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.  o

 

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

 

(Do not check if a smaller reporting company)

 

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 2, 2010, was approximately $1,724,494,759 based on a per share price of $27.67, 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 67,126,057 shares of the registrant’s Common Stock outstanding as of the close of business on February 18, 2011.

 

 

 

 

DOCUMENTS INCORPORATED BY REFERENCE
(Specific sections incorporated are identified under applicable items herein)

 

Certain information required for Parts II and III of this Form 10-K, to the extent not set forth herein, is incorporated herein by reference to the Proxy Statement for the 2011 Annual Meeting of Stockholders.

 

 

 

 

GSI COMMERCE, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED JANUARY 1, 2011

 

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:

 

 

 

Company Overview

 

GSI Commerce operates a network of businesses to enable enterprise clients to maximize their opportunities in the digital channel. GSI Commerce operates three business segments: Global e-Commerce Services, Global Marketing Services and Consumer Engagement. Each business segment offers products and services that either are, or aim to be, market leaders in their respective areas on a stand-alone basis, but that also complement each other, which allows for cross-selling within and between businesses. The combination of these segments provides a unique view into the digital channel and gives GSI Commerce insight into customer and transaction lifecycles, as well as multi-channel activities. The Company provides products and services to over 2,000 brands globally, including Toys ‘R’ Us^®, the National Football League^®, Aeropostale^®, Polo Ralph Lauren^®, Dick’s Sporting Goods^®, Dell^® and Estee Lauder^®. While the Company operates on a global basis, the vast majority of its revenues are derived from its North American operations. At this time, international revenues are not material. Below is a summary of revenues by segment from 2008-2010.

 

 

Global e-Commerce Services

 

The Global e-Commerce Services (“GeC”) segment offers a comprehensive suite of e-Commerce services that enables companies to operate e-commerce businesses and to integrate their e-commerce businesses with their multi-channel retail offerings. GSI Commerce sells its products and services on an individual basis and also as bundled solutions. The GeC segment serves over 180 enterprise clients that operate in general merchandise categories, including apparel, sporting goods, toys & baby, health & beauty and home. The Company refers to its clients as enterprise clients because the Company generally serves large nationally recognized brand name companies. The GeC segment is comprised of three principal business units: Technology & Payments, Operations and Licensed Sports Merchandise.

 

Technology & Payments

 

The technology & payments business unit provides e-commerce technology products and services on a global basis. The business unit shares common sales, service, operations and administration teams for three business units: 1) webstore & mobile, 2) commerce exchange & multi-channel, and 3) payments.

 

 

 

In 2010, GSI Commerce purchased a 27% interest in Intershop Communications AG. Intershop is publicly traded and listed on the Frankfurt stock exchange in Germany and sells a licensed e-commerce software product to large enterprise companies. In conjunction with the equity purchase, GSI Commerce and Intershop entered into a strategic commercial relationship. Through this strategic relationship, GSI Commerce is using Intershop software and services as a foundation for its next generation webstore product. In addition, GSI Commerce became the exclusive reseller of Intershop licenses in the Americas and a non-exclusive reseller on a global basis.

 

In May 2010 GSI Commerce acquired VendorNet, a multichannel e-commerce supply chain solutions provider to more than 100 retailers and brand marketers. The acquisition expanded the Company’s breadth of offerings, including software to facilitate the use of local-store inventory for cost-effective same- and next-day delivery direct to consumers. VendorNet became part of the Commerce Exchange and Multi-Channel business unit in the second quarter of 2010.

 

Operations

 

The operations business unit is separated into three business units that provide the following e-commerce operations services to companies in North America and Europe: 1) Fulfillment & Freight Services, 2) Customer Care and 3) Direct Response.

 

 

Licensed Sports Merchandise (“LSM”)

 

LSM is GSI’s licensed sports merchandise business, which includes the e-commerce operations for all of the major U.S. professional sports leagues (MLB, NFL, NBA, NHL, NASCAR). Given both the lack of physical stores as well as the large numbers of displaced fans, who are people who support teams which are outside the local area, the professional sports leagues rely on GSI Commerce to provide full end-to-end e-commerce capabilities, including front-end webstore capabilities, order management and payments technology, fulfillment, freight and customer care. Additionally, GSI supports this business through its own in-house buying, operations and business management teams. LSM also provides licensed products to several sporting goods retailers and some online-only retailers where the Company leverages its licensed inventory. With the exception of one professional league, LSM is the seller of record for sales through the professional sports league web-sites. Because LSM is the seller of record

and has complete discretion as to the selection and purchasing of inventories as well as the setting of prices and marketing & promotional events, this part of the business is referred to as an “owned-inventory” model. In return for the right to operate the e-commerce businesses of these brands and retailers, the Company pays a revenue share or royalty to the brand owner.

 

In September, 2010, LSM opened a new facility located in Louisville, KY dedicated to the customization of licensed team garments. The 87,000 square foot center customizes apparel such as jersey, t-shirts and fleece garments for clients including the NFL, NASCAR, NHL and NBA.

 

In February 2011, GSI Commerce entered into a definitive agreement to acquire Fanatics, Inc. (“Fanatics”), an online retailer of licensed sports merchandise. The acquisition is expected to close in the second quarter of fiscal 2011 and is subject to the satisfaction of customary closing conditions and expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act. Upon closing of the acquisition, we expect Fanatics to become part of the LSM business.

 

Global Marketing Services

 

GSI Commerce’s Global Marketing Services (“GMS”) segment offers a broad suite of services to help clients exploit digital marketing channels. In 2010, as the segment grew in size and scope of services offered, GSI Commerce added a dedicated executive management team to oversee the segment and manage future growth. The segment is comprised of eight business units and has offices in the United States, Europe and Asia.

 

 

 

Consumer Engagement

 

The consumer engagement segment operates consumer facing e-commerce businesses that are complimentary to the clients of GeC and GMS segments. Consumer engagement consists of two business units, Rue La La and ShopRunner.

 

 

Competition

 

Given the broad set of services GSI Commerce provides, it faces different competitors for each segment in which it competes. The Company aims to be a leader in each of its industries and strives to compete on the basis of offering premium capabilities with a cost advantage. GSI’s fees are often tied to the success of its clients’ businesses with GSI, further differentiating GSI’s service. In addition, while each of GSI’s businesses competes on a stand- alone basis, GSI Commerce also differentiates by cross selling and bundling services within and across its segments enabling it to offer more attractive pricing and integrated implementations. The table below represents an example of competitors by segment.

 

 

Employees

 

As of January 17, 2011, the Company employed 5,304 people worldwide. It had 4,890 full-time employees and 92 part-time employees in the U.S. and 309 full-time and 13 part-time employees internationally. Globally, 3,957 employees work in GeC, 1,103 in GMS and 334 in Consumer Engagement. Employment levels fluctuate due to the seasonal nature of e-commerce and consumer engagement businesses. In addition, the Company uses independent contractors and temporary personnel. None of the employees are covered by a collective bargaining agreement and the Company considers its relationship with employees to be good. Competition for qualified personnel in the industry is intense. The Company’s future success will depend, in part, on its continued ability to attract, hire and retain qualified personnel.

 

Intellectual Property

 

Our technology platforms and the services we provide include proprietary technologies. To protect our proprietary rights in services and technology, we rely on various intellectual property laws and contractual

restrictions and protections. These include confidentiality, trade secret law, invention assignment and nondisclosure agreements with our clients, employees, contractors and suppliers.

 

We also rely on technologies that we license from third parties. These licenses may not continue to be available to us on commercially reasonable terms in the future.

 

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

 

Our consumer-facing businesses also rely on patents, trademarks, service marks, domain names and copyrights, and we have registered, or applied for the registration of, a number of U.S. and international trademarks, service marks, domain names, and copyrights, and have filed U.S. patent applications covering certain of our proprietary technology.

 

Executive Officers

 

The following table sets forth certain information regarding each of our executive officers as of February 18, 2011, who, with the exception of Mr. Rubin, are not also directors:

 

 

Set forth below are brief descriptions of the business experience for at least the past five years of these executive officers.

 

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

 

Michael R. Conn has served as our executive vice president, finance and chief financial officer since March 2007 and our senior vice president, finance and chief financial officer from January 2006 through March 2007. He served as our senior vice president of corporate development from July 2004 until January 2006. Mr. Conn held various other positions with the company since joining in February 1999.

 

J. Scott Hardy has served as our executive vice president, business management since May 2007. From March 2004 to May 2007 Mr. Hardy was vice president at BearingPoint, Inc., a consulting and systems integration firm, responsible for the Americas Consumer Markets Practice.

 

Damon Mintzer served as our executive vice president, sales from July 2004 to February 2011. In February 2011, Mr. Mintzer was promoted to executive vice president, strategic business development. Mr. Mintzer held various other positions with the company since joining in June 2001.

 

Christopher D. Saridakis has served as chief executive officer of Global Marketing Service segment since May 2010. From December 2007 to May 2010 Mr. Saridakis served as senior vice president and chief digital officer of Gannett Co., Inc. Prior to joining Gannett, Mr. Saridakis served as chief executive officer of PointRoll, Inc. from June 2003 to December 2007.

 

Investor Information

 

We are subject to the informational requirements of the Securities Exchange Act of 1934. Therefore, we file reports, proxy and information statements and other information with the Securities and Exchange Commission. Such reports, proxy and information statements and other information may be obtained by visiting the Public Reference Room of the SEC at 100 F Street, NW, Washington, DC 20549 or by calling the SEC at 1-800-SEC-0330.

In addition, the SEC maintains an Internet site (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file electronically.

 

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

 

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

 

 

We operate in rapidly changing industries which makes our operating results difficult to predict.

 

The industries in which we operate are rapidly changing and evolving making our risks, capital needs and operating results difficult to predict. Any failure to adapt our business in response to market changes could adversely affect our operating results.

 

We have recently entered new lines of business which may not be successful.

 

We have recently entered into new lines of business both through acquisitions and through internal initiatives. We have limited experience in these new lines of business, and we will be required to devote substantial resources to them. We cannot assure you that these new lines of business will be successful. Lack of success in these new lines of business could adversely impact our ability to meet our growth and financial projections, and our financial results.

 

We may not achieve the expected benefits of acquisitions.

 

We have acquired a number of companies and we may acquire additional companies. These acquisitions are accompanied by a number of risks, including:

 

 

Future acquisitions may also result in dilutive issuances of our equity securities, use of our cash resources, and incurrence of debt and amortization expenses related to intangible assets. Our failure to be successful in addressing these risks or other problems encountered in connection with our past or future acquisitions could cause us to fail to realize the anticipated benefits of such acquisitions.

In addition, valuation of an acquired company could change. We could determine to have declines in fair value of an acquired company that could cause impairments which could adversely impact our financial results.

 

We may not achieve the expected benefits of minority investments.

 

We have purchased minority interests in a number of companies, and we may acquire additional minority interests. Ordinarily, these minority interests are purchased in connection with our entry into a commercial transaction with the investment target. These transactions are accompanied by a number of risks which could adversely impact our financial results, including:

 

 

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

 

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

 

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

 

To date, substantially all of our net revenues, income from operations and assets have been generated from and located in the United States. Our growth strategy involves expanding our business internationally, and since 2006, we have completed acquisitions of companies in Spain and the United Kingdom, purchased a minority interest in a company in Germany, opened a fulfillment center in Canada and opened offices in Japan and Singapore in support of our GeC and GMS segments. However, we have limited experience in international business, and we cannot assure you that our international expansion strategy will be successful. Our experience in the United States may not be relevant to our ability to expand internationally. In addition, our lack of a track record outside the United States increases our execution risks and the risks described below.

 

 

 

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

 

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

 

Our business is rapidly evolving and intensely competitive.

 

In our GeC segment, we face competition from technology and service providers which supply one or more components of an e-commerce solution and other providers of integrated e-commerce solutions. Low barriers to entry into the e-commerce solutions market may increase the number of competitors our e-commerce business may face. Our GeC segment has competitors with longer operating histories, larger customer bases, greater brand recognition and/or greater financial, marketing and other resources. Those competitors may be able to devote more resources to technology development and marketing.

 

In our GMS segment, we face competition from other providers of interactive marketing services, and in-house marketing departments. Low barriers to entry in the interactive marketing industry may increase the number of competitors our GMS business may face. Our GMS segment has competitors with longer operating histories, larger customer bases, greater brand recognition and/or greater financial, marketing and other resources who are able to devote more resources to technology development and marketing.

 

In our consumer engagement segment, we face competition from private sale websites with similar formats to ours, other e-commerce websites and the offline businesses of retailers and manufacturers. New private sale websites may be created and other companies may develop services that compete with our online private sale channel. If our competitors are able to secure merchandise on more favorable terms, our consumer engagement business could be harmed.

 

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

 

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

 

Our fourth fiscal quarter has accounted for and is expected to continue to account for a disproportionate amount of our total annual revenues because consumers increase their purchases and businesses increase their advertising to consumers during the fourth quarter holiday season. For fiscal 2010, 40% of our annual net revenues were generated in our fourth fiscal quarter. For fiscal years 2009 and 2008, 43% and 41% of our annual net revenues were generated in our fourth fiscal quarter, respectively. Since fiscal 1999, we have not generated net income in any fiscal quarter other than a fourth fiscal quarter. Because our fourth quarter accounts for a larger percentage of our annual revenue, any negative impact on our business during the fourth quarter will have a disproportionate adverse affect on our results of operations for the full year.

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

 

General economic conditions may adversely affect our results of operations and financial condition. The direction and relative strength of the global economy as well as the local economies in which we compete continue to be uncertain and any weakness in consumer spending may have an adverse effect on our results of operations and financial condition. Recent softness in the real estate and mortgage markets, volatility in fuel and other energy costs, deteriorating economic conditions in different countries, difficulties in the financial services sector and credit markets, high levels of unemployment and other macro-economic factors have created consumer uncertainty about current economic conditions which could adversely affect consumer confidence and behavior in ways that adversely affect our results of operations and financial condition.

 

We have an accumulated deficit and may incur additional losses.

 

Since 2001, we have recorded net losses in all but two of our fiscal years. As of the end of fiscal 2010, we had an accumulated deficit of $202.1 million. If we fail to generate sufficient revenue and/or adequately control our expenses, we may not be able to return to profitability. We will continue to incur significant operating expenses and capital expenditures as we seek to expand our operations and enhance our capabilities.

 

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

 

We rely upon access to the credit and capital markets to fund our growth plans and working capital requirements. We may in the future need to seek additional equity or debt financing. We may not be able to obtain financing on satisfactory terms or at all and the terms of these securities could impose restrictions on our operations.

 

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

 

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

 

We have a secured revolving bank credit facility with a borrowing capacity of $150 million (the “Existing Credit Facility”). We have entered into a new credit agreement providing for a $285 million revolving credit facility and a $115 million term loan facility, with the option to increase the commitments under these facilities by up to an additional $50 million to a total of $450 million (the “New Credit Facility”). The New Credit Facility becomes effective if our acquisition of Fanatics, Inc. closes on or before May 10, 2011. The Existing Credit Facility and the New Credit Facility contain restrictive covenants that limit our ability to engage in activities that may be in our long-term best interests. These covenants limit or restrict, among other things, our ability to:

 

 

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

 

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

 

We currently have and expect to continue to have a significant amount of indebtedness. As of January 1, 2011, including our outstanding convertible notes, borrowings under our Existing Credit Facility, capital leases, and the mortgage on our headquarters building we had approximately $166.8 million of outstanding indebtedness reflected on our balance sheet with an aggregate principal amount of $193.4 million, and we had $148.2 million of borrowing capacity under the revolving portion of our Existing Credit Facility. If the New Credit Facility becomes effective, we will have substantially greater borrowing capacity under the New Credit Facility. We may also incur additional indebtedness in the future. In the event of a default under any of our indebtedness, our indebtedness could become immediately due and payable and could adversely affect our financial condition.

 

Our indebtedness could have significant negative consequences, including:

 

 

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

 

As of January 1, 2011, in connection with several recent acquisitions, former stockholders and employees of companies we have acquired will be eligible to receive earnout payments, based on the performance of the acquired companies, payable in cash and/or common stock in fiscal years 2011 - 2016 with an aggregate value of up to $208.4 million if certain financial performance targets are achieved. These earnout obligations may limit our cash available for other purposes, limit our ability to engage in other business activities that may be in our best interests, limit our ability to make future acquisitions, cause dilution to existing stockholders and may affect our ability to obtain financing.

 

We have entered into long-term incentive plans with certain of our employees and executives which obligate us to make payments to these employees and executives in future years.

 

We have entered into long-term incentive plans with certain of our employees and executives which obligate us to make payments to certain employees based on the performance of the business for which the employee is responsible. Amounts due under these incentive plans are payable in cash and/or common stock in fiscal years 2012 — 2015 if certain financial performance targets are achieved. These incentive plan obligations may limit our cash available for other purposes, limit our ability to engage in other business activities that may be in our best interests, limit our ability to make future acquisitions, cause dilution to existing stockholders and may affect our

ability to obtain financing. Payments under these incentive plans are based on the performance of our segments or business units and may result in substantial payments based on the performance of these segments or business units even if the financial performance of our company as a whole does not meet our publically announced guidance or market expectations.

 

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

 

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

 

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

 

Key elements of our growth strategy include adding new clients and extending the term of existing client agreements. Competition for clients is intense, and we may not be able to add new clients or keep existing clients on favorable terms, or at all. If we are unable to add new clients within the time frames projected by us, we may not be able to achieve our targeted results in the expected periods. A change in the management of our clients could adversely affect our relationship with those clients, including our ability to renew agreements with those clients or enter into amendments to those agreements on favorable terms. Many of our client contracts contain service level commitments. If we are unable to meet these commitments, our relationships with our clients could be damaged, client rights to terminate their contracts with us may be triggered, and financial penalty provisions of the contracts may be triggered. If any of our existing clients were to exit the business we provide services to, declare bankruptcy, suffer other financial difficulties, fail to pay amounts owed to us, and/or terminate or modify their relationships with us, our business, results of operations and financial condition could be adversely affected. If our agreements with existing clients expire or are terminated, we may be unable to renew or replace these agreements on comparable terms, or at all.

 

Our GeC segment is tied to the online growth of our clients and impacted by the offline businesses of our clients.

 

A portion our revenues is derived from the value of e-commerce transactions that flow through our businesses and depend upon the continued growth of the online businesses of our clients. In addition, our GeC business is substantially impacted by the offline businesses of our clients. The impairment of the offline business of a client, whether due to financial difficulties, impairment of their brands, reduction in marketing efforts or reduction in the number of their retail stores, could adversely affect our GeC business. If any of these occurred, consumer traffic and sales through our clients’ websites could be negatively affected and clients could choose not to continue to utilize our e-commerce services. Our results of operations could also be negatively impacted if certain of our clients fail to accurately forecast product demand. Under certain of our client agreements, the clients select and buy the inventory for their corresponding webstores. Under such arrangements, the client establishes product prices and pays us service fees based either on a fixed or variable percentage of revenues, or on the activity performed. As a result, if any of these clients fail to forecast product demand or optimize or maintain access to inventory, our service fees could be adversely affected.

A large percentage of our revenue is derived from our relationships with a small number of our clients.

 

For fiscal 2008, 2009 and 2010, we did not make sales to any client or customer in an amount equal to 10% or more of our consolidated revenues. However, in fiscal 2009 and 2008, sales to one client and to customers through that client’s business accounted for 11% and 12% of our revenue, respectively, and sales to another client and to customers through that client’s business accounted for 10% and 12% of our revenue, respectively. In fiscal 2010 there were no clients for which sales to such client and to customers through such client’s business accounted for 10% or more of our revenue.

 

In fiscal 2010, sales through our top five clients’ businesses accounted for 31% of our revenues. For fiscal years 2009 and 2008, sales through our top five clients’ businesses accounted for 37% and 38% of our revenue, respectively.

 

The loss of any of our major clients could adversely affect our business, results of operations and financial condition.

 

We are subject to significant inventory risks.

 

We are exposed to significant inventory risks that may adversely affect our operating results. These inventory risks are a result of seasonality, changes in consumer tastes, changes in consumer demand and spending habits, and other factors. In order to be successful in our owned inventory e-commerce and consumer engagements businesses, we must accurately predict consumer demand and avoid overstocking or understocking products. If we fail to identify and respond to changes in merchandising and consumer preferences, sales on our owned inventory e-commerce and consumer engagement businesses could suffer and we could be required to mark down unsold inventory, which would depress our profit margins. In addition, any failure to keep pace with changes in consumers’ tastes could result in lost opportunities and reduced sales through our owned inventory e-commerce and consumer engagement businesses. If we are unable to liquidate our inventory through our primary channels, then we may need to liquidate merchandise below cost through third party channels.

 

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

 

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

 

Relationships with Manufacturers, Retailers and Other Suppliers

 

In our GeC and Consumer Engagement businesses, we own inventory and primarily purchase products from the manufacturers and distributors of the products. If we are unable to develop and maintain relationships with these manufacturers, distributors or sources, we may be unable to obtain or continue to carry a sufficient assortment and quantity of quality merchandise on acceptable commercial terms and our e-commerce businesses could be adversely impacted. We purchased 15% and 18% of the total amount of inventory we purchased from the same manufacturer during fiscal years 2010 and 2009, respectively. During fiscal year 2008, we purchased 17% and 13% of the total amount of inventory we purchased from two manufacturers. While we have contracts with these manufacturers, these manufacturers and other manufacturers, some of which do not have contracts with us, could stop selling products to us and may ask us to remove their products or logos from our or our clients’ webstores. If we are unable to obtain products directly from manufacturers, retailers or other suppliers, especially popular brand merchandise, we may not be able to obtain the same or comparable merchandise in a timely manner or on acceptable commercial terms.

 

We purchase licensed sports merchandise from suppliers with licensing agreements with professional sports leagues and other licensors. Some of these suppliers have exclusive rights to manufacture this merchandise. We are dependent on these exclusive suppliers for the availability of this merchandise. If for any reason these suppliers do not, are unwilling to, or are unable to, sell and deliver quality merchandise to us in a timely fashion, our sales of licensed sports merchandise could be adversely affected.

Our consumer engagement business depends on purchasing increasing volumes of inventory from brands, retailers and other suppliers. These brands, retailers and other suppliers may not continue to sell their inventory to us on current terms or at all. For example, our suppliers may sell their inventory to other traditional or online retailers or they may not have inventory to sell. Our failure to obtain inventory on current terms or at all may limit the growth of our consumer engagement business.

 

Marketing and Promotional Arrangements

 

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

 

Shipping Vendors

 

We rely upon multiple third parties to ship the products sold in our GeC and consumer engagement businesses. We also rely upon certain drop-ship vendors to ship products directly to consumers. As a result, we are subject to the risks associated with the ability of these vendors and other third parties to successfully and in a timely manner fulfill and ship customer orders and any price increases, including as a result of fuel surcharges, instituted by these vendors. The failure of these vendors and other third parties to provide these services, or the termination or interruption of these services, could adversely affect the satisfaction of consumers, which could result in reduced sales by our GeC and consumer engagement businesses.

 

Payment Processors

 

Consumers typically pay for purchases through webstores in our GeC businesses and through our consumer engagement business by credit card or similar payment method. We must rely on banks or payment processors to process these transactions and must pay a fee for this service. From time to time, credit card associations may increase the interchange fees that they charge for each transaction using one of their cards. Our credit card processors have the right to pass any increases in interchange fees on to us as well as increase their own fees for processing. These increased fees would increase our operating costs and reduce our profit margins. We are also required by our processors to comply with credit card association operating rules, and we may be required to reimburse our processors for any fines they are assessed by credit card associations as a result of any rule violations by us. The credit card associations and their member banks set and interpret operating rules related to their credit cards. The credit card associations and/or member banks could adopt new operating rules or re-interpret existing rules that we might find difficult or even impossible to follow. As a result, we could lose our ability to give customers the option of using credit cards to make their payments, which would seriously damage our business.

 

We also accept alternative payments, including Paypal, Bill Me Later, Google checkout, gift cards and gift certificates, and open invoices. If we were to lose our ability to give customers the option to use these payment methods our business and financial results could be could be adversely affected.

 

Telecommunications and Data Providers

 

We rely on third parties to provide telecommunications and data links upon which our businesses are dependant. Any disruption in these services could cause substantial harm to our business and our financial results.

 

Our licensed sports business depends on continued customer interest in professional sports leagues and could be adversely affected by any decrease in fan interest in the professional sports leagues, their teams or their players.

 

Our business derives substantial revenues from the sale of sports products branded with the names and logos of professional sports leagues, their teams and/or their players. Any decrease in fan interest in professional sports leagues, their teams or their players, including as a result of labor conflicts (and resulting lock-outs, strikes, or

cancelled games or seasons), player trades, player injuries, the lack of success of popular players or teams, or logo changes, could adversely affect our revenues and financial results.

 

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

 

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

 

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

 

 

If any of these events occur, it could result in interruptions, delays or cessations in our businesses. Our clients might seek significant compensation from us for their losses. Even if unsuccessful, this type of claim likely would be time consuming and costly for us to address and damaging to our reputation.

 

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

 

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

 

We are dependent upon consumers’ willingness to use the Internet for commerce.

 

Our success depends upon the general public’s continued willingness to use the Internet as a means to purchase goods, communicate, and conduct and research commercial transactions. If consumers became unwilling or less willing to use the Internet for communications or commerce for any reason, including lack of access to high-speed communications equipment, congestion of traffic on the Internet, Internet outages or delays, disruptions or other damage to users’ computers, increases in the cost of accessing the Internet and security and privacy risks or the perception of such risks our businesses would suffer, such decreased use of the internet for communications and commerce would have an adverse impact on our businesses.

 

We may be liable if third parties misappropriate our or our clients’ customers’ personal information from our network.

 

We cannot be assured that our security measures will prevent security breaches. A compromise of our security systems that results in customers’ personal information being obtained by an unauthorized person could result in litigation against us and fines imposed on us, and could adversely affect customers’ willingness to utilize our and our clients’ businesses, our reputation, operations, results of operations, financial condition and liquidity.

Additionally, any security breach could require that we expend significant resources to strengthen the security of our information systems and result in a disruption of our online operations.

 

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

 

The industries in which we participate are characterized by rapid technological change. To remain competitive, we must continue to develop new services and technologies and respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis.

 

We are in the process of enhancing and unbundling the components of our e-commerce and payments platform. If this technology project requires higher than expected expenses, the success of client migrations to the enhanced platform are not accomplished as planned, the enhanced platform is not accepted by the market and/or we fail to meet client commitments and services level agreements, we could be subject to substantial penalties under our agreements with our clients and/or our relationships with our clients, our business and our results of operations and financial condition could be substantially harmed.

 

In addition, the number of individuals who access the Internet through devices other than a personal computer, such as mobile telephones, personal digital assistants, smart phones, hand held computers, televisions and set-top box devices, has increased dramatically and is likely to increase in the future. As a result, we must continue to adapt our existing technologies for use with these alternative devices.

 

Substantial costs and management time can be required to introduce new services and enhancements, and we may be unable to respond to rapid technological changes in a timely enough manner to avoid our services becoming uncompetitive. Our failure to respond to technological changes could substantially harm our business, results of operations and financial condition.

 

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

 

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

 

 

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

We may be unable to protect our proprietary technology and intellectual property rights.

 

Our success depends to a significant degree upon the protection of our intellectual property rights. We may be unable to deter infringement or misappropriation of our software, trademarks, business processes and other proprietary information and material, detect unauthorized use or take appropriate steps to enforce our intellectual property rights. The steps we have taken to protect our proprietary rights may be inadequate and third parties may infringe or misappropriate our proprietary rights. Any significant failure on our part to protect our intellectual property could make it easier for our competitors to offer similar services and thereby adversely affect our market opportunities. In addition, litigation may be necessary in the future to enforce our intellectual property rights. Litigation could result in substantial costs and diversion of management and technical resources.

 

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

 

Third parties may assert that our businesses or technologies infringe or misappropriate their intellectual property rights, or that we are engaging in unfair competition or other illegal trade practices. We have been sued for infringing other parties’ patents and have been notified of other potential patent disputes. We could increasingly be subject to patent infringement claims as our services expand in scope and complexity. Patent infringement and other intellectual property claims, whether meritorious or not, are time consuming and costly to resolve, and could require expensive changes in our methods of doing business, could require us to enter into costly royalty or licensing agreements, or could require us to cease conducting certain operations. We may be unsuccessful in defending against these claims, which could result in substantial damages, fines or other penalties. Even unsuccessful claims could result in significant legal fees and other expenses, diversion of 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 which could expose us to product liability claims if any of these products are alleged to be defective. If any product that we sell were to cause physical injury or injury to property, the injured party or parties could bring claims against us. We could also be subject to claims that customers of our GeC or consumer engagement businesses were harmed due to their reliance on our product information, product selection guides, advice or instructions. If a successful claim were brought against us in excess of our insurance coverage, it could adversely affect our business, results of operations and financial condition. Even unsuccessful claims could result in the expenditure of funds and management time and adverse publicity and could have a negative impact on our business.

 

Credit card and payment fraud could adversely affect our business.

 

The failure to adequately control fraudulent transactions on our GeC, consumer engagement and GMS platforms could increase our expenses. Under current credit card practices, we are liable for fraudulent credit card transactions because we do not obtain a cardholder’s signature. We may in the future suffer losses as a result of orders placed with fraudulent credit card data.

 

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

 

The application of sales tax or other similar taxes to interstate and international sales over the Internet is complex and evolving. We currently collect sales or other similar taxes only for goods we own, sell and ship into certain states. One or more local, state or foreign jurisdictions may seek to impose past and future sales tax obligations on us or other out-of-state companies that engage in e-commerce. If one or more states or any foreign country successfully asserts that we should collect sales or other taxes on the sale of merchandise for which we are not currently collecting taxes, it could result in substantial tax liability for past sales, decrease future sales and otherwise harm our business.

We may have exposure in excess of our recorded tax liabilities.

 

We are subject to income, payroll and other taxes in both the United States and foreign jurisdictions. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. Moreover, significant judgment is required in evaluating our worldwide provision for income taxes. Our determination of our tax liability is always subject to review by applicable tax authorities. Any adverse outcome of such a review could have a negative effect on our operating results and financial condition. Any change in existing taxation rules or practices could result in increased tax liabilities and adversely affect our financial results.

 

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

 

As of January 1, 2011, we had estimated available net operating loss carry-forwards (“NOLs”) of $216.2 million for federal income tax purposes that expire between 2011 and 2030. Our ability to use these NOLs will be dependent on our ability to generate future taxable income and may expire before we generate sufficient taxable income. Through 2010, approximately $3.1 million of these NOLs has expired unutilized.

 

Section 382 of the Internal Revenue Code (“Section 382”) imposes limitations on a corporation’s ability to utilize NOLs if it experiences an “ownership change.” In general terms, an ownership change may result from transactions increasing the ownership of certain stockholders in the stock of a corporation by more than 50 percentage points over a three-year period. In the event of an ownership change, utilization of our NOLs would be subject to an annual limitation under Section 382. Any unused NOLs in excess of the annual limitation may be carried over to later years.

 

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

 

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

 

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

 

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

 

 

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

 

Existing or future laws or regulations could harm our business.

 

We are subject to international, federal, state and local laws applicable to businesses in general and applicable to e-commerce and marketing services specifically.

 

Existing and proposed laws and regulations covering issues such as taxation, pricing, content, distribution, access, quality and delivery of products and services, electronic contracts, intellectual property rights, user privacy and information security may impede the growth of our businesses. Our international operations are also subject to import and export requirements, U.S. laws such as the Foreign Corrupt Practices Act, and local laws prohibiting corrupt payments to governmental officials.

 

It is not clear how some existing laws apply to the Internet and e-commerce, and some laws that are specific to the Internet and e-commerce, such as the Digital Millennium Copyright Act and The Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003, or the “CAN-SPAM” Act, are only beginning to be interpreted by the courts and their applicability and reach are therefore uncertain. In addition, the potential scope of operation and enforcement of the new Consumer Financial Protection Bureau with respect to those handling consumer credit card transactions also is unclear at present. Unfavorable regulations and laws, or interpretations thereof, could diminish the demand for our services, limit the services we can provide, increase our cost of doing business and subject us to penalties.

 

In addition, our businesses utilize “behavioral marketing” (generally, the tracking of a user’s online activities) to deliver relevant content to web users. The Federal Trade Commission, or FTC, has released a Staff Report with principles to address consumer privacy issues that may arise from behavioral marketing and to encourage industry self-regulation. The FTC also has issued a Staff Report in December 2010 on consumer privacy policy, proposing a set of self-regulatory best practices and several policy recommendations for consideration by Congress, including institution of “do not track” mechanisms. In the future, regulations or legislation could, if enacted, prohibit the use of certain technologies that track individuals’ activities on the internet. Such laws and regulations could restrict our ability to collect and use page viewing data, and personal information, which may reduce demand for our GMS and/or reduce demand for the webstores using our GeC business. If our interactive marketing products are perceived to cause or are otherwise unfavorably associated with invasions of privacy, whether or not illegal, we or our clients may be subject to public criticism. Existing and potential future privacy laws and increasing public concerns regarding data collection, privacy and security may cause some internet users to be less likely to visit our client’s websites or otherwise interact with them. If enough consumers choose not to visit our customers’ websites or otherwise interact with them, our customers could stop using our interactive marketing products and the growth of these businesses could be harmed or it may not be possible to continue the current business models for these products.

 

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

 

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

 

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

 

Our success depends to a significant degree upon the contribution of our executive officers and other key personnel, particularly Michael G. Rubin, our chairman of the board, president and chief executive officer. Our executive officers and key personnel could terminate their employment with us at any time despite any employment agreements we may have with these employees. Due to the competition for highly qualified personnel, we cannot be sure that we will be able to retain or attract executive, managerial or other key personnel. In addition, key personnel

of an acquired company may decide not to work for us. We do not maintain and do not intend to obtain key person life insurance for any of our executive officers or key personnel. The loss of any of our key personnel could harm our business if we are unable to effectively replace that person, if we incur significant operating expenses and direct management time to search for a replacement, or if that person should join one of our competitors or otherwise compete with us.

 

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

 

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

 

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

 

Pursuant to our amended and restated certificate of incorporation and under Delaware law, our directors are not liable to us or our stockholders for monetary damages for breach of fiduciary duty, except for liability for breach of a 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 and update our controls based on changes to our business over financial reporting or fail to prevent fraud, current and potential stockholders and clients could lose confidence in our financial reporting, which could harm our business, the trading price of our common stock and our ability to retain our current clients and obtain new clients.

 

The price of our common stock has and may continue to fluctuate significantly.

 

Our stock price has been and may continue to be volatile. Fluctuations in our stock price have been and may be as a result of a variety of factors, many of which are beyond our control. These factors include, among others: our performance and prospects; fluctuations in our operating results; changes in our publicly available guidance of future results of operations; investor perception of us and the industries in which we operate; and general financial, economic and other market conditions. In addition, broad market and industry fluctuations may adversely affect the price of our stock, regardless of our operating performance. Declines in our stock price could have a material adverse impact on investor confidence and employee retention.

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

 

We may issue common stock or equity securities senior to our common stock in the future for a number of reasons, including to attract and retain key personnel or outside consultants, to finance our operations and growth strategy, including possible acquisitions, to adjust our ratio of debt to equity, to satisfy outstanding obligations, including obligations under earnout agreements and long term incentive plans, or for other reasons. If we issue securities, our existing stockholders may experience dilution or the new securities may have rights senior to those of our common stock. In addition, the terms of these securities could impose restrictions on our operations. Future sales of our common stock, the perception that such sales could occur or the availability for future sale of shares of our common stock or securities convertible into or exercisable for our common stock could adversely affect the market prices of our common stock prevailing from time to time. No prediction can be made as to the effect, if any, that the sale, or the availability for sale, of substantial amounts of common stock could have on the market price of our common stock.

 

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

 

We have never paid cash dividends on our common stock and do not anticipate that any cash dividends will be declared or paid in the foreseeable future. In addition, the terms of our Existing Credit Facility and New Credit Facility restrict our ability to declare or pay dividends on our common stock.

 

It may be difficult for a third party to acquire us and this could depress our stock price.

 

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

 

In addition, we are subject to Section 203 of the Delaware General Corporation Law which, subject to certain exceptions, restricts certain transactions and business combinations between a corporation and a stockholder owning 15% or more of the 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 Existing Credit Facility and New Credit Facility, convertible notes and other indebtedness.

 

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

 

 

We, like other issuers, from time to time receive written comments from the staff of the SEC regarding our periodic or current reports under the Exchange Act. There are no comments that remain unresolved that we received not less than 180 days before the end of fiscal 2010.

 

The following table provides information about owned and leased facilities that we occupy as of February 1, 2011:

 

 

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

 

We own our principal executive office in King of Prussia, PA, which was subject to an $11.9 million mortgage as of the end of fiscal 2010. We also have an option through March 2012 to purchase an additional building lot adjacent to our principal executive office in King of Prussia, PA. We own another office in King of Prussia, PA, a fulfillment center in Louisville, KY, and a call center in Eau Claire, WI none of which is subject to a mortgage. All other properties listed above are leased.

 

 

We are involved in various litigation incidental to our business, including alleged contractual claims, claims relating to infringement of intellectual property rights of third parties, claims relating to the manner in which goods are sold through our integrated-commerce platform and claims relating to our collection of sales taxes in certain states. We currently collect sales taxes for goods owned and sold by us and shipped into certain states. As a result,

we are subject from time to time to claims from other states alleging that we failed to collect and remit sales taxes for sales and shipments of products to customers in those states.

 

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

 

 

 

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 February 18, 2011, we had approximately 1,770 stockholders of record. The last reported sales price per share for our common stock on February 18, 2011, as reported on the NASDAQ Global Select Market, was $22.05.

 

We have never declared or paid a cash dividend on our common stock. We currently intend to retain any future earnings to fund our growth and, therefore, do not anticipate declaring or paying any cash dividends on our common stock for the foreseeable future. In addition, the terms of our existing and new secured bank credit facilities restrict our ability to declare or pay dividends on our common stock.

 

We made no repurchases of our common stock during the fourth quarter of fiscal 2010.

 

Pursuant to the terms of a Consulting Agreement dated April 22, 2009 between Arimor, LLC (“Arimor”) and GSI Commerce Solutions, Inc., the Company agreed to issue to Arimor shares of the Company’s common stock as a fee for consulting services provided by Arimor. For the fourth quarter of fiscal 2010, the Company issued an aggregate of 12,583 shares of common stock to Arimor (“Arimor Shares”) pursuant to such agreement.

 

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

STOCK PERFORMANCE GRAPH

 

The following graph shows a comparison of the cumulative total return for our common stock, the Morgan Stanley Internet Index and the NASDAQ Composite, assuming an investment of $100 in each on December 31, 2005, and the reinvestment of all dividends. The data points used for the performance graph are listed below.

 

COMPARISON OF CUMULATIVE TOTAL RETURN

 

ASSUMES $100 INVESTED ON JAN 01, 2006

ASSUMES DIVIDEND REINVESTED

 

Total Return Analysis

 

Period Ending

 

 

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 2008, fiscal 2009 and fiscal 2010 and the balance sheet data as of the end of fiscal 2009 and fiscal 2010 are derived from our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The selected statement of operations data for fiscal 2006 and fiscal 2007 and the balance sheet data as of the end of fiscal 2006, fiscal 2007 and fiscal 2008 are derived from our audited consolidated financial statements that are not included in this Annual Report on Form 10-K.

 

 

 

 

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

 

Executive Overview

 

Fiscal 2010 Financial Results Compared to Fiscal 2009 and Significant Events:

 

 

 

 

 

 

Consolidated Results (amounts in tables in millions):

 

Comparison of Fiscal 2010 and 2009:

 

Total Net Revenues, Costs and Expenses and Income (Loss) from Operations

 

Net Revenues from Product Sales

 

The increase in net revenues from product sales in fiscal 2010 was primarily driven by the acquisition of Rue La La, which we acquired in November 2009, as well as higher shipping revenue due to increased volume of unit shipments in the Global e-Commerce Services (“GeC”) segment.

 

Service Fee Revenues

 

The increase in service fee revenues in fiscal 2010 was primarily driven by growth in the GeC and Global Marketing Services (“GMS”) segments. The revenue growth in both segments was driven by increased revenue from existing clients, the addition of new clients as well as from the impact of companies acquired in fiscal 2010.

 

Costs and Expenses

 

Cost of Revenues from Product Sales

 

 

The increase in cost of revenues from product sales in fiscal 2010 was driven by the addition of the Consumer Engagement segment as well as increased net revenues from products sales in the GeC segment. Cost of revenue from product sales as a percentage of net revenues from product sales was relatively flat.

 

Marketing

 

The absolute dollar increase in marketing expenses was driven by the increase in net revenues from product sales in the GeC and Consumer Engagement segment. As a percentage of net revenues from product sales, marketing expenses decreased from 10% in fiscal 2009 to 8% in fiscal 2010 due to the increase in product sales from the Consumer Engagement segment which have lower marketing expenses as a percentage of net revenues than product sales in the GeC segment.

 

Account Management and Operations

 

The absolute dollar increase in account management and operations expenses was driven primarily by increased payroll, professional fees and related personnel expenses in each of our segments as well as increased fulfillment, customer care and credit card fees in the GeC and Consumer Engagement segments driven by increased order and shipment volume in the GeC segment and the acquisition of Rue La La in November 2009.

 

Product Development

 

The absolute dollar increase in product development expenses was primarily driven by payroll and professional fees in each of our segments for enhancements to our technology platforms, the expansion and upgrading of our technology operations infrastructure and costs associated with launching new clients on our platforms as well as from companies acquired in fiscal 2010. The largest increase came from the GeC segment.

 

General and Administrative

 

The absolute dollar increase in general and administrative expenses was primarily driven by increased payroll and related expenses and professional fees in each of our segments including expenses from the companies acquired in the last year. Expenses for acquisition related integration, transaction, due diligence and earn-out expenses increased to $10.1 million in fiscal 2010 from $4.1 million in fiscal 2009 primarily due to earn-out expenses associated with one of the companies we acquired in fiscal 2010.

 

Depreciation and Amortization

 

Depreciation expenses increased by $11.0 million for fiscal 2010 primarily due to an increase in capital expenditures in fiscal 2010 compared to fiscal 2009 as well as depreciation on assets from companies acquired in

fiscal 2009 and fiscal 2010. Amortization expenses increased by $9.4 million for fiscal 2010 due to the intangible asset amortization related to the companies acquired in fiscal 2009 and fiscal 2010.

 

Changes in Fair Value of Deferred Acquisition Payments

 

The decrease in the fair value of deferred acquisition payments was due to a revision of our estimate of the amount of deferred acquisition payments that will be paid to the former shareholders of Rue La La based on Rue La La’s financial performance in fiscal 2010 and revised financial projections for fiscal years 2011 and 2012. Based on these revised estimates, we do not expect Rue La La to achieve the minimum earnings thresholds needed to trigger any of the deferred acquisition payments and have determined that the fair value of the deferred acquisition payment liability is $0 at the end of fiscal 2010 compared to $61.0 million at the end of fiscal 2009.

 

Impairment of Goodwill and Intangible Assets

 

In the fourth quarter of fiscal 2010, we completed our annual impairment testing of goodwill and indefinite-lived intangible assets and determined there was an impairment in our Rue La La and International e-Commerce Services reporting units. The fair value of each of these two reporting units was less than their respective carrying values. As a result, we conducted the second step of the impairment test for both reporting units and determined that the goodwill in both of these reporting units was impaired. We determine fair value using widely accepted valuation techniques, including, but not limited to, the income approach which estimates the fair value of our reporting units based on the future discounted cash flows, and the market approach which estimates the fair value of our reporting units based on comparable market prices. We also tested our finite-lived intangible assets for impairment and determined there was an impairment in our Rue La La and International e-Commerce Services reporting units.

 

We recorded a total goodwill impairment expense of $77.7 million comprised of $71.3 million for the Rue La La reporting unit in our Consumer Engagement segment and $6.4 million for the International e-Commerce Services reporting unit in our GeC segment. We also recorded a $10.6 million impairment expense related to Rue La La’s finite-lived intangible assets.

 

The impairments in the Rue La La reporting unit resulted from a decline in our projected cash flows. The goodwill impairment charge of $71.3 million reduced the carrying value of the goodwill associated with the reporting unit from $172.9 million to its implied fair value of $101.6 million. The finite-lived intangible asset impairment charge of $10.2 million related to supplier relationships and reduced the carrying value of this intangible asset to $0.

 

The impairments in the International e-Commerce Services reporting unit resulted from a decline in our projected cash flows. The impairment charges reduced the carrying value of the reporting unit’s goodwill and finite-lived intangible assets to $0.

 

Other (Income) Expense

 

 

Interest expense decreased in fiscal 2010 primarily due to the conversion of our $57.5 million 3% convertible notes into shares of our common stock in June 2010. Other (income) expense is primarily comprised of foreign currency exchange gains and losses on transactions denominated in currencies other than the functional currency. The $0.7 million loss on investments is a result of the write-off on an investment in the third quarter of fiscal 2010, which was accounted for under the cost method, due to the deterioration in the financial condition of the investee.

Income Taxes

 

Our effective tax rate for fiscal years 2010, 2009, and 2008 was (1.9%), (27.0%) and 24.8%, respectively. Our tax rate is affected by recurring items such as tax rates in foreign jurisdictions and the relevant amount of income we earn in each jurisdiction, which has not been consistent as we seek to expand our presence in the international market, as well as the reversal of valuation allowances in some years. See Note 11, Income Taxes, to our consolidated financial statements included in Item 15, Exhibits and Financial Statement Schedules, of this Annual Report on Form 10-K for a reconciliation of the differences between our effective income tax rate and the statutory U.S. federal income tax rate of 35% for fiscal years 2010, 2009 and 2008.

 

Segment Results

 

 

 

 

GeC Segment:

 

Net revenues increased 16% in fiscal 2010. The growth is due to an increase in net revenues from product sales and service fee revenues. The increase in net revenues from product sales was driven by an increase in shipping revenue due to increased unit shipments as well as an increase in product revenue from clients that operated for the entirely of both periods. The increase in service fee revenues for fiscal 2010 was primarily due to an increase in revenues from clients that operated during the entirety of both periods as well as from the addition of clients that began generating revenue for us in fiscal 2010, including inter-company revenues from Rue La La.

 

Segment profit increased $21.1 million or 28% in fiscal 2010 compared to fiscal 2009 and segment operating margins increased to 9.3% in fiscal 2010 versus 8.5% in fiscal 2009. The increase in segment operating margins was driven primarily by service fee revenues comprising a larger percentage of total net revenues as service fee revenue has no associated cost of revenue or marketing expenses.

 

GMS Segment:

 

Net revenues increased 49% in fiscal 2010. The increase is due to growth of revenue from existing clients, including inter-company revenue, revenue from new clients as well as revenue from the acquisitions of Silverlign and Pepperjam in 2009 and MBS Insight, FetchBack and M3 Mobile in 2010.

Segment profit increased $17.8 million or 58% in fiscal 2010 compared to fiscal 2009. Segment operating margins increased from 24.0% to 25.5% in fiscal 2010 compared to fiscal 2009. The increase in segment profit was primarily driven by the revenue growth described above. The increase in the segment margins for fiscal 2010 compared to fiscal 2009 was driven by a favorable mix of revenue from higher margin services partially offset by expenses associated with hiring an executive management team for the segment.

 

Consumer Engagement Segment:

 

Net revenues increased $190.4 million in fiscal 2010. The increase is due to Rue La La which was acquired in November 2009. Rue La La accounted for substantially all of the segment revenues. Segment profit decreased $10.6 million due to Rue La La and ShopRunner. Although Rue La La’s revenue grew significantly in fiscal 2010, we continued to invest in the business to support expected continued growth in fiscal 2011. ShopRunner began operations in late fiscal 2009 but didn’t begin to generate any revenue until the fourth quarter of fiscal 2010.

 

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

 

Total Net Revenues, Costs and Expenses and Loss from Operations

 

 

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

 

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

 

Service Fee Revenues.  Service fee revenues include revenues from the provision of e-commerce services and interactive marketing services. E-commerce service fee revenues are generated from a 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.

 

Net Revenues by Segment

 

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

 

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

 

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

 

Consumer Engagement Segment Revenues.  Net revenues increased to $26.3 million from $0 due to the acquisition of Rue La La in November 2009.

 

 

Costs and Expenses

 

 

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.

 

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

 

As a percentage of net revenues from product sales, marketing expenses decreased from 12% in fiscal 2008 to 10% in fiscal 2009. Of the $15.5 million decrease in marketing expenses, $7.6 million was due to a decrease in client revenue share expenses caused by decreased sales from owned inventory clients, $4.0 million was due to a decrease in promotional, free, and subsidized shipping and handling costs, and $3.9 million was due to a decrease in advertising costs. The decreases in client revenue share expenses and advertising costs were primarily the result of the client transition discussed above and have minimal impact on marketing expenses as a percentage of net revenue from product sales, because of the corresponding decrease in net revenues from product sales as a result of the client transition.

 

Account Management and Operations:  Account management and operations expenses increased $12.8 million in fiscal 2009. As a percentage of net revenues, account management and operations expenses remained constant at 27%. The increase in absolute dollars was primarily due to our acquisitions of Rue La La, Silverlign and Pepperjam in fiscal 2009 as well as increases in personnel and related costs mostly from our GMS segment, partially offset by decreases in fulfillment expenses.

 

Product Development:  Product development expenses increased $16.0 million in fiscal 2009. As a percentage of net revenues, product development expenses increased from 11% to 12%. The increases in absolute dollars and as a percentage of net revenues were primarily due to increased personnel expenses to enhance our e-commerce technology platform.

 

General and Administrative:  General and administrative expenses increased $13.9 million in fiscal 2009. As a percentage of net revenues, general and administrative expenses increased from 7% to 8%. The increase in absolute dollars was primarily due to personnel and related expenses as well as our acquisition of Rue La La.

 

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

 

Changes in Fair Value of Deferred Acquisition Payments:  The increase was due to the acquisition of Rue La La in fiscal 2009.

 

Other (Income) Expense

 

 

Interest expense remained relatively constant in fiscal 2009 compared to fiscal 2008. The $1.3 million decrease in interest income was due to lower interest rates earned in fiscal 2009. The $1.6 million decrease in other expense was primarily due to larger foreign currency exchange losses in fiscal 2008 compared to fiscal 2009 on transactions denominated in currencies other than the functional currency. The fiscal 2008 $1.7 million loss on investments was due to an other-than-temporary impairment on an equity investment.

Seasonality

 

We have experienced and expect to continue to experience seasonal fluctuations in our revenues from GeC. These seasonal patterns will cause quarterly fluctuations in our operating results. We also expect to experience seasonal fluctuations from consumer engagement, but to a lesser degree than with GeC. We experience less seasonality in our revenues from GMS. The fourth fiscal quarter has accounted for and is expected to continue to account for a disproportionate percentage of our total annual revenues. We believe that results of operations for any quarterly period may not be indicative of the results for any other quarter or for the full year. We recognized 40%, 43% and 41% of our annual net revenues during the fourth quarter of fiscals 2010, 2009 and 2008, respectively. For additional information, see Note 16, Quarterly Results (Unaudited), to our consolidated financial statements included in Item 15, Exhibits and Financial Statement Schedules, of this Annual Report on Form 10-K.

 

Liquidity and Capital Resources

 

 

As of January 1, 2011, we had $242.1 million of cash and cash equivalents, compared to $228.4 million of cash and cash equivalents as of January 2, 2010. Cash equivalents are comprised of money market mutual funds.

 

In June 2010, we called all of our $57.5 million 3% convertible notes due 2025 for redemption and substantially all of the notes were converted into 3.2 million shares of our common stock.

 

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

 

Sources of Cash

 

Our principal sources of liquidity in fiscal 2010 were our cash and cash equivalents balances, cash provided by operating activities, and cash provided by financing activities.

 

We generated cash from operating activities of $140.1 million, $140.2 million, and $96.0 million in fiscal 2010, fiscal 2009, and fiscal 2008, respectively. Cash provided by operating activities is driven by our net loss, adjusted for non-cash items and changes in operating assets and liabilities. Non-cash adjustments include depreciation, amortization, stock-based compensation expense and deferred income taxes. Cash provided by operating activities was greater than our net loss in fiscal 2010 primarily due to the net impact of non-cash adjustments to our net loss as well as an increase in cash provided by our operating assets and liabilities.

 

We generated $12.2 million of cash from financing activities in fiscal 2010 primarily from the $16.8 million of proceeds from exercise of common stock options partially offset by principal payments on our debt and lease obligations. During fiscal 2009, we generated $88.6 million of cash from financing activities primarily from the proceeds on the sale of 5.3 million shares of common stock. During fiscal 2008, we generated $5.5 million of cash from financing activities primarily from proceeds received from capital lease financings.

 

As of January 1, 2011 and January 2, 2010 we had no borrowings under our $150 million Existing Credit Facility. During fiscal 2010, we borrowed and also repaid $25 million on our Existing Credit Facility. We did not borrow on the Existing Credit Facility during fiscal 2009. The Existing Credit Facility contains financial and restrictive covenants that limit our ability to engage in activities that may be in our long term best interests. We do not believe the financial covenants will limit our ability to utilize the entire borrowing availability in fiscal 2011, if necessary.

Uses of Cash

 

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

 

Our capital expenditures totaled $70.9 million, $43.0 million, and $57.2 million in fiscal 2010, fiscal 2009, and fiscal 2008, respectively. Our capital expenditures have generally been comprised of purchases of computer hardware and software, development of internal-use software, purchases of furniture and fixtures, and purchases of real estate. Capital expenditures increased 65% in fiscal 2010 compared to the 25% decrease in fiscal 2009 primarily due to investments in our e-commerce technology platform as well as capital expenditures in our consumer engagement segment due to the acquisition of Rue La La in November 2009.

 

We used $66.5 million of cash for acquisitions and investments in fiscal 2010, compared to $88.9 million and $145.0 million in fiscal 2009 and fiscal 2008, respectively. In fiscal 2010, we acquired MBS for $22.2 million, net of cash acquired, acquired three other companies for an aggregate purchase price of $24.1 million, net of cash acquired, and paid $1.6 million of deferred acquisition payments for companies acquired in prior years. We are also obligated to pay up to an additional $208.4 million in earnout payments through 2016 based on the achievement of certain performance targets by some of our acquired companies, of which we have the ability to pay up to $45.8 million with shares of our common stock. Acquisitions in fiscal 2009 included primarily included Rue La La and our fiscal 2008 acquisitions included e-Dialog.

 

See Note 8, Commitments and Contingencies, to our consolidated financial statements included in Item 15, Exhibits and Financial Statement Schedules, of this Annual Report on Form 10-K, for additional discussion of our principal contractual commitments.

 

Outlook

 

For fiscal 2011, we expect increases in net revenues in all three of our segments. The GeC and GMS revenue increases are expected to be driven by increased revenue from clients who generated revenue for us for the entirety of both periods as well as the addition of new clients, partially offset by the loss of clients. The expected increase in net revenues from our existing clients is based on the Company’s recent revenue growth trends which are expected to continue as well as projected industry growth. The GeC segment will also increase due to the acquisition of Fanatics which we expect to close in the second quarter of fiscal 2011. The expected revenue increase for Consumer Engagement is due an increase in revenue from Rue La La driven by expected continued growth in membership and from the first full year of operation of Shoprunner.

 

We expect an increase in income from operations compared to 2010. The expected increase is primarily driven by revenue growth in each of our three segments as well as from Fanatics. The expected percentage increase in other operating costs and expenses is expected to be less than the expected percentage increase in net revenues.

 

We expect to have a smaller net loss in 2011 as compared to 2010 based on the expected increase in income from operations noted above.

 

We expect an increase in our capital expenditures primarily from investments in our e-commerce technology platform and capital expenditures for companies acquired in 2010 and 2011, as well as from the expected acquisition of Fanatics.

 

We expect to generate positive cash flow from operations in fiscal 2011, all of which we expect to be generated in our fourth fiscal quarter. We believe that our cash flow from operating activities, cash and cash equivalents balances, and borrowing availability under either our Existing Credit Facility or our New Credit Facility will be sufficient to meet our anticipated operating cash needs, including any deferred acquisition payments, for at least the next 12 months. However, any projections of future cash needs and cash flows are subject to substantial uncertainty.

 

We continually evaluate opportunities to sell additional equity or debt securities, obtain credit facilities, or repurchase, refinance, or otherwise restructure our long-term debt for strategic reasons or to further strengthen our financial position. Our existing and new secured revolving bank credit facilities contain negative covenants

including restrictions on our ability to incur additional indebtedness. The sale of additional equity or convertible debt securities would likely be dilutive to our stockholders. In addition, we will, from time to time, consider the acquisition of, or investment in, complementary businesses, products, services, and technologies, which might affect our liquidity requirements or cause us to issue additional equity or debt securities. There can be no assurance that additional lines-of-credit or financing instruments will be available in amounts or on terms acceptable to us, if at all.

 

Contractual Obligations

 

The following summarizes our principal contractual commitments, excluding open orders for inventory purchases that support normal operations, as of January 1, 2011:

 

 

 

 

Off Balance Sheet Arrangements

 

We have no off balance sheet arrangements other than the obligations not required to be recorded on the balance sheet as shown above in the contractual obligations table.

 

Critical Accounting Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make significant judgments and estimates that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period as well as the related disclosures. Management bases these significant

judgments and estimates on historical experience, current trends and other assumptions it believes to be reasonable based upon information presently available. On a regular basis, management reviews the accounting policies, assumptions, judgments and estimates to ensure that our financial statements are presented fairly and in accordance with generally accepted accounting principles. However, because future events and their affects cannot be determined with certainty, actual results could materially differ from those estimates.

 

Our significant accounting policies are discussed in Note 2, Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements, included in Item 15, Exhibits and Financial Statement Schedules, of this Annual Report on Form 10-K. Management has identified the following as our critical accounting estimates, which are defined as those that reflect significant judgments and uncertainties, are the most pervasive and important to the presentation of our financial condition and results of operations and could potentially result in materially different results under different assumptions, judgments or conditions. Management has reviewed these critical accounting estimates with the Audit Committee of our Board.

 

Accounting for Inventory

 

Inventory is valued at the lower of cost (determined using the weighted average method) or market. Inherent in this valuation are significant management judgments and estimates, including among others, assessments concerning obsolescence and shrinkage. Based upon these judgments and estimates, which are applied consistently from period to period, we record obsolescence and shrinkage allowances to adjust the carrying amount of our inventory. We record a charge for obsolescence based upon, among other factors, the aging of the inventory, forecasted customer demand, the anticipated mark-downs required to sell the inventory in the normal course of business and the expected recovery value we could achieve by selling the inventory through alternative liquidation channels. We record a charge for inventory shrinkage for damages and other losses based on rates experienced in our fulfillment centers. We have not made any material changes in the accounting methodology used to measure inventory obsolescence or shrinkage during the past three fiscal years. If the market value of our inventory decreases significantly below its carrying value or our judgments or estimates regarding inventory valuation allowances are inaccurate, we may be exposed to income or losses that could materially affect our future financial results. If the market value of our inventory decreased to 10% below its carrying value as of January 1, 2011, it would have affected earnings before income taxes by approximately $6.2 million.

 

Accounting for Internal Use Software

 

Included in our property and equipment is the capitalized cost of internal-use software development and webstore development, including software used to upgrade and enhance the webstores we operate and processes supporting our business. We capitalize costs incurred during the application development stage related to the development of internal-use software and amortize these costs over the estimated useful life of up to four years. Costs incurred related to planning and training relating to or maintenance of internal-use software is expensed as incurred. We capitalized $52.7 million, $29.9 million and $26.2 million, of costs associated with internal-use software and webstore development during fiscal years 2010, 2009 and 2008, respectively. We depreciated $30.0 million, $21.1 million and $16.5 million of previously capitalized amounts in fiscal 2010, fiscal 2009 and fiscal 2008, respectively.

 

Changes in strategy and/or market conditions could significantly impact the remaining useful life and/or the carrying value of our internal-use software and webstore development costs. We use estimates and make assumptions to determine the related estimated useful lives and assess the carrying value of internal-use software and webstore development costs. If our judgments or estimates regarding internal use software are inaccurate and we were to reduce the useful life of our internal use software, we may be exposed to losses, including impairment losses that could be material to our future financial results.

Goodwill and Other Intangible Assets

 

The purchase price of an acquired company is allocated between the intangible assets and net tangible assets of the acquired business with the residual of the purchase price recorded as goodwill. The determination of the value of the intangible assets acquired involves certain judgments and estimates. These judgments can include, but are not limited to, the cash flows that an asset is expected to generate in the future and the appropriate risk adjusted discount rate for market participants.

 

Goodwill and indefinite — lived intangible assets are tested for impairment on an annual basis, or more often if events or changes in circumstances indicate the carrying value may not be recoverable. Application of the impairment test requires judgment, including the identification of reporting units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units, and determining the fair value of each reporting unit. We determine fair value using widely accepted valuation techniques, including, but limited to, the income approach which estimates the fair value of our reporting units based on the future discounted cash flows, and the market approach which estimates the fair value of our reporting units based on comparable market prices. These types of analyses contain assumptions and uncertainties because they require management to apply judgment to estimate industry economic factors and the profitability of future business strategies. The estimate of cash flow is based upon, among other things, certain assumptions about expected future operating performance and an appropriate discount rate determined by management. Our estimates of discounted cash flows may differ from actual cash flows due to, among other things, economic conditions, changes to our business model or changes in operating performance. Significant differences between these estimates and actual cash flows could materially affect our future financial results.

 

In our fiscal 2010 annual impairment test, we concluded that goodwill was impaired in both our Rue La La reporting unit and our International e-Commerce reporting unit. As a result, we recorded a goodwill impairment charge of $77.7 million comprised of $71.3 million impairment in our Rue La La reporting unit to reduce the carrying value of goodwill from $172.9 million to its implied fair value of $101.6 million, and $6.4 million impairment in our international e-commerce reporting unit to reduce the carrying value of goodwill from $6.4 million to is implied fair value of $0. The valuation methodology applied in the current year impairment test was consistent with the methodology applied in prior year analysis, and based on updated assumptions, as appropriate. The impairment was due to a decline in our projected cash flows for each of the two reporting units.

 

Finite-lived intangible assets that have determinable useful lives are tested for impairment whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. If an evaluation of the undiscounted future cash flows indicates impairment, the asset is written down to its estimated fair value. Our estimates of future cash flows attributable to our intangible assets require significant judgment based on our historical and anticipated results and are subject to many factors. Different assumptions and judgments, including the expected use of the asset by the Company, could materially affect the calculation of the fair value of our finite intangible assets which could trigger impairment.

 

In fiscal 2010, we concluded that the supplier relationship finite-lived intangible asset in our Rue La La reporting unit and the customer contract finite-lived intangible asset in our International e-Commerce reporting unit were impaired due to declines in projected cash flows for both reporting units. As a result, we recorded an impairment charge of $10.6 million comprised of $10.2 million to reduce the carrying value of the Rue La La supplier contract intangible to $0, and $0.4 million to reduce the carrying value of the International e-Commerce customer contract intangible to $0. The valuation methodology applied was consistent with the methodology applied in the prior year.

 

Income Taxes and Deferred Taxes

 

Our income tax benefit or expense, deferred tax assets and liabilities and reserves for uncertain tax positions reflect management’s best assessment of estimated current and future taxes to be paid. We are subject to income taxes in both the U.S. and in several foreign jurisdictions. Significant judgments and estimates are required in determining the consolidated income tax benefit or expense.

 

Deferred income taxes reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. We record deferred

tax assets for favorable tax attributes, including tax loss carryforwards. A portion of the benefit of the acquired tax loss carryforwards has been reserved by a valuation allowance pursuant to U.S. GAAP. These valuation allowances of the deferred tax asset will be reversed if and when it is more likely than not that the deferred tax asset will be realized. We evaluate the need for a valuation allowance of the deferred tax asset on a quarterly basis. Any future release of valuation allowance will reduce income tax expense.

 

If our assumptions change and we determine we will not be able to realize these NOL’s without a valuation allowance, the additional valuation allowance will be accounted for as an increase in income tax expense and could materially affect our future financial results.

 

In accordance with accounting standards for accounting for uncertainty in income taxes, income tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recorded to the financial statement. The standards also provide guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

 

Fair Value of Deferred Acquisition Payments

 

Deferred acquisition payments represent future payments to the selling shareholders of acquired companies that are either fixed amounts payable at a specified future date based solely on the passage of time or contingent payments based on the achievement of specified earnings and/or other financial performance thresholds by the acquired companies over one or more years. The determination of the fair value of our contingent deferred acquisition payments involves certain judgments and estimates. These judgments can include, but are not limited to, an estimate of the future performance of our acquired entities, an estimate of the amount and timing of the deferred acquisition payments and the discount rate used to calculate the fair value of the payments. We utilize a discounted cash flow model that incorporates several different scenarios of future performance.

 

We assess the fair value of deferred acquisition payments for changes at each reporting period, and any changes are recorded as an increase or decrease to changes in fair value of deferred acquisition payments on the Consolidated Statements of Operations. Changes in fair value can result from changes in our assumptions regarding the amount and timing of payments as well as changes in the discount rate. Our estimates of future performance and payments may differ from actual performance and payments due to, among other things, economic conditions, changes to our business model, or changes in operating performance of the acquired entities. Significant differences between these estimates and actual performance could materially affect the fair value of the deferred acquisition payments and our future financial results.

 

Recent Accounting Pronouncements

 

See Note 2, Summary of Significant Accounting Policies, to our consolidated financial statements included in Item 15, Exhibits and Financial Statement Schedules, of this Annual Report on Form 10-K.

 

 

Our investment policy is to earn a market return consistent with the safety of principal and the maintenance of adequate liquidity at all times. We have not used derivative financial instruments in our investment portfolio. Approved investments include direct obligations of the U.S. Treasury, securities explicitly backed by the full faith and credit of the U.S. Government, money market mutual funds, so long as such funds maintain a constant net asset value and provide daily liquidity, and bank deposits. We protect and preserve our invested funds by limiting default, market and reinvestment risk.

 

Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates or it may suffer losses in principal if we are forced to sell securities which have declined in market value due to changes in interest rates.

 

As of the end of fiscal 2010, all of our cash consisted of bank deposits.

In March 2010, we amended and expanded our existing secured revolving bank credit facility (“Existing Credit Facility”) to $150 million. The Existing Credit Facility matures in March 2013 and provides for the issuance of up to $30 million of letters of credit, which is included in the $150 million available under the Existing Credit Facility. The Existing Credit Facility is collateralized by substantially all of our assets. We may elect to have amounts outstanding under the credit facilities bear interest at either a LIBOR rate plus an applicable margin of 2.0% to 3.25%, the prime rate plus an applicable margin of 2.0% to 3.25%, Daily LIBOR plus 1.0% plus an applicable margin of 2.0% to 3.25%, or at the Federal Funds Open Rate plus 0.5% plus an applicable margin of 2.0% to 3.25%. The applicable margin is determined by the leverage ratio of funded debt to EBITDA, as defined in the credit facility. We had no outstanding borrowings and $1.8 million of outstanding letters of credit under the Existing Credit Facility as of January 1, 2011.

 

We have entered into a new credit agreement providing for a $285 million revolving credit facility and a $115 million term loan facility, with the option to increase the commitments under these facilities by up to an additional $50 million to a total of $450 million (the “New Credit Facility”). The New Credit Facility becomes effective if our acquisition of Fanatics, Inc. closes on or before May 10, 2011. For additional information, see Note 17, Subsequent Events, of the Notes to Consolidated Financial Statements, included in Item 15, Exhibits and Financial Statement Schedules, of this Annual Report on Form 10-K.

 

We transact business internationally and have market risk arising from changes in foreign currency exchange rates relating to our international operations. We do not manage our foreign currency exchange rate risk through the use of any financial or derivative instruments, forward contracts or hedging activities. To date, international operations have not been material and we believe that potential fluctuations in currency exchange rates will not have a material effect on our financial position.

 

 

Our financial statements, supplementary data and related documents that are included in this Annual Report on Form 10-K are listed in Item 15(a), Part IV, of this Annual Report on Form 10-K.

 

 

Not applicable.

 

 

Evaluation of disclosure controls and procedures.  We maintain disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and accumulated and communicated to our management, including our chief executive officer and chief financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

Our management, with the participation of our chief executive officer and our chief financial officer, conducted an evaluation, as of the end of the period covered by this report, of the effectiveness of our disclosure controls and procedures, as such term is defined in Exchange Act Rule 13a-15(e). Based on this evaluation, our chief executive officer and our chief financial officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures, as defined in Rule 13a-15(e), were effective at the reasonable assurance level.

 

Changes in internal control over financial reporting.  We monitor and evaluate on an ongoing basis our internal control over financial reporting in order to improve its overall effectiveness. In the course of these evaluations, we modify and refine our internal processes and controls as conditions warrant. As required by Rule 13a-15(d), our management, including our chief executive officer and our chief financial officer, also conducted an evaluation of our internal control over financial reporting to determine whether any changes occurred during the fiscal quarter ended January 1, 2011 that have materially affected, or are reasonably likely to materially

affect, our internal control over financial reporting. Based on that evaluation, there has been no such change during the quarter ended January 1, 2011.

 

Management’s annual report on internal control over financial reporting.  Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements due to human error, or the improper circumvention or overriding of internal controls. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions and that the degree of compliance with the policies or procedures may change over time.

 

Our management, with the participation of our chief executive officer and our chief financial officer, conducted an evaluation, as of January 1, 2011, of the effectiveness of our internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation under the framework in Internal Control — Integrated Framework, our management concluded that, as of January 1, 2011, our internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

 

Our independent registered public accounting firm, Deloitte & Touche LLP, has issued an attestation report on our internal control over financial reporting. Their report appears below.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of

GSI Commerce, Inc.

King of Prussia, Pennsylvania

 

We have audited the internal control over financial reporting of GSI Commerce, Inc. and subsidiaries (the “Company”) as of January 1, 2011, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring

 

Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 1, 2011, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the fiscal year ended January 1, 2011 of the Company and our report dated March 1, 2011 expressed an unqualified opinion on those financial statements and financial statement schedule.

 

 

Philadelphia, Pennsylvania

March 1, 2011

 

Not applicable