UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

 

 

Commission file number 0-16611

 

 

GSI COMMERCE, INC.

(Exact name of registrant as specified in its charter)

 

 

Registrant’s telephone number, including area code (610) 491-7000

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Securities registered pursuant to Section 12(g) of the Act:

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ     No o

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o     No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o     No þ

 

The aggregate market value of the registrant’s voting stock held by non-affiliates of the registrant as of the close of business on July 3, 2009, was approximately $360,296,158 based on a per share price of $14.39, the closing price of the registrant’s common stock on the trading day prior to the end of the registrant’s second fiscal quarter, as reported on the NASDAQ Global Select Market.⁽¹⁾

 

There were 60,392,539 shares of the registrant’s Common Stock outstanding as of the close of business on March 1, 2010.

 

 

DOCUMENTS INCORPORATED BY REFERENCE

 

(Specific sections incorporated are identified under applicable items herein)

 

Certain information required for Parts II and III of this Form 10-K, to the extent not set forth herein, is incorporated herein by reference to the Proxy Statement for the 2010 Annual Meeting of Stockholders.

 

 

 

 

GSI COMMERCE, INC.
ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED JANUARY 2, 2010

 

TABLE OF CONTENTS

 

 

The Company’s fiscal year ends on the Saturday nearest the last day of December. The Company’s fiscal year ends are as follows:

 

 

 

Overview

 

We are a leading provider of e-commerce and interactive marketing services to large businesses that sell products directly to consumers (b2c). We operate in three business segments — e-commerce services, interactive marketing services and consumer engagement. Within these segments, we provide services to more than 500 retailers and brands, including: 7 for all Mankind^®; Aeropostale^®; American Eagle Outfitters^®, Avis^®, Bath & Body Works^®, British Airways^®, Calvin Klein^®, Christopher & Banks^®, Cole Haan^®, Dell^®, Dick’s Sporting Goods^®, Estee Lauder^®, Expedia^®, HP^®, Major League Baseball^®, the NFL^®, Philips^®, Publishers Clearing House^®, RalphLauren.com^®, Sports Authority^®, The TJX^® Companies, Tory Burch^®, Toys “R” Us^®, Tumi^®, Warnaco^® and the Washington Post Newspapers, Inc. ^®

 

Our services enable retailers and brands to build and grow their e-commerce and multichannel businesses. By working with us, we believe companies gain access to high quality technologies, a proven, integrated and scalable infrastructure, and interactive marketing expertise. Further, by investing continuously in our offerings, we provide a broader range of high-quality capabilities than our clients could justify building, implementing and maintaining on their own. As we continue to invest in our services, infrastructure and expertise, we believe that we increase our overall value to our clients.

 

In our e-commerce services business, we deliver customized solutions to clients through an e-commerce platform, which is comprised of three components: technology, fulfillment and customer care / call center services. We offer each of the platform’s components on a modular basis or as part of an integrated, end-to-end solution.

 

In our interactive marketing services business, we offer comprehensive digital and traditional agency and e-mail marketing services that include brand development and strategic account planning, user experience and creative design, interactive marketing, traditional advertising, media buying, video, marketing content and promotional development, e-mail marketing and distribution, Web store usability, and product photography and content development.

 

In our consumer engagement business, we offer retailers and brands an online platform to sell excess inventory in the private sales channel as well as through an off-price marketplace. The private sales channel is an online platform that uses sales limited in time and inventory to create an efficient and effective channel for brands to sell excess inventory in a brand-friendly environment designed to protect the brand’s image and enhance brand visibility. Our off-price marketplace is an online alternative sales channel for manufacturers, brands, distributors and other retailers to liquidate inventory.

 

For additional information about our business segments, see Note 14, Segment Information, to our consolidated financial statements included in Item 15, Exhibits and Financial Statement Schedule, of this Annual Report on Form 10-K.

 

e-Commerce Services

 

Overview

 

We provide e-commerce services domestically and internationally that enable b2c companies to operate e-commerce and multichannel retailing businesses. Our services include a comprehensive suite of Web and e-commerce technologies, fulfillment and customer care / call center services. We offer components of these services as part of an integrated e-commerce platform as well as on a modular basis. Additionally, our e-commerce services include technical Web and e-commerce development services, buying services, value-added fulfillment services, and third-party services we resell to our clients.

 

We believe that our e-commerce services help clients grow their e-commerce and multichannel businesses faster and more profitably than they could on their own. As retailers and brands place a greater emphasis on developing their online channels, they are challenged to make the level of investment required to support high-quality, multichannel, e-commerce businesses. The online businesses of our clients and prospects often account for

a small, but growing percentage of their companies’ overall businesses, which makes their online businesses too important to ignore, but often not large enough to justify the initial and continuing investment required for a robust e-commerce offering.

 

We continually seek to broaden the scope of our services and capabilities to help our clients grow their e-commerce businesses and enhance their customers’ online experience.

 

Our e-commerce services can be customized to provide solutions that best fit the needs of our clients. We continually upgrade or enhance our core set of platform components to gain efficiencies, improve performance and provide solutions that encourage the growth of our clients’ businesses.

 

We provide e-commerce services to clients that manage their own inventory and to clients for which we purchase and own the inventory. In cases where product is owned by the client, the client is the seller of the merchandise, establishes product prices and pays us service fees based either on a fixed or variable percentage of revenues, or based on the activities we perform. In cases where our clients have us select and purchase inventory from product manufacturers and other vendors, we operate the client’s e-commerce site on their behalf (under their brand or name) and we sell the inventory directly to consumers.

 

When we own the inventory, we establish the prices for products that we offer, and to the extent possible, we strategically price products sold through a client’s e-commerce business to be consistent with the pricing for the same products at that client’s retail stores. Accordingly, prices for the same products may differ across our clients’ e-commerce businesses. Generally, we pay a percentage of revenues to the respective clients in exchange for the right to use their brand or names, logos and Web site address in the operation of their e-commerce business and for their commitment to promote and advertise their e-commerce business. This model is used primarily for our relationships with sporting goods retailers. A similar “owned inventory” model is used with our licensed products business and most of our professional sports leagues and some entertainment companies with the primary difference being that we have licensing agreements with the clients to sell selected products on their Web sites.

 

To facilitate our selection and purchasing of inventory, we have a buying organization that procures products in the merchandise categories of sporting goods, consumer electronics and licensed entertainment and sporting goods products. In the case of sporting goods, we use a common pool of owned sporting goods inventory, which allows us to offer a broad assortment while efficiently managing the inventory. We also have business to business (b2b) relationships with several clients to sell sporting goods and licensed products we own to their customers through their Web stores or other retail channels. We sell products to these b2b clients from our inventory or through our network of drop shippers and fulfill customer orders on behalf of these clients. We believe that we have strong relationships with our vendors and sources of unique products, and we regularly seek to add new vendors, brands and sources of unique products. During fiscal 2009, we purchased $41.3 million of inventory from one vendor, which accounted for 18.2% of the total dollar amount of inventory we purchased.

 

Technology Services

 

We build and operate our clients’ Web stores using our proprietary, hosted e-commerce software solution, which enables a complete online shopping experience tailored to our clients’ brands. This solution includes a broad set of configurable features and functions, such as product presentation, merchandising, shopping cart and checkout, that enable the buying and selling of products online. On a selective basis, we also integrate specialized, third-party software applications into our solution.

 

We provide our clients with proprietary Web store management tools to manage their Web store’s administration, product and catalog content and reporting. These tools help clients to create and manage product categories, marketing and descriptive content, product images, advertisements and promotions, merchandising, inventory, cross-selling and up-selling, and search capabilities.

 

We provide hosting services for our clients’ Web stores and related systems. These services are hosted in two data centers, which are co-located with a leading third-party telecommunications company. We actively manage and monitor the operations and infrastructure of these data centers.

We can manage all aspects of orders placed through our clients’ Web stores through our order management and processing system, including credit card payments, alternative payments, private-label credit cards, promotions, gift card purchase and redemption, shipping fees, taxes, and other service fees such as for gift wrapping.

 

We can also provide our clients with continuous access to a secure, Web-based, analytics portal with reporting and analytical capabilities including demand, merchandising, marketing, click stream, and Web metrics.

 

Fulfillment and Drop Shipping Services

 

We offer a range of order fulfillment services through seven fulfillment centers — five in the U.S., one in Canada, and one in Europe. Our fulfillment centers support multicategory, b2c requirements and can be used as a part of an integrated offering with our Web Store technologies and customer care and call center operations or utilized as a stand-alone module integrated with a client’s third party applications and operations.

 

As of March 1, 2010, our total fulfillment footprint was approximately 2.7 million square feet. We also integrate with and manage a network of about 750 third-party, drop-ship vendors as well as with certain clients who perform their own fulfillment.

 

We also process orders and provide fulfillment for clients that directly market products through television advertisements (infomercials), the Web and over the telephone and provide fulfillment services for specialized award programs.

 

We maintain relationships with major freight carriers and offer ‘ShipQuik,’ a customized shipping program for the U.S., which uses our operational scale to improve ship times at competitive prices. We also offer ‘iShip,’ an international shipping program that allows a U.S. customer to ship purchased products to approximately 30 European, South American and Asian countries.

 

Customer Care and Call Center Services

 

We provide customer care and call center services 24 hours per day, seven days per week through four customer care centers in the U.S. and one customer care center in the U.K. When needed, we utilize third-parties to add customer service capacity. We also deploy our customer care application remotely for clients that provide their own customer care services. Our customer care applications and informational tools can provide a 360-degree view and access to customer information including service history, previous purchases, personal preferences, product information, inventory availability and order status. Our customer care tools are integrated with our order management and fulfillment operations to provide a consistent experience across all customer touch points including our clients’ Web stores, direct mail, newspaper circulars, catalogs, promotional events and direct response television campaigns. These tools can also be integrated with client’s or third-party applications.

 

Interactive Marketing Services

 

Overview

 

We provide brand development and strategic account planning, user experience and creative design, interactive marketing, affiliate marketing, studio services (photography and content development) as well as traditional media services through our in-house digital marketing agency, TrueAction^tm. We also provide advanced e-mail marketing and data services and solutions through our subsidiary, e-Dialog, Inc.

 

Digital Marketing Agency Services

 

With an understanding of data and customer insights, we work with our clients to develop, implement and manage marketing initiatives and compelling Web store features, functions and content. We also offer traditional print and media services such as print advertising, video, marketing content development and promotional campaigns. These initiatives are aimed at increasing sales for our e-commerce clients’ and non-platform clients’ products and promoting consistency for client brands across all customer channels. We have combined our e-commerce expertise, our familiarity with our clients’ online businesses and our skills in interactive and traditional marketing to offer a comprehensive suite of marketing services. Our e-commerce clients benefit from the integrated

relationship between our interactive marketing services and our e-commerce platform, which gives us significant insight and knowledge about our clients’ direct-to-consumer businesses.

 

We help clients develop and increase the strength and consistency of their brand(s) online and across multiple channels by developing the overall messaging, imagery and tone for those brands.

 

We also work with our clients to develop strategies and create online brand experiences that are intuitive and easy to use and that affect our clients’ customers’ needs and behaviors. Our team of design, usability research, and technology professionals collaborates with our clients to create custom online experiences that reinforce our clients’ offline presence. We also use our state-of-the-art usability lab to test shoppers’ experiences with our clients’ Web stores’ design, navigation and content and to provide valuable insight and feedback into customer shopping and purchasing habits and expectations.

 

We create and produce product images and descriptive content for our clients’ Web stores that is consistent with our clients’ branding. We operate an in-house professional digital photography studio to create product presentations designed to inform online shoppers and encourage purchases.

 

We develop, implement and manage strategic marketing programs for our clients that are designed to increase online exposure, generate incremental revenue, drive new customer acquisition and maximize the return on our clients’ marketing investment. We help our clients create favorable product marketplace and brand positioning opportunities using our marketing research and analysis. We create and manage marketing programs that include paid and natural search engine marketing (SEM) & search engine optimization (SEO), comparison shopping engines (CSEs), online advertising, contextually relevant publisher sites, blogs, social networks, affiliate marketing, and emerging media opportunities.

 

We also measure and analyze consumer purchasing behavior and use the intelligence to help optimize marketing campaigns for our clients.

 

The agency also owns and operates an affiliate marketing network. We believe affiliate marketing is an effective tool that has helped our clients grow their online businesses.

 

e-Mail Marketing Services

 

We provide advanced e-mail marketing and database technologies, products, strategies, and services for permission-based e-mail marketers in the U.S. and in Europe.

 

We offer e-mail marketers a comprehensive and integrated set of tools that combines campaign management, data segmentation, in-depth reporting, analysis and performance. We offer a broad range of service offerings that include campaign management (for full-service and collaborative relationships), strategy, analytics, data services, data integration, creative, advanced applications, deliverability/ISP relations, and response management. Custom solutions include development of a custom content collection interface (CCI), workflow optimization and specialized conversion and Web tracking. We offer clients a range of service delivery options depending on their e-mail marketing needs including full-service, self-service and collaborative relationship solutions, which clients can rely on us for training, custom applications and production assistance whenever the expertise is needed.

 

Consumer Engagement

 

Overview

 

We provide retailers and brands with an online platform to sell excess inventory in the private sale channel through Rue La La, as well as in the off-price marketplace through SmartBargains.

 

Online Private Sale Channel

 

We provide an online platform that brings the “sample sale” concept online and creates an efficient and effective channel for brands to merchandise and sell excess inventory in a brand-friendly environment designed to protect the brand’s image and enhance brand visibility. We utilize a viral and cost-efficient marketing strategy based on member referrals through e-mail to grow the membership base. Members receive daily e-mails alerting them to

the sales of the day which builds anticipation and excitement among the membership. Sales are limited — both in time and inventory, which adds a sense of urgency to the promotion for the consumer.

 

Off-Price Marketplace

 

We provide an online platform for the sale of off-price merchandise across a wide, cross-section of categories. This is an online alternative sales channel for manufacturers, brands, distributors and other retailers to liquidate inventory.

 

Growth Strategy

 

Our objective is to grow our business by:

 

 

Expand the e-Commerce Services Client Base

 

We continue to grow our client base primarily through the efforts of our in-house sales organization and sales support group. We seek to attract new clients by providing solutions that enable companies to grow their e-commerce businesses more rapidly and cost-effectively than they could on their own. We believe our clients select our e-commerce solutions for the following reasons:

 

 

Retain Clients, Grow Their Businesses and Sell Additional Services

 

The financial benefit that we derive from our e-commerce service relationships with our clients is primarily tied to the performance of their e-commerce businesses. Accordingly, it is part of our strategy to grow our business by growing our clients’ e-commerce businesses. It is therefore important for us to build long-term and multifaceted relationships with our clients and to provide services and create opportunities for our clients to grow their businesses.

 

For our e-commerce services clients, we typically have long-term, exclusive contracts. When our e-commerce services contracts come up for renewal, the majority of our e-commerce clients renew their relationship with us for multiple years. Long-term and multifaceted relationships provide opportunity to sell additional services such as those we offer through our marketing services and consumer engagement businesses.

 

Grow Our Interactive Marketing Services Business

 

We also grow by adding interactive marketing services clients as well as expanding the scope of services used by existing clients. We expect industry growth trends showing more marketing dollars moving from traditional

marketing channels to online and other interactive channels to continue. We believe this shift in marketing channels provides us with the opportunity to sell additional marketing services to existing clients and helps us obtain new marketing services clients outside of those on our e-commerce platform.

 

Drive Consumer Engagement

 

We grow by offering Rue La La, our online private sales channel, and SmartBargains, our off-price merchandise marketplace. Both offerings were acquired in 2009.

 

Expand Globally

 

Through organic development and strategic acquisitions, we have built, and continue to add e-commerce and marketing services to our international offering. As we add more e-commerce services clients internationally, we would also expect to grow our international interactive marketing services business. We grow internationally by signing new clients based outside of North America and by expanding our relationships with our existing North American clients that have global brands and want to expand the online presence of those brands internationally. Our international operations do not currently represent a material portion of our business.

 

Selectively Pursue Strategic Acquisitions

 

We also intend to continue to grow by selectively acquiring companies that enhance existing capabilities, or provide new capabilities strategic to either e-commerce, interactive marketing, or consumer engagement services, add operational scale, or provide geographic expansion. From 2007 through November 2009, we completed six such acquisitions:

 

 

Competition

 

e-Commerce Services

 

The market for the development and operation of e-commerce businesses is continuously evolving and intensely competitive. Many of our prospective e-commerce services clients evaluate managing all aspects of an e-commerce operation with internal resources. As a result, we often compete with in-house solutions promoted and supported by internal information technology staffs, merchandising groups and other internal corporate constituencies as well as with technology and service providers that supply one or more components of an e-commerce solution that allow prospects to develop and operate their e-commerce business in-house. This group of providers may include the prospective client itself and companies that offer: Web platforms (ATG, IBM and Microsoft); customer care /call center services (West and Convergys); fulfillment and logistics (DHL and UPS); and systems integrators (Accenture, EDS, Sapient, Infosys and IBM). We also compete with the online and offline businesses of a variety of retailers and manufacturers in our targeted categories.

 

We believe that we compete with e-commerce competitors primarily on the basis of the following:

 

 

 

Interactive Marketing Services

 

The market for interactive marketing services is continuously evolving and intensely competitive. Our prospective interactive marketing services clients evaluate managing their marketing services with internal resources as well as through digital marketing agencies. As a result, we often compete with in-house solutions promoted and supported by internal marketing departments as well as with service providers that supply one or more interactive marketing services. This group of providers may include the prospective client itself and companies that offer: e-mail management and data aggregation (Experian, Harte-Hanks and Epsilon); and online marketing and design services (digital marketing services agencies such as Omnicom Group, WPP Group, Publicis and the Interpublic Group of Companies)

 

We believe that we compete with marketing services competitors primarily on the basis of the following:

 

 

Consumer Engagement

 

The competitive marketplace for the online liquidation of merchandise is also extremely competitive and consists of two principal types of businesses — the online private sale space and online outlets that sell off-price merchandise. Competitors in the online private sale space in North America include companies such as Gilt Groupe, HauteLook, and ideeli. Competitors in online off-price merchandise include companies such as Overstock.com and e-Bay.

 

We believe that we compete with online, product liquidation competitors primarily on the basis of the following:

 

 

Intellectual Property

 

Our e-commerce and e-mail platforms include certain proprietary technology. To protect our proprietary rights in services and technology, we rely on various intellectual property laws and contractual restrictions. These include confidentiality, trade secret law, invention assignment and nondisclosure agreements with our clients, employees, contractors and suppliers. Despite these precautions, it may be possible for a third-party to copy or otherwise obtain and use our intellectual property without our authorization.

 

We use our clients’ names, URLs, logos and other marks in connection with the operation and promotion of their e-commerce businesses. Our agreements with our clients provide us with licenses generally to use this intellectual property in connection with the operation of their e-commerce businesses. These licenses typically are coterminous with the respective agreements.

We also rely on technologies that we license from third parties. These licenses may not continue to be available to us on commercially reasonable terms in the future. As a result, we may be required to obtain substitute technology of lower quality or at greater cost, which could materially adversely affect our business, results of operations and financial condition.

 

Employees

 

As of February 12, 2010, we employed approximately 5,500 people worldwide. We had approximately 5,100 full-time employees and 117 part-time employees in the U.S. and 268 full-time and 22 part-time employees internationally. Globally, approximately 4,500 employees work in e-commerce services, 794 work in interactive marketing services and 216 work in consumer engagement. Employment levels may fluctuate due to the seasonal nature of our e-commerce services and consumer engagement businesses. In addition, we use independent contractors and temporary personnel. None of our employees are covered by a collective bargaining agreement, and we consider our relationship with our employees to be good. Competition for qualified personnel in our industry is intense. We believe that our future success will depend, in part, on our continued ability to attract, hire and retain qualified personnel.

 

Investor Information

 

We are subject to the informational requirements of the Securities Exchange Act of 1934. Therefore, we file reports and information, proxy statements and other information with the Securities and Exchange Commission. Such reports, proxy and information statements and other information may be obtained by visiting the Public Reference Room of the SEC at 100 F Street, NW, Washington, DC 20549 or by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file electronically.

 

You can access financial and other information at our Investor Relations Web site. The address is www.gsicommerce.com/investors. We make available through our Web site, free of charge, copies of our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after filing such material electronically or otherwise furnishing it to the SEC. In addition, we will provide, at no cost, paper or electronic copies of our reports and other filings made with the SEC. Requests should be directed to Investor Relations, 935 First Avenue, King of Prussia, Pennsylvania, 19406. The information on the Web site listed above is not and should not be considered part of this Annual Report on Form 10-K and is not incorporated by reference in this document. This Web site is and is only intended to be an inactive textual reference.

 

We are a Delaware corporation organized in 1986. Our executive offices are located at 935 First Avenue, King of Prussia, Pennsylvania, 19406. Our telephone number is (610) 491-7000.

 

 

We operate in rapidly changing industries and have recently entered new lines of business, all of which make our operating results difficult to predict.

 

The industries in which we operate are rapidly changing and evolving. The evolution of these industries makes our risks, capital needs and operating results difficult to predict. Any failure to adapt our services in response to changing market and technological requirements could adversely affect our operating results. In connection with recent acquisitions, we have also recently entered into new lines of business: the online private sale business, the off-price e-commerce marketplace business and the affiliate marketing business. The online private sale business is an especially new and unproven business model. We have limited experience in these new lines of business, and we will be required to devote substantial financial, technical, managerial and other resources to them. We cannot assure you that these new lines of business will be successful.

We may not achieve the expected benefits of acquisitions and investments.

 

We have acquired a number of companies and invested in a number of companies, products and technologies, and we may acquire additional companies or invest in additional companies, products or technologies in the future. These transactions are accompanied by a number of risks, including:

 

 

These transactions may also result in dilutive issuances of our equity securities, use of our cash resources, and incurrence of debt and amortization expenses related to intangible assets. Our failure to be successful in addressing these risks or other problems encountered in connection with our past or future acquisitions and investments could cause us to fail to realize the anticipated benefits of such acquisitions or investments. In addition, valuations supporting our acquisitions and investments could change. We could determine that such valuations have experienced impairments or other-than-temporary declines in fair value which could adversely impact our financial results.

 

Our failure to manage growth and diversification of our business could harm us.

 

We are continuing our efforts to grow and diversify our business both in the United States and internationally. This has placed, and will continue to place, demands on our management, as well as on our operational and financial infrastructure. To effectively manage our growth initiatives, we will need to continue to expand, improve and adapt our personnel, operations, infrastructure and our financial, information and other systems and continue to implement adequate controls. These enhancements and improvements are likely to be complex and could require significant capital expenditures and allocation of valuable management resources. We may also have to expand our management team by recruiting and employing additional experienced executives and employees. If we are unable to adapt our systems and business, put adequate controls in place and expand our management team in a timely manner to accommodate our growth, our business may be adversely affected.

 

We plan to continue to expand our business internationally which may cause our business to become increasingly susceptible to numerous international business risks and challenges. We have limited experience in international operations.

 

For fiscal 2009, substantially all of our net revenues, income from operations and assets were in the United States. Our growth strategy involves expanding our business internationally, and since 2006, we have completed acquisitions of companies in Spain and the United Kingdom and opened a fulfillment center in Canada. However, we have limited experience in international business, and we cannot assure you that our international expansion strategy will be successful. Our experience in the United States may not be relevant to our ability to expand internationally. In addition, our lack of a track record outside the United States increases our execution risks and the risks described below.

International expansion is subject to inherent risks and challenges that could adversely affect our business, including:

 

 

Some of these factors may cause our international costs of doing business to exceed our comparable domestic costs. Any negative impact from our international business efforts could negatively impact our business, results of operations and financial condition as a whole.

 

We may not be able to compete successfully against current and future competitors.

 

Our businesses are rapidly evolving and intensely competitive.

 

In our e-commerce services segment, we face competition from in-house e-commerce solutions, technology and service providers which supply one or more components of an e-commerce solution and other providers of integrated e-commerce solutions. Low barriers to entry into the e-commerce solutions market may increase the number of competitors our e-commerce business may face. As we continue to expand internationally, our e-commerce services segment will face increased competition from local companies which may have a greater understanding of, and focus on, the local customer. Our e-commerce services segment has competitors with longer operating histories, larger customer bases, greater brand recognition or greater financial, marketing and other resources. Those competitors may be able to secure merchandise on more favorable terms and devote more resources to technology development and marketing than our e-commerce services segment.

 

In our interactive marketing services segment, we face competition from other providers of interactive marketing services, other providers of traditional marketing services and in-house marketing departments. Low barriers to entry in the interactive marketing industry may increase the number of competitors our interactive marketing services business may face. International expansion of our interactive marketing services segment will increase our exposure to competition with local companies who may have a competitive advantage because of their understanding of the needs of local businesses and consumers. Our interactive marketing services segment has competitors with longer operating histories, larger customer bases, greater brand recognition or greater financial, marketing and other resources who are able to devote more resources to technology development and marketing.

 

In our consumer engagement segment, we face competition from the offline businesses of retailers and manufacturers and other e-commerce Web sites. New private sale Web sites may be created and traditional

liquidators and online retailers may develop services that compete with our online private sale channel and off-price marketplace. If our competitors are able to secure merchandise on more favorable terms, our consumer engagement business could be harmed. In addition, manufacturers and retailers may decide to create their own Web sites for selling excess inventory. Local companies will have a competitive advantage over our consumer engagement segment as we expand internationally.

 

We cannot assure you that we will be able to compete successfully against current and future competitors. In addition, competition may intensify as our competitors enter into business combinations or alliances and established companies in other market segments or geographic markets expand into our market segments or geographic markets. If we cannot compete successfully against our competitors, our business, results of operations and financial condition could be negatively impacted.

 

Our business is highly seasonal; a weak fourth quarter would have a material adverse effect on our operating results for the year.

 

Our fourth fiscal quarter has accounted for and is expected to continue to account for a disproportionate amount of our total annual revenues. For fiscal 2009, 42.8% of our annual net revenues were generated in our fourth fiscal quarter. For fiscal 2008 and fiscal 2007, 40.5% and 44.7% of our annual net revenues were generated in our fourth fiscal quarter, respectively. Since fiscal 1999, we have not generated net income in any fiscal quarter other than a fourth fiscal quarter. Our results of operations historically have been seasonal primarily because consumers increase their purchases during the fourth quarter holiday season.

 

Because our fourth quarter accounts for a larger percentage of our annual revenue, any negative impact on our business during the fourth quarter will have a disproportionate adverse affect on our results of operations for the full year. Certain significant components of our expenses, including rent, utilities, maintenance and other facility-related expenses and the costs of our information technology systems, are incurred throughout the year at amounts required in order to maintain the capacity required during our fourth quarter. In addition, we have significant cash requirements in the months leading up to our fourth quarter in anticipation of higher sales volume during the fourth quarter, including expenses for additional inventory, advertising and employees. Our fourth quarter results could be lower than expected if, among other things:

 

 

If for any reason our fourth fiscal quarter results were substantially below expectations, our operating results for the full year would be materially adversely affected.

 

General economic conditions may adversely affect our results of operations and financial condition.

 

General economic conditions may adversely affect our results of operations and financial condition. The direction and relative strength of the global economy continues to be uncertain due to recent softness in the real estate and mortgage markets, volatility in fuel and other energy costs, varying economic conditions in different countries, difficulties in the financial services sector and credit markets, high levels of unemployment and other macro-economic factors. Consumer uncertainty about current economic conditions could adversely affect consumer confidence and behavior in ways that adversely affect our results of operations and financial condition. For example, the economic uncertainty could cause consumers to reduce their discretionary purchases of goods which

we and our clients sell. This in turn could result in slower inventory turnover and could cause us or our clients to have greater markdowns on inventory.

 

We have an accumulated deficit and may incur additional losses.

 

Since 2001, we have recorded net losses in all but two of our fiscal years. As of the end of fiscal 2009, we had an accumulated deficit of $165.6 million. If we fail to generate sufficient revenue from our existing clients, add an appropriate number of new clients or adequately control our expenses, we may not be able to return to profitability. We will continue to incur significant operating expenses and capital expenditures as we seek to expand our operations and enhance our capabilities. If we incur expenses at a greater pace than we generate revenues, we could incur additional losses.

 

We may not be able to access on satisfactory terms, or at all, the credit and capital markets as needed to finance a portion of our working capital requirements and support our liquidity needs.

 

We rely upon access to the credit and capital markets as a source of liquidity for the portion of our working capital and debt repayment requirements, infrastructure needs and consideration for acquisitions and strategic investments not provided by cash from operations or investments. We may in the future need to seek additional equity or debt financing. We may not be able to obtain financing on satisfactory terms or at all. If we issue securities to raise capital, our existing stockholders may experience dilution or the new securities may have rights senior to those of our common stock. In addition, the terms of these securities could impose restrictions on our operations.

 

Market disruptions such as those recently experienced in the United States and abroad may increase our cost of borrowing or adversely affect our ability to access sources of liquidity. If the lenders in our secured revolving bank credit facility are unable to meet their obligations to provide loans to us under the terms of the credit facility, if we are unable to access credit at competitive rates, or at all, if our short-term or long-term borrowing costs dramatically increase, or if we are not able to obtain financing on satisfactory terms or at all, our ability to finance our operations, meet our short-term obligations and implement our operating strategy could be adversely affected which may limit our growth potential and our ability to execute our business strategy.

 

Our substantial leverage and significant debt service obligations could adversely affect our financial condition and our ability to fulfill our obligations and operate our business.

 

We currently have and expect to continue to have a significant amount of indebtedness. As of January 2, 2010, including our outstanding convertible notes, borrowings under our secured revolving bank credit facility and capital leases, we had approximately $205.8 million of indebtedness outstanding with an aggregate principal amount of $240.9 million and we had $90 million of borrowing capacity under the revolving portion of our secured revolving bank credit facility. We may also incur additional indebtedness in the future. On June 1, 2010, holders of our 3% convertible notes due 2025, referred to as the “3% convertible notes,” are permitted to require us to repurchase the 3% convertible notes for 100% of the principal amount outstanding ($57.5 million as of January 2, 2010) plus accrued and unpaid interest. Although we cannot provide any assurances, we currently expect to have sufficient liquidity from our cash from operating activities, our cash and cash equivalents and/or our secured revolving bank credit facility to fund any such required repurchases. In the event of a default under the notes or the secured revolving bank credit facility, our indebtedness could become immediately due and payable and could adversely affect our financial condition.

 

Our indebtedness could have significant negative consequences on us, including:

 

 

 

The terms of our secured revolving bank credit facility impose financial and operating restrictions on us.

 

We have a secured revolving bank credit facility with a borrowing capacity of $90 million, which, subject to certain conditions, may be increased to $150 million. Our secured revolving bank credit facility contains restrictive covenants that limit our ability to engage in activities that may be in our long-term best interests. These covenants limit or restrict, among other things, our ability to:

 

 

These limitations and restrictions may adversely affect our ability to finance our future operations or capital needs or engage in other business activities that may be in our best interests. In addition, our ability to borrow under the secured revolving bank credit facility is subject to compliance with covenants. If we breach any of the covenants in our secured revolving bank credit facility, we may be in default under our secured revolving bank credit facility. If we default, the lenders under our secured revolving bank credit facility could declare all borrowings owed to them, including accrued interest and other fees, to be immediately due and payable.

 

We may become obligated to make earnout payments to the former stockholders and employees of RCI, which may limit our available cash or affect our ability to engage in other business activities that may be in our best interests.

 

In connection with the acquisition of RCI, the former stockholders and employees of RCI will be eligible to receive an earnout payable in cash and common stock for each of the 2010, 2011 and 2012 fiscal years with an aggregate value of up to $170 million if certain financial performance targets are achieved. This earnout may limit our cash available for other purposes, limit our ability to engage in other business activities that may be in our best interests, limit our ability to make future acquisitions and may affect our ability to obtain financing.

 

If we fail to manage our exposure to global financial and securities market risk successfully, our operating results and financial condition could be materially impacted.

 

The primary objective of most of our investment activities is to conservatively invest excess cash. To achieve this objective, a majority of our cash and cash equivalents are held in bank deposit accounts and institutional money market mutual funds. If the carrying value of our investments exceeds the fair value, and the decline in fair value is deemed to be other-than-temporary, we will be required to write down the value of our investments, which could materially harm our results of operations and financial condition. We maintain cash and cash equivalents in various institutions at levels exceeding the insurance limits of the Federal Deposit Insurance Corporation, or FDIC, and we purchase investments not guaranteed by the FDIC. Accordingly, if any of these institutions fail, there may be a risk that we will not recover the full principal of our investments or that their liquidity may be diminished. These investments are subject to general credit, liquidity, market, and interest rate risks, which may be directly or

indirectly impacted by uncertainty about current economic conditions. We could incur significant realized, unrealized or impairment losses associated with these investments.

 

Our growth and success depend, in part, on our ability to add new clients and maintain and expand our relationships with existing clients.

 

Key elements of our growth strategy include adding new clients, extending the term of existing client agreements and growing the business of our existing clients. Competition for clients is intense, and we may not be able to add new clients or keep existing clients on favorable terms, or at all. If we are unable to add and launch new clients within the time frames projected by us, we may not be able to achieve our targeted results in the expected periods. A change in the management of our clients could adversely affect our relationship with those clients, including our ability to renew agreements with those clients or enter into amendments to those agreements on favorable terms. If any of our existing clients were to exit the e-commerce channel, declare bankruptcy or suffer other financial difficulties and/or terminate or modify their relationships with us, our business, results of operations and financial condition could be adversely affected. If our agreements with existing clients terminate or are terminated, we may be unable to renew or replace these agreements on comparable terms, or at all.

 

Our success is tied to the offline businesses of our clients.

 

Our success is substantially dependent upon the offline businesses of our clients. Our business and reputation could be adversely affected if any of our clients were to suffer impairment of their offline businesses, whether due to financial difficulties, impairment of their brands, reduction in marketing efforts or reduction in the number of their retail stores. If any of these occurred, consumer traffic and sales through our clients’ Web sites could be negatively affected and clients could choose not to continue to utilize our e-commerce, interactive marketing or liquidation services. Our results of operations could also be negatively impacted if certain of our clients fail to forecast product demand. Under certain of our client agreements, the clients select and buy the inventory for their corresponding Web stores. Under such arrangements, the client establishes product prices and pays us service fees based either on a fixed or variable percentage of revenues, or on the activity performed. As a result, if any of these clients fail to forecast product demand or optimize or maintain access to inventory, our service fees could be adversely affected.

 

A large percentage of our revenue is derived from a small number of our clients’ businesses.

 

For fiscal 2009, sales to customers through one of our client’s businesses accounted for 11.1% of our revenue, and sales through another client’s businesses accounted for 10.2% of our revenue. In fiscal 2009, sales through our top five clients’ businesses accounted for 36.9% of our revenues. For fiscal 2008 and 2007, sales through our top five clients’ businesses accounted for 38.0% and 45.3% of our revenue, respectively. Loss of any of our major clients could adversely affect our business, results of operations and financial condition.

 

We are subject to significant inventory risks.

 

We are exposed to significant inventory risks that may adversely affect our operating results. These inventory risks are a result of seasonality, changes in consumer tastes, changes in consumer demand and spending habits, and other factors. In order to be successful, we and our clients must accurately predict consumer demand and avoid overstocking or understocking products. If we or our clients fail to identify and respond to changes in merchandising and consumer preferences, sales on our or our clients’ e-commerce businesses could suffer and we or our clients could be required to mark down unsold inventory. For the inventory we own, this would depress our profit margins. For the inventory owned by our clients, this would reduce the fees we are able to collect, as our fees are calculated as a percentage of sales. In addition, any failure to keep pace with changes in consumers’ tastes could result in lost opportunities and reduced sales through our or our clients’ e-commerce businesses.

 

Inventory loss and theft, or “shrinkage,” and merchandise returns could also increase in the future. If merchandise returns are significant, or our shrinkage rate increases, our revenues and costs of operations could be adversely affected.

Our business could suffer if we are unsuccessful in making, integrating, and maintaining commercial agreements and other business relationships.

 

Relationships with Manufacturers, Retailers and Other Suppliers.

 

For some of our clients’ e-commerce businesses, we own inventory and primarily purchase products from the manufacturers and distributors of the products. For other of our clients’ e-commerce businesses, our clients own inventory and typically purchase products from the manufacturers and distributors of products or source their own products. If we or our clients are unable to develop and maintain relationships with these manufacturers, distributors or sources, we or our clients may be unable to obtain or continue to carry a sufficient assortment and quantity of quality merchandise on acceptable commercial terms and our and our clients’ e-commerce businesses could be adversely impacted. During fiscal 2009 we purchased 18.2% of the total amount of e-commerce services inventory we purchased from one manufacturer. During fiscal 2008 and 2007, we purchased 16.8% and 18.0%, respectively, of the total amount of e-commerce services inventory we purchased from one manufacturer. While we have a contract with this manufacturer, this manufacturer and other manufacturers, some of which do not have contracts with us, could stop selling products to us or our clients and may ask us or our clients to remove their products or logos from our or our clients’ Web stores. If we or our clients are unable to obtain products directly from manufacturers, retailers or other suppliers, especially popular brand merchandise, we or our clients may not be able to obtain the same or comparable merchandise in a timely manner or on acceptable commercial terms. In addition, retailers and other suppliers may not continue to sell their excess inventory to us on current terms or at all. For example, our suppliers may sell their excess inventory to other traditional or online merchandise liquidators or they may not have excess inventory to sell. Our failure to obtain excess inventory on current terms or at all may limit our growth.

 

Marketing and Promotional Arrangements.

 

We have relationships with search engines, comparison shopping sites, affiliate marketers and other Web sites to provide content, advertising banners and other links to our clients’ e-commerce businesses. We rely on these relationships as significant sources of traffic to our clients’ e-commerce businesses. If we are unable to maintain these relationships or enter into new relationships on acceptable terms, our ability to attract new customers could be harmed.

 

Shipping Vendors.

 

Although we operate our own fulfillment centers, we rely upon multiple third parties for the shipment of our products. We also rely upon certain vendors to ship products directly to consumers. As a result, we are subject to the risks associated with the ability of these vendors and other third parties to successfully and in a timely manner fulfill and ship customer orders and any price increases instituted by these vendors. The failure of these vendors and other third parties to provide these services, or the termination or interruption of these services, could adversely affect the satisfaction of consumers, which could result in reduced sales by our and our clients’ e-commerce businesses. In addition, if third parties were to increase the prices they charge to ship our products, and we passed these increases on to consumers, consumers might choose to buy comparable products locally to avoid shipping charges.

 

Our revenue from our affiliate marketing network may fail to grow or may decline if the reputation of the affiliate marketing network is damaged by unscrupulous activities of network participants.

 

The goal of an affiliate marketing network is to facilitate long-term and mutually beneficial partnerships between publishers/affiliates and advertisers/merchants. Our affiliate network may not continue to be effective in the future due to, among other reasons, publishers/affiliates acting in an unscrupulous manner, including using spam, false advertising, adware, cookie stuffing, forced clicks and other similar methods to drive traffic to advertisers on the network. If publishers/affiliates in the affiliate network utilize unethical practices, this could adversely affect the reputation of the affiliate network and we may experience difficulty in attracting advertisers/merchants to the affiliate network and our revenues could fail to grow or could decline.

A disruption in our operations could materially and adversely affect our business, results of operations and financial condition.

 

Any disruption to our operations, including system, network, telecommunications, software or hardware failures, and any damage to our physical locations or off-site data centers, could materially and adversely affect our business, results of operations and financial condition.

 

Our operations are subject to the risk of damage or interruption from:

 

 

If any of these events occur, it could result in interruptions, delays or cessations in service to customers of our and our clients’ e-commerce businesses and adversely impact our and our clients’ e-commerce businesses. These events could also prevent us from fulfilling orders for our and our clients’ e-commerce businesses. Our clients might seek significant compensation from us for their losses. Even if unsuccessful, this type of claim likely would be time consuming and costly for us to address and damaging to our reputation.

 

Any system failure that causes an interruption of the availability of our or our clients’ e-commerce businesses could reduce the attractiveness of our or our clients’ e-commerce businesses to consumers and result in reduced revenues, which could materially and adversely affect our business, results of operations and financial condition.

 

Problems in our fulfillment operations could adversely affect our business.

 

Under some of our client agreements, we maintain the inventory of our clients in our fulfillment centers. We also maintain our own inventory in our fulfillment centers. Our failure to properly handle and protect such inventory could adversely affect our relationship with our clients or our business. In addition, because it is difficult to predict demand, we may not manage our fulfillment centers in an optimal way, which may result in excess or insufficient inventory or warehousing, fulfillment and distribution capacity. We may be unable to adequately staff our fulfillment centers. As we continue to add fulfillment and warehouse capability or add new clients with different fulfillment requirements, our fulfillment network becomes increasingly complex and operating it becomes more challenging. If we are unable to adapt to these changes, our business could be adversely affected.

 

Our success is tied to the adequacy of the Internet infrastructure.

 

The success of our businesses and our clients’ e-commerce businesses depends on the continued development and maintenance of the Internet infrastructure. As currently configured, the Internet may not support changes in technology or continued increases in the number or requirements of users, or there may be delays in the development of necessary modifications to the Internet infrastructure, either of which could result in Internet outages and delays. In addition, problems caused by “viruses,” “worms,” malware and similar programs may harm the performance of the Internet. The amount of traffic on our and our clients’ e-commerce businesses could decline materially if there are Internet outages or delays in the future.

 

We are dependent upon consumers’ willingness to use the Internet 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. Consumers may be unwilling to use the Internet to purchase goods for a number of reasons, including lack of access to high-speed communications equipment, congestion of traffic on the Internet, Internet outages or delays, possible disruptions or other damage to users’ computers, increases in the cost of accessing the

Internet and security and privacy risks or the perception of such risks. If, for example, consumer confidence in the security of e-commerce businesses is undermined, consumers may cease doing business through the Internet, including through our and our clients’ e-commerce businesses, which would adversely affect our business, results of operations and financial condition. See “We may be liable if third parties misappropriate our customers’ personal information” and “Credit card and payment fraud could adversely affect our business.”

 

We may be liable if third parties misappropriate our customers’ personal information.

 

Although we have developed systems and processes that are designed to protect consumer information and prevent security breaches, we cannot assure you that our security measures will prevent security breaches. A compromise of our security systems that results in customers’ personal information being obtained by an unauthorized person could adversely affect customers’ willingness to utilize our and our clients’ e-commerce businesses, our reputation, operations, results of operations, financial condition and liquidity, and could result in litigation against us and fines imposed on us. Additionally, any security breach could require that we expend significant resources to strengthen the security of our information systems and result in a disruption of our online operations.

 

If we do not respond to rapid technological changes, our services and proprietary technology and systems may become obsolete.

 

The Internet and e-commerce industries are characterized by rapid technological change. To remain competitive, we must continue to develop new services and technologies and respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis. For example, the number of individuals who access the Internet through devices other than a personal computer, such as mobile telephones, personal digital assistants, smart phones, hand held computers, televisions and set-top box devices, has increased dramatically and is likely to increase in the future. As a result, we must continue to adapt our existing technologies for use with these alternative devices. Due to the costs and management time required to introduce new services and enhancements, we may be unable to respond to rapid technological changes in a timely enough manner to avoid our services becoming uncompetitive. Our failure to respond to technological changes could substantially harm our business, results of operations and financial condition.

 

Our business is heavily dependent on the use of e-mail, and any decrease in the use of e-mail may harm our business, results of operations and financial condition.

 

We rely on e-mail marketing to drive consumer traffic to our and our clients’ e-commerce businesses. In our e-mail marketing solutions business, we derive revenue from selling our e-mail marketing solutions. E-mail could become a less effective means of communicating with and marketing to consumers for a variety of reasons, including:

 

 

Our ability to contact customers through e-mail could also be harmed and our business may be adversely affected if we mistakenly end up on SPAM lists, or lists of entities that have been involved in sending unwanted, unsolicited e-mails. If any of these were to occur, the traffic to our and our clients’ e-commerce businesses and the demand for our e-mail marketing solutions may decrease, which could adversely affect our business, results of operations and financial condition.

 

We and/or our clients may be unable to protect our and their proprietary technology and intellectual property rights.

 

Our success depends to a significant degree upon the protection of our and our clients’ intellectual property rights. We may be unable to deter infringement or misappropriation of our software and other proprietary information and material, detect unauthorized use or take appropriate steps to enforce our intellectual property rights. Additionally, the laws of some foreign countries do not protect our proprietary rights to the same extent as do the laws of the United States. The steps we have taken to protect our proprietary rights may be inadequate and third parties may infringe or misappropriate our proprietary rights. Any significant failure on our part to protect our intellectual property could make it easier for our competitors to offer similar services and thereby adversely affect our market opportunities. In addition, litigation may be necessary in the future to enforce our intellectual property rights. Litigation could result in substantial costs and diversion of management and technical resources. The failure of our clients to protect their intellectual property rights, including their trademarks and domain names, could also impair our operations.

 

We have been, and may in the future be subject to intellectual property claims or competition or trade practices claims that could be costly and could disrupt our business.

 

Third parties may assert that our business or technologies infringe or misappropriate their intellectual property rights, or that we are engaging in unfair competition or other illegal trade practices. We have been sued for infringing other parties’ patents and have been notified of other potential patent disputes. We could increasingly be subject to patent infringement claims as our services expand in scope and complexity. Patent infringement and other intellectual property claims, whether meritorious or not, are time consuming and costly to resolve, and could require expensive changes in our methods of doing business, could require us to enter into costly royalty or licensing agreements, or could require us to cease conducting certain operations. We may be unsuccessful in defending against these claims, which could result in substantial damages, fines or other penalties. Even unsuccessful claims could result in significant legal fees and other expenses, diversion of management’s time and disruptions in our business. Any of these claims could also harm our reputation.

 

We may be subject to product liability claims that could be costly and time-consuming.

 

We sell products sourced by us and products manufactured by third parties, 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. We could also be subject to claims that customers of our or our clients’ e-commerce businesses were harmed due to their reliance on our product information, product selection guides, advice or instructions. If a successful claim were brought against us in excess of our insurance coverage, it could adversely affect our business, results of operations and financial condition. Even unsuccessful claims could result in the expenditure of funds and management time and adverse publicity and could have a negative impact on our business.

 

Credit card and payment fraud could adversely affect our business.

 

The failure to adequately control fraudulent transactions could increase our expenses and undermine consumer confidence in e-commerce in general and our e-commerce offerings in particular. To date, we have not suffered material losses due to fraud. However, we may in the future suffer losses as a result of orders placed with fraudulent credit card data. Under current credit card practices, we are liable for fraudulent credit card transactions because we do not obtain a cardholder’s signature. See also “We are dependent upon consumers’ willingness to use the Internet to purchase goods.”

If one or more states successfully assert that we should collect or should have collected sales or other taxes on the sale of our merchandise, our business could be harmed.

 

The application of sales tax or other similar taxes to interstate and international sales over the Internet is complex and evolving. We currently collect sales or other similar taxes only for goods sold by us and shipped into certain states. One or more local, state or foreign jurisdictions may seek to impose past and future sales tax obligations on us or our clients and other out-of-state companies that engage in e-commerce. If one or more states or any foreign country successfully asserts that we should collect sales or other taxes on the sale of merchandise through the e-commerce businesses we operate, it could result in substantial tax liability for past sales, decrease future sales and otherwise harm our business.

 

We may have exposure to greater than anticipated tax liabilities.

 

We are subject to income, payroll and other taxes in both the United States and foreign jurisdictions. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. Moreover, significant judgment is required in evaluating our worldwide provision for income taxes. Our determination of our tax liability is always subject to review by applicable tax authorities. Any adverse outcome of such a review could have a negative effect on our operating results and financial condition. Although we believe our estimates are reasonable, the ultimate tax outcome may differ from the amounts recorded in our financial statements and may materially affect our financial results in the period or periods for which such determination is made.

 

Our ability to use net operating loss carryforwards to reduce future tax payments may be limited.

 

As of January 2, 2010, we had approximately $507.3 million of U.S. Federal net operating loss carryforwards, referred to as “NOLs,” available to reduce taxable income in future years.

 

Utilization of the NOLs may be subject to a substantial annual limitation due to ownership change limitations that may have occurred or that could occur in the future, as required by Section 382 of the Internal Revenue Code of 1986, as amended, referred to as the “Code.” These ownership changes may limit the amount of NOLs that can be utilized annually to offset future taxable income and tax, respectively. In general, an ownership change, as defined by Section 382 of the Code results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50 percentage points of the outstanding stock of a company by certain stockholders or public groups. The issuance of securities in connection with our acquisition of RCI and the disposition of our stock by certain selling stockholders, including the selling stockholder named in this prospectus supplement, may have resulted in an ownership change, or could result in an ownership change in the future upon subsequent dispositions of our stock. In the event of an ownership change, Section 382 imposes an annual limitation on the amount of post-ownership change taxable income a corporation may offset with pre-ownership change NOLs. The limitation imposed by Section 382 for any post-change year would be determined by multiplying the value of our stock immediately before the ownership change (subject to certain adjustments) by the applicable long-term tax-exempt rate. Any unused annual limitation may be carried over to later years, and the limitation may under certain circumstances be increased by built-in gains which may be present with respect to assets held by us at the time of the ownership change that are recognized in the five-year period after the ownership change. Our use of NOLs arising after the date of an ownership change would not be affected.

 

In addition, the ability to use NOLs will be dependent on our ability to generate taxable income. The NOLs may expire before we generate sufficient taxable income. There were no NOLs that expired in the fiscal years ended December 29, 2007 and January 3, 2009. The maximum NOLs that could expire if not utilized for the year ended January 2, 2010 is approximately $2.0 million.

 

We rely on insurance to mitigate some risks facing our business, and to the extent our insurance does not mitigate the risks facing our business or our insurers are unable to meet their obligations, our operating results may be negatively impacted.

 

We contract for insurance to cover certain potential risks and liabilities. It is possible that we may not be able to get enough insurance to meet our needs, may have to pay very high prices for the coverage we do get, have very high

deductibles or may not be able to, or may choose not to, acquire any insurance for certain types of business risk. This could leave us exposed to potential claims. If we were found liable for a significant claim in the future, our operating results could be negatively impacted. Also, to the extent the cost of maintaining insurance increases, our operating results could be negatively affected. Additionally, we are subject to the risk that one or more of our insurers may become insolvent and would be unable to pay a claim that may be made in the future. There can be no assurance that our insurance will be adequate to protect us from pending and future claims. In addition, we are required to maintain insurance coverage under some of our agreements with our clients. If we are not able to or do not maintain the required insurance coverage, we could breach those agreements.

 

Variability in self-insurance liability estimates could significantly impact our financial results.

 

In the fourth quarter of fiscal 2008, we began to self-insure for employee medical coverage up to a set retention level, beyond which we maintain excess insurance coverage. We may decide to self-insure for other risks for which we currently purchase insurance. Liabilities are determined using actuarial estimates of the aggregate liability for claims incurred and an estimate of incurred but not reported claims, on an undiscounted basis. Our accruals for insurance reserves reflect certain actuarial assumptions and management judgments, which are subject to a high degree of variability. The variability is caused by factors external to us such as:

 

 

Any significant variation in these factors could cause a material change to our reserves for self-insurance liabilities as well as earnings. Our results could be materially impacted by claims and other expenses related to our self-insured plans if future occurrences and claims differ from our assumptions and historical trends.

 

Existing or future laws or regulations could harm our business or marketing efforts.

 

We are subject to international, federal, state and local laws applicable to businesses in general and to e-commerce specifically. Existing and proposed laws and regulations covering issues such as taxation, pricing, content, distribution, access, quality and delivery of products and services, electronic contracts, intellectual property rights, user privacy and information security may impede the growth of the Internet or e-commerce. Our international operations are also subject to import and export requirements, U.S. laws such as the Foreign Corrupt Practices Act, and local laws prohibiting corrupt payments to governmental officials. It is not clear how some existing laws apply to the Internet and e-commerce, and some laws that are specific to the Internet and e-commerce, such as the Digital Millennium Copyright Act and The Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003, or the “CAN-SPAM” Act, are only beginning to be interpreted by the courts and their applicability and reach are therefore uncertain. Unfavorable regulations and laws, or interpretations thereof, could diminish the demand for our services, limit the services we can provide, increase our cost of doing business and subject us to penalties.

 

In addition, we utilize “behavioral marketing” (generally, the tracking of a user’s online activities to deliver advertising tailored to his or her interests) in order to drive consumer traffic to our Web sites. The Federal Trade Commission, or FTC, has released a Staff Report with principles to address consumer privacy issues that may arise from behavioral marketing and to encourage industry self-regulation. In the future, it is expected that the FTC or Congress could take further action to limit or further restrict the use of behavioral marketing, and those actions could have an adverse affect on our marketing efforts.

Existing federal, state and international laws regulating e-mail marketing practices impose certain obligations on the senders of commercial e-mails and could expose us to liability for violations, decrease the effectiveness of our e-mail marketing solutions, and expose us to financial, criminal and other penalties for non-compliance, which could increase our operating costs.

 

The CAN-SPAM Act establishes certain requirements for commercial e-mail messages and specifies penalties for commercial e-mail that violates the CAN-SPAM Act. The CAN-SPAM Act, among other things, obligates the sender of commercial e-mails to provide recipients with the ability to opt out of receiving future commercial e-mail messages from the sender. As a result, in the event our products and services were to become unavailable or malfunction for any period of time for any reason, it is possible that certain opt-out requests would not be received, or other compliance obligations would be impeded, potentially exposing our clients and us to liability under the CAN-SPAM Act. Non-compliance with the CAN-SPAM Act may carry significant financial penalties. Moreover, penalties under the CAN-SPAM Act may increase if it is determined that e-mail lists provided to us by our clients were obtained using unlawful means. We generally cannot confirm the origins of e-mail lists provided to us by our clients. The CAN-SPAM Act preempts similar state laws directed at commercial e-mail in many instances, but there are some exceptions and liability in connection with e-mail marketing campaigns can arise under state law as well. In addition, many states have more general laws that may apply to commercial e-mail practices. These laws often provide a private right of action and specify damages and other penalties, which in some cases may be more substantial than the penalties provided under the CAN-SPAM Act. In addition, certain foreign countries have enacted laws that regulate e-mail marketing, and some of these laws are more restrictive than U.S. laws. For example, some foreign laws prohibit sending unsolicited e-mail unless the recipient has provided the sender advance consent to receipt of such e-mail, or in other words has “opted-in” to receiving it. If we were found to be in violation of the CAN-SPAM Act, applicable state laws not preempted by the CAN-SPAM Act, or foreign laws regulating the distribution of e-mail, whether as a result of violations by our clients or if we were deemed to be directly subject to and in violation of these requirements, we could be exposed to one or more of the following consequences:

 

 

Any of these potential areas of exposure would adversely affect our financial performance, could preclude us from doing business in specific jurisdictions, and significantly harm our business. We also may be required to change one or more aspects of the way we operate our business, which could impair our ability to attract and retain clients or increase our operating costs.

 

Loss of our credit card acceptance privileges or changes to credit card association fees, rules, or practices could harm our business.

 

Payment by consumers for purchases through our and our clients’ e-commerce businesses is typically made by credit card or similar payment method. We must rely on banks or payment processors to process these transactions and must pay a fee for this service. From time to time, credit card associations may increase the interchange fees that they charge for each transaction using one of their cards. Our credit card processors have the right to pass any increases in interchange fees on to us as well as increase their own fees for processing. These increased fees would increase our operating costs and reduce our profit margins. We are also required by our processors to comply with credit card association operating rules, and we will reimburse our processors for any fines they are assessed by credit card associations as a result of any rule violations by us. The credit card associations and their member banks set and interpret operating rules related to their credit cards. The credit card associations and/or member banks could adopt new operating rules or re-interpret existing rules that we might find difficult or even impossible to follow. As a

result, we could lose our ability to give customers the option of using credit cards to make their payments, which would seriously damage our business.

 

Future changes in financial accounting standards or practices or taxation rules or practices may adversely affect our reported financial results.

 

A change in accounting standards or practices or a change in existing taxation rules or practices could have a significant effect on our reported results and may even require retroactive or retrospective application. Changes to existing rules or the questioning of current practices may cause adverse unexpected revenue and/or expense fluctuations and could adversely affect our reported financial results or the way we conduct our business.

 

Our success is dependent upon our executive officers and other key personnel.

 

Our success depends to a significant degree upon the contribution of our executive officers and other key personnel, particularly Michael G. Rubin, chairman of the board, president and chief executive officer. Our executive officers and key personnel could terminate their employment with us at any time despite any employment agreements we may have with these employees. Due to the competition for highly qualified personnel, we cannot be sure that we will be able to retain or attract executive, managerial or other key personnel. In addition, key personnel of an acquired company may decide not to work for us. We do not intend to obtain key person life insurance for any of our executive officers or key personnel. The loss of any of our key personnel could harm our business if we are unable to effectively replace that person, if we incur significant operating expenses and direct management time to search for a replacement, or if that person should join one of our competitors or otherwise compete with us.

 

We may be unable to hire and retain skilled personnel which could limit our growth.

 

Our future success depends on our ability to continue to identify, attract, retain and motivate skilled personnel. Due to intense competition for these individuals from our competitors and other employers, we may not be able to attract or retain highly qualified personnel in the future. Our failure to attract and retain the experienced and highly trained personnel that are integral to our business may limit our growth. Additionally, we have experienced recent growth in personnel numbers and expect to continue to hire additional personnel in selected areas. Managing this growth requires significant time and resource commitments from our senior management. If we are unable to effectively manage a large and geographically dispersed group of employees or to anticipate our future growth and personnel needs, we may not be able to retain skilled personnel and our business may be adversely affected.

 

There are limitations on the liabilities of our directors and executive officers. Under certain circumstances, we are obligated to indemnify our directors and executive officers against liability and expenses incurred by them in their service to us.

 

Pursuant to our amended and restated certificate of incorporation and under Delaware law, our directors are not liable to us or our stockholders for monetary damages for breach of fiduciary duty, except for liability for breach of a 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 and executive officers. These agreements, among other things, require us to indemnify each director and executive officer for certain expenses, including attorneys’ fees, judgments, fines and settlement amounts, incurred by any such person in any action or proceeding, including any action by us or in our right, arising out of the person’s services as one of our directors or executive officers. The costs associated with providing indemnification under these agreements could be harmful to our business.

 

If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud.

 

Section 404 of the Sarbanes-Oxley Act of 2002 requires our management to report on the effectiveness of our internal control over financial reporting. We have expended significant resources to comply with our obligations under Section 404. If we fail to correct any issues in the design or operating effectiveness of our internal controls

over financial reporting or fail to prevent fraud, current and potential stockholders and clients could lose confidence in our financial reporting, which could harm our business, the trading price of our common stock and our ability to retain our current clients and obtain new clients.

 

The price of our common stock may fluctuate significantly.

 

Our stock price has been and may continue to be volatile. During fiscal 2009 and 2008, the high and low sales prices of our common stock ranged from $26.00 to $5.69 per share. We expect that the market price of our common stock may continue to fluctuate as a result of a variety of factors, many of which are beyond our control. These factors include, among others:

 

 

In addition, the stock market in general, and the market prices for Internet-related companies in particular, have experienced volatility that often has been unrelated to the operating performance of such companies. These broad market and industry fluctuations may adversely affect the price of our stock, regardless of our operating performance.

 

Future sales of our common stock in the public market or the issuance of our common stock or securities senior to our common stock could adversely affect the trading price of our common stock.

 

We may issue common stock or equity securities senior to our common stock in the future for a number of reasons, including to attract and retain key personnel, to finance our operations and growth strategy, to adjust our ratio of debt to equity, to satisfy outstanding obligations or for other reasons. If we issue securities, our existing stockholders may experience dilution or the new securities may have rights senior to those of our common stock. In addition, the terms of these securities could impose restrictions on our operations. Future sales of our common stock, the perception that such sales could occur or the availability for future sale of shares of our common stock or

securities convertible into or exercisable for our common stock could adversely affect the market prices of our common stock prevailing from time to time.

 

As of February 10, 2010, we had:

 

 

In addition, in connection with our acquisition of RCI, we could issue shares of common stock with an aggregate value of up to approximately $44.1 million, valued at the time of issuance, to RCI employees in connection with the earnout provisions of the merger agreement. No prediction can be made as to the effect, if any, that the sale, or the availability for sale, of substantial amounts of common stock could have on the market price of our common stock.

 

We have never paid dividends on our common stock and do not anticipate paying dividends in the foreseeable future.

 

We have never paid cash dividends on our common stock and do not anticipate that any cash dividends will be declared or paid in the foreseeable future. In addition, the terms of our secured revolving bank credit facility prohibit us from declaring or paying dividends on our common stock. 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.

 

Certain provisions of our amended and restated certificate of incorporation, bylaws, stockholder rights agreement and Delaware law may have the effect of discouraging, delaying or preventing transactions that involve any actual or threatened change in control. The rights issued under our stockholder rights agreement may be a substantial deterrent to a person acquiring beneficial ownership of 20% or more of our common stock without the approval of our board of directors. The stockholder rights agreement would cause extreme dilution to such person.

 

In addition, we are subject to Section 203 of the Delaware General Corporation Law which, subject to certain exceptions, restricts certain transactions and business combinations between a corporation and a stockholder owning 15% or more of the corporation’s outstanding voting stock for a period of three years from the date the stockholder becomes a 15% stockholder. In addition to discouraging a third party from seeking to acquire control of us, the foregoing provisions could impair the ability of existing stockholders to remove and replace our management and/or our board of directors.

 

Because many investors consider a change of control a desirable path to liquidity, delaying or preventing a change in control of our company may reduce the number of investors interested in our common stock, which could depress our stock price.

 

Holders of our common stock will be subordinated to our secured revolving bank credit facility, convertible notes and other indebtedness.

 

In the event of our liquidation or insolvency, holders of common stock would receive a distribution only after payment in full of all principal and interest due (i) under our secured revolving bank credit facility, (ii) to holders of our convertible notes and (iii) to other creditors. After these payments are made, there may be little or no proceeds to distribute to holders of our common stock.

 

We, like other issuers, from time to time receive written comments from the staff of the SEC regarding our periodic or current reports under the Exchange Act. There are no comments that remain unresolved that we received not less than 180 days before the end of fiscal 2009.

 

 

The following table provides information about our owned, leased and licensed facilities as of March 1, 2010:

 

 

We also lease additional space to fill short term needs on an as needed basis. We believe that our properties are adequate for our present needs and that suitable additional or replacement space will be available as required.

 

We own our principal executive office in King of Prussia, PA, which was subject to a $12.1 million mortgage as of the end of fiscal 2009. We also have an option through March 2012 to purchase an additional building lot adjacent to our principal executive office in King of Prussia, PA. We own another office in King of Prussia, Pennsylvania, a fulfillment center in Louisville, KY, and a call center in Eau Claire, WI which are not subject to a mortgage.

 

 

We are involved in various litigation incidental to our business, including alleged contractual claims, claims relating to infringement of intellectual property rights of third parties, claims relating to the manner in which goods are sold through our e-commerce platform and claims relating to our collection of sales taxes in certain states. We currently collect sales taxes for goods owned and sold by us and shipped into certain states. As a result, we are subject from time to time to claims from other states alleging that we failed to collect and remit sales taxes for sales and shipments of products to customers in those states.

Based on the merits of the cases and/or the amounts claimed, we do not believe that any claims are likely to have a material adverse effect on our business, financial position or results of operations. We may, however, incur substantial expenses and devote substantial time to defend these claims whether or not such claims are meritorious. In addition, litigation is inherently unpredictable. In the event of a determination adverse to us, we may incur substantial monetary liability and may be required to implement expensive changes in our business practices, enter into costly royalty or licensing agreements, or begin to collect sales taxes in states in which we previously did not. An adverse determination could have a material adverse effect on our business, financial position or results of operations.

 

 

No matters were submitted to a vote of our stockholders during the fiscal quarter ended January 2, 2010.

 

 

The following table sets forth information regarding each of our executive officers who, with the exception of Mr. Rubin, are not also directors:

 

 

 

 

Set forth below are brief descriptions of the business experience for at least the past five years of our executive officers, who, with the exception of Mr. Rubin, are not also directors.

 

Michael G. Rubin has served as our chairman of the board and chief executive officer since July 1995, as co-president from May 2004 through October 2006 and president from July 1995 to May 2004 and since October 2006.

 

Michael R. Conn has served as our executive vice president, finance and chief financial officer since March 2007 and our senior vice president, finance and chief financial officer from January 2006 through March 2007. He served as our senior vice president of corporate development from July 2004 until January 2006, senior vice president, business development from June 2000 through July 2004 and senior vice president of strategic development from February 1999 through June 2000.

 

Stephen J. Gold has served as our executive vice president and chief information officer since February 2005 and as our corporate chief technology officer since June 2009. From November 2003 until February 2005, he served as corporate vice president and divisional chief information officer of Merck & Company, Inc., a pharmaceutical company. Prior thereto, he held various positions with Medco Health Solutions, Inc., a prescription benefits management company, from July 1993 to September 2003, when it was a subsidiary of Merck. Most recently, he served as senior vice president and chief information officer and senior vice president, electronic commerce at Medco Health Solutions, Inc.

 

J. Scott Hardy has served as our executive vice president, business management since May 2007. From March 2004 to May 2007 Mr. Hardy was Vice President at BearingPoint, Inc., a consulting and systems integration firm, responsible for the Americas Consumer Markets Practice. From February 2001 to March 2004 Mr. Hardy was a managing director at BearingPoint, Inc., and before that was a partner at KPMG LLC prior to the spin-off of BearingPoint from KPMG.

Arthur H. Miller has served as our executive vice president and general counsel since September 1999. From January 1988 to September 1999, Mr. Miller was a partner at Blank Rome LLP, a law firm based in Philadelphia, PA. Mr. Miller joined Blank Rome in April 1983.

 

Damon Mintzer has served as our executive vice president, sales since July 2004 and served as president and chief operating officer of Global-QVC Solutions, Inc., a wholly owned subsidiary of ours, from June 2001 to November 2006.

 

 

The following table sets forth the high and low sales prices per share of our common stock as reported on the NASDAQ Global Select Market under the symbol “GSIC.”

 

 

As of March 1, 2010, we had approximately 1,845 stockholders of record. The last reported sales price per share for our common stock on March 1, 2010, as reported on the NASDAQ Global Select Market, was $25.70.

 

We have never declared or paid a cash dividend on our common stock. We currently intend to retain any future earnings to fund our growth and, therefore, do not anticipate declaring or paying any cash dividends on our common stock for the foreseeable future. In addition, the terms of our secured revolving bank credit facility prohibit us from declaring or paying dividends on our common stock.

 

We made no repurchases of our common stock during the fourth quarter of fiscal 2009.

 

On April 6, 2009, in connection with the acquisition of Silverlign Group, Inc. (“Silverlign”), the Company issued an aggregate of 168,778 shares of common stock to the two selling stockholders of Silverlign (the “Silverlign Shares”).

 

Pursuant to the terms of a Consulting Agreement dated April 22, 2009 between Arimor, LLC (“Arimor”) and GSI Commerce Solutions, Inc., the Company agreed to issue to Arimor shares of the Company’s common stock as a fee for consulting services provided by Arimor. As of the end of fiscal 2009, the Company issued an aggregate of 41,867 shares of common stock to Arimor (“Arimor Shares”) pursuant to such agreement.

 

On September 1, 2009, in connection with the acquisition of substantially all of the assets of KBJ Holdings, LLC, (“KBJ Holdings) the Company issued an aggregate of 57,694 shares of common stock to KBJ Holdings (the “KBJ Holdings Shares”).

 

The issuances of the Silverlign Shares, the Arimor Shares and the KBJ Holdings Shares were completed in accordance with Section 4(2) of the Securities Act of 1933, as amended, in offerings without any public offering or distribution. The Arimor Shares and the KBJ Holdings Shares are restricted securities and include appropriate restrictive legends.

STOCK PERFORMANCE GRAPH

 

The following graph shows a comparison of the cumulative total return for our common stock, the Morgan Stanley Internet Index and the NASDAQ Composite, assuming an investment of $100 in each on January 1, 2005, and the reinvestment of all dividends. The data points used for the performance graph are listed below.

 

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among GSI Commerce, Inc., The NASDAQ Composite
Index And Morgan Stanley Internet Index

 

 

 

 

Total Return Analysis

 

 

Note: Stock price performance shown in this Performance Graph for our common stock is historical and not necessarily indicative of future price performance. The information contained in this Performance Graph is not “soliciting material” and has not been “filed” with the Securities and Exchange Commission. This Performance Graph will not be incorporated by reference into any of our future filings under the Securities Act of 1933 or the Securities Exchange Act of 1934.

 

EQUITY COMPENSATION PLAN INFORMATION

 

Information about securities authorized for issuance under our equity compensation plan appears in Part III, Item 12 of this Annual Report on Form 10-K.

 

The following tables present portions of our financial statements and are not complete. You should read the following selected consolidated financial data together with our consolidated financial statements and related notes to our financial statements, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors.” The selected statement of operations data for fiscal 2007, fiscal 2008 and fiscal 2009 and the balance sheet data as of the end of fiscal 2008 and fiscal 2009 are derived from our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The selected statement of operations data for fiscal 2005 and fiscal 2006 and the balance sheet data as of the end of fiscal 2005, fiscal 2006 and fiscal 2007 are derived from our audited consolidated financial statements that are not included in this Annual Report on Form 10-K.

 

 

 

 

 

 

All statements made in this Annual Report on Form 10-K, other than statements of historical fact, are forward-looking statements, as defined under federal securities law. The words “look forward to,” “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “will,” “would,” “should,” “could,” “guidance,” “potential,” “opportunity,” “continue,” “project,” “forecast,” “confident,” “prospects,” “schedule,” “designed,” “future” “discussions,” “if” and similar expressions typically are used to identify forward-looking statements. Forward-looking statements are based on the then-current expectations, beliefs, assumptions, estimates and forecasts about our business. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or implied by these forward-looking statements. Factors which may affect our business, financial condition and operating results include the effects of changes in the economy, consumer spending, the financial markets and the industries in which we and our clients operate, changes affecting the Internet e-commerce and marketing service, our ability to develop and maintain relationships with clients and suppliers and the timing of our establishment, extension or termination of our relationships with clients, our ability to timely and successfully develop, maintain and protect our technology, confidential and proprietary information, and product and service offerings, our ability to execute operationally to attract and retain qualified personnel,, to successfully integrate our recent acquisitions, and the performance of acquired businesses. More information about potential factors that could affect us is described in Item 1A of Part I, “Risk Factors.” We expressly disclaim any intent or obligation to update these forward-looking statements.

 

Executive Overview

 

Fiscal 2009 Financial Results and Significant Events:

 

 

 

2010 Outlook:

 

 

Results of Operations

 

Comparison of Fiscal 2009 and 2008 (amounts in tables in millions):

 

Net Revenues

 

We derive our revenues from sales of products by us through our clients’ e-commerce businesses as well as through the Web stores in our consumer engagement segment. We derive our revenues from service fees through the development and operation of our clients’ e-commerce businesses, and through service fees earned by us through our provision of interactive marketing services.

 

 

Net Revenues by Type

 

Net Revenues from Product Sales.  Net revenues from product sales are derived from the sale of products by us through our clients’ e-commerce Web stores as well as through the Web stores in our consumer engagement segment. Net revenues from product sales include outbound shipping charges for all of our Web stores for which we provide fulfillment services. Net revenues from product sales are net of allowances for returns and discounts and exclude sales tax. We recognize revenue from product sales and shipping when title and risk of ownership passes to the consumer either upon shipment of products to customers or upon receipt of products to customers dependent

upon the terms and conditions of the Web store. Our revenue recognition accounting estimates contain uncertainties because they require management to make assumptions and to apply judgment to estimate future sales returns.

 

Net revenues from product sales decreased $34.9 million in fiscal 2009. Of this decrease, $57.1 million was due to the decrease in revenues from clients that did not operate for the entirety of both periods as well as a decrease due to the transition during the first quarter of fiscal 2009 of one owned inventory client to a non-owned inventory e-commerce agreement structure the client transition discussed below, and $3.9 million was due to the decrease in revenues from clients that operated for the entirety of both periods, partially offset by a $26.1 million increase in revenues from RCI which was acquired in mid-November.

 

Total shipping revenue was $133.1 million for fiscal 2009 and $120.2 million for fiscal 2008. Fiscal 2009 included 52 weeks compared to 53 weeks for fiscal 2008, and the extra week added incremental net revenues from product sales of approximately $11.0 million for fiscal 2008.

 

Service Fee Revenues.  Service fee revenues include revenues from the provision of e-commerce services and interactive marketing services. E-commerce service fee revenues are generated from a client’s use of one or more of our e-commerce platform components, which include technology, fulfillment and customer care, as well as from professional services and gift card breakage. Interactive marketing services service fee revenues are generated from online marketing, advertising, email and design services. E-commerce service fee revenues can be fixed or variable and are based on the activity performed, the value of merchandise sold, or the gross profit from a transaction.

 

Service fee revenues increased $72.2 million in fiscal 2009. This increase was primarily due to an increase in revenues from our e-commerce segment including the client transition discussed above, and the growth of our interactive marketing services segment. Partially offsetting these increases was a decrease in revenues from clients that are no longer operating with us, including the liquidation of a client that was one of our top ten contributors of service fee revenues for fiscal 2008. The 53^rd week in fiscal 2008 added incremental service fee revenues of approximately $7.5 million for fiscal 2008.

 

For fiscal 2010, we expect an increase in total net revenues.

 

Net Revenues by Segment

 

E-Commerce Services Segment Revenues.  Net revenues from e-commerce services decreased $20.4 million in fiscal 2009 due to a $60.9 million decrease in net revenues from product sales which was partially offset by an increase of $40.5 million in service fee revenues.

 

Of the $20.4 million decrease in net revenues from our e-commerce services segment, $59.4 million was from clients that are no longer operating with us and from the client transition, which are both discussed above. Partially offsetting these decreases was an increase of $25.8 million from clients that operated for the entirety of both periods and $13.2 million from clients that began generating revenue for us in fiscal 2009.

 

Interactive Marketing Services Segment Revenues.  Net revenues from interactive marketing services increased by $43.1 million in fiscal 2009. Key drivers of the increase include growth of e-mail marketing services provided by e-Dialog, growth of the design, studio and online marketing services provided by TrueAction, the acquisition of Silverlign Group Inc. (“Silverlign”) in April 2009, and the acquisition of Pepperjam in September 2009.

 

Consumer Engagement Segment Revenues.  Net revenues increased $26.3 million due to the acquisition of RCI in November 2009.

Costs and Expenses

 

 

Cost of Revenues from Product Sales.  Costs of revenues from product sales consist primarily of direct costs associated with (i) products we sell through our clients Web stores, (ii) products we sell through the Web stores in our consumer engagement segment, and (iii) our shipping charges for all Web stores for which we provide fulfillment services. Costs of revenues from product sales were attributable to our e-commerce services and consumer engagement segments.

 

 

Cost of revenues from product sales decreased $6.7 million in fiscal 2009. The decrease in cost of revenues as a percentage of net revenues from 42% in fiscal 2008 to 40% in fiscal 2009 was primarily due to the increase in service fees and the decrease in product sales, because service fees have no associated cost of revenue.

 

The increase in cost of revenues from product sales as a percentage of net revenues from product sales from 70% to 74% was primarily due to an increase in shipping revenue. Our cost of generating shipping revenue is higher than our cost of generating revenue on sale of products.

 

We expect cost of product sales to increase in absolute dollars in fiscal 2010. The extent to which cost of product sales increases or decreases as a percentage of net revenue and net revenue from product sales will depend on the relative growth rates of RCI, shipping revenue, other product sales and service fees.

 

Marketing.  Marketing expenses consist primarily of net client revenue share charges, promotional free shipping and subsidized shipping and handling costs, catalog costs, and net advertising and promotional expenses. Marketing expenses support our net revenues from product sales.

 

 

Marketing expenses decreased $15.5 million in fiscal 2009. As a percentage of net revenues, marketing expenses decreased from 7% in fiscal 2008 to 6% in fiscal 2009. This decrease was primarily due to the higher percentage increase in service fees compared to the percentage increase in product sales, because service fees typically have no associated marketing expenses.

 

As a percentage of net revenues from product sales, marketing expenses decreased from 12% in fiscal 2008 to 10% in fiscal 2009. Of the $15.5 million decrease in marketing expenses, $7.6 million was due to a decrease in client revenue share expenses caused by decreased sales from owned inventory clients, $4.0 million was due to a decrease in promotional, free, and subsidized shipping and handling costs, and $3.9 million was due to a decrease in

advertising costs. The decreases in client revenue share expenses and advertising costs were primarily the result of the client transition discussed above and have minimal impact on marketing expenses as a percentage of net revenue from product sales, because of the corresponding decrease in net revenues from product sales as a result of the client transition.

 

We expect marketing expenses to increase in absolute dollars during fiscal 2010 compared to fiscal 2009. The extent to which marketing expenses increase or decrease as a percentage of net revenue and net revenue from product sales will depend on the relative growth rates of RCI, other product sales and service fees.

 

Account Management and Operations.  Account management and operations expenses consist primarily of costs to operate our fulfillment centers and customer care centers, credit card fees, and payroll related to our buying, business management, operations and marketing functions.

 

Account management and operations expenses increased $12.8 million in fiscal 2009. As a percentage of net revenues, account management and operations expenses remained constant at 27%. The increase in absolute dollars was primarily due to our acquisitions of RCI, Silverlign and Pepperjam in fiscal 2009 as well as increases in personnel and related costs mostly from our interactive marketing services segment, partially offset by decreases in fulfillment expenses. We expect account management and operations expenses to increase in absolute dollars in fiscal 2010 due to the acquisition of RCI and growth in our e-commerce services and interactive marketing services segments.

 

Product Development.  Product development expenses consist primarily of expenses associated with planning, maintaining and operating our proprietary e-commerce and e-mail platforms and related systems, and payroll and related expenses for engineering, production, creative and management information systems.

 

Product development expenses increased $16.0 million in fiscal 2009. As a percentage of net revenues, product development expenses increased from 11% to 12%. The increases in absolute dollars and as a percentage of net revenues were primarily due to increased personnel expenses to enhance our e-commerce technology platform. We expect product development expenses to increase in absolute dollars in fiscal 2010 compared to fiscal 2009, as we plan to continue to launch additional client Web stores, invest in our e-commerce, interactive marketing services and consumer engagement platforms and expand our international operations.

 

General and Administrative.  General and administrative expenses consist primarily of payroll and related expenses for executive, finance, human resources, legal, sales and administrative personnel, as well as bad debt expense and occupancy costs for our headquarters and other offices.

 

General and administrative expenses increased $13.9 million in fiscal 2009. As a percentage of net revenues, general and administrative expenses increased from 7% to 8%. The increase in absolute dollars was primarily due to personnel and related expenses as well as our acquisition of RCI. We expect general and administrative expenses to increase in absolute dollars in fiscal 2010 compared to fiscal 2009 primarily due to the acquisition of RCI.

 

Depreciation and Amortization.  Depreciation and amortization expenses relate primarily to the depreciation or amortization of the capitalized costs for our purchased and internally-developed technology, including a portion of the cost related to the employees that developed such technology, hardware and software; furniture and equipment at our corporate headquarters, fulfillment centers and customer care centers; the office buildings and other facilities owned by us; and acquisition-related intangible assets.

 

Depreciation and amortization expenses decreased $4.7 million in fiscal 2009. As a percentage of net revenues, depreciation and amortization expenses decreased from 7% to 6%. Amortization expenses decreased $2.8 million primarily due to the intangible asset amortization related to the e-Dialog acquisition in fiscal 2008. Depreciation expenses decreased $1.9 million due to the acceleration of depreciation for abandoned equipment in fiscal 2008 related to a facility closure and from reduced capital expenditures in fiscal 2009, partially offset by the depreciation of prior and current year fixed asset additions. We expect our capital expenditures for fiscal 2010 to increase, and we expect depreciation expenses to increase due to the acquisition of RCI and as we continue to depreciate capital expenditures made in prior years. We expect amortization expenses to increase in fiscal 2010 compared to fiscal 2009 due to the acquisition of RCI.

Changes in Fair Value of Deferred Acquisition Payments.  Changes in fair value of deferred acquisition payments expenses consist of the change in the fair value of future estimated acquisition payments.

 

Changes in fair value of deferred acquisition payments expenses increased from $0 to $0.9 million due to the acquisition of RCI. We expect changes in fair value of deferred acquisition payments to increase in fiscal 2010 as we accrete the liability up to the estimated payment amount even if our assumptions utilized to value the earnout of RCI do not change. For more information on the earnout see Note 6, Acquisitions, to our consolidated financial statements included in Item 15, Exhibits and Financial Statement Schedule, of this Annual Report on Form 10-K. Any change in our assumptions may result in a significant change to our change in fair value of deferred acquisition payments.

 

Fiscal 2009 included 52 weeks compared to 53 weeks for fiscal 2008. The extra week did not materially impact our costs and expenses for fiscal 2008.

 

Comparison of Fiscal 2008 and 2007 (amounts in tables in millions):

 

Net Revenues

 

 

Net Revenues by Type

 

Net Revenues from Product Sales.  Net revenues from product sales increased $64.9 million in fiscal 2008. This increase was primarily due to revenue growth from our professional sports league clients and an increase in shipping revenue, partially offset by a decrease in sales from one consumer electronics client. Of this increase, $34.3 million was due to the increase in revenues from clients that operated for the entirety of both periods, $29.5 million was due to the increase in revenues from clients that initially began generating revenue during fiscal 2007, which includes clients of Accretive Commerce, Inc. (“Accretive”) which we acquired during the third quarter of fiscal 2007, and $1.1 million was due to the increase in revenues from clients that were launched in fiscal 2008. Shipping revenue for all clients for which we provide fulfillment services was $120.2 million for fiscal 2008 and $82.9 million for fiscal 2007. Fiscal 2008 included 53 weeks compared to 52 weeks for fiscal 2007, and the extra week added incremental net revenues from product sales of approximately $11.0 million.

 

Service Fee Revenues.  Service fee revenues increased $152.0 million in fiscal 2008. This increase was primarily due to the acquisitions of Accretive and e-Dialog, which closed in the third quarter of fiscal 2007 and first quarter of fiscal 2008, respectively, as well as growth from clients that operated for the entirety of fiscal years 2007 and 2008. Of this increase, $69.4 million was attributable to clients that launched in fiscal 2008, including the addition of e-Dialog clients. Also included in the $69.4 million increase was $3.0 million from gift card breakage, for which we began recognizing revenue in fiscal 2008. $53.0 million of the increase was from clients that initially began generating revenue during fiscal 2007, including the addition of Accretive clients, and $29.6 million was from clients that operated for the entirety of both periods. The $29.6 million increase for clients that operated for the

entirety of both periods decreased from the $36.8 million increase for clients that operated for the entirety of fiscal 2007 and fiscal 2006 due primarily to a decline in the growth rate of existing client sales and the liquidation of the business of a client that was one of our top ten contributors of service fee revenues for fiscal 2008 and fiscal 2007. The extra week in fiscal 2008 compared to fiscal 2007 added incremental service fee revenues of approximately $7.5 million.

 

Net Revenues by Segment

 

E-Commerce Services Segment Revenues.  Net revenues from e-commerce services increased $162.1 million in fiscal 2008. This increase was comprised of $97.2 million from service fee revenues (an increase from $225.7 million in fiscal 2007 to $322.9 million in fiscal 2008) and $64.9 million from net revenues from product sales (an increase from $512.2 million in fiscal 2007 to $577.1 million in fiscal 2008).

 

Of the $162.1 million increase in net revenues from our e-commerce services segment, $77.0 million was from clients that initially began generating revenue during fiscal 2007, including the addition of Accretive clients, $62.6 million was from clients that operated for the entirety of both periods, and $22.5 million was from clients that launched in fiscal 2008.

 

Of the $97.2 million service fee revenue increase, $47.5 million was from clients that launched during fiscal 2007, including the addition of Accretive clients, $28.3 million was from clients that operated for the entirety of both periods, and $21.4 million was from clients that launched during fiscal 2008. See the discussion above under Net Revenues by Type — Net Revenues from Product Sales for a discussion of the $64.9 million increase in net revenues from product sales.

 

Interactive Marketing Services Segment Revenues.  Net revenues from interactive marketing services increased $57.6 million due primarily to the acquisition of e-Dialog in February 2008 and, to a lesser extent, growth in our online marketing, design, and digital photo studio services.

 

Costs and Expenses

 

 

Cost of Revenues from Product Sales

 

 

Cost of revenues from product sales increased $48.8 million in fiscal 2008. The decrease in cost of revenues as a percentage of net revenues from 47% in fiscal 2007 to 42% in fiscal 2008 was primarily due to the higher percentage increase in service fees compared to the percentage increase in product sales, because service fees have no associated cost of revenue.

The increase in cost of revenues from product sales as a percentage of net revenues from product sales from 69.6% in fiscal 2007 to 70.2% in fiscal 2008 was primarily due to an increase in shipping revenue. Our cost of generating shipping revenue is higher than our cost of generating revenue on sale of the underlying physical product.

 

Marketing

 

 

Marketing expenses increased $5.7 million in fiscal 2008. As a percentage of net revenues, marketing expenses decreased from 8% in fiscal 2007 to 7% in fiscal 2008. This decrease was primarily due to the higher percentage increase in service fees compared to the percentage increase in product sales, because service fees typically have no associated marketing expenses.

 

As a percentage of net revenues from product sales, marketing expenses decreased slightly from 13% in fiscal 2007 to 12% in fiscal 2008 due a to decrease in promotional free shipping and subsidized shipping and handling costs. The $5.7 million increase in marketing expenses was primarily due to a $6.5 million increase in client revenue share expenses caused by growth in revenue from our professional sports league clients, and a $1.1 million increase in catalog costs, partially offset by a $1.9 million decrease in promotional free shipping and subsidized shipping and handling costs.

 

Account Management and Operations.  Account management and operations expenses increased $82.8 million in fiscal 2008. As a percentage of net revenues, account management and operations expenses increased from 24% in fiscal 2007 to 27% in fiscal 2008. The increases in absolute dollars and as a percentage of net revenues were primarily due to the e-Dialog, Zendor.com Ltd. (“Zendor”) and Accretive acquisitions in February 2008, December 2007 and September 2007, respectively, and start-up, occupancy and payroll expenses related to our Richwood, Kentucky fulfillment center, which commenced operations in the second quarter of fiscal 2007. The $82.8 million increase in account management and operations expenses was due to a $53.8 million increase in payroll and related costs mostly in our customer care and fulfillment operations, a $14.0 million increase in office expenses and occupancy costs, a $7.2 million increase in credit card fees, and a $7.8 million increase in other account management and operations costs which include professional fees and communication costs.

 

Product Development.  Product development expenses increased $38.2 million in fiscal 2008. As a percentage of net revenues, product development expenses increased from 9% in fiscal 2007 to 11% fiscal 2008. The increases in absolute dollars and as a percentage of net revenues were primarily due to the e-Dialog, Zendor and Accretive acquisitions, payroll expenses and professional fees incurred for client launches during fiscal 2008 and expected future client launches, and increased expenses to enhance the technology features and functionality on our e-commerce platform. The $38.2 million increase in product development expenses was primarily due to a $24.9 million increase in personnel and related costs, a $4.8 million increase in professional fees, a $2.9 million increase in office expenses and occupancy costs, a $2.9 million increase in software and equipment maintenance, and a $2.7 million increase in other product development costs.

 

General and Administrative.  General and administrative expenses increased $25.3 million in fiscal 2008. As a percentage of net revenues, general and administrative expenses increased from 6% in fiscal 2007 to 7% in fiscal 2008. The increases in absolute dollars and as a percentage of net revenues were primarily due to the e-Dialog, Zendor and Accretive acquisitions, the addition of new clients, the expansion of the e-commerce businesses of our existing clients and the expansion of our interactive marketing services business. The $25.3 million increase in general and administrative expenses was primarily due to a $17.2 million increase in personnel and related costs to support the growth of our business, a $4.7 million increase in professional fees, a $1.2 million increase in office expenses and occupancy costs, $0.9 million in deal costs for a potential acquisition no longer deemed probable, and a $1.3 million increase in other general and administrative costs.

 

Depreciation and Amortization.  Depreciation and amortization expenses increased $30.8 million in fiscal 2008. As a percentage of net revenues, depreciation and amortization expenses increased from 5% in fiscal 2007 to

7% in fiscal 2008. Depreciation expenses increased $21.8 million due to the depreciation of prior and current year fixed asset additions. Amortization expenses increased $9.0 million primarily due to the intangible asset amortization in connection with the Accretive and e-Dialog acquisitions.

 

Fiscal 2008 included 53 weeks compared to 52 weeks for fiscal 2007. The extra week did not materially impact our costs and expenses for fiscal 2008.

 

Other (Income) Expense

 

Other (income) expense consists of interest expense, interest income, other expense, loss on sales of marketable securities, and impairment of equity investments. Interest expense consists primarily of interest related to our convertible notes and our secured revolving bank credit facility. The interest income consists of interest earned on cash and cash equivalents. Other expense consists primarily of foreign currency transaction losses.

 

 

We derive our interest expense primarily from the amortization of the debt discount on our convertible notes, the coupon interest on our convertible notes, and our secured revolving credit facility. Interest expense remained relatively constant in fiscal 2009 compared to fiscal 2008. The $1.3 million decrease in interest income was due to lower interest rates earned in fiscal 2009. The $1.6 million decrease in other expense was primarily due to larger foreign currency exchange losses in fiscal 2008 compared to fiscal 2009 on transactions denominated in currencies other than the functional currency. The fiscal 2008 $1.7 million impairment of equity investments was due to an other-than-temporary impairment on an equity investment.

 

 

Other expense increased $12.2 million in fiscal 2008. The $6.6 million increase in interest expense was primarily due to the amortization of the debt discount on our convertible notes, the interest on our 2.5% convertible notes issued in July 2007, and our line of credit which we entered into in January 2008. The $7.5 million decrease in interest income was due to lower cash balances and lower interest rates earned in fiscal 2008. The $1.4 million increase in other expense was primarily due to foreign currency exchange losses on transactions denominated in currencies other than the functional currency. The fiscal 2007 $5.0 million loss on sale of marketable securities related to the sale of our auction rate securities. The $1.7 million increase in impairment of equity investments was due to an other-than-temporary impairment on an equity investment incurred in fiscal 2008.

Income Taxes

 

Our effective tax rate for fiscal years 2009, 2008, and 2007 was (27.0%), 24.8% and 75.1%, respectively. Our tax rate is affected by recurring items such as tax rates in foreign jurisdictions and the relevant amount of income we earn in each jurisdiction, which has not been consistent as we seek to expand our presence in the international market, as well as the reversal of valuation allowances in some years. In addition to state income taxes, the following items had the most significant impact on the difference between our effective income tax rate and the statutory U.S. federal income tax rate of 35%:

 

Fiscal 2009:

 

 

Fiscal 2008:

 

 

Fiscal 2007:

 

 

Seasonality

 

We have experienced and expect to continue to experience seasonal fluctuations in our revenues from e-commerce services. These seasonal patterns will cause quarterly fluctuations in our operating results. We also expect to experience seasonal fluctuations from consumer engagement, but to a lesser degree than with our e-commerce services. We experience less seasonality in our revenues from interactive marketing services. The fourth fiscal quarter has accounted for and is expected to continue to account for a disproportionate percentage of our total annual revenues. We believe that results of operations for any quarterly period may not be indicative of the results for any other quarter or for the full year. We recognized 42.8%, 40.5% and 44.7% of our annual net revenues during the fourth quarter of fiscals 2009, 2008 and 2007, respectively. For additional information, see Note 16, Quarterly Results (Unaudited), to our consolidated financial statements included in Item 15, Exhibits and Financial Statement Schedule, of this Annual Report on Form 10-K.

 

Liquidity and Capital Resources

 

 

Sources of Cash

 

Our principal sources of liquidity in fiscal 2009 were our cash and cash equivalents balances, cash provided by operating activities, and cash provided by financing activities, including the $88 million of net proceeds received in August 2009 through our sale of common stock.

As of January 2, 2010, we had $228.4 million of cash and cash equivalents, compared to $130.3 million of cash and cash equivalents as of January 3, 2009. Cash equivalents are comprised of money market mutual funds.

 

Cash provided by operating activities was $140.2 million, $96.0 million, and $58.1 million in fiscal 2009, fiscal 2008, and fiscal 2007, respectively. Cash provided by operating activities is driven by our net loss, adjusted for non-cash items and changes in operating assets and liabilities. Non-cash adjustments include depreciation, amortization, stock-based compensation expense and deferred income taxes. Cash provided by operating activities was greater than our net loss in fiscal 2009 primarily due to the net impact of non-cash adjustments to loss as well as an increase to our accounts payable and accrued expense balances and a decrease to our accounts receivable balance.

 

We have experienced and expect to continue to experience seasonal fluctuations in our cash flows. We generate the majority of our cash from operating activities in our fourth fiscal quarter. In our first fiscal quarter, we typically use cash generated from operating activities in the fourth quarter of the prior fiscal year to satisfy accounts payable and accrued expenses incurred in the fourth fiscal quarter of our prior fiscal year. During our second and third fiscal quarters, we generally fund our operating expenses and capital expenditures from cash generated from operating activities, cash and cash equivalents, and/or cash from financing activities.

 

As of January 2, 2010 and January 3, 2009 we had no borrowings under our $90 million secured revolving bank credit facility. During fiscal 2009, we did not borrow on the secured revolving credit facility, and during fiscal 2008 we borrowed and also repaid $70 million on our secured revolving credit facility. The credit facility contains financial and restrictive covenants that limit our ability to engage in activities that may be in our long term best interests. We do not believe the financial covenants will limit our ability to utilize the entire borrowing availability in fiscal 2010, if necessary.

 

During fiscal 2007, we issued subordinated convertible notes resulting in net proceeds of $145 million.

 

Uses of Cash

 

We invest cash to support our operations, our infrastructure needs, and as consideration for acquisitions and strategic investments. Cash used in investing activities is primarily attributable to capital expenditures and acquisitions.

 

Our capital expenditures totaled $43.0 million, $57.2 million, and $54.2 million in fiscal 2009, fiscal 2008, and fiscal 2007, respectively. Our capital expenditures have generally been comprised of purchases of computer hardware and software, development of internal-use software, purchases of furniture and fixtures, and purchases of real estate. Capital expenditures decreased 25% in fiscal 2009 compared to the 6% increase in fiscal 2008. We expect an increase in capital expenditures in fiscal 2010 due to increased investments in our infrastructure and technology as well as from our acquisition of RCI.

 

We utilized $88.9 million of cash for acquisitions in fiscal 2009, compared to $145.0 million and $103.7 million in acquisitions and equity investments in fiscal 2008 and fiscal 2007, respectively. Acquisitions in fiscal 2009 primarily included RCI which we also issued shares of our common stock valued at approximately $94 million. In addition, we will be obligated to pay RCI shareholders and employees additional earnout payments of up to $170 million over a three year period beginning with fiscal year 2010 contingent on RCI’s achievement of certain performance targets, of which we have the ability to pay up to $44.1 million with shares of our common stock. We funded the cash payment for RCI acquisition from our existing cash and cash equivalent balances. Acquisitions in fiscal 2008 included e-Dialog and our fiscal 2007 acquisitions included Accretive and Zendor.

 

Outlook

 

We expect to continue to generate positive cash flow from operations in fiscal 2010, the majority of which will be generated in our fourth fiscal quarter. We believe that our cash flow from operating activities, cash and cash equivalents balances, and borrowing availability under our secured revolving credit facility will be sufficient to meet our anticipated operating cash needs for at least the next 12 months. However, any projections of future cash needs and cash flows are subject to substantial uncertainty. See Item 1A of Part I, Risk Factors.

Holders of our 3% subordinated convertible notes due June 1, 2025 may require us to repurchase the notes at a repurchase price equal to 100% of their principal amount plus accrued and unpaid interest, if any, on June 1, 2010. In the event our holders require us to repurchase the notes in fiscal 2010, we expect to have sufficient liquidity from our cash from operating activities, our cash and cash equivalents and/or from our secured revolving bank credit facility to fund the repurchases as well as our operating cash needs. See Note 7, Long-Term Debt and Credit Facility, of the Notes to Consolidated Financial Statements, included in Item 15, Exhibits and Financial Statement Schedule, of this Annual Report on Form 10-K.

 

We continually evaluate opportunities to sell additional equity or debt securities, obtain credit facilities, or repurchase, refinance, or otherwise restructure our long-term debt for strategic reasons or to further strengthen our financial position. Our secured revolving bank credit facility contains negative covenants including prohibitions on our ability to incur additional indebtedness. The sale of additional equity or convertible debt securities would likely be dilutive to our stockholders. In addition, we will, from time to time, consider the acquisition of, or investment in, complementary businesses, products, services, and technologies, which might affect our liquidity requirements or cause us to issue additional equity or debt securities. There can be no assurance that additional lines-of-credit or financing instruments will be available in amounts or on terms acceptable to us, if at all.

 

Contractual Obligations

 

We had the following contractual obligations as of the end of fiscal 2009: