
are sustained or repeated, they could reduce the attractiveness of our
partners' online retail stores and direct response television campaigns to
customers, vendors and advertisers. Our operations are subject to damage or
interruption from:
. fire, flood, earthquake or other natural disasters;
. power losses, interruptions or brown-outs;
. Internet, telecommunications or data network failures;
. physical and electronic break-ins or security breaches;
. computer viruses; and
. other similar events.
We have been operating e-commerce businesses for our partners for less than
three years. The limited time during which we have been operating these
businesses, as well as the inherent unpredictability of the events described
above, makes it difficult to predict whether the occurrence of any of these
events is likely. If any of these events do occur, they could result in
interruptions, delays or cessations in service to users of our partners' online
retail stores or viewers of our partners' direct response television campaigns.
In addition, we maintain our computers on which we operate our partners'
online retail stores at the facility of a third-party hosting company. We
cannot control the maintenance and operation of this facility, which is also
susceptible to similar disasters and problems. Our insurance policies may not
adequately compensate us for any losses that we may incur. Any system failure
that causes an interruption in our service or a decrease in responsiveness
could harm our relationships with our customers and result in reduced revenues.
We may be unable to protect our proprietary technology or keep up with that
of our competitors.
Our success depends to a significant degree upon the protection of our
software and other proprietary intellectual property rights. We may be unable
to deter misappropriation of our proprietary information, detect unauthorized
use or take appropriate steps to enforce our intellectual property rights. In
addition, our competitors could, without violating our proprietary rights,
develop technologies that are as good as or better than our technology.
Our failure to protect our software and other proprietary intellectual
property rights or to develop technologies that are as good as our competitors'
could put us at a disadvantage to our competitors. In addition, the failure of
our partners to protect their intellectual property rights, including their
trademarks and domain names, could impair our operations. These failures could
have a material adverse effect on our ability to generate revenues.
If we do not respond to rapid technological changes, our services could
become obsolete and we could lose customers.
Due to costs and management time required to introduce new services,
products and enhancements, we may be unable to respond to rapid technological
changes in a timely enough manner to avoid our services becoming
28
uncompetitive. If this happens, our customers may forgo the use of our
partners' e-commerce businesses and use those of our competitors. To remain
competitive, we must continue to enhance and improve the functionality and
features of our partners' online retail stores and direct response television
campaigns. The Internet, online retailing and the direct response marketing are
constantly changing. If competitors introduce new products and services using
new technologies or if new industry standards and practices emerge, our
partners' existing online retail stores and direct response television
campaigns and our proprietary technology and systems may become uncompetitive.
Developing our partners' e-commerce businesses and other proprietary
technology entails significant technical and business risks. We may use new
technologies ineffectively or we may fail to adapt our partners' online retail
stores and direct response television campaigns, our order processing systems
and our computer and telecommunications network to meet customer requirements
or emerging industry standards.
We may be subject to intellectual property claims or competition or trade
practices claims that could be costly and could disrupt our business.
Third parties may assert that our business or technologies infringe their
intellectual property rights. From time to time, we may receive notices from
third parties questioning our right to present specific images or logos on our
partners' online retail stores or direct response television campaigns, or
stating that we have infringed their trademarks or copyrights. We may in the
future receive claims that we are engaging in unfair competition or other
illegal trade practices. We 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 us to change how we do business,
redesign our partners' e-commerce businesses or enter into burdensome royalty
or licensing 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. Our insurance coverage may not be adequate to cover
every claim that third parties could assert against us. Even unsuccessful
claims could result in significant legal fees and other expenses, diversion of
management's time and disruptions in our business. Any of these claims could
also harm our reputation.
We rely on our ability to enter into marketing and promotion agreements with
online services, search engines, directories and other Web sites to drive
traffic to the e-commerce businesses we operate. If we are unable to enter into
or properly develop these marketing and promotional agreements, our ability to
generate revenue could be adversely affected.
We have entered into marketing and promotion agreements with online
services, search engines, directories and other Web sites to provide content,
advertising banners and other links that link to our partners' online retail
stores. We expect to rely on these agreements as significant sources of traffic
to our partners' online retail stores and to generate new customers. If we are
unable to enter into satisfactory agreements on acceptable terms, our ability
to attract new customers could be harmed. Further, many of the parties with
which we may have online advertising arrangements could provide advertising
services for other marketers of goods. As a result, these parties may be
reluctant to enter into or maintain relationships with us. Failure to achieve
sufficient traffic or generate sufficient revenue from purchases originating
from third parties may result in termination of these types of agreements.
Without these relationships, we may not be able to sufficiently increase our
market share.
Our success is dependent upon our executive officers and other key personnel.
Our success depends to a significant degree upon the contribution of our
executive officers and other key personnel, particularly Michael G. Rubin,
Chairman, President and Chief Executive Officer. We have employment agreements
with some of our executive officers and key personnel. Due to the costs
associated with compensating executive officers and key personnel and the
competition for highly qualified personnel, we cannot be sure that we will be
able to retain or attract executive, managerial and other key personnel. We
have obtained key person life insurance for Mr. Rubin in the amount of $8.0
million. We have not obtained key person life insurance for any of our other
executive officers or key personnel.
29
We may be unable to hire and retain the skilled personnel necessary to
develop our business.
We intend to continue to hire a number of skilled personnel. Due to intense
competition for these individuals from our competitors and other employers, we
may not be able to attract, assimilate or retain highly qualified personnel in
the future. Our failure to attract and retain the highly trained personnel that
are integral to our business may limit our growth rate.
We may not be able to compete successfully against current and future
competitors, which could harm our margins and our business.
Online retailing and direct response marketing are constantly evolving and
are extremely competitive. Increased competition could result in price
reductions, reduced gross margins and loss of market share, any of which could
seriously harm our business, financial condition and results of operations. We
compete with companies that may be able to provide solutions to companies that
wish to establish e-commerce businesses, including:
. third party providers, such as Amazon.com, USA Interactive and Digital
River; and
. third-party fulfillment and customer services providers, such as Federal
Express, UPS and Newroads.
We also compete with the online and offline businesses of a variety of
companies, including:
. specialty retailers, including sporting goods and jewelry and luxury
goods retailers, such as Footlocker, REI.com and Tiffany's;
. general merchandise retailers, such as Target, Wal-Mart and Nordstrom;
. catalog retailers, such as L.L. Bean and Eastbay; and
. manufacturers, such as Nike.
If we experience problems in our fulfillment, warehouse and distribution
operations, we could lose customers.
Although we operate our own fulfillment center, we rely upon multiple third
parties for the shipment of our products. We also rely upon certain vendors to
ship products directly to our customers. As a result, we are subject to the
risks associated with the ability of these vendors to successfully and timely
fulfill and ship customer orders and to successfully handle our inventory
delivery services to meet our shipping needs. The failure of these vendors to
provide these services, or the termination or interruption of these services,
could adversely affect the satisfaction of our customers, which could result in
reduced sales.
Sporting goods and apparel and jewelry and luxury goods are subject to
changing consumer preferences. If we fail to anticipate these changes, we could
experience lower sales, higher inventory markdowns and lower margins.
Our success depends, in part, upon our ability to anticipate and respond to
trends in sporting goods and jewelry and luxury goods merchandise and
consumers' participation in sports and fashion. Consumers' tastes in sporting
goods equipment, apparel, jewelry and luxury goods are subject to frequent and
significant changes, due in part to manufacturers' efforts to influence
purchases. In addition, the level of consumer interest in a given sport or type
of fashion can fluctuate dramatically. If we fail to identify and respond to
changes in merchandising and consumer preferences, our sales could suffer and
we could be required to mark down unsold inventory. This would depress our
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 could adversely affect our business, financial
condition and results of operations.
Our policy for allowing our customers to return products is generally
consistent with the policies of each of our partners for which we operate
e-commerce or direct response television businesses. If merchandise returns are
significant, our revenues could be adversely affected.
30
We may be subject to product liability claims that could be costly and
time-consuming.
We sell products manufactured by third parties, some of which may be
defective. If any product that we sell were to cause physical injury or injury
to property, the injured party or parties could bring claims against us as the
retailer of the product. Our insurance coverage may not be adequate to cover
every claim that could be asserted. Similarly, we could be subject to claims
that users of our partners' online retail stores or viewers of our partners'
direct response television campaigns were harmed due to their reliance on our
product information, product selection guides, advice or instructions. If a
successful claim were brought against us in excess of our insurance coverage,
it could adversely affect our business. Even unsuccessful claims could result
in the expenditure of funds and management time and could have a negative
impact on our business.
We may be liable if third parties misappropriate our customers' personal
information.
If third parties are able to penetrate our network or telecommunications
security or otherwise misappropriate our customers' personal information or
credit card information or if we give third parties improper access to our
customers' personal information or credit card information, we 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 have been
investigating various companies regarding their use of customers' personal
information. We could incur additional expenses if new regulations regarding
the use of personal information are introduced or if government agencies
investigate our privacy practices.
We are controlled by certain principal stockholders.
As of August 1, 2002, Michael G. Rubin, our Chairman, President and Chief
Executive Officer, beneficially owned 18.8%, funds affiliated with SOFTBANK
America Inc., or SOFTBANK, beneficially owned 24.8% and Interactive Technology
Holdings, LLC, or ITH, a joint venture company of Comcast Corporation and QVC,
Inc., beneficially owned 31.7% of our outstanding common stock, including
currently exercisable warrants and options to purchase common stock. Should
they decide to act together, Mr. Rubin, SOFTBANK and ITH would be in a position
to exercise 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 our affairs. Furthermore, the
stock purchase agreements pursuant to which SOFTBANK and ITH acquired their
shares of our common stock provide that SOFTBANK and ITH each have the right to
designate up to two members of our board of directors. This concentration of
ownership and SOFTBANK's and ITH's right to designate members to our board of
directors may have the effect of delaying or preventing a change in control of
us, including transactions in which stockholders might otherwise receive a
premium over current market prices for their shares.
From time to time, we may acquire or invest in other companies. There are
risks associated with potential acquisitions and investments. As a result, we
may not achieve the expected benefits of potential acquisitions.
If we are presented with appropriate opportunities, we may make investments
in complementary companies, products or technologies or we may purchase other
companies. On March 14, 2002, we acquired all of the outstanding shares of
Ashford, an online jewelry, luxury goods and corporate gifts retailer. We may
not realize the anticipated benefits of the acquisition of Ashford or any other
investment or acquisition. We may not be able to successfully assimilate the
additional personnel, operations, acquired technology or products into our
business. Any acquisition, including the acquisition of Ashford, may further
strain our existing financial and managerial controls and reporting systems and
procedures. If we do not successfully integrate the business of Ashford, the
expenditures on integration efforts will reduce our cash position without us
being able to realize the expected benefits of the merger. In addition, key
personnel of an acquired company may decide not to work for us. These
difficulties could disrupt our ongoing business, distract our management and
employees and increase our
31
expenses. Further, the physical expansion in facilities that would occur as a
result of the acquisition of Ashford and any other acquisition may result in
disruptions that seriously impair our business. Finally, we may have to incur
debt or issue additional equity securities to pay for other acquisitions or
investments, the issuance of which could be dilutive to our stockholders.
There are certain risks associated with our acquisition of Ashford as a
result of litigation pending or threatened against Ashford at the time of the
acquisition.
Since July 11, 2001, several stockholder class action complaints have been
filed in the United States District Court of the Southern District of New York
against Ashford, several of Ashford's officers and directors, and various
underwriters of Ashford's initial public offering. The purported class actions
have all been brought on behalf of purchasers of Ashford common stock during
various periods beginning on September 22, 1999, the date of Ashford's initial
public offering. The plaintiffs allege that Ashford's prospectus, included in
Ashford's Registration Statement on Form S-1 filed with the Securities and
Exchange Commission, was materially false and misleading because it failed to
disclose, among other things, certain fees and commissions collected by the
underwriters or arrangements designed to inflate the price of the common stock.
The plaintiffs further allege that because of these purchases, Ashford's
post-initial public offering stock price was artificially inflated. As a result
of the alleged omissions in the prospectus and the purported inflation of the
stock price, the plaintiffs claim violations of Sections 11 and 15 of the
Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of
1934. The complaints have been consolidated into a single action. Ashford has
maintained that it has defenses against these actions and intends to vigorously
defend them. Ashford is also subject to various other claims and legal actions
arising in the ordinary course of business. Ashford also has maintained that
the ultimate disposition of these matters would not have a material effect on
Ashford's business, financial condition or results of operations. Based on our
review of these matters, we have no reason to disagree with Ashford's
assessment, although there can be no assurances as to the ultimate outcomes of
these matters.
We may expand our business internationally, causing our business to become
increasingly susceptible to numerous international business risks and
challenges that could affect our profitability.
We believe that the current globalization of the economy requires businesses
to consider pursuing international expansion. We recently began shipping
products to Canada. In the future, we may expand into other international
markets. International sales are subject to inherent risks and challenges that
could adversely affect our profitability, including:
. the need to develop new supplier and manufacturer relationships,
particularly because major manufacturers may require that our
international operations deal with local distributors;
. unexpected changes in international regulatory requirements and tariffs;
. difficulties in staffing and managing foreign operations;
. longer payment cycles from credit card companies;
. greater difficulty in accounts receivable collection;
. potential adverse tax consequences;
. price controls or other restrictions on foreign currency; and
. difficulties in obtaining export and import licenses.
Any negative impact on our international business could negatively impact
our business, operating results and financial condition as a whole. In
particular, gains and losses on the conversion of foreign payments into United
States dollars may contribute to fluctuations in our results of operations and
fluctuating exchange rates could cause reduced revenues and/or gross margins
from non-dollar-denominated international sales.
32
Our success is tied to the continued growth in the use of the Internet and
the adequacy of the Internet infrastructure.
Our 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 become more accepted and
widespread 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 the Internet
servers or to users' computers;
. excessive governmental regulation;
. uncertainty regarding intellectual property ownership; and
. lack of high-speed modems and other communications equipment.
Published reports have also indicated that growth in the use of the Internet
has resulted in users experiencing delays, transmission errors and other
difficulties. 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 our partners' Web sites could be materially affected
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, or if the Internet does not become a
viable commercial medium, the number of our customers could decrease. In
addition, we may be required to spend significant capital to adapt our
operations to any new or emerging technologies relating to the Internet.
The technology of the Internet is changing rapidly and could render the
online retail stores which we operate obsolete.
The technology of the Internet and online retailing is evolving rapidly for
many reasons, including:
. customers frequently changing their requirements and preferences;
. competitors frequently introducing new products and services; and
. industry associations and others creating new industry standards and
practices.
If the costs associated with the changing technology of the Internet
prevents us from enhancing the online retail stores that we operate, those
stores could become less effective, which would reduce our competitive
advantage and put our ability to attract and retain customers at risk. While we
sell products through the direct response television campaigns, the primary
channel through which we sell products is the online retail stores that we
operate. Therefore, the potential negative impact of these stores becoming less
effective would affect us to a greater extent than it would affect a company
that has other significant channels for the sale or distribution of its
products.
In order to keep the Web sites that we operate from becoming obsolete, and
maintain our ability to attract and retain customers, we must accomplish the
following tasks:
. continuously enhance and improve our partners' Web sites;
. identify, select and obtain leading technologies useful in our business;
and
. respond to technological advances and emerging industry standards in a
cost-effective and timely manner.
33
Customers may be unwilling to use the Internet to purchase goods.
Our long-term future depends heavily upon the general public's willingness
to use the Internet as a means to purchase goods. The failure of the Internet
to develop into an effective commercial tool would seriously damage our future
operations. Online retailing is a relatively new concept, and large numbers of
customers may not begin or continue to use the Internet to purchase goods. The
demand for and acceptance of products sold over the Internet are highly
uncertain, and most online retailers have a short track record. If consumers
are unwilling to use the Internet to conduct business, our business may not
develop profitably. The Internet may not succeed as a medium of commerce
because of delays in developing elements of the needed Internet infrastructure,
such as a reliable network, high-speed modems, high-speed communication lines
and other enabling technologies.
The security risks of online retailing may discourage customers from
purchasing goods from us.
In order for online retailing to develop successfully, we and other market
participants must be able to transmit confidential information securely over
public networks. Third parties may have the technology or know-how to breach
the security of customer transaction data. Any breach could cause customers to
lose confidence in the security of our partners' online retail stores and
choose not to purchase from those stores. If someone is able to circumvent our
security measures, he or she could destroy or steal valuable information or
disrupt the operation of our partners' online retail stores. Concerns about the
security and privacy of transactions over the Internet could inhibit the growth
of the Internet and online retailing. Our security measures may not effectively
prohibit others from obtaining improper access to the information on our
partners' online retail stores. Any security breach could expose us to risks of
loss, litigation and liability and could seriously disrupt our operations.
We need to continuously acquire and effectively use media space to market
and sell our direct response television campaign products.
We generally enter into exclusive agreements with media companies,
manufacturers and other sellers of products to run the direct response
television portion of their e-commerce businesses. In those agreements, the
media companies, manufacturers and other sellers of products generally agree to
certain marketing, advertising and air-time commitments for the promotion of
products sold through direct response television as well as promotion of their
online retail stores. Air-time is very valuable and is essential for the
success of direct response television campaigns. If we are unable to negotiate
favorable marketing, advertising and air-time commitments in our agreements
with our partners or if our partners do not fulfill their commitments, the
amount of products we could sell likely would be lower which would cause our
revenues to be lower.
Credit card fraud could adversely affect our business.
We do not carry insurance against the risk of credit card fraud, so the
failure to adequately control fraudulent credit card transactions could
increase our general and administrative expenses. We have put in place
technology and processes to help us detect the fraudulent use of credit card
information. To date, we have not suffered material losses related to credit
card fraud. However, we may in the future suffer losses as a result of orders
placed with fraudulent credit card data even though the associated financial
institution approved payment of the orders. Under current credit card
practices, we are liable for fraudulent credit card transactions because we do
not obtain a cardholder's signature.
If one or more states successfully assert that we should collect sales or
other taxes on the sale of our merchandise, our business could be harmed.
We do not currently collect sales or other similar taxes for goods sold by
us and shipped into states other than Kentucky, Pennsylvania and Texas in which
we collect and remit applicable sales taxes. One or more local, state or
foreign jurisdictions may seek to impose sales tax collection obligations on us
and other out-of-state
34
companies that engage in e-commerce. Our business could be adversely affected
if one or more states or any foreign country successfully asserts that we
should collect sales or other taxes on the sale of our merchandise.
Existing or future government regulation could harm our business.
We are subject to the same federal, state and local laws as other companies
conducting e-commerce and direct response television businesses. Today there
are relatively few laws specifically directed towards conducting these types of
businesses. However, due to the increasing growth and popularity of the
Internet, online retailing and direct response television, many laws and
regulations relating to these businesses, particularly the Internet, are
proposed and considered at the state and federal levels. These laws and
regulations could cover issues such as user privacy, freedom of expression,
pricing, fraud, quality of products and services, taxation, advertising,
intellectual property rights and information security. Applicability of
existing laws governing issues such as property ownership, copyrights and other
intellectual property issues, taxation, libel, obscenity and personal privacy
could also harm our business. For example, United States and foreign laws
regulate our ability to use customer information and to develop, buy and sell
mailing lists. Many of these laws may not contemplate or address the unique
issues raised by the Internet, online retailing or direct response marketing.
Some laws that do contemplate or address those unique issues, such as the
Digital Millennium Copyright 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 our ability to operate efficiently.
Laws or regulations relating to user information and online privacy may
adversely affect the growth of our Internet business or our marketing efforts.
We are subject to increasing regulation at the federal and state levels
relating to privacy and the use of personal user information. Several states
have proposed legislation that would limit the uses of personal user
information online or require collectors of information to establish privacy
policies. The Federal Trade Commission has adopted regulations regarding the
collection and use of personal identifying information obtained from children
under 13. In addition, bills pending in Congress would extend online privacy
protections to adults. Laws and regulations of this kind may include
requirements that we establish procedures to disclose and notify users of
privacy and security policies, obtain consent from users for collection and use
of information, or provide users with the ability to access, correct and delete
personal information stored by us. Even in the absence of those regulations,
the Federal Trade Commission has settled several proceedings resulting in
consent decrees in which Internet companies have been required to establish
programs regarding the manner in which personal information is collected from
users and provided to third parties. We could become a party to a similar
enforcement proceeding. These regulatory and enforcement efforts could also
harm our ability to collect demographic and personal information from users,
which could be costly or adversely affect our marketing efforts.
We have never paid dividends on our common stock and do not anticipate
paying dividends in the foreseeable future.
We have never paid cash dividends on our common stock and do not anticipate
that any cash dividends will be declared or paid in the foreseeable future. As
a result, holders of our common stock will not receive a return, if any, on
their investment unless they sell their shares of our common stock.
It may be difficult for a third party to acquire us and this could depress
our stock price.
Pursuant to our amended and restated certificate of incorporation, we have
authorized a class of 5,000,000 shares of preferred stock, which our board of
directors may issue with terms, rights, preferences and designations as the
board may determine and without any vote of the stockholders, unless otherwise
required by law. Issuing the preferred stock, depending upon the terms, rights,
preferences and designations set by our board, may delay, deter or prevent a
change in control of us. In addition, issuing additional shares of common stock
could result in
35
dilution of the voting power of the current holders of our common stock.
Moreover, "anti-takeover" provisions of Delaware law may restrict the ability
of the stockholders to approve a merger or business combination or obtain
control of us. As many investors consider a change of control as a desirable
path to liquidity, delaying or preventing a change in control of our company
may reduce the number of investors interested in our common stock, which could
depress our stock price.
There are limitations on the liabilities of our directors.
Pursuant to our amended and restated certificate of incorporation and under
Delaware law, our directors are not liable to us or our stockholders for
monetary damages for breach of fiduciary duty, except for liability for breach
of a 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, we have entered into indemnification agreements with each of our
directors. These agreements, among other things, require us to indemnify each
director for certain expenses including attorneys' fees, judgments, fines and
settlement amounts incurred by any such person in any action or proceeding,
including any action by us or in our right, arising out of the person's
services as one of our directors. Our directors are not currently subject to
legal action that would require us to indemnify them; however, if any such
actions were brought, the costs associated with such actions could be harmful
to our business.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no significant changes in market risk for the quarter ended
June 29, 2002. See the information set forth in Item 7A of the Company's Annual
Report on Form 10-K for the fiscal year ended December 29, 2001 filed with the
Securities and Exchange Commission on April 4, 2002.
36
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are involved in various routine litigation incidental to our current and
discontinued businesses. We believe that the disposition of these matters will
not have a material adverse effect on our financial position or results of
operations.
On June 11, 2002, Ashford, a wholly owned subsidiary of GSI announced the
resolution of the Securities and Exchange Commission's investigation into
Ashford's accounting for certain agreements with Amazon.com. Under the terms of
the settlement, Ashford agreed, without admitting or denying the SEC's
allegations, to cease and desist from committing or causing any violations of
the anti-fraud provisions, the reporting provisions and the books and records
provisions of the federal securities laws. The cease and desist order relates
to conduct by Ashford and two of its executives prior to the acquisition of
Ashford by GSI on March 14, 2002. The cease and desist order is not directed at
GSI and will have no material impact on the financial condition or operating
results of GSI.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 23, 2002, we held our Annual Meeting of Stockholders. Proxies were
solicited for the Annual Meeting pursuant to Regulation 14A of the Securities
Exchange Act of 1934. At the Annual Meeting, the following matters were voted
on:
1. Kenneth J. Adelberg, M. Jeffrey Branman, Ronald D. Fisher, Harvey Lamm,
Mark S. Menell, Michael S. Perlis, Jeffrey F. Rayport and Michael G. Rubin were
elected to serve on the Board of Directors of the Company for one-year terms
and until their respective successors are duly elected and qualified. The votes
for and the votes withheld for the election of each director were as follows:
Name For Withheld
---- --- --------
Kenneth J. Adelberg 34,592,487 130,545
M. Jeffrey Branman 34,592,487 130,545
Ronald D. Fisher 34,592,487 130,545
Harvey Lamm 33,641,158 1,081,874
Mark S. Menell 34,592,487 130,545
Michael S. Perlis 34,577,187 145,845
Jeffrey F. Rayport 33,656,458 1,066,574
Michael G. Rubin 33,752,488 970,544
2. The Amendment of the Certificate of Incorporation to change the
Company's name to GSI Commerce, Inc. was approved by the following vote:
For Against Abstain
--- ------- -------
34,693,899 24,537 4,596
ITEM 5. OTHER INFORMATION
None.
37
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Certificate of Amendment to Amended and Restated Certificate of Incorporation of Global Sports, Inc.
4.1 Specimen Common Stock Certificate
10.1 Personal Services Agreement, dated June 12, 2001, by and between GSI West, Inc. and Damon Mintzer
10.2 Amendment Number 1, dated September 10, 2001, to Personal Services Agreement by and between GSI
West, Inc. and Damon Mintzer
99.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
On May 28, 2002, we filed a Form 8-K/A with the Securities and Exchange
Commission regarding the acquisition of Ashford in a merger transaction.
Included in such filing were the historical financial statements of Ashford and
pro forma combined statements of operations of the registrant and Ashford.
38
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, hereunto duly authorized.
GSI COMMERCE, INC.
/s/ MICHAEL G. RUBIN
By: -----------------------------
Michael G. Rubin
Chairman, President &
Chief Executive Officer
/s/ JORDAN M. COPLAND
By: -----------------------------
Jordan M. Copland
Executive Vice President &
Chief Financial Officer
Date: August 12, 2002
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