As filed with the Securities and Exchange
Commission on July 7, 2011
No. 333-173668
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
Amendment No. 2
to
Form S-1
REGISTRATION
STATEMENT
UNDER
THE
SECURITIES ACT OF 1933
Bluestem
Brands, Inc.
(Exact
name of registrant as specified in its charter)
|
|
|
|
|
Delaware
|
|
5961
|
|
61-1425164
|
(State or other jurisdiction
of
incorporation or organization)
|
|
(Primary Standard Industrial
Classification Code Number)
|
|
(I.R.S. Employer
Identification No.)
|
6509
Flying Cloud Drive
Eden
Prairie, Minnesota 55344
(952) 656-3700
(Address,
including zip code, and telephone number,
including
area code, of registrants principal executive
offices)
Brian A.
Smith
Chief
Executive Officer
Bluestem
Brands, Inc.
6509
Flying Cloud Drive
Eden
Prairie, Minnesota 55344
(952) 656-3700
(Name,
address, including zip code, and telephone number,
including
area code, of agent for service)
Copies
of all communications, including communications sent to agent
for service, should be sent to:
|
|
|
David B. Miller, Esq.
Erik J. Romslo, Esq.
Faegre & Benson LLP
90 South Seventh Street
Minneapolis, Minnesota 55402
(612) 766-7000
|
|
David Lopez, Esq.
Cleary Gottlieb Steen & Hamilton LLP
One Liberty Plaza
New York, NY 10006
(212) 225-2000
|
Approximate
date of commencement of proposed sale to the
public: As
soon as practicable after this Registration Statement becomes
effective.
If any of
the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under
the Securities Act, check the following
box: o
If this Form
is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check
the following box and list the Securities Act registration
statement number of the earlier effective registration statement
for the same
offering. o
If this Form
is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the
Securities act registration statement number of the earlier
effective registration statement for the same
offering. o
If this Form
is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier
effective registration statement for the same
offering. o
Indicate by
check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of large
accelerated filer, accelerated filer and
smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
|
|
|
|
Large
accelerated
filer o
|
Accelerated
filer o
|
Non-accelerated
filer þ
|
Smaller reporting
company o
|
(Do
not check if a smaller reporting company)
CALCULATION
OF REGISTRATION FEE
|
|
|
|
|
|
|
|
|
|
Proposed
Maximum
|
|
|
Amount
of
|
Title of
Each Class of
|
|
|
Aggregate
|
|
|
Registration
|
Securities
to be Registered
|
|
|
Offering
Price (1)(2)
|
|
|
Fee (2)
|
Common Stock, $0.00001 par value per share
|
|
|
$150,000,000
|
|
|
$17,415(3)
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Includes
shares of common stock that the underwriters may purchase from
us and from the selling stockholders
|
|
(2)
|
|
Estimated
solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) under the Securities Act of 1933, as
amended
|
|
(3)
|
|
Previously
Paid
|
The
Registrant hereby amends this Registration Statement on such
date or dates as may be necessary to delay its effective date
until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933, as amended, or until this
Registration Statement shall become effective on such date as
the Securities and Exchange Commission, acting pursuant to said
Section 8(a), may determine.
The
information in this preliminary prospectus is not complete and
may be changed. We may not sell these securities until the
registration statement filed with the Securities and Exchange
Commission is effective. This preliminary prospectus is not an
offer to sell these securities and we are not soliciting an
offer to buy these securities in any state where the offer or
sale is not permitted.
|
Subject
to Completion, Dated July 7, 2011
Bluestem Brands,
Inc.
This is the initial public offering of shares of common stock of
Bluestem Brands, Inc. We are
offering shares
of our common stock and the selling stockholders are
offering shares
of common stock. We will not receive any proceeds from the sale
of shares by the selling stockholders. The estimated initial
public offering price is between $
and $ per share. We expect to
apply for listing of our common stock on the NASDAQ Global
Select Market under the symbol BSTM.
Investing in our common stock involves risk. See Risk
Factors beginning on page 12.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or passed upon the adequacy or accuracy of this
prospectus. Any representation to the contrary is a criminal
offense.
|
|
|
|
|
|
|
|
|
|
|
Per share
|
|
Total
|
|
Initial public offering price
|
|
$
|
|
|
|
$
|
|
|
Underwriting discounts and commissions
|
|
$
|
|
|
|
$
|
|
|
Proceeds to Bluestem, before expenses
|
|
$
|
|
|
|
$
|
|
|
Proceeds to selling stockholders, before expenses
|
|
$
|
|
|
|
$
|
|
|
We have granted the underwriters an option for a period of
30 days to purchase up to additional shares of common stock.
The underwriters expect to deliver the shares on or
about ,
2011.
|
|
Deutsche
Bank Securities |
Piper Jaffray |
|
|
Oppenheimer &
Co. |
William Blair & Company |
The date of this prospectus
is ,
2011.
Bluestem brands, inc.
Now you can
FiNGERHUT. Gettington.com |
TABLE OF
CONTENTS
|
|
|
|
|
Prospectus Summary
|
|
|
1
|
|
Risk Factors
|
|
|
12
|
|
Forward Looking Statements
|
|
|
38
|
|
Use of Proceeds
|
|
|
40
|
|
Dividend Policy
|
|
|
41
|
|
Capitalization
|
|
|
42
|
|
Dilution
|
|
|
45
|
|
Selected Consolidated Financial and Other Data
|
|
|
47
|
|
Managements Discussion and Analysis of Financial Condition
and Results of Operations
|
|
|
53
|
|
Business
|
|
|
98
|
|
Management
|
|
|
117
|
|
Executive Compensation
|
|
|
127
|
|
Principal and Selling Stockholders
|
|
|
151
|
|
Certain Relationships and Related Party Transactions
|
|
|
155
|
|
Description of Capital Stock
|
|
|
164
|
|
Shares Eligible for Future Sale
|
|
|
171
|
|
Material U.S. Federal Income and Estate Tax Considerations to
Non-U.S.
Holders
|
|
|
174
|
|
Underwriting
|
|
|
178
|
|
Conflict of Interest
|
|
|
180
|
|
Market and Industry Data
|
|
|
182
|
|
Legal Matters
|
|
|
182
|
|
Experts
|
|
|
182
|
|
Where You Can Find More Information
|
|
|
182
|
|
Index to Financial Information
|
|
|
F-1
|
|
We are responsible for the information contained in this
prospectus and in any related free writing prospectus we prepare
or authorize. Neither we nor the selling stockholders have
authorized anyone to give you any other information, and neither
we nor the selling stockholders take any responsibility for any
other information that others may give you. We and the selling
stockholders are offering to sell, and seeking offers to buy,
shares of our common stock only in jurisdictions where such
offers and sales are permitted. The information in this
prospectus or a free writing prospectus is accurate only as of
its date, regardless of its time of delivery or the time of any
sale of shares of our common stock. Our business, financial
condition, results of operations and prospects may have changed
since that date.
i
ABOUT THIS
PROSPECTUS
Certain differences in the numbers in the tables and text
throughout this prospectus may exist due to rounding.
We use a typical retail 52 or 53 week fiscal year ending on
the Friday closest to January 31st of each year.
Fiscal years are identified in this prospectus according to the
calendar year in which the fiscal year begins. For example,
references to 2010, fiscal 2010,
fiscal year 2010 or similar references refer to the
fiscal year ended January 28, 2011.
Except as otherwise indicated, all share and per share
information referenced throughout this prospectus has been
adjusted to reflect
a
for 1 reverse stock split of our common stock that became
effective
on ,
2011.
TRADEMARKS AND
TRADE NAMES
This prospectus includes our trademarks such as
Fingerhut®,
Gettington.com®,
and Fingerhut
FreshStartsm,
which are protected under applicable intellectual property laws
and are the property of Bluestem Brands, Inc. or its
subsidiaries. Solely for convenience, trademarks and trade names
referred to in this prospectus may appear without the
®,
sm
ortm
symbols, but such references are not intended to indicate, in
any way, that we will not assert, to the fullest extent under
applicable law, our rights or the right of the applicable
licensor to these trademarks and trade names. This prospectus
also contains trademarks, service marks, trade names and
copyrights of other companies, which are the property of their
respective owners. Such trademarks and trade names may also
appear without the
®,
sm
ortm
symbols.
ii
PROSPECTUS
SUMMARY
This summary highlights information contained elsewhere in
this prospectus. This summary is a brief overview of the key
aspects of this offering and does not contain all of the
information that you should consider in making your investment
decision. You should read the following summary together with
the entire prospectus, including the more detailed information
regarding us, the common stock being sold in this offering and
our financial statements and the related notes appearing
elsewhere in this prospectus. You should carefully consider,
among other things, the matters discussed in the sections
entitled Risk Factors and Managements
Discussion and Analysis of Financial Condition and Results of
Operations in this prospectus before deciding to invest in
our common stock. Some of the statements in this prospectus
constitute forward looking statements. See Forward Looking
Statements.
Company
Overview
We are a leading national multi-brand, multi-channel retailer of
a broad selection of name brand and private label general
merchandise which we sell through our Fingerhut and
Gettington.com brands to low to middle income consumers. We
estimate that our target customer demographic represents
approximately 100 million consumers, or approximately
one-third of the U.S. population. Our customers rely on the
credit products we offer to pay over time for their purchases
from us.
We market our merchandise to our existing and prospective
customers through multi-channel marketing strategies and
proprietary targeted marketing and credit decision-making tools.
Very few retailers today combine the sale of general merchandise
with customized credit products. We believe that the breadth of
the merchandise and the flexibility and convenience of the
credit products we offer, combined with our high level of
customer service, create value for our customers and promote
loyalty, as demonstrated by our high customer repurchase rate of
approximately 57% during 2010.
The Fingerhut brand has provided customers with extensive
branded, non-branded and private label general merchandise
selections, and monthly payment plans, for over 60 years.
Historically, catalogs have been the primary source of orders
for Fingerhut, although customers are increasingly making
purchases online. We launched Gettington.com in 2009 as an
alternative
e-commerce
brand targeting a slightly younger, more
e-commerce
focused customer. Overall, online orders accounted for 44% of
our total orders during 2010, compared to 25% in 2005.
We offer an extensive assortment of general merchandise
including hundreds of well recognized name brands such as
Columbia, Dyson, Fisher-Price, KitchenAid, Skechers and Sony, as
well as targeted, high quality private label offerings under our
own brands, including Chefs Mark, LifeMax, Master Craft,
McLeland Designs, Outdoor Spirit and Super Chef. We continuously
tailor our merchandise across three key product categories:
|
|
|
|
|
Homeincluding housewares, bed and bath, lawn and
garden, home furnishings and hardware;
|
|
|
|
Entertainmentincluding electronics, video games,
toys and sporting goods; and
|
|
|
|
Fashionincluding apparel, footwear, cosmetics,
fragrances and jewelry.
|
In fiscal year 2010, we had net sales of $521 million
versus $438 million in fiscal 2009, an increase of 19%.
Adjusted EBITDA grew 23% over the same period, from
$64 million to $78 million. Net income before loss
from derivatives in our own equity grew 34%, from
$16 million to $21 million, while GAAP net income
declined from $9.2 million in fiscal 2009 to a loss of
$11.5 million in fiscal 2010, due to increases in the value
of the conversion feature of our preferred stock and the value
of our common stock warrants. Additionally, new customer
acquisitions increased over that same period from 439,000 to
599,000, a 36% increase, and
1
average order size grew 8%, from $166 to $180. For a discussion
of the non-GAAP measures Adjusted EBITDA and net income before
loss from derivatives in our own equity, and reconciliations to
net income, see notes (i) and (j) to Selected
Consolidated Financial and Other Data.
Our
History
Founded in 1948, the Fingerhut brand stands for offering
customers a wide assortment of high quality general merchandise
and flexible monthly payment plans. Our company, Bluestem
Brands, Inc., formerly named Fingerhut Direct Marketing, Inc.,
was established in 2002 when we acquired certain assets of
Fingerhut Companies, Inc., from FAC Acquisition LLC, which had
acquired the assets from Federated Department Stores, Inc.
Industry
Overview
We participate in the general merchandise segment of the
retailing industry and sell through complementary catalog and
e-commerce
channels.
General MerchandiseAccording to the
U.S. Census Bureau, this segment generated
$610.3 billion of sales in 2010, representing 14% of total
U.S. retail sales and a 2.9% compounded annual growth rate
from $527.9 billion of sales in 2005.
CatalogThe catalog retailing industry
consists of retail goods purchased via mail order, catalog and
other media channels. This sector generated $132.7 billion
of U.S. sales in 2010 according to IBISWorld.
E-commerceAccording
to Forrester Research, U.S. online retail sales were
$176.2 billion in 2010 and are expected to grow to
$278.9 billion in 2015, representing a 9.6% compounded
annual growth rate. In addition, Forrester predicts that online
retail sales will grow from 8% of total retail sales in 2010 to
11% of total retail sales by 2015.
Our Target
Market
Our target market is low to middle income, credit constrained
consumers with FICO scores between 500 and 700. Based on an
Equifax report provided in March 2011, the estimated size of the
U.S. population with FICO scores between 500 and 700 was
approximately 100 million. Within this group, we target a
subset of low to middle income consumers, which we define as
those with an annual household income below $75,000. Consumers
with household incomes below $75,000 represented approximately
68% of all U.S. consumers in 2009, according to the
U.S. Census Bureau.
Our Competitive
Strengths
We believe we have a number of competitive strengths that
distinguish us from our competitors and that are key to our
continuing success. These include:
Highly
Recognized Brand with Significant Customer Loyalty
By consistently marketing our distinct combination of leading
general merchandise brands with targeted credit offers to low to
middle income consumers, Fingerhut has become a highly
recognized brand garnering significant customer loyalty. We
believe our focus on providing timely, relevant offers using our
targeted marketing capabilities, a user-friendly customer order
process and transparent credit offers instills trust and helps
build positive customer relationships.
2
Expertise in
Serving a Niche Customer Segment
We have developed significant expertise in serving low to middle
income, credit constrained consumers by exclusively focusing on
the specific needs of this customer segment. We have a deep
understanding of our customers merchandise preferences and
utilize our extensive marketing experience to develop a tailored
message to attract their attention.
Integrated and
Differentiated Business Model
We have created a differentiated business model by combining our
direct marketing and credit decision-making expertise to offer
integrated general merchandise and credit products across
multiple channels. We believe only a few companies integrate
these functions as well as we do or with the same level of
success in the low to middle income demographic.
Sophisticated,
Proprietary Marketing and Credit Decision-Making
Technologies
We have developed sophisticated prospect and customer databases
that support our ability to successfully offer, through third
party financial institutions, credit to low to middle income,
credit constrained consumers. Our technology enables us to make
credit decisions utilizing the latest customer behavior
information, and allows us to make real time underwriting
decisions, at the point of sale. We believe we acquire, convert
and retain customers in an efficient and cost effective manner
while maintaining a high level of risk management.
Established
Multi-Channel Platform
We have created and developed Internet marketing strategies and
web order channels in order to capitalize on the growing
e-commerce
market and complement our catalog direct marketing expertise.
Our online customer orders have increased from 25% of total
orders placed in 2005 to 44% in 2010. Our internal data
indicates that our catalogs reinforce our Internet marketing
channels, as many customers respond to our catalogs by shopping
and ordering merchandise on the Fingerhut.com and Gettington.com
websites.
Highly
Experienced Management Team
We believe that the breadth and experience of our executive team
is extremely valuable in driving the success of our
multi-faceted business. Our executive team members have prior
experience with large organizations and collectively have
significant analytical experience as it pertains to running
retail and credit businesses. Our executive officers have an
average of 22 years of experience with leading retail,
finance and technology companies.
Our Growth
Strategy
We expect to grow our sales and profits through a multi-pronged
approach that leverages our expertise in serving our target
market. Key elements of our growth strategy include:
Increasing
Penetration with Existing and Prospective
Customers
We intend to increase sales by proactively identifying new
customer prospects that are best suited for our combined
merchandise and credit offerings. We consistently update and
test our marketing messages to optimize our marketing
effectiveness. Furthermore, we will continue to refresh our
merchandise offerings, which we believe attracts new customers
and drives repeat existing customer purchases.
3
Increasing
Internet Penetration
Our Internet marketing efforts allow us to reach existing and
prospective customers in a cost efficient manner. As our current
catalog customers become increasingly comfortable shopping
online, we expect to continue to evolve into a more web-centric
model and realize cost savings through a reduction in catalogs
and other print marketing materials. Since 2008, we have
consistently been ranked as a top 100 Internet retailer based on
online sales by Internet Retailer.
Expanding Our
Demographic Reach
We are committed to expanding our reach to prospective customers
who we believe will benefit from our merchandise and credit
offerings. As an example, we have developed robust marketing and
servicing capabilities targeting the Spanish speaking
sub-population
of our target market.
Growing
Gettington.com and Continuing to Introduce New
Concepts
In 2009, we launched Gettington.com as a complementary brand to
Fingerhut, targeting a slightly younger, more
e-commerce
focused customer. This target customer base possesses a higher
average credit score than the typical Fingerhut customer and
seeks a wide assortment of on-trend brands and items.
Gettington.com offers more competitive price points and credit
options than the Fingerhut brand, which makes it more appealing
to this customer segment. Going forward, we intend to introduce
additional new concepts that target low to middle income
consumers while utilizing our existing infrastructure, business
intelligence and technological capabilities.
Introducing
New Credit Offerings
We intend to continue to develop new credit products with the
goal of capturing additional consumer segments while further
solidifying relationships with existing customers. As a recent
example, we introduced Fingerhut FreshStart in 2010, which is
designed to offer customers, otherwise unable to qualify for
revolving credit, the alternative of purchasing merchandise on
installment credit terms. We believe this and other new
financing options that we may introduce will drive sales and
profitable growth as well as enhance customer loyalty.
Risk
Factors
We are subject to a number of risks, including risks that may
prevent us from achieving our business objectives or may
adversely affect our business, financial condition, results of
operations, cash flows and prospects. You should carefully
consider all of the information set forth in this prospectus
and, in particular, the specific risks set forth under the
heading Risk Factors, beginning on page 12 of
this prospectus, before investing in our common stock. Risks
relating to our business include, among others:
|
|
|
|
|
our dependence on the two financial institutions that make
credit available to our customers;
|
|
|
|
regulatory risks faced by us and these financial institutions in
connection with the extension of credit to our customers;
|
|
|
|
taxation of Internet and catalog based
out-of-state
sales, and the imposition on us of associated obligations;
|
|
|
|
our ability to retain and attract customers and increase sales;
|
4
|
|
|
|
|
the dependence of our customers, who are generally low to middle
income, on credit to make purchases from us;
|
|
|
|
weak economic conditions, economic uncertainty and lower
consumer confidence and discretionary spending;
|
|
|
|
unanticipated delinquencies and losses in our customer accounts
receivable portfolio;
|
|
|
|
our ability to comply with, and successfully operate our
business under, the covenants in our credit facilities;
|
|
|
|
changes in laws and regulations, or the application of existing
laws and regulations to our business;
|
|
|
|
competition from other retailers and lenders; and
|
|
|
|
significant ownership of our voting stock and potential for
control by our principal existing stockholders.
|
Corporate and
Other Information
Our principal executive office is located at 6509 Flying Cloud
Drive, Eden Prairie, Minnesota 55344, and our telephone number
at that address is
(952) 656-3700.
Our website is located at www.bluestembrands.com. The
information on our website is not part of this prospectus.
5
The
Offering
|
|
|
Common stock offered by us |
|
shares |
|
Common Stock offered by the selling stockholders |
|
shares |
|
Common stock to be outstanding immediately after this offering |
|
shares |
|
Over-allotment option |
|
We have granted the underwriters an option to purchase up to an
additional shares
of common stock within 30 days of the date of this
prospectus in order to cover over-allotments, if any. |
|
Offering price |
|
We expect the offering price to be between
$
and
$
per share. |
|
Use of Proceeds |
|
We estimate that the net proceeds to us from this offering,
after deducting underwriting discounts and commissions and
estimated offering expenses payable by us, will be approximately
$ million,
assuming the shares are offered at
$
per share, the midpoint of the price range set forth on the
cover of this prospectus. We intend to use the net proceeds from
the sale of common stock by us in this offering to retire long
term indebtedness plus accrued and unpaid interest and
prepayment penalties thereon, and the balance of net proceeds to
reduce the outstanding balance under the revolving credit
tranche of our account receivable credit facility. See Use
of Proceeds and Capitalization. |
|
|
|
We will not receive proceeds from the sale of shares by the
selling stockholders. |
|
Conflict of Interest |
|
Because an affiliate of one of the underwriters of this offering
is also a lender under the revolving credit tranche of our
account receivable credit facility, and because more than 5% of
the proceeds of this offering will be used to repay the share of
the revolving credit tranche of the account receivable facility
attributable to such underwriters affiliate, a conflict of
interest under FINRA Rule 5121 is deemed to exist.
Accordingly, this offering will be conducted in accordance with
that rule and Piper Jaffray & Co. will act as
qualified independent underwriter for this offering. |
|
Dividend Policy |
|
Following the consummation of the offering, we do not expect to
pay any dividends on our common stock for the foreseeable
future. Any determination to pay dividends and other
distributions in cash, stock or property of Bluestem will be at
the discretion of our board of directors and will be dependent
on
then-existing
conditions, including our financial condition and results of
operations, contractual restrictions, capital requirements and
other factors. See Dividend Policy. |
6
|
|
|
Risk Factors |
|
Investing in our common stock involves a high degree of risk.
See Risk Factors beginning on page 12 of this
prospectus for a discussion of factors you should carefully
consider before deciding to invest in our common stock. |
|
Proposed symbol for trading on the NASDAQ Global Select Market |
|
BSTM |
The number of shares of common stock outstanding after this
offering excludes, as
of ,
2011:
|
|
|
|
|
shares
of our common stock issuable upon exercise of outstanding
options under our 2003 Equity Incentive Plan, which we refer to
herein as the 2003 Plan, at a weighted average exercise price of
$
per share;
|
|
|
|
shares
of our common stock issuable upon exercise of outstanding
options under our Amended and Restated 2005 Non-Employee
Directors Equity Compensation Plan, which we refer to herein as
the 2005 Plan, at a weighted average exercise price of
$
per share;
|
|
|
|
shares
of our common stock issuable upon exercise of outstanding
options under our 2008 Equity Incentive Plan, which we refer to
herein as the 2008 Plan, at a weighted average exercise price of
$
per share;
|
|
|
|
shares
of our common stock reserved for future grants under our 2008
Plan; and
|
|
|
|
shares
of our common stock issuable upon exercise of outstanding
warrants having a weighted average exercise price of
$
per share, and an
additional shares
of common stock that will become issuable upon exercise of
outstanding warrants upon completion of this offering as an
anti-dilution adjustment due to the payment of accrued and
unpaid dividends on our preferred stock in the form of shares of
common stock.
|
Except as otherwise indicated, all information in this
prospectus assumes:
|
|
|
|
|
no exercise of the underwriters over-allotment option to
purchase an
additional shares;
|
|
|
|
all outstanding shares of our two series of preferred stock will
convert into shares of common stock upon the closing of this
offering;
|
|
|
|
no outstanding options or warrants have been exercised or
forfeited
since ,
2011; and
|
|
|
|
all of the accrued and unpaid dividends payable to our preferred
stockholders will be paid in common stock on an assumed
conversion date
of ,
2011. Dividends accrue on our outstanding preferred stock at an
aggregate rate of
$
per day and will continue to accrue until the conversion date,
which is the closing date of this offering. For this purpose,
common stock is valued based on the price to the public set
forth on the cover page of this prospectus, less the
underwriting discount. Based on the midpoint of the range set
forth on the cover page of this prospectus, the price to the
public is assumed to
be ,
the discount of the underwriters is assumed to
be ,
the accrued and unpaid preferred stock dividends on the assumed
conversion date are assumed to
be ,
and the number of shares of common stock to be issued in
satisfaction of accrued and unpaid dividends is assumed to
be .
|
7
SUMMARY
CONSOLIDATED FINANCIAL AND OTHER DATA
The following tables sets forth our summary consolidated
financial and other data for the periods and at the dates
indicated. The statement of operations data for each of the
years in the three-year period ended January 28, 2011, and
the balance sheet data as of January 28, 2011 and
January 29, 2010, have been derived from our audited
consolidated financial statements included elsewhere in this
prospectus. The statement of operations data for the
13 weeks ended April 30, 2010 and April 29, 2011
and the balance sheet data as of April 29, 2011 have been
derived from our unaudited consolidated financial statements
which are included elsewhere in this prospectus. The unaudited
consolidated financial statements have been prepared on the same
basis as our audited consolidated financial statements and, in
the opinion of our management, reflect all adjustments
consisting of normal recurring adjustments, necessary for a fair
presentation of this data. The consolidated financial and other
data as of and for the 13 weeks ended April 29, 2011
are not necessarily indicative of the results that may be
obtained for a full year.
The following tables also set forth summary consolidated pro
forma data, which give effect to the events described in
footnote (g) to the following table. The consolidated pro
forma data have been derived from pro forma data included in our
consolidated financial statements included elsewhere in this
prospectus.
The historical results presented below are not necessarily
indicative of the results to be expected for any future period.
The consolidated pro forma financial data are unaudited and are
presented for informational purposes only and do not purport to
represent what our financial position actually would have been
had the events so described occurred on the dates indicated or
to project our financial position as of any future date. This
information should be read in conjunction with Risk
Factors, Use of Proceeds,
Capitalization, Selected Consolidated
Financial and Other Data, Managements
Discussion and Analysis of Financial Condition and Results of
Operations, and our consolidated financial statements and
the related notes included elsewhere in this prospectus.
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended (a)
|
|
|
13 Weeks Ended (a)
|
|
|
|
January 30,
|
|
|
January 29,
|
|
|
January 28,
|
|
|
April 30,
|
|
|
April 29,
|
|
|
|
2009
|
|
|
2010 (b)
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
|
(in thousands, except per share data)
|
|
|
Consolidated Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
423,338
|
|
|
$
|
438,189
|
|
|
$
|
521,307
|
|
|
$
|
87,106
|
|
|
$
|
99,206
|
|
Cost of sales
|
|
|
220,294
|
|
|
|
226,140
|
|
|
|
275,521
|
|
|
|
44,944
|
|
|
|
51,755
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
203,044
|
|
|
|
212,049
|
|
|
|
245,786
|
|
|
|
42,162
|
|
|
|
47,451
|
|
Sales and marketing expenses
|
|
|
110,404
|
|
|
|
109,384
|
|
|
|
130,091
|
|
|
|
23,706
|
|
|
|
24,761
|
|
Net credit expense (income) (c)
|
|
|
1,105
|
|
|
|
(22,316
|
)
|
|
|
(36,896
|
)
|
|
|
(11,156
|
)
|
|
|
(14,444
|
)
|
General and administrative expenses
|
|
|
59,533
|
|
|
|
69,087
|
|
|
|
84,031
|
|
|
|
18,225
|
|
|
|
20,906
|
|
Loss from derivatives in our own equity (d)
|
|
|
|
|
|
|
6,500
|
|
|
|
32,607
|
|
|
|
|
|
|
|
14,944
|
|
Loss on early extinguishment of debt (e)
|
|
|
|
|
|
|
|
|
|
|
5,109
|
|
|
|
|
|
|
|
|
|
Interest expense, net (f)
|
|
|
29,839
|
|
|
|
31,216
|
|
|
|
30,750
|
|
|
|
8,173
|
|
|
|
7,395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
2,163
|
|
|
|
18,178
|
|
|
|
94
|
|
|
|
3,214
|
|
|
|
(6,111
|
)
|
Income tax expense (benefit)
|
|
|
828
|
|
|
|
8,956
|
|
|
|
11,618
|
|
|
|
1,175
|
|
|
|
3,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
1,335
|
|
|
|
9,222
|
|
|
|
(11,524
|
)
|
|
|
2,039
|
|
|
|
(9,267
|
)
|
Series B Preferred Stock accretion
|
|
|
(2,399
|
)
|
|
|
(3,491
|
)
|
|
|
(3,710
|
)
|
|
|
(887
|
)
|
|
|
(931
|
)
|
Series A Preferred Stock accretion
|
|
|
(8,890
|
)
|
|
|
(9,111
|
)
|
|
|
(9,824
|
)
|
|
|
(2,412
|
)
|
|
|
(2,603
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common shareholders
|
|
$
|
(9,954
|
)
|
|
$
|
(3,380
|
)
|
|
$
|
(25,058
|
)
|
|
$
|
(1,260
|
)
|
|
$
|
(12,801
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of pro forma adjustments (g):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from derivatives in our own equity
|
|
|
|
|
|
|
|
|
|
$
|
30,012
|
|
|
|
|
|
|
$
|
13,738
|
|
Series B Preferred Stock accretion
|
|
|
|
|
|
|
|
|
|
|
3,710
|
|
|
|
|
|
|
|
931
|
|
Series A Preferred Stock accretion
|
|
|
|
|
|
|
|
|
|
|
9,824
|
|
|
|
|
|
|
|
2,603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders, pro forma (g)
|
|
|
|
|
|
|
|
|
|
$
|
18,488
|
|
|
|
|
|
|
$
|
4,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma income per share (g)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of April 29, 2011 (a)(h)
|
|
|
|
|
|
|
|
|
|
Pro Forma,
|
|
|
|
Actual
|
|
|
Pro Forma
|
|
|
As Adjusted
|
|
|
|
(in thousands)
|
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
306
|
|
|
$
|
306
|
|
|
$
|
|
|
Customer accounts receivable (net of allowance for doubtful
accounts)
|
|
|
455,298
|
|
|
|
455,298
|
|
|
|
|
|
Merchandise inventories
|
|
|
51,447
|
|
|
|
51,447
|
|
|
|
|
|
Total assets
|
|
|
585,960
|
|
|
|
585,960
|
|
|
|
|
|
Derivative liabilities in our own equity (d)
|
|
|
58,225
|
|
|
|
7,975
|
|
|
|
|
|
Total debt
|
|
|
304,322
|
|
|
|
304,322
|
|
|
|
|
|
Series B and Series A Preferred Stock
|
|
|
201,573
|
|
|
|
|
|
|
|
|
|
Shareholders (deficit) equity
|
|
|
(64,679
|
)
|
|
|
187,144
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended (a)
|
|
|
13 Weeks Ended (a)
|
|
|
|
January 30,
|
|
|
January 29,
|
|
|
January 28,
|
|
|
April 30,
|
|
|
April 29,
|
|
|
|
2009
|
|
|
2010 (b)
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
|
(in thousands, except average order size)
|
|
|
Selected Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New customer credit accounts (i)
|
|
|
430
|
|
|
|
439
|
|
|
|
599
|
|
|
|
90
|
|
|
|
143
|
|
Average order size (j)
|
|
$
|
161.61
|
|
|
$
|
166.30
|
|
|
$
|
179.51
|
|
|
$
|
168.91
|
|
|
$
|
177.05
|
|
Number of orders (k)
|
|
|
2,708
|
|
|
|
2,728
|
|
|
|
2,985
|
|
|
|
529
|
|
|
|
573
|
|
Contribution Margin (l)
|
|
$
|
91,535
|
|
|
$
|
124,981
|
|
|
$
|
152,591
|
|
|
$
|
29,612
|
|
|
$
|
37,134
|
|
Net income before loss from derivatives in our own
equity (l)
|
|
$
|
1,335
|
|
|
$
|
15,722
|
|
|
$
|
21,083
|
|
|
$
|
2,039
|
|
|
$
|
5,677
|
|
Adjusted EBITDA (l)
|
|
$
|
41,009
|
|
|
$
|
63,784
|
|
|
$
|
78,416
|
|
|
$
|
13,450
|
|
|
$
|
19,056
|
|
As a % of net sales
|
|
|
9.7
|
%
|
|
|
14.6
|
%
|
|
|
15.0
|
%
|
|
|
15.4
|
%
|
|
|
19.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Credit Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance charge and fee income as a % of average customer
accounts receivable (m)
|
|
|
32.1
|
%
|
|
|
32.7
|
%
|
|
|
32.9
|
%
|
|
|
32.8
|
%
|
|
|
35.6
|
%
|
Net charge-offs as a % of average customer accounts
receivable (m)
|
|
|
22.0
|
%
|
|
|
19.5
|
%
|
|
|
16.1
|
%
|
|
|
15.7
|
%
|
|
|
13.2
|
%
|
Balances 30+ days delinquent as a % of customer accounts
receivable (n)
|
|
|
16.5
|
%
|
|
|
14.5
|
%
|
|
|
13.2
|
%
|
|
|
13.9
|
%
|
|
|
14.3
|
%
|
|
|
(a)
|
Our fiscal year ends on the Friday closest to
January 31st
of each year, resulting in fiscal years of 52 or 53 weeks
in length. Fiscal 2008, 2009 and 2010 are presented above as
52-week fiscal years ended January 30, 2009,
January 29, 2010 and January 28, 2011, respectively.
Our first fiscal quarter of fiscal year 2011 and fiscal year
2010 included 13 weeks.
|
|
(b)
|
Includes the effects of the restatement of our 2009 financial
statements discussed in Note 14 to the consolidated
financial statements.
|
|
(c)
|
Our net credit expense (income) consists of finance charge and
fee income, less the provision for doubtful accounts and credit
management costs.
|
|
|
(d) |
We have derivative liabilities relating to certain of our common
stock warrants, preferred stock warrants, embedded derivatives
in preferred stock, and a contingent fee agreement. These
derivative liabilities are recorded at their estimated fair
value at each balance sheet date. Changes in fair value are
reflected in the consolidated statement of operations as gains
or losses from derivatives in our own equity as described in the
notes to the consolidated financial statements.
|
|
|
(e)
|
On August 20, 2010, we entered into our $365 million
A/R Credit Facility. The proceeds were used to prepay our Senior
Secured Revolving Credit Facility due May 15, 2011. We
accounted for our prepayment as an extinguishment and recognized
a $5.1 million pre-tax loss on early extinguishment of debt.
|
|
(f)
|
Interest expense, net includes interest income of
$0.6 million, $0.1 million, zero, zero, and zero for
the fiscal years ended January 30, 2009, January 29,
2010, January 28, 2011, and the 13 weeks ended
April 30, 2010, and April 29, 2011, respectively.
|
|
(g)
|
Pro forma net income available to common shareholders and pro
forma basic and diluted net income per share reflect the
following events as if they had occurred on January 30,
2010, or January 29, 2011:
|
|
|
|
|
|
the conversion of all outstanding shares of our preferred stock
into shares of our common stock upon the closing of this
offering;
|
|
|
|
the payment of the accrued and unpaid dividends payable to our
preferred stockholders upon conversion of their shares of
preferred stock into shares of our common stock in the form of
additional shares of common stock on the closing of this
offering;
|
|
|
|
the lapse of certain anti-dilution rights of the holders of the
216,045,882 common stock warrants issued May 2008;
|
10
|
|
|
|
|
the termination of a contingent fee agreement; and
|
|
|
|
the issuance of additional common stock warrants as an
anti-dilution adjustment due to the payment of accrued and
unpaid dividends on our preferred stock in the form of common
stock.
|
|
|
(h) |
The consolidated balance sheet data as of April 29, 2011 is
presented:
|
|
|
|
|
|
on an actual basis;
|
|
|
|
on a pro forma basis to reflect the following events as if they
had occurred on April 29, 2011:
|
|
|
|
|
|
the conversion of all outstanding shares of our preferred stock
into shares of our common stock upon the closing of this
offering;
|
|
|
|
the payment of the accrued and unpaid dividends payable to our
preferred stockholders upon conversion of their shares of
preferred stock into shares of our common stock in the form of
additional shares of common stock on the closing of this
offering;
|
|
|
|
the lapse of certain anti-dilution rights of the holders of the
216,045,882 common stock warrants issued May 2008;
|
|
|
|
the termination of a contingent fee agreement; and
|
|
|
|
the issuance of additional common stock warrants as an
anti-dilution adjustment due to the payment of accrued and
unpaid dividends on our preferred stock in the form of common
stock.
|
|
|
|
|
|
on a pro forma, as adjusted basis to reflect the following
events as if they had occurred on April 29, 2011:
|
|
|
|
|
|
the sale
of shares
of our common stock in this offering by us at an assumed initial
public offering price of
$
per share, the midpoint of the price range set forth on the
cover of this prospectus, less estimated underwriting discounts
and commissions and estimated offering expenses payable by
us; and
|
|
|
|
the ultimate application of the net proceeds from this offering
to retire our $30 million Senior Subordinated Secured
Notes, plus accrued and unpaid interest, the $75 million
Term Loan Tranche of our A/R Credit Facility, plus prepayment
penalties of $1.5 million and accrued and unpaid interest
(assuming for these purposes that the Term Loan Tranche was
prepayable immediately upon closing of this offering,
notwithstanding the fact that it cannot be prepaid until
August 21, 2011) and, with all remaining proceeds,
outstanding borrowings under the Revolving Credit Tranche of our
A/R Credit Facility.
|
A $1.00 increase (decrease) in the assumed offering price of
$
per share, which is the mid-point of the range set forth on the
cover page of this prospectus, would increase (decrease) each of
total assets, total debt, and stockholders equity by
$ ,
assuming the number of shares offered by us, as set forth on the
cover page of this prospectus, remains the same, and after
deducting estimated underwriting discounts and commissions and
estimated offering expenses payable by us. Similarly, if we
change the number of shares offered by us, the net proceeds we
receive will increase or decrease by the increase or decrease in
the number of shares sold, multiplied by the offering price per
share, less the underwriting discount payable by us. At
April 29, 2011, we had availability under our A/R Credit
Facility of $40.3 million and under our Inventory Line of
Credit of $7.7 million. See Managements
Discussion and Analysis of Financial Condition and Results of
OperationsLiquidity and Capital Resources for
details on these facilities, including borrowing base
limitations thereunder.
|
|
(i)
|
Customers that have made their initial order on account during
the fiscal period presented.
|
|
(j)
|
Average order size represents retail merchandise sales including
shipping and handling revenue divided by the number of
merchandise orders fulfilled during the fiscal period presented.
|
|
(k)
|
Number of fulfilled merchandise orders.
|
|
(l)
|
To supplement our consolidated financial statements which are
presented in accordance with U.S. generally accepted
accounting principles, or GAAP, we use Contribution Margin, net
income before loss from derivatives in our own equity and
Adjusted EBITDA as non-GAAP performance measures. See
notes (h), (i) and (j) to Selected Consolidated
Financial and Other Data for details on these non-GAAP
financial measures.
|
|
(m)
|
Finance charge and fee income and net charge-offs each as a
percentage of average customer accounts receivable for the
13 weeks ended April 30, 2010 and April 29, 2011
have been annualized to a comparable 52-week basis.
|
|
(n)
|
Delinquent balances as of the customers statement cycle
dates prior to or on fiscal period end as a percentage of total
customer accounts receivable as of the customers statement
cycle dates prior to or on fiscal period end.
|
11
RISK
FACTORS
This offering and an investment in our common stock involve a
high degree of risk. You should consider carefully the risks
described below, together with the financial and other
information contained in this prospectus, before you decide to
purchase shares of our common stock. If any of the following
risks actually occurs, our business, financial condition,
results of operations, cash flow and prospects could be
materially and adversely affected. As a result, the trading
price of our common stock could decline and you could lose all
or part of your investment in our common stock.
Risks Related to
the Operation of Our Business
Substantially
all of our sales are made on credit, and we are dependent upon
the availability of third party financial institutions to issue
credit accounts to our customers; recent developments involving
credit offerings unrelated to Bluestem have resulted in
regulatory actions directed at these financial
institutions.
We have agreements with MetaBank and WebBank, which we refer to
herein as the Credit Issuers, that permit our
customers to establish credit accounts that may be used
exclusively to purchase our products and services. Approximately
95% of our sales are financed by credit extended through the
Credit Issuers, and therefore we are dependent on the Credit
Issuers. Under our agreements with the Credit Issuers, we are
responsible for applying the Credit Issuers underwriting
criteria and on-going administration of the credit programs. In
that regard, we are required to process all applications,
determine whether the Credit Issuers eligibility criteria
are satisfied and perform certain administrative, processing and
collection services. We are also required to purchase from the
Credit Issuers our customers loan receivables after a
contractual holding period, generally one or two business days.
If we fail to perform these obligations or otherwise are in
default under our agreements with the Credit Issuers, they can,
among other things, terminate our agreements and stop lending to
our customers.
The Credit Issuers are themselves exposed to liquidity,
financial, operating and regulatory risks that may adversely
affect their ability to fulfill their obligations to us and to
meet our needs, particularly issuing credit accounts to our
customers at levels necessary to operate our business profitably
or to grow our business, and to meet the needs of our customers.
These risks are especially acute in the current difficult
business environment for financial institutions in general.
Should the Credit Issuers refuse, become unable, limit
availability or otherwise cease to provide credit to some or all
of our customers, we may not be able to find replacements for
the Credit Issuers. This is complicated by the very small pool
of financial institutions which we believe might be able and
willing to meet the credit needs of our customers. Because we do
not have a bank charter, our ability to extend credit, other
than through agreements with the Credit Issuers, is limited
unless we were to become licensed in certain states. If we are
unable to extend or execute new agreements with the Credit
Issuers at the expiration of our current agreements with them,
or if our existing or new agreements with our Credit Issuers
were terminated or otherwise disrupted, there is a risk that we
would not be able to enter into agreements with an alternate
provider on terms that we consider favorable or in a timely
manner without disruption of our business.
The foregoing risks are heightened by recent regulatory actions
concerning certain of the Credit Issuers credit offerings,
including supervisory directives issued to MetaBank by the
Office of Thrift Supervision, or OTS, and a consent order issued
to WebBank by the Federal Deposit Insurance Corporation, or
FDIC. Neither of these actions relates to the credit offerings
made available to our customers through the Credit Issuers.
However, the OTS directives require MetaBank to obtain prior
written approval of the OTS before entering into any new
agreements concerning any credit or deposit product, or
materially amending any such
12
existing agreements. This could adversely affect our ability to
amend our agreements with MetaBank or, should we desire to do
so, establish new credit programs through MetaBank. In addition,
the OTS, FDIC
and/or
another federal or state regulator may take additional actions
to address these or other matters with respect to the Credit
Issuers, and we cannot predict the effect any such actions might
have on our relationships with the Credit Issuers or the
applicable Credit Issuers results of operations, financial
condition or effectiveness in serving as one of our Credit
Issuers. The recent regulatory actions faced by the Credit
Issuers are described in more detail under
BusinessGovernment RegulationRecent
Developments for the Credit Issuers.
Our credit operations currently are dependent on our Credit
Issuer relationships, and their regulators could at any time
limit their ability to issue some or all products on our behalf,
or that we service on their behalf, or modify those products
significantly. Any significant interruption of those
relationships could result in our being unable to originate new
receivables and other credit products for a period of time. It
is possible that a regulatory position or action taken with
respect to either of the Credit Issuers might result in the
Credit Issuers inability or unwillingness to originate
future credit products on our behalf or in partnership with us.
Any of the above adverse events, including our failure to
perform under or termination of agreements with our Credit
Issuers, adverse regulatory actions, or interruption of our
relationship with our Credit Issuers could materially and
adversely impact our business and results of operations.
Commercial
credit provided by external financing sources is crucial to our
business operations; loss of commercial borrowing capacity or
increases in our cost of capital would jeopardize our
business.
The funding of receivables purchased from the Credit Issuers,
the purchase of inventory and the cost of distributing catalogs
and instituting other marketing efforts are capital intensive.
We rely upon external financing sources to fund these
operations. We pledge the customer accounts receivable that we
purchase from the Credit Issuers as collateral for our
$365 million account receivable credit facility with
various financial institutions. We refer to this facility as the
A/R Credit Facility, and to the lenders thereunder
as our Receivables Lenders. We use advances from the
A/R Credit Facility to fund our liquidity needs pending
collection of the customer accounts receivable purchased from
the Credit Issuers. We also have a $50 million credit
facility with various lenders that is secured by our inventory.
We refer to this facility as the Inventory Line of
Credit. It is imperative that commercial credit be
available to us on a daily and revolving basis at acceptable
terms.
The availability, cost and use of funding under our credit
facilities are subject to a number of risks:
|
|
|
|
|
The amount of credit available to us under our credit facilities
is subject to borrowing base limitations. See
Managements Discussion and Analysis of Financial
Condition and Results of OperationsLiquidity and Capital
ResourcesAccounts Receivable Credit Facility and
Inventory Line of Credit. The amount and
performance of our customer accounts receivable are key
components of the borrowing base formula under the A/R Credit
Facility. If the receivables do not perform within the
parameters required under the A/R Credit Facility or if we are
in default of our agreements with the Credit Issuers, our
Receivable Lenders may reduce the amount of financing to
purchase receivables from Credit Issuers or terminate the A/R
Credit Facility, which could have a negative impact on net
sales. The Inventory Line of Credit has a borrowing base formula
tied to the value of our inventory. Deterioration in the value
of our inventory due to lack of consumer
|
13
|
|
|
|
|
demand, overstock, obsolescence or other factors could restrict
the availability of funding for additional merchandise inventory
and have a negative impact on net sales.
|
|
|
|
|
|
Our credit facilities have financial covenants tied to our
financial performance, the performance of the receivables and
our liquidity. If there is deterioration in the performance of
the receivables portfolio or in our financial condition, or if
we breach the representations, warranties or covenants that we
make in the agreements governing our credit arrangements, our
creditors will have the right to refuse to extend additional
credit to us and to accelerate the repayment of our debts.
Further, if our Receivables Lenders refuse or fail to make new
advances to us for any reason, we will be unable to purchase the
receivables from the Credit Issuers, which will cause defaults
under our receivables purchase agreements with the Credit
Issuers. If we default under our receivables purchase
agreements, the Credit Issuers may refuse to extend new credit
to our customers which will prevent our customers from making
new purchases from us.
|
|
|
|
Additional covenants under our credit facilities restrict our
ability to incur additional indebtedness, pay dividends, make
investments, sell assets and amend our agreements with the
Credit Issuers or enter into similar agreements with other
consumer lenders without the consent of the lenders. A failure
by us to comply with these covenants could result in an event of
default. Such covenants could also adversely affect our ability
to respond to changes in our business, to manage our business
and to grow our business.
|
|
|
|
|
|
The Revolving Credit Tranche of our A/R Credit Facility and our
Inventory Line of Credit each have a variable interest rate
based on LIBOR plus an applicable spread. An increase in the
variable rate under our credit facilities could adversely affect
our financial performance, in particular because the revolving
credit accounts that our customers establish provide for fixed
interest rates. See Managements Discussion and
Analysis of Financial Condition and Results of
OperationsLiquidity and Capital
ResourcesQuantitative and Qualitative Disclosure about
Market RiskInterest Rate Risk.
|
|
|
|
|
|
Servicing our debt requires a significant amount of cash. Our
ability to generate sufficient cash depends on sales, the
availability of credit to finance such sales, the availability
of credit to fund the resulting receivables and the collection
of those receivables. We may not be successful in managing these
critical cash drivers, which are affected by a variety of
factors, many of which are beyond our control, and we may be
unable to generate sufficient cash flow to service our debt
obligations. Additionally, our debt level could make us more
vulnerable than our competitors, many of whom have greater
financial resources.
|
In the event that we become unable to meet our obligations under
our credit facilities, we may be required to seek waivers of
events of default from our lenders or amendment of our credit
facilities or, in the absence of waivers, amendment or cure, we
may be required to refinance all or a part of our existing
indebtedness, incur additional indebtedness, reduce credit
available to our customers or sell assets. The terms of existing
or future debt agreements may restrict our ability to take these
actions. In 2008, under a predecessor to our current A/R Credit
Facility, we were compelled to obtain a waiver for a single
covenant default arising from performance of customer
receivables and ultimately to replace that credit facility. In
addition, when each of our existing credit facilities expires in
August 2013, we will likely need to seek replacement financing.
In any such case, replacement financing may be unavailable to us
or available only on more expensive or restrictive terms. A
number of factors such as our financial results and condition,
changes within our company, disruptions in the capital markets,
especially as they relate to asset based lending and
securitization, our corporate and regulatory structure, interest
rate fluctuations, general economic conditions and accounting
and regulatory changes could make such financing more difficult
or impossible to
14
obtain or more expensive. The loss or material reduction of
available financing, or any material increase in the cost of
such financing would materially and adversely affect our ability
to support the purchase by our customers of our merchandise with
credit provided by the Credit Issuers, our ability to purchase
inventory to sell to our customers, our ability to meet our cash
flow needs, and our results of operations.
Our agreements
with the Credit Issuers obligate us to bear many of the risks
related to making credit available to our customers, including
those associated with various federal and state laws and
regulations governing credit extensions to consumers, and our
failure to comply with applicable laws and regulations, and any
adverse changes in those laws or regulations could have a
negative impact on our business.
Our operations, and the operations of the Credit Issuers, are or
may be subject to the jurisdiction of federal, state and local
government authorities, including the Consumer Financial
Protection Bureau, which we refer to herein as the Bureau, the
SEC, the FDIC, the Office of the Comptroller of the Currency,
the FTC, state regulators having jurisdiction over financial
institutions and debt origination and collection and state
attorneys general. Because we act as a service provider to the
Credit Issuers, our business practices, including the terms of
our marketing, servicing and collection practices, may be
subject to both periodic and special reviews by these regulatory
and enforcement authorities. These reviews could range from
investigations of specific consumer complaints or concerns to
broader inquiries into our practices generally. If as part of
these reviews the regulatory authorities conclude that we are
not complying with applicable law, they could request or impose
a wide range of remedies including requiring changes in
advertising and collection practices, changes in the terms of
our products (such as decreases in interest rates or fees), the
imposition of fines or penalties, or the paying of restitution
or the taking of other remedial action with respect to affected
customers. They also could require us to stop offering some of
our products, either nationally or in selected states.
To the extent that these remedies are imposed on the Credit
Issuers, under certain circumstances we are responsible for the
remedies as a result of our indemnification obligations with the
Credit Issuers. We also may elect to change practices or
products that we believe are compliant with law in order to
respond to regulatory concerns. Furthermore, negative publicity
relating to any specific inquiry or investigation could hurt our
ability to conduct business with various industry participants
or to attract new accounts and could negatively affect our stock
price, which would adversely affect our ability to raise
additional capital and would raise our costs of doing business.
If any deficiencies or violations of law or regulations are
identified by us or asserted by any regulator, or if any
regulator requires us to change any of our practices, the
correction of such deficiencies or violations, or the making of
such changes, could have a material adverse effect on our
financial condition, results of operations or business. We face
the risk that restrictions or limitations resulting from the
enactment, change, or interpretation of laws and regulations
could negatively affect our business activities or effectively
eliminate some of the credit products currently offered to our
customers. In addition, whether or not we modify our practices
when a regulatory or enforcement authority requests or requires
that we do so, there is a risk that we or other industry
participants may be named as defendants in litigation involving
alleged violations of federal and state laws and regulations,
including consumer protection laws. Any failure to comply with
legal requirements by us or the Credit Issuers in connection
with the issuance of those products, or by us or our agents as
the servicer of our accounts, could significantly impair our
ability to collect the full amount of the account balances. The
institution of any litigation of this nature, or any judgment
against us or any other industry participant in any litigation
of this nature, could adversely affect our business and
financial condition in a variety of ways.
15
We have agreed to perform many functions related to making
credit available to our customers under our agreements with the
Credit Issuers, subject to the oversight of the Credit Issuers
and their regulators, including maintaining compliance with
certain applicable laws, sourcing prospective borrowers,
applying the Credit Issuers underwriting criteria for new
applicants, setting up account files and maintaining
bookkeeping. As a result, we may be liable to the Credit
Issuers, or our agreements with them may be subject to
termination, in the case of violations of such laws. Moreover,
our dependence on the Credit Issuers exposes us to the risks
related to the failure by the Credit Issuers to materially
comply with legal or regulatory requirements.
Consumer credit protection laws and regulations regularly
undergo significant changes. These changes can have significant
effects, some of which may be materially adverse, on our product
offerings and results of operations. For example, the Credit
Card Accountability Responsibility and Disclosure Act of 2009,
or the CARD Act, required lenders, including the Credit Issuers,
to make fundamental changes to many aspects of their open-end
credit business practices, including marketing, underwriting,
pricing and billing. Among other things, the CARD Act limited
several practices and required new credit disclosures to
consumers in connection with open-end credit accounts. The CARD
Act also provides consumers with the right to opt out of certain
interest rate increases and other significant changes to account
terms.
The Dodd-Frank Wall Street Reform and Consumer Protection Act,
or the Dodd-Frank Act, enacted in July 2010, authorized the
creation of the Bureau. The Bureau is authorized to regulate
consumer financial products and services, enforce compliance
with federal consumer financial laws and ensure that markets for
such products and services are fair, transparent and
competitive. The Bureau is empowered to investigate and
respond to complaints related to consumer financial products and
services, and to monitor markets for such products and services
to identify consumer risks. We cannot currently predict whether
the Bureau will impose additional regulations that could affect
the credit products offered by us and the Credit Issuers.
However, if the Bureau were to promulgate regulations that
adversely impact these credit products, such regulations could
have a material adverse effect on our business, prospects,
results of operations and financial condition. Other changes in
the Dodd-Frank Act may also affect our business. For example,
the Dodd-Frank Act established a new preemption standard of
state consumer protection laws applicable to national banks and
thrifts, including MetaBank. In addition, MetaBank will be
subject to a new federal regulator, the Office of the
Comptroller of the Currency, when the OTS is eliminated in July
2011. While the full scope of the Dodd-Frank Acts
implications are not fully known, we anticipate that new or more
onerous requirements will apply to the Credit Issuers and to us.
We are not
licensed to extend credit and rely on the Credit Issuers to
extend credit to our customers, and a successful challenge to
our arrangements with the Credit Issuers could result in a
requirement to be licensed as a creditor in states in which we
do business, unenforceability of the receivables purchased from
the Credit Issuers, material modification or termination of our
relationships with the Credit Issuers, discontinuance of our
marketing activity or other adverse changes in our current
business practices.
The laws of many states require entities that engage in consumer
credit related activities to be licensed and, in some cases,
examined by state regulators. National banks and other federally
or state chartered financial institutions are generally not
subject to such state laws except, in the case of state
chartered banks, for laws of the state in which they are
chartered. Further, federal law allows the Credit Issuers, and
other similar chartered financial institutions, to extend credit
without complying with many state laws, often referred to as
preemption,
16
including rate and fee limitations of states other than those
from which the Credit Issuers extend credit.
We are not a chartered financial institution nor are we licensed
to extend credit to our customers in any state. Accordingly, we
rely on the Credit Issuers to extend credit to customers so that
we do not have to obtain licenses and to facilitate uniform
lending terms and practices nationwide. Several lawsuits against
other entities have brought under scrutiny the association
between certain loan marketers and banks. These lawsuits have
alleged, in some cases successfully, that the loan marketers
establish deceptive relationships with banks to conceal the
marketers roles as lenders so that loan marketers do not
have to comply with state laws addressing licensing, credit
terms, rates, disclosure, collection practices and other
consumer protection requirements where they do business.
Although we believe that our relationships are distinguishable
from those involved in these cases, additional state consumer
protection laws would be applicable to us if, as a result of
lawsuits of the type described above, we were deemed a lender.
In that event, the receivables purchased from the Credit Issuers
could be voidable or unenforceable, and we could be subject to
other penalties. In addition, we or the Credit Issuers could be
subject to enforcement actions and penalties by regulators or
state attorneys general, and we could be forced to discontinue
the manner in which our customers currently obtain credit,
materially modify or terminate our relationships with the Credit
Issuers, materially modify rates, fees and other terms of credit
extended to our customers, or be required to register or obtain
licenses or regulatory approvals in those states in which we do
business. These actions could force us to restructure aspects of
our business, which would impose a substantial cost and
compliance burden on us and, if we did not have sufficient lead
time to accomplish this, could interrupt our ability to make
sales. Any of the actions described above could have a material
adverse effect on our business and our financial results.
We do not
collect state sales, use or other taxes, which could subject us
to liability for past sales and any imposition of an obligation
to do so in the future could negatively impact our financial
results.
We do not collect sales, use, or other state or local taxes on
sales of goods shipped to customers located in states other than
Minnesota, which is the only state in which we have employees,
facilities and inventory. We interpret existing judicial rulings
to prohibit states in which we are not physically present, and
local tax jurisdictions located in such states, from imposing
upon us a requirement to collect sales and use taxes. If our
interpretation is not correct, or if legislation or future
judicial rulings alter the law, including bills currently
pending in the U.S. Congress, then we could be required to
collect sales and use taxes in the future from all customers. In
some cases such obligations could be retroactive, as in the case
of North Carolina, discussed below. Currently, our customers may
be obligated to file a use tax return and pay use tax on taxable
purchases of items that we sell when we do not collect the tax.
However, it may often be the case that use tax returns are not
filed. Thus, if we were required to collect the tax, our
customers might perceive the tax to be in the nature of a price
increase, which would negatively impact our sales. In that case,
we may also become less competitive with retailers that
currently are collecting sales and use taxes, depending on their
base pricing levels. Since customer spending is constrained by
credit availability, funds spent on taxes are otherwise
unavailable for making purchases. Consequently, sales related
tax impositions can directly and adversely impact revenues.
Collecting the tax would also impose additional administrative
burdens on us.
Some states have enacted, and other states may be considering,
legislation requiring us to notify our customers of their
possible use tax liability and provide the state with
information about customer purchases. We have not fully complied
with such laws and could face adverse consequences as a result
of such noncompliance. Some states have enacted, and other
states
17
may be considering, legislation requiring the collection of
sales and use taxes from customers if a seller has commission
agreements with Internet advertisers located in the state. We
have terminated our relationships with Internet advertisers
located in the states that have enacted such laws, including
North Carolina, which is discussed in more detail below. If
other states adopt similar laws, we may decide to terminate our
Internet advertisers in those states as well. Such terminations
could harm our business by reducing our advertising on the
Internet.
In 2009, a statutory amendment to North Carolina law became
effective which required the collection of sales tax from
customers if a seller has commission agreements with Internet
advertisers located in that state. However, the North Carolina
Department of Revenue has announced its position that such
statutory amendment was a clarification of prior law, and
therefore applies to prior periods. The department is conducting
an examination of our transactions with North Carolina customers
for the period August 1, 2003, through March 31, 2010.
We believe the departments position is incorrect, but we
could be liable for substantial sales taxes, penalties, and
interest if the departments position is sustained. We have
not accrued in our financial statements for this or any other
potential sales or use tax liability. There is also a
possibility that other states might assess sales and use taxes
against us for prior tax periods.
Our sales are
highly dependent on consumer discretionary
spending.
The extent to which our customers can engage in discretionary
spending has a very significant impact on our net sales and
results of operations. This is particularly true for us since
many of our customers have low to middle income and most of the
purchases made from us could be considered discretionary in
nature. Most factors affecting discretionary spending are beyond
our control, including unfavorable general business conditions,
increases in gas and energy prices, higher interest rates and
inflation. Consumer debt levels, the availability of consumer
credit, increased taxation, adverse unemployment trends,
declining consumer confidence, war, terrorism or fears of war or
terrorism are further examples. Increased borrowing costs due to
adverse mortgage rate adjustments, credit card liability or
other debt service obligations also reduce available consumer
discretionary spending. Further deterioration in economic
conditions or increasing unemployment levels, or consumer
concerns over future employment levels, may continue to reduce
the level of consumer spending and inhibit consumers use
of credit, which may adversely affect our business, our
financial condition and our results of operations.
Our customer
base is largely comprised of low to middle income consumers, who
depend on the credit arranged through us to purchase our
products, are sensitive to changes in economic conditions and
present significant risk of default for
non-payment
and collection of accounts receivable acquired by
us.
Our customer base is largely comprised of low to middle income
consumers that utilize the proprietary credit products that we
market to purchase our products. Our customers are at greater
risk for credit delinquency and default. See
Managements Discussion and Analysis of Financial
Condition and Results of OperationsCustomer Accounts
Receivable Asset Quality and
ManagementDelinquencies. We purchase on a daily
basis all loans made by the Credit Issuers to our customers and,
as a result, we bear the risk of non-payment or slow payment by
our customers.
The nature of our customer base makes it sensitive to adverse
economic conditions such as those experienced since 2007. These
conditions may make our customers less likely to make purchases
on credit, or less likely to meet our prevailing underwriting
standards, which may be more restrictive in an adverse economic
environment. As a result, during such periods we may experience
decreases in the growth of new customers and limit the
availability of credit to existing customers, which may
adversely affect our net sales and Contribution Margin.
18
In this regard, during the last half of 2007 through the first
half of 2009, we refocused our efforts away from growing net
sales and acquiring large numbers of new customers to, among
other things, improving the overall credit quality of our
customer accounts receivable and maintaining profitability and
liquidity. Net sales decreased from $448.5 million in 2007
to $423.3 million in 2008 and $438.2 million in 2009
and new customer credit accounts decreased from 700,000 in 2007
to 430,000 in 2008 and 439,000 in 2009. During this period,
Contribution Margin decreased from $97.3 million in 2007 to
$91.5 million in 2008 and increased to $125.0 million
in 2009. See note (h) to Selected Consolidated
Financial and Other Data for a discussion of Contribution
Margin and reconciliation to net income.
We rely on
internal models to manage risk, to provide accounting estimates
and to make other business decisions. Our results could be
adversely affected if those models do not provide reliable
estimates or predictions of future activity.
The accurate modeling of risks is critical to our business,
particularly with respect to managing underwriting and credit
extension on behalf of the Credit Issuers. Our expectations
regarding response rates, customer repayment levels, as well as
our allowances for doubtful accounts and other accounting
estimates, are based in large part on internal modeling. We also
rely heavily on internal models in making a variety of other
decisions crucial to the successful operation of our business.
It is therefore important that our models are accurate, and any
failure in this regard could have a material adverse effect on
our results.
Models are inherently imperfect predictors of actual results
because they are based on historical data available to us and
our assumptions about factors such as credit demand, payment
rates, default rates, delinquency rates and other factors that
may overstate or understate future experience. Our models could
produce unreliable results for a number of reasons, including
the limitations of historical data to predict results due to
unprecedented events or circumstances, invalid or incorrect
assumptions underlying the models, the need for manual
adjustments in response to rapid changes in economic conditions,
incorrect coding of the models, incorrect data being used by the
models or inappropriate application of a model to products or
events outside of the models intended use. In particular,
models are less dependable when the economic environment is
outside of historical experience, as has been the case recently.
Due to the factors described above and in
Managements Discussion and Analysis of Financial
Condition and Results of Operations and elsewhere in this
prospectus, we may, among other things, experience actual
charge-offs that exceed our estimates and possibly are greater
than our allowance for doubtful accounts or require material
adjustments to the allowance. Unanticipated and excessive
default and charge-off experience can adversely affect our
profitability and financial condition, breach covenants in our
credit facilities, limit availability of credit under our A/R
Credit Facility and adversely affect our ability to finance our
business.
New
initiatives, adding new customers and an evolving business model
are important to our growth strategy and may not be
successful.
We have limited experience introducing new brands, entering new
markets and introducing new credit products or services.
Consequently, whenever we attempt new projects there is no
assurance of success, if any, or of our ability to recoup our
investments. Recently, we launched the Gettington.com brand,
began offering a total Spanish language experience to
Fingerhuts Spanish speaking customers, and began offering
installment credit under Fingerhut FreshStart, where our
customers make an initial down payment on their purchase.
Profitability, if any, in these new activities may be lower than
in our existing business. Any failure of new initiatives could
damage our reputation, limit our growth and adversely affect our
operating results.
19
To grow our business we will seek to acquire new customers. The
costs of acquiring new customers are frequently not
recovered until the second year that accounts are active. Newer
customers also present a higher risk of delinquency and default
than established accounts. As a result, we anticipate an
increase in historical levels of delinquency and default rates
as we grow our new customer base. If we fail to appropriately
manage the customer acquisition costs, default and collection
risks associated with our growing base of new customers, it
could have significant adverse effects on our business and
results of operations.
In addition, while our catalogs continue to comprise a
significant sales driver of our merchandise, we have an evolving
business model. In particular, we have increased and will seek
to continue to increase the proportion of our net sales that
come through the Internet. However, we may not be successful in
our efforts to grow Internet sales, and our actions taken in
furtherance of this goal could negatively impact our catalog
sales and have other adverse effects on our business and results
of operation.
The introduction of new credit products may also require the
Credit Issuers and us to comply with additional regulatory and
licensing requirements. These requirements may entail additional
investment of time and capital, including additional marketing
expenses, legal costs and other incremental
start-up
costs. Any failure to comply with applicable regulations could
result in fines, suspensions, or legal actions against the
Credit Issuers
and/or us
and could have a material adverse effect on our business,
prospects, results of operations, and financial condition. Our
failure to offer new products in an efficient manner, or low
customer demand for any of these new products, could have a
material adverse effect on our business, prospects, results of
operations and financial condition.
We face
intense competition.
The general merchandise retail industry is highly competitive.
We have many competitors, including traditional retailers,
catalog merchants and
e-commerce
services. Credit card issuers, banks and consumer credit
agencies also compete with us for consumer lending that is
critical to our customer base. Many of our competitors have
greater resources and brand recognition than we do. Their more
significant purchasing power and higher efficiency may permit
them to offer products at more attractive prices and credit
terms to customers. In addition, competition may intensify if
our competitors target our historical customer base.
Few traditional retailers combine merchandising with convenient
consumer access to non-traditional consumer credit in the way we
do. The entry of such a competitor, particularly if it had
significant resources and name recognition, could have a
material adverse effect on our business.
Any easing by other lenders in general purpose and private label
credit card underwriting standards for low to middle income
consumers could adversely impact our net sales and profitability
in several ways. It would increase credit offers by third
parties to our current and prospective consumers, thereby
expanding their access to available credit and reducing the
effectiveness of our distinctive business model. It would also
increase the direct mailing by others to our customers,
affecting our catalog response rate and reducing our marketing
efficiency. It could also cause adverse selection for the
individuals applying for credit through us. For example, lower
risk credit customers might not respond to our offers in the
same proportion as higher risk credit customers. Finally, more
freely available credit to consumers generally can result in
higher overall consumer leverage which impacts their ability to
pay for debt incurred in their purchases from us.
The lack of traditional brick and mortar storefronts places us
at a disadvantage compared to some of our competitors. Some
consumers prefer locations where they can view and handle
products, make comparisons, make payments and rely on the input
of store personnel. Physical storefronts are also preferred by
individuals without established banking relationships
20
that rely on a cash based economy, as is the case for many of
our target customers. This is particularly true where cultural
preferences extend to cash based commerce.
Changes in
regulations or customer concerns, in particular as they relate
to privacy and protection of customer data, could adversely
affect our business.
We are subject to laws relating to the collection, use,
retention, security and transfer of personally identifiable
information about our customers. The interpretation and
application of privacy and customer data protection laws are in
a state of flux and may vary from jurisdiction to jurisdiction.
These laws may be interpreted and applied inconsistently and our
current data protection policies and practices may not be
consistent with those interpretations and applications.
Complying with these varying requirements could cause us to
incur substantial costs or require us to change our business
practices in a manner adverse to our business. In addition,
some jurisdictions are considering imposing additional
restrictions. For example, in December 2010, the Obama
administration proposed giving Americans a privacy bill of
rights that would regulate the commercial collection of
consumer data online, and the creation of a federal privacy
policy office that would coordinate online privacy issues in the
U.S. and abroad. We cannot predict the outcomes of these
initiatives.
Continued access to credit, demographic, purchasing and other
information is critical to us, both to identify new customer
prospects and to structure marketing efforts encouraging repeat
business by existing customers. We identify prospective
customers in various ways and rely heavily on a confidential and
proprietary database that contains customer and purchasing
information. By sharing portions of this data with third parties
we can obtain additional prospect information in exchange,
greatly leveraging the value of our database. Should regulators
restrict such data sharing between companies, exchanges and
cooperatives in the future, it could adversely affect our
marketing capabilities. In addition, initiatives directed at
focusing advertising to those most directly interested in our
products and services could be at odds with laws and regulations
limiting dissemination of the very consumer data needed to
accomplish such focused marketing. Likewise, if new regulations
were adopted limiting our ability to use credit bureau
information to pre-select individuals for possible credit
extension, or adversely affecting our ability to utilize the
Internet and mobile phone communication channels to market our
business, it could have a significant adverse effect on our
business.
Any failure, or perceived failure, by us to comply with our own
privacy policies or with any regulatory requirements or orders
or other privacy or consumer protection related laws and
regulations could result in proceedings or actions against us by
governmental entities or others, subject us to significant
penalties and negative publicity and adversely affect our
operating results.
We could be
liable for breaches of security and any failure to protect the
security of personal information about our
customers.
The nature of our business involves the receipt and storage of
personal information about our customers. If we experience a
data security breach, we could be exposed to government
enforcement actions and private litigation. In addition, our
customers could lose confidence in our ability to protect their
personal information, which could cause them to discontinue
usage of our services. Such events could lead to lost future
sales, adversely affect our results of operations, damage our
brand and require us to expend resources on alterations to our
data security systems. Although we have developed systems and
processes that are designed to protect consumer information and
prevent fraudulent payment transactions and other security
breaches, these systems and processes may not be successful and
any failure to prevent or mitigate such fraud or breaches may
adversely affect our operating results and our brand.
21
Challenges in
anticipating merchandising trends and forecasting sales may
adversely affect our business.
Our success is tied to our ability to anticipate changes in
merchandising and customer expectations and react to them in a
timely and efficient manner. Because trends change quickly and
frequently, they are difficult to predict. Since we need to
order merchandise well in advance of customer orders, we must
order merchandise based on our best projections of consumer
tastes and anticipated demand, but we cannot guarantee that such
projections will be accurate. It is critical to our success that
we stock our product offerings in appropriate quantities. If
demand for one or more products outstrips our available supply,
we may have large backorders and cancellations and lose sales.
On the other hand, if one or more products do not achieve
projected sales levels, we may have surplus or un-saleable
inventory that would force us to take significant inventory
markdowns, which could reduce our net sales and gross margins.
If we are unable to accurately predict customer demand, or if
sales projections are inaccurate, we may fail to optimize
fulfillment operations. Sales projections also form the basis
for determining marketing expenditures, staffing and operations,
so shortfalls in sales volume will be reflected in lower than
anticipated margins.
Failure to
successfully manage the use of catalogs and
e-commerce
could adversely affect our business.
Our catalogs and websites are key drivers of our sales. We must
create, design, publish and distribute catalogs as well as web
content that offer and display merchandise that our customers
want to purchase at prices that are attractive. Our future
success depends in part on our ability to anticipate, assess and
react to changing product trends and market demand, designing
and publishing catalogs and web content that address these
developments in a way that generates sales. We must also
accurately determine the optimal number of catalogs to publish
and the most advantageous distribution strategies. There can be
no assurance that we will be able to identify and react to
trends in a timely fashion and distribute catalogs with a high
level of effectiveness justifying our marketing investment.
Increases in
postage and paper and other operating costs could negatively
affect our results of operation and financial
condition.
We are particularly vulnerable to postage and shipping rate
increases with respect to catalog mailings, which is a central
aspect of our business model, and merchandise deliveries. While
some of these variations are cyclical, others have been
unpredictable and significant.
Paper and postage represent significant components of our total
cost to produce, distribute, and market our products. We use the
U.S. Postal Service for distribution of substantially all
of our catalogs and other marketing materials. As such, the
continued rise in postal rates has increased our costs. Postal
rates are dependent on the operating efficiency of the postal
service and on legislative mandates imposed upon the postal
service. We cannot predict the magnitude of future price changes
in postage. The current economic environment is likely to lead
to further potential rate increases.
Paper is the principal raw material used in our business for
printed products and promotional materials. Paper is a commodity
and its price is subject to significant volatility. The price of
paper may fluctuate significantly in the future, and changes in
the market supply of or demand for paper could affect delivery
times and prices. We may need to find alternative sources for
paper from time to time. We cannot assure that we will continue
to have access to paper in the necessary amounts or at
reasonable prices or that any increases in the cost of paper
will not have a material adverse effect on our business.
Further, we may not be able to pass such increases on to our
customers. Any paper shortage may increase our paper costs,
22
cause us to reduce our catalog circulation, force us to use
different weights or grades of paper that could increase our
cost, reduce the number of pages per catalog or both. Our
inability to absorb the impact of increases in postage and paper
costs or any strategic determination not to pass on all or a
portion of these increases to customers could materially and
adversely affect our results of operations and financial
condition.
Current and
future government regulation of our catalog and Internet retail
operations could substantially harm our business.
We are subject to various laws and regulations, including
regulations of the Federal Trade Commission governing the manner
in which customers may be solicited, and prescribing other
obligations in fulfilling orders and consummating sales. In
addition to general business regulations and laws, we are
subject to governmental oversight of interstate commerce
generally and orders taken over the Internet in particular.
Existing and future regulations and laws may impede the growth
of the Internet or other online services. These regulations and
laws may cover taxation, restrictions on imports and exports,
customs, tariffs, user and consumer privacy, data protection,
pricing, content, copyrights, distribution, electronic contracts
and other communications, consumer protection, the provision of
online payment services, broadband residential Internet access
and the characteristics and quality of products and services. It
is not clear how existing laws and regulations governing issues
such as property ownership, sales and other taxes, libel and
personal privacy apply to the Internet and online commerce.
Unfavorable resolution of these issues may slow the growth of
online commerce and, in turn, our business.
Changes in any of the laws and regulations to which we are or
may become subject, or additional regulation, could cause the
demand for and sales of our products to decrease. Moreover,
complying with increased or changed regulations could force us
to change our business practices and may cause our operating
expenses to increase. This could adversely affect our revenues
and profitability.
We rely on
third party carriers as part of our fulfillment operations, and
these carriers could fail to adequately serve our
customers.
We rely on a limited number of carriers to ship inventory to us
and to deliver orders to our customers. If we are unable to
negotiate service levels and costs that are acceptable, or our
delivery vendors fail to perform satisfactorily, it could
negatively affect the satisfaction of our customers and our
profitability. Other transportation impediments could be caused
by external factors including inclement weather, fire, flood,
power loss, earthquakes, labor disputes, acts of war, terrorism
and acts of God.
System
interruption and the lack of integration and redundancy in our
order entry and online systems may adversely affect our net
sales.
Customer access to our call center and websites is key to the
continued flow of new orders. Anything that would hamper or
interrupt such access could adversely affect our net sales,
operating results and customer satisfaction. Examples of risks
that could affect access include problems with the Internet or
telecommunication infrastructure, limited web access by our
customers, local or more systemic impairment of computer systems
due to viruses or malware, or impaired access due to breaches of
Internet security or denial of service attacks. Changes in the
policies of service providers or others that increase the cost
of telephone or Internet access could inhibit our ability to
market our products or transact orders with customers.
In addition, our ability to operate our business from day to
day, in particular our ability to manage our credit operations
and inventory levels, largely depends on the efficient operation
23
of our computer hardware and software systems and communications
systems. Our computer and communications systems and operations
could be damaged or interrupted by fire, flood, power loss,
telecommunications failure, earthquakes, acts of war or
terrorism, acts of God, computer viruses, physical or electronic
break-ins or denial of service attacks, improper operation by
employees, and similar events or disruptions. Any of these
events could cause system interruption, delays, and loss of
critical data, and could prevent us from accepting and
fulfilling customer orders and providing services, which would
impair our operations. Certain of our systems are not redundant
and we have not fully implemented a disaster recovery plan. In
addition, we may have inadequate insurance coverage to
compensate us for any related losses. Interruptions to customer
ordering, particularly if prolonged, could damage our reputation
and be expensive to remedy and have significant adverse effects
on our financial results.
Our
anticipated growth is subject to a number of uncertainties that
could adversely affect our plans and our results of
operations.
We have rapidly and significantly expanded our operations, and
anticipate that further significant expansion will be required
to address potential growth in our customer base and market
opportunities. This expansion has placed, and is expected to
continue to place, a significant strain on the companys
management, operational and financial resources. From September
2006 to March 2011, we expanded from approximately 608 to
831 employees. To manage the expected growth of our
operations and personnel, we will be required to improve
existing
and/or
implement new transaction processing, operational and financial
systems, procedures and controls, and to expand, train and
manage our already growing employee base. Furthermore, should we
add fulfillment and warehouse capacity or add new businesses
with different fulfillment requirements, our fulfillment system
could become increasingly complex and challenging to operate.
We also may be required to expand our finance, administrative
and operations staff. Further, our management will be required
to maintain and expand our relationships with various
distributors and printers, freight companies, websites and web
service providers, Internet and other online service providers
and other third parties necessary to our business. There can be
no assurance that our current and planned personnel, systems,
procedures and controls will be adequate to support our future
operations, that management will be able to hire, train, retain,
motivate and manage required personnel or that our management
will be able to successfully identify, manage and exploit
existing and potential market opportunities. If we are unable to
manage growth effectively, our business, prospects, financial
condition and results of operations will be materially adversely
affected.
If we engage
in acquisitions, significant investments in new businesses, or
other strategic transactions, we will incur a variety of risks,
any of which may adversely affect our business.
We may make acquisitions of, or significant investments in,
businesses or assets that offer complementary products, services
and technologies. Any acquisitions or investments will be
accompanied by the risks commonly encountered in acquisitions of
businesses, which may include:
|
|
|
|
|
failure to achieve the financial and strategic goals for the
acquired and combined business;
|
|
|
|
overpayment for the acquired companies or assets;
|
|
|
|
difficulty integrating the operations and personnel of the
acquired businesses;
|
|
|
|
disruption of our existing business;
|
24
|
|
|
|
|
distraction of management from our ongoing business;
|
|
|
|
dilution of our existing stockholders and earnings per share;
|
|
|
|
unanticipated liabilities, legal risks and costs;
|
|
|
|
increased regulatory and compliance requirements;
|
|
|
|
retention of key personnel; and
|
|
|
|
impairment of relationships with employees and customers as a
result of integration of new management personnel.
|
These risks could harm our business, financial condition or
results of operations, particularly if they occur in the context
of a significant acquisition.
General
economic factors may adversely affect our financial
performance.
General economic conditions may adversely affect our financial
performance. In the United States, changes in interest rates,
changes in fuel and other energy costs, weakness in the housing
market, inflation or deflation or expectations of either
inflation or deflation, higher levels of unemployment,
unavailability of or limitations on consumer credit, higher
consumer debt levels or efforts by consumers to reduce debt
levels, higher tax rates and other changes in tax laws, overall
economic slowdowns, changes in consumer desires and other
economic factors could adversely affect consumer demand for the
products and services we sell, change the mix of products we
sell to a mix with a lower average gross margin, result in
slower inventory turnover and greater markdowns on inventory and
result in higher levels of slow payment, default and
uncollectibility in our customer accounts receivable. Higher
interest rates, transportation costs, inflation, costs of labor,
insurance and healthcare, foreign exchange rate fluctuations,
higher tax rates and adverse changes in tax and other laws and
regulations and other economic factors in the United States can
increase our cost of sales, commodity pricing, operating,
selling, general and administrative expenses and interest
expense, and otherwise adversely affect our operations and
operating results. These factors affect not only our operations,
but also the operations of our sources of consumer and
commercial credit critical to our business, as well as suppliers
from whom we purchase goods, a condition that can limit the
availability of credit or goods to us or increase the cost to us
of the goods we sell to, and credit we arrange for, our
customers.
The
seasonality of our business increases the strain on our
operations and results in fluctuations in our quarterly
results.
A disproportionate amount of our net sales, 42% in 2010, occurs
during our fourth fiscal quarter. If we do not maintain adequate
inventory to meet seasonal customer demand, it could
significantly affect our net sales and future growth.
Conversely, if we overstock seasonal products in excess of
demand, we may have to offer significant pricing markdowns or
take inventory write-offs. If too many customers access our
telephone order lines, servicing connections or websites within
a short period, particularly during holidays, it could prevent
us from taking orders or reduce customer satisfaction. A similar
adverse impact would result from inadequate staffing in our
customer service and ordering centers and warehouse fulfillment
functions during times of peak volume.
In addition, because a disproportionate amount of our net sales
occur during the fourth fiscal quarter, our financial results in
such quarter will have a disproportionate effect on our
financial results for the full year. Our stock price may also
experience substantial volatility based on our results for the
fourth fiscal quarter due to the intense focus investors and
stock analysts place on these results.
25
Our
international sourcing relationships and service providers
subject us to risks that could adversely affect our
business.
We source our merchandise both domestically and internationally,
as do many of our third party suppliers. In addition, we rely on
foreign third party service providers based in Guatemala, India,
Jamaica, Panama and the Philippines for various aspects of our
operations, including phone and mail order entry, collections
and global import transportation/logistics.
International purchases subject us and our suppliers to inbound
freight costs, tariffs, duties and currency fluctuations as well
as other risks and could increase our costs and, therefore,
decrease our gross profits as well as decrease our ability to
ship our merchandise in a timely manner.
We may source an increasing amount of merchandise directly from
vendors abroad, particularly in Asia, which will subject us to
risks and uncertainties including import/export controls or
regulations and quotas and possible cancellations of backorders
due to delayed shipping. Any disruption or delays in, or
increased costs of, importing our products could have an adverse
effect on our business, financial condition and operating
results. Foreign orders are often placed through third party
intermediaries, and as a result may present greater difficulty
in identifying and supervising vendors with respect to quality
control and addressing product defects. In addition, declines in
the value of the U.S. dollar relative to foreign currencies
affect our buying power and the ultimate price of the products
we sell to our customers.
Changing or uncertain economic conditions in foreign countries
and political unrest, war, natural disasters or health epidemics
can all be detrimental to dealings with foreign sources of
product or service providers. Any of these factors may disrupt
the ability of foreign vendors to supply merchandise in a timely
manner or at all, and the ability of foreign service providers
to fulfill their obligations to us. Such factors could also
substantially increase our costs to source merchandise through
foreign vendors or engage third party service providers. The
need to replace any such vendors or service providers could be
expensive and disruptive to our operations. For instance, many
electronics products we offer are manufactured or contain parts
that are made in Japan. These products include iPods, MP3
players, televisions, notebook computers, digital cameras, car
navigation and video game consoles. In 2010, total electronics
products represented in the aggregate approximately 28% of our
merchandise sales.
The March 2011 earthquake and tsunami experienced in Japan
resulted in suspension of operations at many factories in Japan
that are in the supply chain for these products. While we have
begun to order from our vendors additional quantities of
affected products from existing inventories in anticipation of
potential supply shortages, there is no assurance we will be
able to obtain merchandise in quantities sufficient to meet our
needs. The recent occurrence of and nature and degree of
destruction from the natural disasters in Japan do not permit us
to predict when, to what extent and for how long our electronic
merchandise offerings may be affected. A substantial and
prolonged disruption in the availability of this merchandise
would have a material adverse effect on our results of
operations.
If we are
unable to maintain vendor relationships and obtain adequate
supplies of inventory, our results of operations will be
negatively impacted.
Our financial performance depends on the ability to purchase
products in sufficient quantities at competitive prices. We
offer a changing mix of products and, therefore, our buyers must
develop and maintain relationships with vendors to locate
sources for high quality, low cost, name brand merchandise they
believe will interest our customers. We currently purchase our
products from over 1,000 domestic and foreign manufacturers. Our
top ten suppliers accounted for approximately 23% of our
merchandise inventory purchases in 2010. Inability to obtain
merchandise from any of the larger vendors could cause supply
disruptions that would hamper the business.
26
If we are unable to maintain supplier relationships, our ability
to offer high quality, competitively priced products to our
customers may be impaired, and our net sales and gross profits
would decline. If our current vendors were to stop selling
merchandise to us on acceptable terms, including because of one
or more vendor bankruptcies due to poor economic conditions, we
may be unable to procure alternatives from other vendors in a
timely and efficient manner and on acceptable terms, or at all.
Because the contracts with our suppliers are frequently short
term in nature, we may be unable to acquire product to meet
customer demand that extends beyond initial expectations and net
sales may suffer. Furthermore, vendors under short term
contracts may increase prices or cut off supply at any time.
Because our
single fulfillment center is located in Minnesota, we are
subject to regional risks and adverse effects upon our business
and results of operations if our fulfillment operations are
interrupted for any significant period of time.
In order to maximize efficiency, we use a single large
fulfillment center located in St. Cloud, Minnesota where we
warehouse our merchandise and ship customer orders. This
arrangement subjects us to regional risks, such as a shutdown or
interruption in operations at the regional airport, and risks
associated with systems lacking redundancy. The facility is
susceptible to damage or interruption from human error, fire,
flood or other acts of God, power loss, telecommunications
failure, terrorist attacks, acts of war, break-ins and similar
events. Many of our competitors operate across the United States
and thus are not as vulnerable to the risks of operating in one
region. Should anything interrupt operations at this facility,
we have very limited alternate ways to fill product orders and
limited ability to reroute orders to third parties for drop
shipping.
Strikes, work
stoppages and slowdowns by our employees could adversely affect
our business, financial position and results of
operations.
As of March 2011, the company employed approximately
831 employees, of which approximately 162 were warehouse
and order fulfillment employees subject to a collective
bargaining agreement. Labor organizing activities could result
in additional employees becoming unionized. Strikes, work
stoppages and slowdowns by our employees could adversely affect
our ability to fulfill orders and meet our customers
needs, and customers may move their business to competitors as a
result. This could adversely affect our business, financial
position and results of operations. Increased unionization and
the terms of future collective bargaining agreements also may
affect our competitive position and results of operations.
We face risk
related to the strength of our operational, technological and
organizational infrastructure.
We are exposed to operational risks that can be manifested in
many ways, such as errors related to failed or inadequate
processes, faulty or disabled computer systems, fraud by
employees, contractors or third parties and exposure to external
events. In addition, we are heavily dependent on the strength
and capability of our technology systems which we use to manage
our internal financial, credit and other systems, interface with
our customers and develop and implement effective marketing
campaigns.
Our ability to operate our business to meet the needs of our
existing customers and attract new ones and to run our business
in compliance with applicable laws and regulations depends on
the functionality of our operational and technology systems. Any
disruptions or failures of our operational and technology
systems, including those associated with improvements or
modifications to such systems, could cause us to be unable to
market and manage our
27
products and services and to report our financial results in a
timely and accurate manner, all of which could have a negative
impact on our results of operations.
In some cases, we outsource delivery, maintenance and
development of our operational and technological functionality
to third parties. These third parties may experience errors or
disruptions that could adversely impact us and over which we may
have limited control. Any increase in the amount of our
infrastructure that we outsource to third parties may increase
our exposure to these risks.
If we do not
respond to technological changes, our services could become
obsolete and we could lose customers.
To remain competitive, we must continue to enhance and improve
the functionality and features of our
e-commerce
websites and other technologies. We may face material delays in
introducing new products and enhancements. If this happens, our
customers may forego the use of our websites and use those of
our competitors. The Internet and the online commerce industry
are rapidly changing. If competitors introduce new products and
services using new technologies or if new industry standards and
practices emerge, our existing websites and our proprietary
technology and systems may become obsolete. Our failure to
respond to technological change or to adequately maintain,
upgrade and develop our computer network and the systems used to
process customers orders and payments could harm our
business, prospects, financial condition and results of
operations.
We are
dependent on third parties to fulfill key operational tasks,
including with respect to our credit and payment processing
system, and are vulnerable to various risks with respect to
these relationships.
We depend on a number of independent businesses to operate our
business efficiently, none of which are under our control. Any
adverse developments affecting these vendors, the products or
services provided by them, or the fees that they charge us could
have a detrimental impact on our operations and financial
results. For example, we are highly dependent on software that
we license from CoreCard Software, Inc. This software provides a
highly customized platform that is critical to our credit and
payment processing system, and we rely on CoreCard for ongoing
maintenance and support of this system. In the event that
CoreCard ceases to provide the maintenance and support we need,
we may be forced to incur substantial additional costs in order
to maintain or replace our credit and payment processing system,
and there is no assurance that we would be successful in doing
so. A failure or delay in responding to such developments, even
for a short period of time, could have significant adverse
effects on our ability to provide customers access to credit,
generate sales and operate our business.
Examples of other critical vendors include the following:
|
|
|
|
|
vendors that print and mail our catalogs;
|
|
|
|
vendors that handle credit applications, remittance and
collections;
|
|
|
|
shipping companies;
|
|
|
|
telephone and Internet providers;
|
|
|
|
e-commerce
service providers;
|
|
|
|
outside call centers handling customer telephone orders, account
servicing and collections, many of which reside in foreign
countries;
|
|
|
|
outside service providers to provide repairs under extended
service plans; and
|
|
|
|
factory direct vendors for timely fulfillment of merchandise
orders.
|
28
Many of our vendor agreements have relatively short terms. As a
result, we are at risk of increased vendor pricing and other
adverse changes in vendor terms. Further, the need to replace
one of our vendors, particularly on short notice, could cause
significant disruption to our operations and have an adverse
effect on our financial results.
The loss of
key senior management personnel could negatively affect our
business.
While we attempt to anticipate succession planning needs,
departures by senior management can be disruptive. We depend
heavily on our senior management and other key personnel,
particularly Brian Smith, our Chairman and Chief Executive
Officer, to execute our business plan. The loss of any of our
executive officers or other key employees could harm our
business. We do not have key person life insurance policies or
employment agreements for our executive management team.
We may not be
able to adequately protect our intellectual property rights or
may be accused of infringing intellectual property rights of
third parties.
We regard our trademarks, service marks, copyrights, trade
dress, trade secrets, proprietary technology, and similar
intellectual property as critical to our success. In particular,
we believe certain proprietary information, including but not
limited to our credit models, are central to our business model
and give us a key competitive advantage. We rely on trademark
and copyright law, trade secret protection, and confidentiality,
license and work product agreements with our employees,
customers, and others to protect our proprietary rights.
We may be unable to prevent third parties from acquiring
trademarks, service marks and domain names that are similar to,
infringe upon, or diminish the value of our trademarks and other
proprietary rights. In addition, we currently own the exclusive
right to use various domain names containing or relating to our
company name and brands. We may be unable to prevent third
parties from acquiring and maintaining domain names that
infringe or otherwise decrease the value of our trademarks and
other proprietary rights. Failure to protect our domain names
could affect adversely our reputation and brand, and make it
more difficult for users to find our website.
We may be unable to discover or determine the extent of any
unauthorized use of our proprietary rights. The protection of
our intellectual property may require the expenditure of
significant financial and managerial resources. In addition, the
steps we take to protect our intellectual property may not
adequately protect our rights or prevent parties from infringing
or misappropriating our proprietary rights. We can be at risk
that others will independently develop or acquire equivalent or
superior technology or other intellectual property rights. The
use of our technology or similar technology by others could
reduce or eliminate any competitive advantage we have developed,
cause us to lose sales or otherwise harm our business.
We cannot be certain that the intellectual property used in our
business does not and will not infringe the intellectual
property rights of others, and we are from time to time subject
to third party infringement claims. Any third party infringement
claims against us, whether or not meritorious, may result in the
expenditure of significant financial and managerial resources,
injunctions against us or the payment of damages. Moreover,
should we be found liable for infringement, we may be required
to seek to enter into licensing agreements, which may not be
available on acceptable terms or at all.
Complaints or
litigation may adversely affect our business and results of
operations.
We face the risk of litigation, including class action lawsuits
challenging, among other things, our marketing and sales
practices as well as our actions as a contract servicer for the
29
Credit Issuers. Other potential risks of litigation relate to
lending terms, rates, disclosures, collections
and/or other
practices, under state and federal consumer protection statutes
and other laws, as well as licensing requirements relating to
consumer lending activity. In particular, state attorneys
general and other government prosecutors have shown an increased
interest in the enforcement of consumer protection laws,
including laws relating to subprime lending, predatory lending
practices and privacy. We may also be subject, from time to
time, to employee claims alleging injuries, wage and hour
violations, discrimination, harassment or wrongful termination.
In addition to the risk of loss following an adverse ruling in
any such litigation, all litigated matters involve costs, in
terms of both monetary expenditures and the diversion of
managements time and attention. In addition, litigation
may result in orders that require us to change our business
practices, pay settlement costs and damages and, in some cases,
penalties. Any or all of these could negatively affect our
business and financial results.
We may face
potential claims and reputational risk arising out of the
fraudulent activities of Thomas J. Petters.
Upon completion of this
offering, shares,
or approximately % of our
outstanding common stock, will be held of record by entities
formerly affiliated with Thomas J. Petters. Each of these
entities and Mr. Petters is in federal bankruptcy or
receivership as a result of Mr. Petters arrest and
conviction on charges of wire and mail fraud, conspiracy and
money laundering. A trustee and receiver has been appointed for
these entities and Mr. Petters and exercises all ownership
rights with respect to these shares and other rights of these
persons. These rights include continuing contractual rights
under our amended and restated stockholders agreement and
amended and restated investor rights agreement, each of which
will terminate upon completion of this offering, except with
respect to registration rights. During the early years of our
company, Mr. Petters also was a director and provided us
various debt financing.
The trustee and receiver has broad powers to seek recovery of
assets for the benefit of creditors of the bankrupt and
forfeited estates of these persons. None of the fraudulent
activity of which Mr. Petters was convicted was at any time
alleged directly to involve our company nor has our company been
the subject of or participated in any civil or criminal
proceeding arising out his fraudulent activity. The trustee and
receiver for the Petters affiliates and Mr. Petters has
furnished to us a letter dated April 14, 2011 to the effect
that based on information actually known to the trustee and
receiver as of the date of the letter, it does not know of any
actual or potential claim in that capacity against the company
or its subsidiaries, current or former officers and directors of
our company (other than the asserted and pending claims of the
trustee and receiver described below), our significant
securityholders or the underwriters named on the cover page of
this prospectus. Further, the trustee and receiver has agreed to
provide at the time of closing of this offering a release of all
claims, known or unknown, that the trustee and receiver may then
have had or in the future have against our company, current or
former officers and directors of our company (other than the
asserted and pending claims of the trustee and receiver
described below), our significant securityholders or the
underwriters named on the cover page of this prospectus, arising
out of any act, omission, transaction, event or occurrence that
relates to our company and takes place prior to the time of
closing of this offering.
The trustee and receiver has made demand of, and in some cases
commenced litigation against, numerous individuals, charitable
organizations, businesses and other persons to recover cash and
other property conveyed to these persons by Mr. Petters or
his affiliates on the grounds that the consideration received by
Mr. Petters or his affiliates, at a time when they
30
were insolvent, was legally insufficient, commonly referred to
as a clawback. Among the individuals subject to these demands
and litigation were one current and one former employee who made
claims for indemnification against the company arising out of
the trustees actions. We reimbursed to the two employees
an aggregate of $10,000 in settlement payments made by them to
the trustee upon a determination that the applicable standard of
conduct and other requirements for indemnification had been
satisfied. In addition, Brian Smith, our Chairman and CEO and a
5% shareholder of the company, was also the subject of a Trustee
clawback demand in respect of two cash bonus payments in 2003
and 2005 in aggregate of $110,000 received by him from a Petters
affiliate while acting as an employee of Bluestem and in
consideration of services to Bluestem. The Trustee also made a
clawback demand in respect of a transfer in 2005 of shares of
our common stock from a Petters affiliate to Mr. Smith in
consideration of services to Bluestem. The value of these shares
was recorded as compensation by Bluestem at the time of transfer
at $158,440. Mr. Smith responded to these demands by
reimbursing the Trustee in the amount of the bonus payments and
paying to the Trustee the full value of the shares at the time
of transfer. Mr. Smith made a demand for indemnification to
Bluestem for reimbursement of an amount equal to the $158,440
payment to the Trustee plus attorneys fees relating to
resolution of that clawback demand. The company reimbursed to
Mr. Smith such amount upon a determination by our board of
directors that the applicable standard of conduct and other
requirements for indemnification had been satisfied and receipt
from Mr. Smith of a release of Bluestem of any claim
arising out of these clawback demands.
Based on information furnished in publicly-filed litigation or
furnished to Bluestem by the trustee and receiver, the trustee
and receiver has asserted additional clawback claims known to
the trustee and receiver aggregating approximately
$12.7 million against four former Bluestem directors, who
Bluestem believes were acting as employees of, or lenders or
consultants to, Petters affiliates other than Bluestem when
payments which are the subject of the clawback claims were made.
The trustee and receiver has advised that similar clawback
claims against a former Bluestem director and executive officer,
who was also believed to be acting in a capacity unrelated to
Bluestem in connection with receipt of the payments which are
the subject of the clawback demand, were resolved by such
individual by payment to the trustee and receiver of
$2.1 million. No claim for indemnification or advancement
of litigation expenses has been made against Bluestem in respect
of any of these asserted trustee and receiver claims, except for
a claim by one of these former directors. This former director
has alleged that he has been made a defendant in a clawback
proceeding demanding repayment of approximately
$3.8 million in part by reason of his official
capacity as a director of Bluestem. The company has
rejected this claim for indemnification.
The foregoing trustee and receiver claims or, subject to the
release by the trustee and receiver, other claims by the trustee
and receiver against persons who have had a relationship with
the company, to the extent not resolved with the company, could
possibly result in claims or litigation for indemnification,
advancement of expenses or other claims for damages against the
company that could be successful and could result in significant
payments by us for the benefit of such persons for which
insurance may not be available.
Publicity or other events associating our company with
Mr. Petters and his affiliates, regardless of their
foundation or accuracy, could adversely affect our reputation in
the consumer, financial and investment communities, and also
could adversely affect our stock price. Such publicity or other
events could also intrude on our normal business operations and
distract management. Please see Certain Relationships and
Related Party TransactionsThomas J. Petters and
Affiliates for additional information concerning our
relationship with Mr. Petters.
31
We may be
subject to product liability claims if people or property are
harmed by products we sell.
Some of the products we sell may expose us to product liability
claims relating to personal injury, death, or environmental or
property damage, and may require product recalls or other
actions. The risk may be particularly high with respect to
products we sell intended for use by or with children, as well
as pellet guns, knives, archery and similar products. Although
we maintain liability insurance, we cannot be certain that our
coverage will be adequate for liabilities actually incurred or
that insurance will continue to be available to us on
economically reasonable terms, or at all.
Adverse
publicity, or any failure to maintain our brand image and
corporate reputation, could adversely affect our business and
results of operations, as could various other social factors
affecting credit use and consumption.
Our success depends in part on our ability to maintain the image
of the Fingerhut and Gettington.com brands as well as our
reputation for providing excellent service to our customers.
Adverse publicity or widespread declines in perception regarding
our products and service quality could tarnish the image of our
brands, even if these developments are unfounded or the
information false. We could be similarly adversely affected if
customers mistakenly associate unrelated businesses with our own
operations.
We do not insure against any diminution in the value of our
brands or the business itself, arising from claims, adverse
publicity or otherwise. In addition, adverse publicity
surrounding labor relations, our business concentration in the
low to middle income consumer sector or our reliance on
financing to such customers could damage our reputation and loss
of sales and brand equity could result. This could require the
expenditure of additional resources to rebuild our reputation
and restore the value of our brands.
In addition, a variety of social factors may cause changes in
customer purchases contingent upon credit, including the
publics perception of consumer debt, payment patterns,
personal bankruptcy, and the rate of defaults by account holders
and borrowers. If consumers develop negative attitudes about
incurring debt or if consumption trends continue to decline, our
business and financial results will be negatively affected.
Risks Related to
this Offering and Ownership of Our Common Stock
An active
public market for our common stock may not develop following
this offering, which could limit your ability to sell your
shares of our common stock at an attractive price, or at
all.
Prior to this offering, there has been no public market for our
common stock. We cannot predict the extent to which investor
interest in our company will lead to the development of an
active trading market in our common stock or how liquid that
market might become. An active public market for our common
stock may not develop or be sustained after the offering. If an
active public market does not develop or is not sustained, it
may be difficult for you to sell your shares of common stock at
a price that is attractive to you, or at all.
Our principal
existing stockholders will continue to own a large percentage of
our voting stock after this offering, which may allow them to
collectively control substantially all matters requiring
stockholder approval.
Our principal existing stockholders will beneficially own
approximately shares,
or %, of our common stock upon the
completion of this offering. Our principal existing stockholders
consist of Brookside Capital Investors, L.P., funds affiliated
with Bain Capital, funds affiliated with Battery Ventures, and
Petters Group Worldwide and its affiliates. In
32
addition, Brian Smith, our Chairman and Chief Executive Officer,
will beneficially own
approximately %, and our directors
and officers as a group will beneficially own
approximately %, of our common
stock upon completion of this offering. If some or all of these
stockholders decided to act in concert, they could control us
through their ability to determine the outcome of the election
of our directors, to amend our certificate of incorporation and
bylaws and to take other actions requiring the vote or consent
of stockholders, including mergers, going private transactions
and other extraordinary transactions, and the terms of any of
these transactions. The ownership positions of these
stockholders may have the effect of delaying, deterring or
preventing a change in control or a change in the composition of
our board of directors. These stockholders may also use their
large ownership positions to address their own interests, which
may be different from those of investors in this offering.
Our stock
price may be volatile or may decline regardless of our operating
performance, and you may not be able to resell your shares at or
above the initial public offering price.
After this offering, the market price for our common stock is
likely to be volatile, in part because our shares have not been
traded publicly. In addition, the market price of our common
stock may fluctuate significantly in response to a number of
factors, many of which are outside of our control, including:
|
|
|
|
|
our ability to retain and attract customers and increase net
sales;
|
|
|
|
availability and pricing of, and the regulatory environment for,
consumer and commercial credit;
|
|
|
|
varying response rates to catalogs and other marketing
activities;
|
|
|
|
unanticipated delinquencies and losses in our customer accounts
receivable portfolio;
|
|
|
|
our ability to offer products on favorable terms, manage
inventory, and fulfill orders;
|
|
|
|
pricing pressures due to competition or otherwise;
|
|
|
|
changes in consumer tastes and demand for particular products;
|
|
|
|
changes in consumer willingness to purchase goods on credit via
catalogs and through the Internet;
|
|
|
|
weak economic conditions, economic uncertainty and lower
consumer confidence and discretionary spending;
|
|
|
|
timing, effectiveness, and costs of expansion and upgrades of
our systems and infrastructure;
|
|
|
|
variations in the mix of products and services we offer and
level of vendor returns;
|
|
|
|
changes in key personnel;
|
|
|
|
entry into new markets;
|
|
|
|
developments concerning Thomas Petters and his former affiliates;
|
|
|
|
announcements by us or our competitors of new product offerings
or significant acquisitions;
|
|
|
|
the publics response to press releases or other public
announcements by us or third parties, including our filings with
the Securities and Exchange Commission, or SEC, and
announcements relating to litigation;
|
33
|
|
|
|
|
the financial projections we may provide to the public, any
changes in these projections or our failure to meet these
projections;
|
|
|
|
changes in financial estimates by any securities analysts who
follow our common stock, our failure to meet these estimates or
failure of those analysts to initiate or maintain coverage of
our common stock;
|
|
|
|
ratings downgrades by any securities analysts who follow our
common stock;
|
|
|
|
the development and sustainability of an active trading market
for our common stock;
|
|
|
|
future sales of our common stock by our officers, directors and
significant stockholders;
|
|
|
|
other events or factors, including those resulting from war,
acts of terrorism, natural disasters or responses to these
events; and
|
|
|
|
changes in accounting principles.
|
In addition, the stock markets have experienced extreme price
and volume fluctuations that have affected and continue to
affect the market prices of equity securities of many retail and
finance companies. In the past, stockholders have instituted
securities class action litigation following periods of market
volatility. If we were to become involved in securities
litigation, we could incur substantial costs and our resources
and the attention of management could be diverted from our
business.
We may need
additional equity capital, and raising additional capital may
dilute existing stockholders.
We believe that our existing capital resources, including the
anticipated proceeds of this offering, availability of
borrowings under our credit facilities, and cash generated from
our business, will enable us to maintain our current and planned
operations. However, if for any reason this is not the case, we
may choose or be required to raise additional funds to fund our
operations. If our capital requirements vary materially from
those currently planned, we may require additional equity
financing sooner than anticipated. For example, if we grow at a
faster rate than we currently expect, we may need to raise
additional equity in order to stay in compliance with the terms
of our credit facilities, or to maintain a debt to equity ratio
that we feel is appropriate. Additional financing may not be
available in sufficient amounts or on terms acceptable to us and
may be dilutive to existing stockholders. If adequate funds are
not available or are not available on acceptable terms, our
ability to fund our future growth, take advantage of new
opportunities, develop or enhance our offerings, or otherwise
respond to competitive pressures would be significantly limited.
Future sales
of our common stock, or the perception in the public markets
that these sales may occur, may depress our stock
price.
Sales of substantial amounts of our common stock in the public
market after this offering, or the perception that these sales
could occur, could adversely affect the price of our common
stock and could impair our ability to raise capital through the
sale of additional shares. Upon completion of this offering, we
will
have shares
of common stock outstanding. The shares of common stock offered
in this offering will be freely tradable without restriction
under the Securities Act of 1933, as amended, or the Securities
Act, except for any shares of our common stock that may be held
or acquired by our directors, executive officers and other
affiliates, as that term is defined in the Securities Act. Those
securities may not be sold in the public market unless the sale
is registered under the Securities Act or an exemption from
registration is available.
We, each of our officers, directors, the selling stockholders
and certain of our other stockholders, have agreed, subject to
certain exceptions, with the underwriters not to dispose
34
of or hedge any of the shares of common stock or securities
convertible into or exchangeable for shares of common stock
during the period from the date of this prospectus continuing
through the date 180 days after the date of this
prospectus, except, in our case, for the issuance of common
stock upon exercise of options under existing option plans. The
underwriters may, in their sole discretion, release any of these
shares from these restrictions at any time without notice, as
permitted by FINRA rules. See Underwriting.
The shares of common stock held by existing stockholders as of
the date of this prospectus will, from time to time after this
offering, become eligible to be sold in the public market,
subject to limitations imposed under federal securities laws.
See Shares Eligible for Future Sale for a more
detailed description of the restrictions on selling shares of
our common stock after this offering.
In the future, we may also issue our securities in connection
with investments or acquisitions. The amount of shares of our
common stock issued in connection with an investment or
acquisition could constitute a material portion of our
then-outstanding shares of our common stock.
Anti-takeover
provisions in our charter documents and Delaware law might
discourage or delay acquisition attempts for us that you might
consider favorable.
Our amended and restated certificate of incorporation and
amended and restated bylaws will contain provisions that may
make the acquisition of our company more difficult without the
approval of our board of directors. These provisions:
|
|
|
|
|
permit our board of directors to issue up
to shares
of preferred stock, with any rights, preferences and privileges
as our board may designate, including the right to approve an
acquisition or other change in our control;
|
|
|
|
provide that the authorized number of directors may be changed
by resolution of the board of directors;
|
|
|
|
divide our board of directors into three classes;
|
|
|
|
provide that all vacancies, including newly created
directorships, may, except as otherwise required by law, be
filled by the affirmative vote of a majority of directors then
in office, even if less than a quorum;
|
|
|
|
provide that stockholders seeking to present proposals before a
meeting of stockholders or to nominate candidates for election
as directors at a meeting of stockholders must provide notice in
writing in a timely manner, and also specify requirements as to
the form and content of a stockholders notice; and
|
|
|
|
do not provide for cumulative voting rights.
|
We are subject to Section 203 of the General Corporation
Law of Delaware, which regulates corporate acquisitions.
Section 203 prohibits us from engaging in a transaction
involving a sale of assets, merger or consolidation of our
company with an interested stockholder, as defined under
Section 203, of our company for a period of three years
following the date of the transaction in which the stockholder
became an interested stockholder unless the transaction is
approved in a prescribed manner.
These anti-takeover provisions could discourage, delay or
prevent a transaction involving a change in control of our
company, even if doing so would benefit our stockholders. These
provisions could also discourage proxy contests and make it more
difficult for you and other stockholders to elect directors of
your choosing and to cause us to take other corporate actions
you desire.
35
If you
purchase shares of common stock sold in this offering, you will
incur immediate and substantial dilution.
If you purchase shares of common stock in this offering, you
will incur immediate and substantial dilution in the amount of
$
per share because the assumed initial public offering price of
$
(the midpoint of the range set forth on the cover page of this
prospectus) is substantially higher than the pro forma as
adjusted net tangible book value per share of our outstanding
common stock. This dilution is due in large part to the fact
that our earlier investors paid substantially less than the
initial public offering price when they purchased their shares
and to the satisfaction of accrued and unpaid dividends on our
outstanding preferred stock through the issuance of new common
stock. In addition, you may also experience additional dilution
upon future equity issuances or the exercise of stock options to
purchase common stock granted to our employees, consultants and
directors under our stock option and equity incentive plans. See
Dilution.
If securities
or industry analysts do not publish research or publish
inaccurate or unfavorable research about our business, our stock
price and trading volume could decline.
The trading market for our common stock will depend in part on
the research and reports that securities or industry analysts
publish about us or our business. We do not currently have and
may never obtain research coverage by securities and industry
analysts. If no securities or industry analysts commence
coverage of our company, the trading price for our common stock
would be negatively impacted. If we obtain securities or
industry analyst coverage and if one or more of the analysts who
covers us downgrades our common stock or publishes inaccurate or
unfavorable research about our business, our stock price would
likely decline. If one or more of these analysts ceases coverage
of us or fails to publish reports on us regularly, demand for
our common stock could decrease, which could cause our stock
price and trading volume to decline.
We do not
expect to pay any cash dividends for the foreseeable
future.
The continued operation and expansion of our business will
require substantial funding. Accordingly, we do not anticipate
that we will pay any cash dividends on shares of our common
stock for the foreseeable future. Any determination to pay
dividends in the future will be at the discretion of our board
of directors and will depend upon results of operations,
financial condition, contractual restrictions, including under
our existing credit facilities and other indebtedness we may
incur, restrictions imposed by applicable law and other factors
our board of directors deems relevant. Accordingly, if you
purchase shares in this offering, realization of a gain on your
investment will depend on the appreciation of the price of our
common stock, which may never occur. Investors seeking cash
dividends in the foreseeable future should not purchase our
common stock.
We will incur
increased costs as a result of becoming a public
company.
As a public company, we will incur significant legal,
accounting, insurance and other expenses that we have not
incurred as a private company, including costs associated with
public company reporting requirements. We also have incurred and
will incur costs associated with the Sarbanes-Oxley Act of 2002
and related rules implemented by the SEC and the NASDAQ stock
market. The expenses incurred by public companies generally for
reporting and corporate governance purposes have been
increasing. We expect these rules and regulations to increase
our legal and financial compliance costs and to make some
activities more time-consuming and costly, although we are
currently unable to estimate these costs with any degree of
certainty.
36
These laws and regulations could also make it more difficult or
costly for us to obtain certain types of insurance, including
director and officer liability insurance, and we may be forced
to accept reduced policy limits and coverage or incur
substantially higher costs to obtain the same or similar
coverage. These laws and regulations could also make it more
difficult for us to attract and retain qualified persons to
serve on our board of directors, our board committees or as our
executive officers. Furthermore, if we are unable to satisfy our
obligations as a public company, we could be subject to
delisting of our common stock, fines, sanctions and other
regulatory action and potentially civil litigation.
Compliance
with Section 404 of the Sarbanes-Oxley Act of 2002 will
require significant expenditures and effort by management, and
if our independent registered public accounting firm is unable
to provide an unqualified attestation report on our internal
controls, our stock price could be adversely
affected.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002
and related rules and regulations and beginning with our Annual
Report on
Form 10-K
for the year ending February 1, 2013, our management will
be required to report on, and, if our market capitalization
exceeds $75.0 million, our independent registered public
accounting firm to attest to, the effectiveness of our internal
control over financial reporting. The rules governing the
standards that must be met for management to assess our internal
control over financial reporting are complex and require
significant documentation, testing and possible remediation. We
are currently in the process of reviewing, documenting and
testing our internal control over financial reporting. In this
regard, subsequent to the issuance of our 2009 financial
statements, we identified a deficiency in the effectiveness of
our internal controls relating to the recognition of derivative
liabilities associated with an outstanding contingent fee
agreement, our outstanding preferred stock, our preferred stock
warrants and certain of our common stock warrants. As a result,
we restated our 2009 financial statements to reflect the proper
derivative accounting treatment. See note 14 to our
consolidated financial statements for additional information
regarding the restatement. We may encounter problems or delays
in completing the implementation of any changes necessary to
make a favorable assessment of our internal control over
financial reporting. In addition, in connection with the
attestation process by our independent registered public
accounting firm, we may encounter problems or delays in
completing the implementation of any requested improvements and
receiving a favorable attestation. If we cannot favorably assess
the effectiveness of our internal control over financial
reporting, or if our independent registered public accounting
firm is unable to provide an unqualified attestation report on
our internal controls, investors could lose confidence in our
financial information and our stock price could decline.
37
FORWARD LOOKING
STATEMENTS
This prospectus contains forward looking statements that are
subject to risks and uncertainties. All statements other than
statements of historical fact included in this prospectus are
forward looking statements. Forward looking statements give our
current expectations and projections relating to our financial
condition, results of operations, plans, objectives, future
performance and business. You can identify forward looking
statements by the fact that they do not relate strictly to
historical or current facts. These statements may include words
such as anticipate, estimate,
expect, project, plan,
intend, believe, may,
will, should, can have,
likely and other words and terms of similar meaning
in connection with any discussion of the timing or nature of
future operating or financial performance or other events. For
example, all statements we make relating to our estimated and
projected earnings, revenues, costs, expenditures, cash flows,
growth rates and financial results, our plans and objectives for
future operations, growth or initiatives, strategies, or the
expected outcome or impact of pending or threatened litigation
are forward looking statements. All forward looking statements
are subject to risks and uncertainties that may cause actual
results to differ materially from those that we expected,
including:
|
|
|
|
|
our dependence upon the availability of third party financial
institutions to issue credit accounts to our customers;
|
|
|
|
loss of commercial borrowing capacity or increases in our cost
of capital;
|
|
|
|
regulatory risks faced by us and the Credit Issuers in
connection with the extension of credit to our customers;
|
|
|
|
taxation of Internet and catalog based
out-of-state
sales, and the imposition on us of associated obligations;
|
|
|
|
changes in customer discretionary spending;
|
|
|
|
our customers dependence on credit to make purchases from
us;
|
|
|
|
failure of our internal models to provide reliable estimates or
predictions of future activity in connection with risk
management, accounting estimates and other business decisions;
|
|
|
|
our ability to successfully implement new initiatives, add new
customers and evolve our business model;
|
|
|
|
competition from other retailers and lenders;
|
|
|
|
changes in regulations or customer concerns about privacy and
protection of customer data;
|
|
|
|
security breaches and any failure to protect private customer
information;
|
|
|
|
challenges in anticipating merchandising trends and forecasting
sales;
|
|
|
|
failure to successfully manage the use of catalogs and
e-commerce;
|
|
|
|
increases in postage and paper and other operating costs;
|
|
|
|
current and future government regulation of our catalog and
Internet retail operations;
|
|
|
|
our reliance on third party carriers as part of our fulfillment
operations;
|
|
|
|
system interruption and the lack of integration and redundancy
in our order entry and online systems;
|
|
|
|
uncertainties upon which our anticipated growth depends;
|
|
|
|
risk related to acquisitions, significant investments in new
businesses, or other strategic transactions in which we may
engage
|
38
|
|
|
|
|
weak economic conditions, economic uncertainty and lower
consumer confidence and discretionary spending;
|
|
|
|
seasonality of our business;
|
|
|
|
our reliance on international sourcing relationships and service
providers, and related foreign risks and uncertainties;
|
|
|
|
our ability to maintain vendor relationships and obtain adequate
supplies of inventory;
|
|
|
|
regional risks and adverse effects related to having a single
fulfillment center;
|
|
|
|
potential strikes, work stoppages and slowdowns by our employees;
|
|
|
|
operational risks related to the strength of our operational,
technological and organizational infrastructure;
|
|
|
|
our ability to respond to technological changes;
|
|
|
|
our reliance on third parties to fulfill key operational tasks,
including with respect to our credit and payment processing
system;
|
|
|
|
changes in key senior management personnel;
|
|
|
|
our ability to protect our intellectual property;
|
|
|
|
potential complaints or litigation relating to our business;
|
|
|
|
risks related to significant ownership of our voting stock and
potential for control by our principal existing stockholders;
|
|
|
|
potential claims and reputational risk arising out of the
fraudulent activities of Thomas J. Petters;
|
|
|
|
potential product liability claims if people or property are
harmed by products we sell; and
|
|
|
|
adverse publicity or any failure to maintain our brand image and
corporate reputation.
|
We derive many of our forward looking statements from our
operating budgets and forecasts, which are based upon many
detailed assumptions. While we believe that our assumptions are
reasonable, we caution that it is very difficult to predict the
impact of known factors, and, it is impossible for us to
anticipate all factors that could affect our actual results.
Important factors that could cause actual results to differ
materially from our expectations, or cautionary statements, are
disclosed under Risk Factors and
Managements Discussion and Analysis of Financial
Condition and Results of Operations in this prospectus.
All written and oral forward looking statements attributable to
us, or persons acting on our behalf, are expressly qualified in
their entirety by the cautionary statements as well as other
cautionary statements that are made from time to time in our
other SEC filings and public communications. You should evaluate
all forward looking statements made in this prospectus in the
context of these risks and uncertainties.
We caution you that the important factors referenced above may
not contain all of the factors that are important to an
investment by you in our securities. In addition, we cannot
assure you that we will realize the results or developments we
expect or anticipate or, even if substantially realized, that
they will result in the consequences we anticipate or affect us
or our operations in the way we expect. The forward looking
statements included in this prospectus are made only as of the
date hereof. We undertake no obligation to publicly update or
revise any forward looking statement as a result of new
information, future events or otherwise, except as otherwise
required by law.
39
USE OF
PROCEEDS
We estimate that the net proceeds to us from the sale of the
shares of common stock offered by us will be approximately
$
based upon an assumed initial public offering price of
$
per share, the midpoint of the range set forth on the cover of
this prospectus, and after deducting estimated underwriting
discounts and commissions and estimated offering expenses
payable by us. We will not receive any proceeds from the sale of
any shares of our common stock sold by the selling stockholders.
A $1.00 increase or decrease in the assumed initial public
offering price of
$
per share, the midpoint of the range set forth on the cover page
of this prospectus, would increase or decrease the net proceeds
we receive from this offering by approximately
$ ,
assuming the number of shares offered by us, as set forth on the
cover of this prospectus, remains the same and after deducting
the estimated underwriter discounts and commissions and
estimated offering expenses payable by us.
We intend to use the net proceeds from the sale of common stock
by us in this offering to retire $30 million aggregate
principal amount of our 13% senior subordinated secured
notes due November 21, 2013 (the Senior Subordinated
Secured Notes), plus accrued and unpaid interest thereon.
We intend to use the remaining net proceeds to reduce the
outstanding balance under the revolving credit tranche (the
Revolving Credit Tranche) of our $365 million
account receivable credit facility pursuant to the credit
agreement, dated as of August 20, 2010, by and among our
wholly-owned subsidiary Fingerhut Receivables I, LLC, the
lenders party thereto and Goldman Sachs Bank USA, as
Administrative Agent (the A/R Credit Facility). The
A/R Credit Facility also has a $75 million term loan
tranche (the Term Loan Tranche) that is not
prepayable prior to August 21, 2011. On August 22,
2011, we intend to use borrowings under the Revolving Credit
Tranche to repay in full the Term Loan Tranche, plus prepayment
penalties of $1.5 million and accrued and unpaid interest.
In July 2011, we obtained commitments from the lenders under our
A/R Credit Facility such that, effective upon our full repayment
of the Term Loan Tranche and the Senior Subordinated Secured
Notes (and satisfaction of other typical conditions), the
maximum commitment of the lenders under the Revolving Credit
Tranche will be increased from $290 million to
$350 million.
The outstanding $30.0 million Senior Subordinated Secured
Notes bear an interest rate of 13.00% and are scheduled to
mature in November 2013. The Term Loan Tranche of our A/R Credit
Facility bears a fixed interest rate of 14.75% and is scheduled
to mature on August 20, 2013. The Revolving Credit Tranche
of our A/R Credit Facility bears an interest rate of LIBOR plus
4.25% (4.52% as of April 1, 2011) and is scheduled to
mature on August 20, 2013. The indebtedness under our A/R
Credit Facility was incurred in August 2010 to refinance our
prior accounts receivable credit facility.
40
DIVIDEND
POLICY
We have never declared or paid cash dividends on our common
stock. We do not expect to pay dividends on our common stock for
the foreseeable future. Instead, we anticipate that all of our
earnings in the foreseeable future will be used in the operation
and growth of our business. Any future determination to pay
dividends will be at the discretion of our board of directors,
subject to compliance with certain contractual restrictions,
including restrictions under our existing credit facilities,
which limit our ability to pay dividends, and will depend upon,
among other factors, our results of operations, financial
condition, capital requirements, restrictions contained in
current and future financing instruments and other factors that
our board of directors deems relevant. See
Managements Discussion and Analysis of Financial
Condition and Results of OperationsLiquidity and Capital
Resources for additional information regarding our
existing credit facilities, including restrictions on payment of
dividends thereunder. We will pay in common stock all of the
accrued and unpaid dividends payable to our preferred
stockholders upon conversion of our two series of outstanding
preferred stock on the closing of this offering.
41
CAPITALIZATION
The following table sets forth our cash and cash equivalents and
capitalization as of April 29, 2011:
|
|
|
|
|
on an actual basis; and
|
|
|
|
on a pro forma basis to reflect the following events as if they
had occurred on April 29, 2011:
|
|
|
|
|
|
the conversion of all outstanding shares of our preferred stock
into shares of our common stock upon the closing of this
offering;
|
|
|
|
the payment of the accrued and unpaid dividends payable to our
preferred stockholders upon conversion of their shares of
preferred stock into shares of our common stock in the form of
additional shares of common stock on the closing of this
offering;
|
|
|
|
the lapse of certain anti-dilution rights of the holders of the
216,045,882 common stock warrants issued May 2008;
|
|
|
|
the termination of a contingent fee agreement; and
|
|
|
|
the issuance of additional common stock warrants as an
anti-dilution adjustment due to the payment of accrued and
unpaid dividends on our preferred stock in the form of common
stock.
|
|
|
|
|
|
on a pro forma, as adjusted basis to reflect the following
additional events as if they too had occurred on April 29,
2011:
|
|
|
|
|
|
the sale
of shares
of our common stock in this offering by us at an assumed initial
public offering price of
$
per share, the midpoint of the price range set forth on the
cover of this prospectus, less estimated underwriting discounts
and commissions and estimated offering expenses payable by
us; and
|
|
|
|
the ultimate application of all net proceeds from this offering
to (i) retire our $30 million Senior Subordinated
Secured Notes, plus accrued and unpaid interest,
(ii) retire the $75 million Term Loan Tranche of our
A/R Credit Facility, plus prepayment penalties of
$1.5 million and accrued and unpaid interest (assuming for
these purposes that the Term Loan Tranche was prepayable
immediately upon closing of this offering, notwithstanding the
fact that it cannot be prepaid until August 21,
2011) and (iii) pay down the Revolving Credit Tranche
of our A/R Credit Facility.
|
You should read the information below in conjunction with the
sections titled Use of Proceeds, Selected
Consolidated Financial Data, Managements
Discussion and Analysis of Financial Condition and Results of
Operations and our financial statements and related notes
included elsewhere in this prospectus.
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of April 29, 2011
|
|
|
|
|
|
|
|
|
|
Pro Forma,
|
|
|
|
Actual
|
|
|
Pro Forma
|
|
|
As Adjusted
|
|
|
|
(in thousands, except share and per share data)
|
|
|
Cash and cash equivalents
|
|
$
|
306
|
|
|
$
|
306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities in our own equity (a)
|
|
$
|
58,225
|
|
|
$
|
7,975
|
|
|
|
|
|
Debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
A/R Credit FacilityRevolving Credit Tranche (b)(c)
|
|
$
|
181,000
|
|
|
$
|
181,000
|
|
|
|
|
|
A/R Credit FacilityTerm Loan Tranche (b)(c)
|
|
|
75,000
|
|
|
|
75,000
|
|
|
|
|
|
Inventory Line of Credit (c)(d)
|
|
|
18,481
|
|
|
|
18,481
|
|
|
|
|
|
Senior Subordinated Secured Notes (b)(e)
|
|
|
28,868
|
|
|
|
28,868
|
|
|
|
|
|
Other
|
|
|
973
|
|
|
|
973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
304,322
|
|
|
|
304,322
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mezzanine equity (f):
|
|
|
|
|
|
|
|
|
|
|
|
|
Series B Preferred Stock, $.00001 par value;
753,523,962 shares authorized, 753,256,768 shares
issued and outstanding, actual; no shares issued and
outstanding, pro forma and pro forma, as adjusted
|
|
|
66,230
|
|
|
|
|
|
|
|
|
|
Series A Preferred Stock, $.00001 par value;
791,738,012 shares authorized, 749,995,554 shares
issued and outstanding, actual; no shares issued and
outstanding, pro forma and pro forma, as adjusted
|
|
|
135,343
|
|
|
|
|
|
|
|
|
|
Shareholders (deficit) equity (f):
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, $0.00001 par value; 2,592,550,586 shares
authorized, 342,236,552 shares issued and outstanding,
actual; shares
issued and outstanding, pro
forma; shares
authorized, shares
issued and outstanding, pro forma, as adjusted
|
|
|
3
|
|
|
|
3
|
|
|
|
|
|
Additional paid-in capital
|
|
|
|
|
|
|
251,823
|
|
|
|
|
|
Accumulated deficit
|
|
|
(64,682
|
)
|
|
|
(64,682
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders (deficit) equity
|
|
|
(64,679
|
)
|
|
|
187,144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
499,441
|
|
|
$
|
499,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
We have derivative liabilities
relating to certain of our common stock warrants, preferred
stock warrants, embedded derivatives in preferred stock, and a
contingent fee agreement. These derivative liabilities are
recorded at their estimated fair value at each balance sheet
date. Changes in fair value are reflected in the consolidated
statement of operations as gains or losses from derivatives in
our own equity as described in the notes to the consolidated
financial statements. Upon an initial public offering, all of
the Preferred Stock will be converted to common stock and the
fair value of the derivative liabilities related to 216,045,882
common stock warrants issued in May 2008, the contingent fee
agreement and the embedded derivatives in our Preferred Stock
would be reclassified from liabilities to shareholders
(deficit) equity. The derivative liabilities related to the
preferred stock warrants and 33,116,154 common stock warrants
issued in February and November of 2004 will continue to be
recorded as derivative liabilities with changes in fair value
being reflected in the consolidated statements of operations
until the warrants expire, are exercised or are otherwise
settled.
|
|
|
|
(b)
|
|
The A/R Credit Facility consists of
a $290 million Revolving Credit Tranche and a
$75 million Term Loan Tranche, of which $181 million
and $75 million, respectively, was outstanding as of
April 29, 2011. Upon completion of this offering, we will
initially use all proceeds not used to repay the Senior
Subordinated Secured Notes to pay down the Revolving Credit
Tranche of our A/R Credit Facility, and when prepayment is
|
43
|
|
|
|
|
first allowed on August 22,
2011, we intend to draw from the Revolving Credit Tranche to
retire the entire $75 million Term Loan Tranche of our A/R
Credit Facility and pay the prepayment penalty of
$1.5 million. The Revolving Credit Tranche of our A/R
Credit Facility allows us to pay down and borrow funds on a
recurring basis, subject to borrowing base limits. The pro
forma, as adjusted column reflects the intended prepayment of
the Senior Subordinated Security Notes, the Term Loan Tranche,
$1.5 million prepayment penalty and the ultimate
application of remaining net proceeds to reduction of the
Revolving Credit Tranche. See Note 4 of the notes to our
consolidated financial statements included elsewhere in this
prospectus.
|
|
|
|
(c)
|
|
At April 29, 2011, we had
availability under our A/R Credit Facility of $40.3 million
and under our Inventory Line of Credit of $7.7 million. See
Managements Discussion and Analysis of Financial
Condition and Results of OperationsLiquidity and Capital
Resources for details on these facilities, including
borrowing base limitations thereunder and an amendment to our
A/R Credit Facility that we expect to become effective on or
about August 22, 2011.
|
|
|
|
(d)
|
|
Our Inventory Line of Credit is a
$50 million line of credit secured by inventory and our
other unencumbered assets maturing in August 2013.
|
|
(e)
|
|
Our Senior Subordinated Secured
Notes were issued, together with warrants to acquire
41.7 million shares of our Series A Preferred Stock,
in March 2006 in an aggregate principal amount at maturity of
$30 million and mature on November 21, 2013. Upon
issuance, $4.2 million of value was attributable to the
issuance of the warrants, which was reflected as derivative
liabilities in our own equity and as a discount to the Senior
Secured Subordinated Notes. Such discount has been amortized
into interest expense and increased the amount recorded as
Senior Secured Subordinated Notes on the balance sheet. Upon
completion of this offering, we intend to use a portion of the
net proceeds to retire these notes for $30 million, plus
accrued and unpaid interest. There is no prepayment penalty.
|
|
(f)
|
|
Upon completion of this offering,
our preferred stockholders will convert all of their shares of
Preferred Stock into common stock, and the rights of the holders
of our Preferred Stock will terminate. As a result, the amount
reported as Preferred Stock at that time will be converted into
common stock and additional paid-in capital. In addition, we
intend to satisfy all of the accrued and unpaid dividends
payable on the Preferred Stock by issuance of our common stock
at the date of conversion of shares.
|
Assuming the number of shares offered by us, as set forth on the
cover page of this prospectus, remains the same, and after
deducting estimated underwriting discounts and commissions and
estimated offering expenses payable by us, a $1.00 increase or
decrease in the assumed initial public offering price of
$
per share (the midpoint of the range set forth on the cover page
of this prospectus) would:
|
|
|
|
|
increase or decrease the amount of debt to be retired by
approximately ;
|
|
|
|
increase or decrease additional paid-in capital by approximately
$ ; and
|
|
|
|
increase or decrease each of total stockholders equity and
total capitalization by approximately
$ .
|
The outstanding share information set forth above is as
of ,
and excludes:
|
|
|
|
|
shares
of our common stock issuable upon exercise of outstanding
options under our 2003 Plan, at a weighted average exercise
price of
$
per share;
|
|
|
|
shares
of our common stock issuable upon exercise of outstanding
options under our 2005 Plan, at a weighted average exercise
price of
$
per share;
|
|
|
|
shares
of our common stock issuable upon exercise of outstanding
options under our 2008 Plan, at a weighted average exercise
price of
$
per share;
|
|
|
|
shares
of our common stock reserved for future grants under our 2008
Plan; and
|
|
|
|
shares
of our common stock issuable upon exercise of outstanding
warrants having a weighted average exercise price of
$
per share, an
additional shares
of common stock to be issuable as a result of anti-dilution
adjustments on certain warrants in connection with this offering.
|
44
DILUTION
If you invest in our common stock, your interest will be diluted
to the extent of the difference between the initial public
offering price per share of our common stock in this offering
and the pro forma net tangible book value per share of our
common stock after this offering. Dilution results from the fact
that the per share offering price of our common stock is
substantially in excess of the book value per share attributable
to our existing stockholders for the presently outstanding stock.
As
of ,
our pro forma net tangible book value would have been
approximately
$ ,
or $
per share of common stock. Pro forma net tangible book value per
share of common stock represents the amount of total tangible
assets less total liabilities, divided by the number of shares
of common stock outstanding after giving effect to the
conversion of all outstanding classes of preferred stock into
common stock upon the completion of this offering (exclusive of
payment of accrued dividends on the preferred stock by issuance
of common stock at the time of conversion).
Pro forma as adjusted net tangible book value per share
represents the amount of total tangible assets less total
liabilities divided by the number of shares of common stock
outstanding, as adjusted to give effect to the conversion of all
outstanding classes of preferred stock into common stock upon
the completion of this offering, our sale
of shares
of common stock in this offering at an assumed initial public
offering price of
$
per share of common stock, the midpoint of the range set forth
on the cover page of this prospectus, after deducting the
underwriting discounts and commissions and estimated offering
expenses payable by us, and the payment in shares of common
stock, based on an assumed initial public offering price of
$
per share, the midpoint of the range set forth on the cover of
this prospectus, and an assumed underwriting discount of
$
per share, to our preferred stockholders of all of the accrued
and unpaid dividends due upon conversion of their shares of
outstanding preferred stock into shares of our common stock. As
of ,
2011, our pro forma as adjusted net tangible book value would
have been approximately
$ ,
or $
per share of common stock. This represents an immediate increase
in pro forma as adjusted net tangible book value of
$
per share of common stock to our existing stockholders and an
immediate dilution in pro forma as adjusted net tangible book
value of
$
per share of common stock to investors purchasing common stock
in this offering. The following table illustrates this per share
dilution:
|
|
|
|
|
|
|
|
|
Assumed initial public offering price per share
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net tangible book value per share as
of
|
|
$
|
|
|
|
|
|
|
Increase per share attributable to this offering
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma as adjusted net tangible book value per share after
this offering
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Dilution per share to new investors purchasing our common stock
in this offering
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
A $1.00 increase or decrease in the assumed initial public
offering price of
$
per share, the midpoint of the range set forth on the cover page
of this prospectus, would increase or decrease, as applicable,
our pro forma as adjusted net tangible book value by
$ million,
or $
per share of common stock, and the dilution per share of common
stock to new investors in this offering by
$ ,
assuming the number of shares offered by us, as set forth on the
cover page of this prospectus, remains the same, after deducting
the estimated underwriting discounts and commissions and
estimated offering expenses payable by us.
45
The following table sets forth, as
of ,
2011, on the pro forma as adjusted basis described above,
assuming no exercise of the over-allotment option by the
underwriters, the differences between existing stockholders and
new investors with respect to the total number of shares of
common stock purchased from us and the selling stockholders in
this offering, the total consideration paid and the average
price per share paid at an assumed initial public offering price
of $
per share of common stock, the midpoint of the range set forth
on the cover page of this prospectus, before deducting
underwriting discounts and commissions and estimated offering
expenses payable by us and the selling stockholders.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
Shares Purchased
|
|
|
Total Consideration
|
|
|
Price Per
|
|
|
|
Number
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Share
|
|
|
Existing stockholders
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
New investors
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A $1.00 increase or decrease in the assumed initial public
offering price of
$
per share, the midpoint of the range set forth on the cover of
this prospectus, would increase or decrease, as applicable,
total consideration paid by new investors in this offering by
$ ,
the percent of total consideration paid by investors
participating in this offering
by %, total consideration paid by
all stockholders by
$
and average price per share paid by all stockholders by
$ ,
assuming the number of shares offered by us and the selling
stockholders, as set forth on the cover page of this prospectus,
remains the same.
If the underwriters over-allotment option is exercised in
full, the number of shares held by existing stockholders after
this offering would
be ,
or %, and the number of shares held
by new investors would increase
to ,
or % , of the total number of
shares of our common stock outstanding after this offering.
Except where specifically indicated, the tables and calculations
above are based on shares of common stock issued and outstanding
as
of ,
2011, and exclude:
|
|
|
|
|
shares
of our common stock issuable upon exercise of outstanding
options under our 2003 Plan, at a weighted average exercise
price of
$
per share;
|
|
|
|
shares
of our common stock issuable upon exercise of outstanding
options under our 2005 Plan, at a weighted average exercise
price of
$
per share;
|
|
|
|
shares
of our common stock issuable upon exercise of outstanding
options under our 2008 Plan, at a weighted average exercise
price of
$
per share;
|
|
|
|
shares
of our common stock reserved for future grants under our 2008
Plan; and
|
|
|
|
shares
of our common stock issuable upon exercise of outstanding
warrants having a weighted average exercise price of
$
per share, which amount
includes
additional shares of common stock to be issuable as a result of
anti-dilution adjustments on certain warrants in connection with
this offering.
|
To the extent that the options and warrants described above are
exercised, there will be further dilution to new investors. See
Description of Capital Stock.
46
SELECTED
CONSOLIDATED FINANCIAL AND OTHER DATA
The following tables set forth selected consolidated financial
and other data for the periods and at the dates indicated. The
selected consolidated statement of operations data for the
fiscal years ended January 30, 2009, January 29, 2010
and January 28, 2011 and selected consolidated balance
sheet data as of January 29, 2010 and January 28, 2011
are derived from our audited consolidated financial statements
that are included elsewhere in this prospectus. The selected
consolidated statement of operations data for the fiscal years
ended February 2, 2007 and February 1, 2008 and
selected consolidated balance sheet data as of February 2,
2007, February 1, 2008, and January 30, 2009 are
derived from our previously audited consolidated financial
statements that are not included in this prospectus. The summary
financial data under the heading Selected Operating
Data relating to customer statistics are derived from our
internal records.
The selected consolidated statement of operations data for the
13 weeks ended April 30, 2010 and April 29, 2011
and the selected consolidated balance sheet data as of
April 30, 2010 and April 29, 2011 have been derived
from our unaudited consolidated financial statements which are
included elsewhere in this prospectus. The unaudited
consolidated financial statements have been prepared on the same
basis as our audited consolidated financial statements and, in
the opinion of our management, reflect all adjustments
consisting of normal recurring adjustments, necessary for a fair
presentation of this data. The selected consolidated financial
and operating data as of and for the 13 weeks ended
April 29, 2011 are not necessarily indicative of the
results that may be obtained for a full year.
The following table also sets forth summary consolidated pro
forma data, which give effect to the events described in
footnote (g) to the following table. The consolidated pro forma
data have been derived from unaudited pro forma data included in
our consolidated financial statements included elsewhere in this
prospectus. The consolidated pro forma financial data are
unaudited and presented for informational purposes only and do
not purport to represent what our financial position actually
would have been had the events so described occurred on the
dates indicated or to project our financial position as of any
future date.
You should read this selected consolidated financial data in
conjunction with the consolidated financial statements and
related notes and the information under Use of
Proceeds, Capitalization,
Managements Discussion and Analysis of Financial
Condition and Results of Operations included elsewhere in
this prospectus. The historical results set forth below are not
necessarily indicative of results of operations to be expected
in any future period.
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended (a)
|
|
|
13 Weeks Ended (a)
|
|
|
|
February 2,
|
|
|
February 1,
|
|
|
January 30,
|
|
|
January 29,
|
|
|
January 28,
|
|
|
April 30,
|
|
|
April 29,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010 (b)
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
|
(in thousands, except average order size)
|
|
|
Consolidated Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
310,251
|
|
|
$
|
448,518
|
|
|
$
|
423,338
|
|
|
$
|
438,189
|
|
|
$
|
521,307
|
|
|
$
|
87,106
|
|
|
$
|
99,206
|
|
Cost of sales
|
|
|
162,622
|
|
|
|
231,851
|
|
|
|
220,294
|
|
|
|
226,140
|
|
|
|
275,521
|
|
|
|
44,944
|
|
|
|
51,755
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
147,629
|
|
|
|
216,667
|
|
|
|
203,044
|
|
|
|
212,049
|
|
|
|
245,786
|
|
|
|
42,162
|
|
|
|
47,451
|
|
Sales and marketing expenses
|
|
|
72,624
|
|
|
|
101,630
|
|
|
|
110,404
|
|
|
|
109,384
|
|
|
|
130,091
|
|
|
|
23,706
|
|
|
|
24,761
|
|
Net credit expense (income) (c)
|
|
|
496
|
|
|
|
17,766
|
|
|
|
1,105
|
|
|
|
(22,316
|
)
|
|
|
(36,896
|
)
|
|
|
(11,156
|
)
|
|
|
(14,444
|
)
|
General and administrative expenses
|
|
|
44,150
|
|
|
|
51,838
|
|
|
|
59,533
|
|
|
|
69,087
|
|
|
|
84,031
|
|
|
|
18,225
|
|
|
|
20,906
|
|
Loss from derivatives in our own equity (d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,500
|
|
|
|
32,607
|
|
|
|
|
|
|
|
14,944
|
|
Loss on early extinguishment of debt (e)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,109
|
|
|
|
|
|
|
|
|
|
Interest expense, net (f)
|
|
|
14,957
|
|
|
|
19,037
|
|
|
|
29,839
|
|
|
|
31,216
|
|
|
|
30,750
|
|
|
|
8,173
|
|
|
|
7,395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
15,402
|
|
|
|
26,396
|
|
|
|
2,163
|
|
|
|
18,178
|
|
|
|
94
|
|
|
|
3,214
|
|
|
|
(6,111
|
)
|
Income tax expense (benefit)
|
|
|
1,134
|
|
|
|
(2,081
|
)
|
|
|
828
|
|
|
|
8,956
|
|
|
|
11,618
|
|
|
|
1,175
|
|
|
|
3,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
14,268
|
|
|
|
28,477
|
|
|
|
1,335
|
|
|
|
9,222
|
|
|
|
(11,524
|
)
|
|
|
2,039
|
|
|
|
(9,267
|
)
|
Series B Preferred Stock accretion
|
|
|
|
|
|
|
|
|
|
|
(2,399
|
)
|
|
|
(3,491
|
)
|
|
|
(3,710
|
)
|
|
|
(887
|
)
|
|
|
(931
|
)
|
Series A Preferred Stock accretion
|
|
|
(7,708
|
)
|
|
|
(8,301
|
)
|
|
|
(8,890
|
)
|
|
|
(9,111
|
)
|
|
|
(9,824
|
)
|
|
|
(2,412
|
)
|
|
|
(2,603
|
)
|
Allocation of net income to participating preferred shareholders
|
|
|
(5,766
|
)
|
|
|
(17,311
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common shareholders
|
|
$
|
794
|
|
|
$
|
2,865
|
|
|
$
|
(9,954
|
)
|
|
$
|
(3,380
|
)
|
|
$
|
(25,058
|
)
|
|
$
|
(1,260
|
)
|
|
$
|
(12,801
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share available to common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.0077
|
|
|
$
|
0.0230
|
|
|
$
|
(0.0691
|
)
|
|
$
|
(0.0188
|
)
|
|
$
|
(0.1138
|
)
|
|
$
|
(0.0064
|
)
|
|
$
|
(0.0531
|
)
|
Diluted
|
|
|
0.0049
|
|
|
|
0.0127
|
|
|
|
(0.0691
|
)
|
|
|
(0.0188
|
)
|
|
|
(0.1138
|
)
|
|
|
(0.0064
|
)
|
|
|
(0.0531
|
)
|
Pro forma income per share (g):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
Weighted-average common stock outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
102,459
|
|
|
|
124,468
|
|
|
|
144,114
|
|
|
|
179,757
|
|
|
|
220,181
|
|
|
|
195,672
|
|
|
|
241,222
|
|
Diluted
|
|
|
162,661
|
|
|
|
226,130
|
|
|
|
144,114
|
|
|
|
179,757
|
|
|
|
220,181
|
|
|
|
195,672
|
|
|
|
241,222
|
|
Margins and Expenses as a Percentage of Net Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit rate
|
|
|
47.6
|
%
|
|
|
48.3
|
%
|
|
|
48.0
|
%
|
|
|
48.4
|
%
|
|
|
47.1
|
%
|
|
|
48.4
|
%
|
|
|
47.8
|
%
|
Contribution Margin (h)
|
|
$
|
74,509
|
|
|
$
|
97,271
|
|
|
$
|
91,535
|
|
|
$
|
124,981
|
|
|
$
|
152,591
|
|
|
$
|
29,612
|
|
|
$
|
37,134
|
|
As a % of net sales
|
|
|
24.0
|
%
|
|
|
21.7
|
%
|
|
|
21.6
|
%
|
|
|
28.5
|
%
|
|
|
29.3
|
%
|
|
|
34.0
|
%
|
|
|
37.4
|
%
|
General and administrative expenses
|
|
|
14.2
|
%
|
|
|
11.6
|
%
|
|
|
14.1
|
%
|
|
|
15.8
|
%
|
|
|
16.1
|
%
|
|
|
20.9
|
%
|
|
|
21.1
|
%
|
Interest expense, net
|
|
|
4.8
|
%
|
|
|
4.2
|
%
|
|
|
7.0
|
%
|
|
|
7.1
|
%
|
|
|
5.9
|
%
|
|
|
9.4
|
%
|
|
|
7.5
|
%
|
Net income before loss from derivatives in our own
equity (i)
|
|
$
|
14,268
|
|
|
$
|
28,477
|
|
|
$
|
1,335
|
|
|
$
|
15,722
|
|
|
$
|
21,083
|
|
|
$
|
2,039
|
|
|
$
|
5,677
|
|
As a % of net sales
|
|
|
4.6
|
%
|
|
|
6.3
|
%
|
|
|
0.3
|
%
|
|
|
3.6
|
%
|
|
|
4.0
|
%
|
|
|
2.3
|
%
|
|
|
5.7
|
%
|
Adjusted EBITDA (j)
|
|
$
|
35,386
|
|
|
$
|
52,533
|
|
|
$
|
41,009
|
|
|
$
|
63,784
|
|
|
$
|
78,416
|
|
|
$
|
13,450
|
|
|
$
|
19,056
|
|
As a % of net sales
|
|
|
11.4
|
%
|
|
|
11.7
|
%
|
|
|
9.7
|
%
|
|
|
14.6
|
%
|
|
|
15.0
|
%
|
|
|
15.4
|
%
|
|
|
19.2
|
%
|
Consolidated Balance Sheet Data (at end of period):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,658
|
|
|
$
|
9,547
|
|
|
$
|
558
|
|
|
$
|
2,614
|
|
|
$
|
1,055
|
|
|
$
|
462
|
|
|
$
|
306
|
|
Customer accounts receivable (net of allowance for doubtful
accounts)
|
|
|
213,801
|
|
|
|
311,389
|
|
|
|
342,413
|
|
|
|
390,842
|
|
|
|
492,836
|
|
|
|
356,779
|
|
|
|
455,298
|
|
Merchandise inventories
|
|
|
38,149
|
|
|
|
45,622
|
|
|
|
45,390
|
|
|
|
41,534
|
|
|
|
44,396
|
|
|
|
44,768
|
|
|
|
51,447
|
|
Total assets
|
|
|
299,554
|
|
|
|
442,113
|
|
|
|
497,129
|
|
|
|
524,329
|
|
|
|
614,002
|
|
|
|
483,426
|
|
|
|
585,960
|
|
Derivative liabilities in our own equity (d)
|
|
|
4,174
|
|
|
|
4,174
|
|
|
|
4,174
|
|
|
|
10,674
|
|
|
|
43,281
|
|
|
|
10,674
|
|
|
|
58,225
|
|
Total debt (k)
|
|
|
168,766
|
|
|
|
286,073
|
|
|
|
289,878
|
|
|
|
275,743
|
|
|
|
329,983
|
|
|
|
248,817
|
|
|
|
304,322
|
|
Series B Preferred Stock and Series A Preferred
Stock (l)
|
|
|
96,514
|
|
|
|
104,915
|
|
|
|
171,703
|
|
|
|
184,305
|
|
|
|
197,939
|
|
|
|
187,603
|
|
|
|
201,573
|
|
Shareholders deficit
|
|
|
(32,526
|
)
|
|
|
(14,696
|
)
|
|
|
(24,521
|
)
|
|
|
(27,503
|
)
|
|
|
(52,207
|
)
|
|
|
(28,664
|
)
|
|
|
(64,679
|
)
|
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended (a)
|
|
|
13 Weeks Ended (a)
|
|
|
|
February 2,
|
|
|
February 1,
|
|
|
January 30,
|
|
|
January 29,
|
|
|
January 28,
|
|
|
April 30,
|
|
|
April 29,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010 (b)
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
|
(in thousands, except average order size)
|
|
|
Selected Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New customer credit accounts (m)
|
|
|
558
|
|
|
|
700
|
|
|
|
430
|
|
|
|
439
|
|
|
|
599
|
|
|
|
90
|
|
|
|
143
|
|
Average order size (n)
|
|
$
|
150.51
|
|
|
$
|
157.32
|
|
|
$
|
161.61
|
|
|
$
|
166.30
|
|
|
$
|
179.51
|
|
|
$
|
168.91
|
|
|
$
|
177.05
|
|
Number of orders (o)
|
|
|
2,155
|
|
|
|
2,958
|
|
|
|
2,708
|
|
|
|
2,728
|
|
|
|
2,985
|
|
|
|
529
|
|
|
|
573
|
|
Customer repurchase rate (p)
|
|
|
63
|
%
|
|
|
63
|
%
|
|
|
58
|
%
|
|
|
58
|
%
|
|
|
57
|
%
|
|
|
57
|
%
|
|
|
57
|
%
|
Percentage of orders placed online (q)
|
|
|
26
|
%
|
|
|
31
|
%
|
|
|
35
|
%
|
|
|
38
|
%
|
|
|
44
|
%
|
|
|
39
|
%
|
|
|
40
|
%
|
Selected Credit Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances 30+ days delinquent (r)
|
|
$
|
32,135
|
|
|
$
|
64,274
|
|
|
$
|
72,670
|
|
|
$
|
71,019
|
|
|
$
|
79,630
|
|
|
$
|
62,925
|
|
|
$
|
81,246
|
|
As a % of customer accounts receivable (s)
|
|
|
12.6
|
%
|
|
|
16.1
|
%
|
|
|
16.5
|
%
|
|
|
14.5
|
%
|
|
|
13.2
|
%
|
|
|
13.9
|
%
|
|
|
14.3
|
%
|
Finance charge and fee income as a % of average customer
accounts receivable (t)
|
|
|
33.0
|
%
|
|
|
33.9
|
%
|
|
|
32.1
|
%
|
|
|
32.7
|
%
|
|
|
32.9
|
%
|
|
|
32.8
|
%
|
|
|
35.6
|
%
|
Provision for doubtful accounts as a % of average customer
accounts receivable (t)
|
|
|
22.4
|
%
|
|
|
30.5
|
%
|
|
|
24.4
|
%
|
|
|
19.9
|
%
|
|
|
18.3
|
%
|
|
|
16.3
|
%
|
|
|
19.1
|
%
|
Net charge-offs as a % of average customer accounts
receivable (t)
|
|
|
12.6
|
%
|
|
|
15.3
|
%
|
|
|
22.0
|
%
|
|
|
19.5
|
%
|
|
|
16.1
|
%
|
|
|
15.7
|
%
|
|
|
13.2
|
%
|
Cash Flow Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
(50,757
|
)
|
|
$
|
(84,275
|
)
|
|
$
|
(24,878
|
)
|
|
$
|
11,943
|
|
|
$
|
(59,095
|
)
|
|
$
|
19,179
|
|
|
$
|
29,383
|
|
Investing activities
|
|
|
(9,380
|
)
|
|
|
(22,370
|
)
|
|
|
(33,431
|
)
|
|
|
4,766
|
|
|
|
14,784
|
|
|
|
5,736
|
|
|
|
(4,696
|
)
|
Financing activities
|
|
|
59,932
|
|
|
|
114,534
|
|
|
|
49,320
|
|
|
|
(14,653
|
)
|
|
|
42,752
|
|
|
|
(27,067
|
)
|
|
|
(25,436
|
)
|
|
|
|
(a)
|
|
We operate on a fiscal calendar
widely used by the retail industry that results in a given
fiscal year consisting of a 52- or 53-week period ending on the
Friday closest to January 31 of the following year. Fiscal year
2006 ended on February 2, 2007, fiscal year 2007 ended on
February 1, 2008, fiscal year 2008 ended on
January 30, 2009, fiscal year 2009 ended on
January 29, 2010, and fiscal year 2010 ended on
January 28, 2011. Fiscal year 2006 included 53 weeks
and fiscal years 2007, 2008, 2009 and 2010 included
52 weeks. Our first fiscal quarters of fiscal year 2011 and
fiscal year 2010 each included 13 weeks.
|
|
(b)
|
|
Includes the effects of the
restatement of our 2009 financial statements as discussed in
Note 14 to the consolidated financial statements.
|
|
(c)
|
|
Our net credit expense (income)
consists of finance charge and fee income, less the provision
for doubtful accounts and credit management costs.
|
|
(d)
|
|
We have derivative liabilities
relating to certain of our common stock warrants, preferred
stock warrants, embedded derivatives in preferred stock, and a
contingent fee agreement. These derivative liabilities are
recorded at their estimated fair value at each balance sheet
date. Changes in fair value are reflected in the consolidated
statement of operations as gains or losses from derivatives in
our own equity as described in the notes to the consolidated
financial statements.
|
|
(e)
|
|
On August 20, 2010, we entered
into our $365 million A/R Credit Facility. The proceeds
were used to prepay our Senior Secured Revolving Credit Facility
due May 15, 2011. We accounted for our prepayment as an
extinguishment and recognized a $5.1 million pre-tax loss
on early extinguishment of debt.
|
|
(f)
|
|
Interest expense, net includes
interest income of $0.1 million, $0.5 million,
$0.6 million, $0.1 million, zero, zero, and zero for
the fiscal years ended February 2, 2007, February 1,
2008, January 30, 2009, January 29, 2010, and
January 28, 2011, and the 13 weeks ended
April 30, 2010 and April 29, 2011, respectively.
|
|
|
(g) |
Pro forma basic and diluted net income per share reflects the
following events as if they had occurred on January 30,
2010, or January 29, 2011:
|
|
|
|
|
|
the conversion of all outstanding shares of our preferred stock
into shares of our common stock upon the closing of this
offering;
|
|
|
|
the payment of the accrued and unpaid dividends payable to our
preferred stockholders upon conversion of their shares of
preferred stock into shares of our common stock in the form of
additional shares of common stock on the closing of this
offering;
|
|
|
|
the lapse of certain anti-dilution rights of the holders of the
216,045,882 common stock warrants issued May 2008;
|
|
|
|
the termination of a contingent fee agreement; and
|
49
|
|
|
|
|
the issuance of additional common stock warrants as an
anti-dilution adjustment due to the payment of accrued and
unpaid dividends on our preferred stock in the form of common
stock.
|
|
|
|
(h)
|
|
To supplement our consolidated
financial statements which are presented in accordance with U.S.
generally accepted accounting principles, or GAAP, we use
Contribution Margin as a non-GAAP performance measure. We
believe Contribution Margin is a meaningful measure of the
profitability of our customer relationships. Contribution Margin
is defined as net sales less cost of sales, sales and marketing
expenses and net credit expense (income) and represents the
combined performance of merchandising, marketing and credit
management activities. The long-term profitability of our
customer relationships is dependent upon strategically managing
these three elements of our business as a whole, rather than
focusing on any one or more component of Contribution Margin. We
present Contribution Margin because it is used by our board of
directors and management to evaluate our operating performance,
and we consider it an important supplemental measure of our
operating performance. We believe that Contribution Margin is
useful to investors in analyzing the performance and value of
our business.
|
|
|
|
|
|
Contribution Margin is not in
accordance with, or an alternative to, measures prepared in
accordance with GAAP. In addition, this non-GAAP measure is not
based on any comprehensive set of accounting rules or
principles. As a result, our calculation of Contribution Margin
is likely not comparable to other calculations of such measure
used by other companies. As a non-GAAP measure, Contribution
Margin has limitations in that it does not reflect all of the
amounts associated with our results of operations as determined
in accordance with U.S. GAAP. Although we use Contribution
Margin as a financial measure to assess the performance of our
business compared to that of others in our industry,
Contribution Margin has limitations as an analytical tool, and
you should not consider it in isolation, or as a substitute for
analysis of our results as reported under GAAP.
|
|
|
|
|
|
The following table reconciles our
Contribution Margin to the nearest U.S. GAAP performance
measure, which is net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
13 Weeks Ended
|
|
|
|
February 2,
|
|
|
February 1,
|
|
|
January 30,
|
|
|
January 29,
|
|
|
January 28,
|
|
|
April 30,
|
|
|
April 29,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
|
(in thousands)
|
|
|
Contribution Margin:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
14,268
|
|
|
$
|
28,477
|
|
|
$
|
1,335
|
|
|
$
|
9,222
|
|
|
$
|
(11,524
|
)
|
|
$
|
2,039
|
|
|
$
|
(9,267
|
)
|
Income tax expense (benefit)
|
|
|
1,134
|
|
|
|
(2,081
|
)
|
|
|
828
|
|
|
|
8,956
|
|
|
|
11,618
|
|
|
|
1,175
|
|
|
|
3,156
|
|
Interest expensenet
|
|
|
14,957
|
|
|
|
19,037
|
|
|
|
29,839
|
|
|
|
31,216
|
|
|
|
30,750
|
|
|
|
8,173
|
|
|
|
7,395
|
|
Loss on early extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,109
|
|
|
|
|
|
|
|
|
|
Loss from derivatives in our own equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,500
|
|
|
|
32,607
|
|
|
|
|
|
|
|
14,944
|
|
General and administrative expenses
|
|
|
44,150
|
|
|
|
51,838
|
|
|
|
59,533
|
|
|
|
69,087
|
|
|
|
84,031
|
|
|
|
18,225
|
|
|
|
20,906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contribution Margin
|
|
$
|
74,509
|
|
|
$
|
97,271
|
|
|
$
|
91,535
|
|
|
$
|
124,981
|
|
|
$
|
152,591
|
|
|
$
|
29,612
|
|
|
$
|
37,134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(i)
|
|
To supplement our consolidated
financial statements which are presented in accordance with
U.S. generally accepted accounting principles, or GAAP, we
use net income (loss) before gain (loss) from derivatives in our
own equity as a non-GAAP performance measure. We believe net
income (loss) before gain (loss) from derivatives in our own
equity is a meaningful measure of profitability and we are
providing this information as we believe it facilitates annual
and year over year comparisons for investors and financial
analysts. We present net income (loss) before gain (loss) from
derivatives in our own equity because it eliminates estimated
non-cash gains and losses due to derivative accounting relating
to certain of our common stock warrants, preferred stock
warrants, embedded derivatives in preferred stock, and a
contingent fee agreement, and is used by our board of directors
and management to evaluate our profitability, and we consider it
an important supplemental measure of our operating performance
and profitability. We believe that net income (loss) before gain
(loss) from derivatives in our own equity is useful to investors
in analyzing the performance and value of our business.
|
|
|
|
Net income (loss) before gain
(loss) from derivatives in our own equity is not in accordance
with, or an alternative to, measures prepared in accordance with
GAAP. In addition, this non-GAAP measure is not based on any
comprehensive set of accounting rules or principles. As a
non-GAAP measure, net income (loss) before gain (loss) from
derivatives in our own equity has limitations in that it does
not reflect all of the amounts associated with our results of
operations as determined in accordance with U.S. GAAP.
Although we use net income (loss) before gain (loss) from
derivatives in our own equity as a financial measure to assess
the performance of our business compared to that of others in
our industry, net income (loss) before gain (loss) from
derivatives in our own equity has limitations as an analytical
tool, and you should not consider it in isolation, or as a
substitute for analysis of our results as reported under GAAP.
|
50
|
|
|
|
|
The following table reconciles our
net income (loss) before gain (loss) from derivatives in our own
equity to the nearest U.S. GAAP performance measure, which
is net income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
13 Weeks Ended
|
|
|
|
February 2,
|
|
|
February 1,
|
|
|
January 30,
|
|
|
January 29,
|
|
|
January 28,
|
|
|
April 30,
|
|
|
April 29,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
|
(In thousands)
|
|
Net income (loss) before gain (loss) from derivatives in our
own equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
14,268
|
|
|
$
|
28,477
|
|
|
$
|
1,335
|
|
|
$
|
9,222
|
|
|
$
|
(11,524
|
)
|
|
$
|
2,039
|
|
|
$
|
(9,267
|
)
|
Loss from derivatives in our own equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,500
|
|
|
|
32,607
|
|
|
|
|
|
|
|
14,944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before loss from derivatives in our own equity
|
|
$
|
14,268
|
|
|
$
|
28,477
|
|
|
$
|
1,335
|
|
|
$
|
15,722
|
|
|
$
|
21,083
|
|
|
$
|
2,039
|
|
|
$
|
5,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(j)
|
|
To supplement our consolidated
financial statements which are presented in accordance with U.S.
generally accepted accounting principles, or GAAP, we use
Adjusted EBITDA as a non-GAAP performance measure. We present
Adjusted EBITDA because it is used by our board of directors and
management to evaluate our operating performance and in
determining incentive compensation, and we consider it an
important supplemental measure of our operating performance. We
believe that Adjusted EBITDA is useful to investors in
evaluating our operating performance compared to other companies
in our industry because it assists in analyzing and benchmarking
the performance and value of our business. The calculation of
Adjusted EBITDA eliminates variations in derivative accounting
for common stock warrants and the conversion feature of our
Series A and Series B Preferred Stock, capital
structure (affecting interest expense), income taxes, and the
accounting effects of capital spending. These items may vary for
different companies for reasons unrelated to the overall
operating performance of a companys business. Adjusted
EBITDA, as we present it, represents net income before loss from
derivatives in our own equity, interest expense, income tax
(benefit)/expense, depreciation and amortization, stock-based
compensation, further adjusted for the following additional
items:
|
|
|
|
realized loss on early
extinguishment of our Senior Secured Revolving Credit Facility
during August 2010;
|
|
|
|
asset impairments and
loss on disposal of assets; and
|
|
|
|
other costs that are
added back consistent with covenant calculations under our
applicable credit agreements such as certain financing costs
including bank administration and servicer fees.
|
Adjusted EBITDA and net income before loss from derivatives in
our own equity are not in accordance with, or an alternative to,
measures prepared in accordance with GAAP. In addition, these
non-GAAP measures are not based on any comprehensive set of
accounting rules or principles. As non-GAAP measures, they have
limitations in that they do not reflect all of the amounts
associated with our results of operations as determined in
accordance with U.S. GAAP. Although we use Adjusted EBITDA
as a financial measure to assess the performance of our business
compared to that of others in our industry, Adjusted EBITDA has
limitations as an analytical tool, and you should not consider
it in isolation, or as a substitute for analysis of our results
as reported under GAAP. Some of these limitations are:
|
|
|
|
|
Adjusted EBITDA does not reflect our cash expenditures, future
requirements for capital expenditures, or contractual
commitments;
|
|
|
|
Adjusted EBITDA does not reflect changes in, or cash
requirements for, our working capital needs;
|
|
|
|
Adjusted EBITDA does not reflect the significant interest
expense or the cash requirements necessary to service interest
or principal payments on our debts;
|
|
|
|
although depreciation and amortization are non-cash charges, the
assets being depreciated and amortized will often have to be
replaced in the future, and Adjusted EBITDA does not reflect any
cash requirements for such replacements;
|
|
|
|
Adjusted EBITDA does not reflect our income tax expense or cash
requirements to pay our taxes; and
|
|
|
|
other companies in our industry may calculate Adjusted EBITDA
differently than we do, limiting its usefulness as a comparative
measure.
|
Because of these limitations, neither EBITDA nor Adjusted EBITDA
should be considered a measure of discretionary cash available
to us to invest in the growth of our business. We compensate for
these limitations by relying primarily on our GAAP results and
using Adjusted EBITDA only supplementally. See the consolidated
statements of cash flows included in our consolidated financial
statements included elsewhere in this prospectus.
51
The following table reconciles our Adjusted EBITDA to the
nearest U.S. GAAP performance measure, which is net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
13 Weeks Ended
|
|
|
|
February 2,
|
|
|
February 1,
|
|
|
January 30,
|
|
|
January 29,
|
|
|
January 28,
|
|
|
April 30,
|
|
|
April 29,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
|
(In thousands)
|
|
|
Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
14,268
|
|
|
$
|
28,477
|
|
|
$
|
1,335
|
|
|
$
|
9,222
|
|
|
$
|
(11,524
|
)
|
|
$
|
2,039
|
|
|
$
|
(9,267
|
)
|
Interest expense
|
|
|
15,053
|
|
|
|
19,507
|
|
|
|
30,461
|
|
|
|
31,310
|
|
|
|
30,752
|
|
|
|
8,174
|
|
|
|
7,396
|
|
Income tax expense (benefit)
|
|
|
1,134
|
|
|
|
(2,081
|
)
|
|
|
828
|
|
|
|
8,956
|
|
|
|
11,618
|
|
|
|
1,175
|
|
|
|
3,156
|
|
Depreciation and amortization expense
|
|
|
4,096
|
|
|
|
5,076
|
|
|
|
6,285
|
|
|
|
7,246
|
|
|
|
8,746
|
|
|
|
1,924
|
|
|
|
2,588
|
|
Stock-based compensation expense
|
|
|
389
|
|
|
|
313
|
|
|
|
110
|
|
|
|
321
|
|
|
|
282
|
|
|
|
90
|
|
|
|
55
|
|
Loss from derivatives in our own equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,500
|
|
|
|
32,607
|
|
|
|
|
|
|
|
14,944
|
|
Loss on early extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,109
|
|
|
|
|
|
|
|
|
|
Asset impairments and loss on disposal of assets
|
|
|
412
|
|
|
|
|
|
|
|
411
|
|
|
|
37
|
|
|
|
497
|
|
|
|
|
|
|
|
|
|
Certain financing costs
|
|
|
|
|
|
|
1,217
|
|
|
|
1,661
|
|
|
|
192
|
|
|
|
329
|
|
|
|
48
|
|
|
|
184
|
|
Other
|
|
|
34
|
|
|
|
24
|
|
|
|
(82
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
35,386
|
|
|
$
|
52,533
|
|
|
$
|
41,009
|
|
|
$
|
63,784
|
|
|
$
|
78,416
|
|
|
$
|
13,450
|
|
|
$
|
19,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(k)
|
|
Upon completion of this offering,
we will use a portion of the net proceeds to retire certain
indebtedness. See Use of Proceeds.
|
|
(l)
|
|
See Note 5 to the consolidated
financial statements for information concerning the relative
rights and preferences of our outstanding preferred stock.
|
|
(m)
|
|
Customers that have made their
initial order on account during the fiscal period presented.
|
|
(n)
|
|
Average order size represents
retail merchandise sales including shipping and handling revenue
divided by the number of merchandise orders fulfilled during the
fiscal period presented.
|
|
(o)
|
|
Number of fulfilled merchandise
orders.
|
|
(p)
|
|
Repurchase rate is calculated as
the percentage of customers that were considered active
12 months prior to the balance sheet date and that made a
purchase during the 12 month period preceding the balance
sheet date. We consider a customer to be active if the customer
has made at least one purchase using a credit account within the
previous 12 months and has made at least one payment on
that credit account since the account was opened.
|
|
(q)
|
|
Number of online orders as a
percentage of all orders taken during the fiscal period
presented.
|
|
(r)
|
|
Delinquent balances as of the
customers statement cycle dates prior to or on fiscal
period end.
|
|
(s)
|
|
Delinquent balances as of the
customers statement cycle dates prior to or on fiscal
period end as a percentage of total customer accounts receivable
as of the customers statement cycle dates prior to or on
fiscal period end.
|
|
(t)
|
|
Finance charge and fee income,
provision for doubtful accounts, and net charge-offs each as a
percentage of average customer accounts receivable for the
13 weeks ended April 30, 2010 and April 29, 2011
have been annualized to a comparable 52-week basis.
|
52
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion together with
Selected Consolidated Financial and Other Data, and
the historical financial statements and related notes included
elsewhere in this prospectus. The statements in this discussion
regarding industry outlook, our expectations regarding our
future performance, liquidity and capital resources and other
non-historical statements in this discussion are forward looking
statements. These forward looking statements are based upon
current expectations and involve risks and uncertainties. Our
actual results may differ materially from those anticipated in
these forward looking statements as a result of various factors,
including those set forth under Risk Factors and
Forward Looking Statements or elsewhere in this
prospectus. See Risk Factors and Forward
Looking Statements for a discussion of some of the
uncertainties, risks and assumptions associated with those
forward looking statements. The following discussion reflects
the effects of the restatement of our 2009 financial statements
as discussed in Note 14 to the consolidated financial
statements.
Overview
We are a leading national multi-brand, multi-channel retailer of
a broad selection of name brand and private label general
merchandise servicing low to middle income consumers. Our
customers typically rely on the credit products we offer to pay
for their purchases from us over time. Our strategy focuses on
tailoring merchandise and credit offers to prospective as well
as existing customers utilizing proprietary marketing and credit
models. We operate in a single business segment, primarily under
the Fingerhut brand, in addition to our new
e-commerce
brand, Gettington.com, which we launched in September 2009. We
have grown our fiscal 2010 net sales to
$521.3 million, and net sales grew 13.9% to
$99.2 million for the 13 weeks ended April 29,
2011, from $87.1 million for the 13 weeks ended
April 30, 2010. During 2010, approximately 44% of our
customer orders occurred online and we added 599,000 new
customers.
Important drivers of our overall business performance include
growth in new customer credit accounts, existing customer
repurchase rates, the
mark-up and
mix of merchandise sold to our customers, the percentage of
customers that order online, our access to liquidity to finance
our customers purchases, and the overall performance and
credit quality of our accounts receivable portfolio.
While numerous retailers also sell merchandise via the Internet
and catalogs to low to middle income customers, we have created
a differentiated business model by utilizing our
direct-marketing expertise to integrate our proprietary credit
offerings with our broad general merchandise offerings.
Approximately 95% of our sales are on revolving customer credit
accounts, extended through the Credit Issuers, reflecting our
ability to combine a relevant merchandise offering with an
attractive consumer credit product aligned with the
consumers ability to pay.
By combining our proprietary marketing and credit
decision-making technologies, we are able to tailor credit
offers to serve a large and, we believe, underserved consumer
audience, thereby expanding our potential customer pool. We view
merchandising, marketing and credit management within our
business model as strategically indivisible. Credit is offered
to customers to reasonably assist them in making merchandise
purchases while enhancing customer loyalty and driving repeat
orders. As a result, our credit offerings are designed to
complement our marketing initiatives rather than maximize the
profitability of our credit portfolio on a standalone basis.
We believe we can increase net sales and earnings growth by
capitalizing on our differentiated business platform to increase
penetration within our target market. Utilizing our
53
multi-channel marketing approach, coupled with the cost
efficiencies of our accelerating online business, we believe we
will be able to expand our prospect universe and reduce our
customer acquisition costs.
We have financed our operations primarily through periodic
preferred stock investments, which will convert to common stock
in connection with the closing of this offering, revolving
credit lines secured by customer accounts receivable and
merchandise inventories, term debt (which we intend to retire
with a portion of the net proceeds of this offering) and cash
flows from operations.
Assessing the
Performance of Our Business
Contribution
Margin
To supplement our consolidated financial statements, which are
presented in accordance with GAAP, we use Contribution Margin as
a non-GAAP performance measure. We define Contribution Margin as
net sales less cost of sales, sales and marketing expenses and
net credit expense (income). This definition is likely not
comparable to other definitions of such measure used by other
companies. Contribution Margin represents the combined
performance of our merchandising, marketing and credit
management activities, which we believe are strategically
indivisible. We obtain full or premium retail prices because our
customers value our total offering that includes name brand and
private label merchandise,
shop-at-home
convenience and a personalized credit program.
We view gross profit from merchandise sales as the primary
driver of profitability for the company, while marketing and
credit are tools used to increase net sales and gross profit. We
utilize our retail product
mark-up
(reflected in gross profit), marketing efforts and credit offers
as means to increase our Contribution Margin. Our long-term
success is dependent upon managing these three elements of our
business as a whole, rather than focusing on any one component
of Contribution Margin. For example, we may sacrifice additional
net sales and gross profit if we believe we can improve our
Contribution Margin dollars through a reduction of marketing and
credit costs, or we may decide to market to customers with lower
credit risk profiles utilizing a higher cost marketing channel.
Conversely, we may take on additional credit risk if the savings
in marketing costs outweigh the additional cost of our credit
offer. For additional details regarding Contribution Margin, see
note (h) to Selected Consolidated Financial and Other
Data.
Net
Sales
Net sales consist of sales of Fingerhut and Gettington.com
merchandise and related shipping and handling revenue, as well
as commissions earned from third parties that market their
products to our customers, the most important of which is
extended service plans. Net sales are reported net of discounts
and estimated sales returns and do not include sales taxes. Our
sales are seasonal in nature due to holiday buying patterns. Our
merchandise sales are highest in the fourth quarter.
We categorize our merchandise sales into three product
categories:
|
|
|
|
|
Homeincluding housewares, bed and bath, lawn and
garden, home furnishings and hardware;
|
|
|
|
Entertainmentincluding electronics, video games,
toys and sporting goods; and
|
|
|
|
Fashionincluding apparel, footwear, cosmetics,
fragrances and jewelry.
|
Gross Profit
Rate
We define gross profit as the difference between net sales and
cost of sales, and gross profit rate is the rate of gross profit
compared to net sales.
54
Our cost of sales includes the cost of merchandise sold (net of
vendor rebates, purchase discounts and estimated returns),
shipping and handling costs, inbound freight costs, payroll and
benefits for distribution center employees, and estimates of
product obsolescence costs.
Changes in the mix of our merchandise categories impact our
overall cost of sales. We review our inventory levels on an
ongoing basis in order to identify slow-moving merchandise, and
generally use markdowns to clear that merchandise. The timing
and level of markdowns are driven by the seasonality of our
business model and customer acceptance of our merchandise. If we
misjudge the market for our products, we may be faced with
significant excess inventories for some products and be required
to mark down those products in order to sell them.
Sales and
Marketing Expenses
Sales and marketing expenses include online advertising, catalog
production and postage costs, premium (i.e., free gift with
purchase) expense, order entry, and customer service costs.
Catalog production and postage costs are deferred and amortized
over the period during which the future benefits of mailings are
expected to be received, generally over three to five months
after mailings. Our sales and marketing expenses as a percentage
of net sales are lowest in the fourth quarter due to higher
existing customer purchases during the holiday season which have
lower marketing costs as a percent of total net sales.
Net Credit
Expense (Income)
We recognize finance charge and fee income on customer accounts
receivable according to the contractual provisions of our
customer account agreements. We accrue finance charge income on
all accounts receivable until the account balance is paid off or
charged off. We impose a late fee if our customer does not pay
at least the minimum payment by the payment due date. We cease
to charge a late fee when an account is 90 or more days past
due. Our estimate of uncollectible finance charge and fee income
is included in the allowance for doubtful accounts.
Credit expenses include credit management costs (including
statement and payment processing, collections, origination fees
paid to the Credit Issuers, new account application and credit
bureau processing costs, as well as direct customer service
costs) and the provision for doubtful accounts. We record a
provision for doubtful accounts to maintain the allowance for
doubtful accounts at a level intended to absorb probable losses
in customer accounts receivable as of the consolidated balance
sheet date.
Our provision for doubtful accounts is highest in the fourth
quarter primarily due to the seasonal buildup of customer
accounts receivable balances during the seasonal peak in our
merchandise sales.
General and
Administrative Expenses
General and administrative expenses include payroll and benefit
costs for corporate and administrative employees, including
information technology, legal, human resources, finance,
merchandising, credit supervision, sales and marketing
management; occupancy costs of corporate and distribution center
facilities; depreciation related to corporate assets; insurance;
software amortization; maintenance; and other overhead costs.
As a public company, we expect to incur additional operating
expenses including investor relations, insurance, stockholder
administration and regulatory compliance costs necessary to
comply with our obligations under the Sarbanes-Oxley Act and
other applicable laws and regulations.
55
Interest
Expense, net
Our interest expense, net is comprised of the expense incurred
on our short- and long-term debt and is net of interest income.
We expect interest expense to decrease significantly in
aggregate dollar amounts and as a percentage of net sales
resulting from our expected payment of outstanding borrowings
with the proceeds of this offering. See Use of
Proceeds, and Liquidity and Capital
Resources.
Factors Affecting
Comparability
We set forth below selected factors that we believe have had, or
are expected to have, a significant effect on the comparability
of recent or future results of operations:
Loss from
Derivatives in Our Own Equity
We have derivative liabilities relating to certain of our common
stock warrants, preferred stock warrants, embedded derivatives
in preferred stock, and a contingent fee agreement. These
derivative liabilities are recorded at their estimated fair
value at each balance sheet date. The fair values of these
derivatives increase or decrease based on the overall estimated
value of our company. Changes in fair value are reflected in the
consolidated statements of operations as gains or losses from
derivatives in our own equity. The fair value of derivatives
related to certain common stock warrants, preferred stock
warrants and embedded derivatives in preferred stock and the
associated non-cash loss are expected to increase significantly
as we become more likely to execute an initial public offering.
We expect the fair value of the contingent fee to continue to
decrease as we become more likely to execute an initial public
offering partially offsetting non-cash losses on other
derivatives in our own equity. Since the contingent fee
terminates upon an initial public offering, its fair value as of
the date of an initial public offering will be zero.
Upon an initial public offering, at which time all of the
Preferred Stock is converted to common stock, the fair value of
the derivative liabilities related to 216 million common
stock warrants issued in May 2008 and the embedded derivatives
in our Preferred Stock would be reclassified from liabilities to
shareholders equity (deficit), and all recognition of
gains or losses from changes in the fair value of these
securities would cease. The derivative liabilities related to
the preferred stock warrants and 33 million common stock
warrants issued in February and November of 2004 will continue
to be recorded as derivative liabilities with changes in fair
value being reflected in the consolidated statements of
operations until the warrants expire, are exercised or are
otherwise settled. The 33 million common stock warrants
expire in June 2012, and the preferred stock warrants expire in
March 2016. See notes 4 and 5 to the consolidated financial
statements for further information about derivatives in our own
equity.
Performance of
Our Credit Portfolio
Since 2008, our credit portfolio delinquencies and credit losses
have decreased from 16.5% and 22.0%, respectively, to 13.2% and
16.1%, respectively, in 2010. This improvement has caused our
provision for doubtful accounts rate to decrease from 24.4% to
18.3% during the same period. However, we anticipate that these
rates will level off or increase as we invest in the acquisition
of new customers and as net sales to new customers becomes a
larger portion of total net sales. The average time since
origination of customer accounts affects the stability of
delinquency and loss rates. The peak delinquency rate for a new
account vintage is approximately eight months after origination.
Customer accounts past this peak delinquency period exhibit
greater stability in their performance. As of April 29,
2011, 21.3% of the receivable balance was related to accounts
originated in the previous 12 months, compared to 17.9% as
of April 30, 2010. Balances of customer accounts receivable
that are 30 days or more
56
delinquent as a percentage of total outstanding customer
accounts receivable increased to 14.3% as of April 29,
2011, compared to 13.9% as of April 30, 2010.
Migration of
Sales to the Internet
Our sales orders placed online as a percent of total orders
placed has increased from 25% in 2005 to 44% in 2010. We expect
this trend to continue as retail consumers shopping
preferences continue to migrate to the Internet and as we refine
our Internet marketing strategies and make further investments
in our websites. We expect the migration of sales to the
Internet to increase the efficiency of our overall marketing and
operating expenditures. However, we also expect this migration
to put pressure on our gross profit rate, as consumers generally
tend to have greater price sensitivity when shopping on the
Internet.
Income
Taxes
We are a U.S. business that operates across state and local
taxing jurisdictions. Developing a provision for income taxes,
including the effective tax rate and the analysis of potential
tax exposure items, if any, requires significant judgment and
expertise in federal and state income tax laws, regulations and
strategies, including the determination of deferred tax assets.
Our judgment and tax strategies are subject to audit by various
taxing authorities.
At April 29, 2011, we had net operating loss carry forwards
of $5.1 million. Our ability to utilize net operating loss
carry forwards is influenced by a number of factors, including
sufficient future taxable income and changes in our ownership.
Tax authorities examine our tax returns from time to time. We
provide tax reserves for uncertainties associated with our tax
benefits (expense). We had tax reserves (including estimated
interest) of $4.5 million as of April 29, 2011. See
Critical Accounting Policies and Use of
EstimatesIncome Taxes.
Preferred
Stock Accretion
Holders of our Series B Preferred Stock and Series A
Preferred Stock are entitled to receive when, and as declared by
the Board, cumulative dividends at an annual rate of 6% and 8%,
respectively. These dividends are cumulative and accrue daily
but compound annually. See Liquidity and Capital
ResourcesPreferred Stock.
Upon completion of this offering, our preferred stockholders
will convert all of their shares of preferred stock, including
accrued and unpaid cumulative dividends into common stock, and
the rights of the holders of our Preferred Stock will terminate.
As a result, the amount reported as Preferred Stock at that time
will be converted into common stock and additional paid-in
capital.
Financing
Our net income (loss) and income (loss) per share are impacted
by our financing activities including changes to interest
expense, prepayment penalties and other costs associated with
financing. The refinancing of our senior secured revolving
credit facility in August 2010 resulted in a $5.1 million
pre-tax loss on early extinguishment of debt. The anticipated
application of the net proceeds of this offering to the
repayment of outstanding indebtedness would also result in
prepayment and early extinguishment of debt costs expected to
aggregate approximately
$ million
during the period in which this offering is consummated.
We have seen better access to and lower costs of debt financing
in the last year as the credit markets and our credit portfolio
performance have improved. These trends have allowed us to
refinance and modify outstanding credit facilities on more
favorable terms. We anticipate that the ultimate repayment of
our $30 million Senior Subordinated Secured Notes and the
$75 million Term Loan Tranche of our A/R Credit Facility
with the proceeds from this offering will provide us with
significant additional annual cash interest expense savings. We
believe the
57
related improvement in earnings and cash flows associated with
this reduction in interest expense, as well as the current
performance of our credit portfolio, will further enhance our
long-term access to debt financing and liquidity needed to grow
our business. See Liquidity and Capital
Resources.
Regulatory and
Public Company Expenses
We incur significant costs in connection with compliance with
laws and regulations affecting our business. This is
particularly true in the increasingly burdensome regulatory
environment for businesses like ours that have a consumer
credit, privacy and data security component. We have made
significant capital expenditures and investments in human
resources during the past three years to improve systems,
processes and procedures to ensure proper controls in connection
with our use and storage of customers personal information
and continuing compliance with applicable consumer credit laws
and regulations. Pending legislative and regulatory initiatives
may result in incurrence of additional costs similar to these
over the next several years.
In addition, as a result of this offering, we will become a
public company and need to comply with additional laws,
regulations and requirements that we did not need to comply with
as a private company, including certain provisions of the
Sarbanes-Oxley Act of 2002, SEC regulations and the requirements
of the NASDAQ Stock Market. We will incur additional costs that
could be significant in connection with these public company
compliance requirements.
Results of
Operations
We operate on a fiscal calendar widely used by the retail
industry that results in a given fiscal year consisting of a 52-
or 53-week period ending on the Friday closest to January 31 of
the following year. Fiscal year 2010 ended on January 28,
2011, fiscal year 2009 ended on January 29, 2010, and
fiscal year 2008 ended on January 30, 2009. Each of these
three fiscal years included 52 weeks. References to years
relate to fiscal years or fiscal year ends rather than calendar
years. Our operating results for fiscal years 2008, 2009 and
2010, and the 13 weeks ended April 30, 2010 and
April 29, 2011, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
13 Weeks Ended
|
|
|
|
January 30,
|
|
|
% of
|
|
|
January 29,
|
|
|
% of
|
|
|
January 28,
|
|
|
% of
|
|
|
April 30,
|
|
|
% of
|
|
|
April 29,
|
|
|
% of
|
|
|
|
2009
|
|
|
Net Sales
|
|
|
2010
|
|
|
Net Sales
|
|
|
2011
|
|
|
Net Sales
|
|
|
2010
|
|
|
Net Sales
|
|
|
2011
|
|
|
Net Sales
|
|
|
|
(in thousands)
|
|
|
Net sales
|
|
$
|
423,338
|
|
|
|
100.0
|
%
|
|
$
|
438,189
|
|
|
|
100.0
|
%
|
|
$
|
521,307
|
|
|
|
100.0
|
%
|
|
$
|
87,106
|
|
|
|
100.0
|
%
|
|
$
|
99,206
|
|
|
|
100.0
|
%
|
Cost of sales
|
|
|
220,294
|
|
|
|
52.0
|
%
|
|
|
226,140
|
|
|
|
51.6
|
%
|
|
|
275,521
|
|
|
|
52.9
|
%
|
|
|
44,944
|
|
|
|
51.6
|
%
|
|
|
51,755
|
|
|
|
52.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
203,044
|
|
|
|
48.0
|
%
|
|
|
212,049
|
|
|
|
48.4
|
%
|
|
|
245,786
|
|
|
|
47.1
|
%
|
|
|
42,162
|
|
|
|
48.4
|
%
|
|
|
47,451
|
|
|
|
47.8
|
%
|
Sales and marketing expenses
|
|
|
110,404
|
|
|
|
26.1
|
%
|
|
|
109,384
|
|
|
|
25.0
|
%
|
|
|
130,091
|
|
|
|
25.0
|
%
|
|
|
23,706
|
|
|
|
27.2
|
%
|
|
|
24,761
|
|
|
|
25.0
|
%
|
Net credit expense (income)
|
|
|
1,105
|
|
|
|
0.3
|
%
|
|
|
(22,316
|
)
|
|
|
(5.1
|
)%
|
|
|
(36,896
|
)
|
|
|
(7.1
|
)%
|
|
|
(11,156
|
)
|
|
|
(12.8
|
)%
|
|
|
(14,444
|
)
|
|
|
(14.6
|
)%
|
General and administrative expenses
|
|
|
59,533
|
|
|
|
14.1
|
%
|
|
|
69,087
|
|
|
|
15.8
|
%
|
|
|
84,031
|
|
|
|
16.1
|
%
|
|
|
18,225
|
|
|
|
20.9
|
%
|
|
|
20,906
|
|
|
|
21.1
|
%
|
Loss from derivatives in our own equity
|
|
|
|
|
|
|
0.0
|
%
|
|
|
6,500
|
|
|
|
1.5
|
%
|
|
|
32,607
|
|
|
|
6.3
|
%
|
|
|
|
|
|
|
0.0
|
%
|
|
|
14,944
|
|
|
|
15.1
|
%
|
Loss on early extinguishment of debt
|
|
|
|
|
|
|
0.0
|
%
|
|
|
|
|
|
|
0.0
|
%
|
|
|
5,109
|
|
|
|
1.0
|
%
|
|
|
|
|
|
|
0.0
|
%
|
|
|
|
|
|
|
0.0
|
%
|
Interest expense, net
|
|
|
29,839
|
|
|
|
7.0
|
%
|
|
|
31,216
|
|
|
|
7.1
|
%
|
|
|
30,750
|
|
|
|
5.9
|
%
|
|
|
8,173
|
|
|
|
9.4
|
%
|
|
|
7,395
|
|
|
|
7.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
2,163
|
|
|
|
0.5
|
%
|
|
|
18,178
|
|
|
|
4.1
|
%
|
|
|
94
|
|
|
|
0.0
|
%
|
|
|
3,214
|
|
|
|
3.7
|
%
|
|
|
(6,111
|
)
|
|
|
(6.2
|
)%
|
Income tax expense
|
|
|
828
|
|
|
|
0.2
|
%
|
|
|
8,956
|
|
|
|
2.0
|
%
|
|
|
11,618
|
|
|
|
2.2
|
%
|
|
|
1,175
|
|
|
|
1.3
|
%
|
|
|
3,156
|
|
|
|
3.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,335
|
|
|
|
0.3
|
%
|
|
$
|
9,222
|
|
|
|
2.1
|
%
|
|
$
|
(11,524
|
)
|
|
|
(2.2
|
)%
|
|
$
|
2,039
|
|
|
|
2.3
|
%
|
|
$
|
(9,267
|
)
|
|
|
(9.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
13 Weeks Ended
|
|
|
|
January 30,
|
|
|
% of
|
|
|
January 29,
|
|
|
% of
|
|
|
January 28,
|
|
|
% of
|
|
|
April 30,
|
|
|
% of
|
|
|
April 29,
|
|
|
% of
|
|
|
|
2009
|
|
|
Net Sales
|
|
|
2010
|
|
|
Net Sales
|
|
|
2011
|
|
|
Net Sales
|
|
|
2010
|
|
|
Net Sales
|
|
|
2011
|
|
|
Net Sales
|
|
|
|
(in thousands)
|
|
|
Contribution Margin (a):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,335
|
|
|
|
0.3
|
%
|
|
$
|
9,222
|
|
|
|
2.1
|
%
|
|
$
|
(11,524
|
)
|
|
|
(2.2
|
)%
|
|
$
|
2,039
|
|
|
|
2.3
|
%
|
|
$
|
(9,267
|
)
|
|
|
(9.3
|
)%
|
Loss from derivatives in our own equity
|
|
|
|
|
|
|
0.0
|
%
|
|
|
6,500
|
|
|
|
1.5
|
%
|
|
|
32,607
|
|
|
|
6.3
|
%
|
|
|
|
|
|
|
0.0
|
%
|
|
|
14,944
|
|
|
|
15.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before loss from derivatives in our own equity
|
|
$
|
1,335
|
|
|
|
0.3
|
%
|
|
$
|
15,722
|
|
|
|
3.6
|
%
|
|
$
|
21,083
|
|
|
|
4.0
|
%
|
|
$
|
2,039
|
|
|
|
2.3
|
%
|
|
$
|
5,677
|
|
|
|
5.7
|
%
|
Income tax expense
|
|
|
828
|
|
|
|
0.2
|
%
|
|
|
8,956
|
|
|
|
2.0
|
%
|
|
|
11,618
|
|
|
|
2.2
|
%
|
|
|
1,175
|
|
|
|
1.3
|
%
|
|
|
3,156
|
|
|
|
3.2
|
%
|
Interest expense, net
|
|
|
29,839
|
|
|
|
7.0
|
%
|
|
|
31,216
|
|
|
|
7.1
|
%
|
|
|
30,750
|
|
|
|
5.9
|
%
|
|
|
8,173
|
|
|
|
9.4
|
%
|
|
|
7,395
|
|
|
|
7.5
|
%
|
Loss on early extinguishment of debt
|
|
|
|
|
|
|
0.0
|
%
|
|
|
|
|
|
|
0.0
|
%
|
|
|
5,109
|
|
|
|
1.0
|
%
|
|
|
|
|
|
|
0.0
|
%
|
|
|
|
|
|
|
0.0
|
%
|
General and administrative expenses
|
|
|
59,533
|
|
|
|
14.1
|
%
|
|
|
69,087
|
|
|
|
15.8
|
%
|
|
|
84,031
|
|
|
|
16.1
|
%
|
|
|
18,225
|
|
|
|
20.9
|
%
|
|
|
20,906
|
|
|
|
21.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contribution Margin
|
|
$
|
91,535
|
|
|
|
21.6
|
%
|
|
$
|
124,981
|
|
|
|
28.5
|
%
|
|
$
|
152,591
|
|
|
|
29.3
|
%
|
|
$
|
29,612
|
|
|
|
34.0
|
%
|
|
$
|
37,134
|
|
|
|
37.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
See note (h) to Selected
Consolidated Financial and Other Data for a discussion of
Contribution Margin.
|
Comparison of
13 Weeks Ended April 29, 2011 to 13 Weeks Ended
April 30, 2010
Net (Loss)
Income
Net loss was $9.3 million in the 13 weeks ended
April 29, 2011 compared to net income of $2.0 million
in the 13 weeks ended April 30, 2010, primarily due to
a $14.9 million increase in loss from derivatives in our
own equity, a $2.7 million increase in general and
administrative expenses, a $2.0 million increase in income
tax expense, and a $1.1 million increase in sales and
marketing expenses, partially offset by a $5.3 million
increase in gross profit, a $3.3 million improvement in net
credit expense (income), and a $0.8 million decrease in
interest expense (net of interest income), as noted below.
Contribution
Margin
Contribution Margin increased $7.5 million, or 25.4%, to
$37.1 million in the 13 weeks ended April 29,
2011 from $29.6 million in the 13 weeks ended
April 30, 2010, primarily due to a 13.9% increase in net
sales. Contribution Margin as a percentage of net sales improved
343 basis points. The primary driver of the increase in
Contribution Margin as a percentage of net sales was a
225 basis point improvement in sales and marketing expenses
as a percentage of net sales, a 175 basis point improvement
in net credit expense (income) as a percentage of net sales,
partially offset by a 57 basis point decrease in gross
profit rate. The improvement in sales and marketing expenses is
primarily the result of increased response rates on new customer
acquisition campaigns as well as higher average order size on
sales to new and existing customers. The improvement in net
credit expense (income) reflects higher finance charge and fee
yield due to higher average customer accounts receivable
balances, changes in fee structure and lower finance charge and
fee charge-offs as a result of continued benefits from our
credit underwriting and account management strategies. The lower
gross profit rate was primarily due to higher freight costs as
noted below.
Net
Sales
Net sales increased 13.9% to $99.2 million in the
13 weeks ended April 29, 2011 from $87.1 million
in the 13 weeks ended April 30, 2010. We added 143,000
new customer credit accounts in the 13 weeks ended
April 29, 2011 compared to 90,000 new customer credit
accounts in the 13 weeks ended April 30, 2010.
59
The $12.1 million net sales increase was due to higher
sales to both new and existing customers. New customer net sales
and accounts acquired increased due to an increase in catalogs
mailed to prospective customers including increased mailings of
our 2011 Spring Big Book as a customer acquisition tool, the
expansion of a credit offer that features a higher than
historical initial credit line to prospective customers, growth
in net sales from our Gettington.com brand, and the marketing of
our Fingerhut FreshStart installment credit offer. The number of
catalogs mailed to prospective customers in the first quarter of
2011 increased approximately 10% over the first quarter of 2010
including additional Spring Big Book mailings to prospective
customers. We also offered selected prospective customers an
initial credit line that was approximately $100 to $200 higher
than historical initial credit lines to similar customers. Only
a small test population received such an offer in the first
quarter of 2010. This strategy generated an increase in overall
response to marketing campaigns as well as an increase in the
customers initial average order size. Also, net sales from
our Gettington.com brand increased $2.0 million, and we
continued our rollout of the Fingerhut FreshStart credit offer.
Prospective customers that do not qualify for a Fingerhut
revolving credit account may apply for a Fingerhut FreshStart
credit account. Fingerhut FreshStart is a credit product that
allows approved applicants to purchase Fingerhut merchandise on
an installment loan basis after a $30 down payment has been
received. We added new Fingerhut FreshStart credit accounts from
both direct marketing efforts and as a counter offer to
applicants who did not qualify for the traditional Fingerhut
revolving credit product.
In addition, account management strategies with existing
customers put in place in late 2009 and 2010 continued to drive
an increase in these customers average order size. Overall
average order size increased $8.14, or 4.8%, over the prior year.
The percentage of our merchandise sales (including shipping and
handling revenue but excluding sales returns and net of sales
discounts) derived from our internal merchandise categories are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
|
|
|
|
|
|
|
|
April 30, 2010
|
|
|
April 29, 2011
|
|
|
Increase/
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
(Decrease)
|
|
|
|
$
|
|
|
Sales
|
|
|
$
|
|
|
Sales
|
|
|
$
|
|
|
%
|
|
|
|
(in thousands)
|
|
|
Sales by Merchandise Category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home
|
|
$
|
46,588
|
|
|
|
52.1
|
%
|
|
$
|
53,100
|
|
|
|
52.3
|
%
|
|
$
|
6,512
|
|
|
|
14.0
|
%
|
Entertainment
|
|
|
31,458
|
|
|
|
35.2
|
%
|
|
|
36,214
|
|
|
|
35.7
|
%
|
|
|
4,756
|
|
|
|
15.1
|
%
|
Fashion
|
|
|
11,306
|
|
|
|
12.7
|
%
|
|
|
12,134
|
|
|
|
12.0
|
%
|
|
|
828
|
|
|
|
7.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total merchandise sales
|
|
|
89,352
|
|
|
|
100.0
|
%
|
|
|
101,448
|
|
|
|
100.0
|
%
|
|
|
12,096
|
|
|
|
13.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Returns and allowances
|
|
|
(4,937
|
)
|
|
|
|
|
|
|
(5,115
|
)
|
|
|
|
|
|
|
178
|
|
|
|
3.6
|
%
|
Commissions
|
|
|
2,691
|
|
|
|
|
|
|
|
2,873
|
|
|
|
|
|
|
|
182
|
|
|
|
6.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
87,106
|
|
|
|
|
|
|
$
|
99,206
|
|
|
|
|
|
|
$
|
12,100
|
|
|
|
13.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All of our merchandise categories experienced significant dollar
growth during the 13 weeks ended April 29, 2011
compared to the comparable prior period in 2010. The
entertainment category continues to be led by sales of
electronics including significant increases in the sales of
computers and televisions. Our home category experienced growth
in a broad assortment of products, and the growth in our fashion
category was led by increases in jewelry sales.
60
Gross Profit
Rate
The gross profit rate decreased 57 basis points to 47.8% in
the 13 weeks ended April 29, 2011, compared to 48.4%
in the 13 weeks ended April 30, 2010. A 102 basis
point decrease in the gross profit rate was due to increases in
freight costs as a result of higher fuel costs and price
increases from our carriers, and 42 basis points was due to
the $2.1 million increase in merchandise sales from our
Gettington.com brand, which has lower
mark-ups.
The gross profit rate benefited from a 63 basis point
improvement in merchandise sales returns, and a 24 basis
point improvement due to increases in vendor discounts.
Sales and
Marketing Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
|
|
|
|
|
|
|
|
April 30, 2010
|
|
|
April 29, 2011
|
|
|
Increase/
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
(Decrease)
|
|
|
|
$
|
|
|
Net Sales
|
|
|
$
|
|
|
Net Sales
|
|
|
$
|
|
|
%
|
|
|
|
(in thousands)
|
|
|
Sales and Marketing Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Catalog direct mail
|
|
$
|
19,540
|
|
|
|
22.4
|
%
|
|
$
|
19,500
|
|
|
|
19.7
|
%
|
|
$
|
(40
|
)
|
|
|
(0.2
|
)%
|
Digital marketing
|
|
|
1,838
|
|
|
|
2.1
|
%
|
|
|
2,028
|
|
|
|
2.0
|
%
|
|
|
190
|
|
|
|
10.3
|
%
|
Order entry and customer service
|
|
|
1,787
|
|
|
|
2.1
|
%
|
|
|
2,663
|
|
|
|
2.7
|
%
|
|
|
876
|
|
|
|
49.0
|
%
|
Premium (free gift with purchase)
|
|
|
541
|
|
|
|
0.6
|
%
|
|
|
570
|
|
|
|
0.6
|
%
|
|
|
30
|
|
|
|
5.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales and marketing expenses
|
|
$
|
23,706
|
|
|
|
27.2
|
%
|
|
$
|
24,761
|
|
|
|
25.0
|
%
|
|
$
|
1,056
|
|
|
|
4.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing expenses in the 13 weeks ended
April 29, 2011 increased to $24.8 million, or 25.0% of
net sales, compared with $23.7 million, or 27.2%, of net
sales in the 13 weeks ended April 30, 2010. The
226 basis point decrease in the sales and marketing expense
rate was primarily due to an increase in overall average order
size of $8.14, or 4.8% over the prior year period and improved
response to new customer marketing campaigns. The improvement in
average order size from existing customers resulted from
continued account and credit line management strategies. The
improvement in response and average order size from new
customers is primarily due to credit offers that included higher
than historical initial credit lines. The improvement in
response rates was also the result of our Fingerhut FreshStart
installment credit counter offer to applicants that did not
qualify for a traditional Fingerhut revolving credit account.
While mailings to prospective customers increased approximately
10%, we were able to drive efficiencies by continuing to reduce
catalog mailings to existing customers and supplementing our
catalog mailings with increased digital marketing. Order entry
and customer service costs increased $876,000, or 63 basis
points as a percent of net sales. The 63 basis point
increase as a percent of net sales reflects the additional
service required to support new customer accounts including the
roll out of the Fingerhut FreshStart credit offer.
61
Net Credit
Expense (Income)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
|
|
|
|
|
|
|
|
April 30, 2010
|
|
|
April 29, 2011
|
|
|
Increase/
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
(Decrease)
|
|
|
|
$
|
|
|
Net Sales
|
|
|
$
|
|
|
Net Sales
|
|
|
$
|
|
|
%
|
|
|
|
(in thousands)
|
|
|
Net Credit Expense (Income):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance charge and fee income
|
|
$
|
(38,110
|
)
|
|
|
(43.8
|
)%
|
|
$
|
(51,260
|
)
|
|
|
(51.7
|
)%
|
|
$
|
13,150
|
|
|
|
34.5
|
%
|
Provision for doubtful accounts
|
|
|
18,896
|
|
|
|
21.7
|
%
|
|
|
27,500
|
|
|
|
27.7
|
%
|
|
|
8,604
|
|
|
|
45.5
|
%
|
Credit management costs
|
|
|
8,058
|
|
|
|
9.3
|
%
|
|
|
9,316
|
|
|
|
9.4
|
%
|
|
|
1,258
|
|
|
|
15.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net credit expense (income)
|
|
$
|
(11,156
|
)
|
|
|
(12.8
|
)%
|
|
$
|
(14,444
|
)
|
|
|
(14.6
|
)%
|
|
|
3,288
|
|
|
|
29.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average customer accounts receivable
|
|
$
|
464,552
|
|
|
|
|
|
|
$
|
575,418
|
|
|
|
|
|
|
$
|
110,866
|
|
|
|
23.9
|
%
|
Annualized finance charge and fee income as a percentage of
average customer accounts receivable
|
|
|
32.8
|
%
|
|
|
|
|
|
|
35.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Annualized provision for doubtful accounts as a percentage of
average customer accounts receivable
|
|
|
16.3
|
%
|
|
|
|
|
|
|
19.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Net credit expense (income) in the 13 weeks ended
April 29, 2011 was $(14.4) million compared with net
credit expense (income) of $(11.2) million in the
13 weeks ended April 30, 2010. The $3.3 million
increase in income was primarily due to a $13.2 million
increase in finance charge and fee income, partially offset by
an $8.6 million increase in the provision for doubtful
accounts and a $1.3 million increase in our credit
management costs compared to the 13 weeks ended
April 30, 2010. Finance charge and fee income was higher
due to an increase in average accounts receivable of
$110.9 million, and a 282 basis point increase in
yield. The increase in yield was primarily due to higher late
fee revenue due to changes in our late fee policy and higher
average balances per customer account, increased sales of our
credit account protection product, and lower finance charge and
fee charge-offs. The annualized provision for doubtful accounts
increased 282 basis points as a percentage of average
accounts receivable primarily due to growth in net sales, growth
in balances 30 days or more delinquent during the
13 weeks ended April 29, 2011, and the 59% increase in
new customer credit accounts originated in the period. As of
April 29, 2011, balances 30 or more days delinquent as a
percent of total accounts receivable was 14.3%, compared to
13.9% as of April 30, 2010. Our provision for doubtful
accounts receivable as a percentage of net sales is generally
higher for new customer credit accounts compared to existing
customer credit accounts that generally have lower charge-off
rates. Net principal charge-offs (uncollectible principal net of
recoveries of amounts previously charged-off) in the
13 weeks ended April 29, 2011 increased
$0.7 million to $19.0 million, compared with
$18.3 million in the 13 weeks ended April 30,
2010. Annualized net principal charge-offs as a percentage of
average accounts receivable improved to 13.2% in the
13 weeks ended April 29, 2011, compared to 15.7% in
the 13 weeks ended April 30, 2010. The increase in
credit management costs reflected the $110.9 million
increase in average customer accounts receivable and the 59%
increase in new customer credit accounts originated during the
period.
For more information on the credit quality of our customer
accounts receivable and our credit management, see
Customer Accounts Receivable Asset Quality and
Management and Selected Consolidated Financial and
Other Data.
62
General and
Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
|
Increase/
|
|
|
|
April 30, 2010
|
|
|
April 29, 2011
|
|
|
(Decrease)
|
|
|
|
$
|
|
|
% of Sales
|
|
|
$
|
|
|
% of Sales
|
|
|
$
|
|
|
%
|
|
|
|
(in thousands)
|
|
|
General and Administrative Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, wages and benefits
|
|
$
|
8,622
|
|
|
|
9.9
|
%
|
|
$
|
9,134
|
|
|
|
9.2
|
%
|
|
$
|
512
|
|
|
|
5.9
|
%
|
Incentive based compensation
|
|
|
1,645
|
|
|
|
1.9
|
%
|
|
|
1,805
|
|
|
|
1.8
|
%
|
|
|
160
|
|
|
|
9.7
|
%
|
Professional fees
|
|
|
2,210
|
|
|
|
2.5
|
%
|
|
|
3,516
|
|
|
|
3.6
|
%
|
|
|
1,306
|
|
|
|
59.1
|
%
|
Depreciation and software amortization
|
|
|
1,924
|
|
|
|
2.2
|
%
|
|
|
2,416
|
|
|
|
2.4
|
%
|
|
|
492
|
|
|
|
25.6
|
%
|
Rents and occupancy costs
|
|
|
3,425
|
|
|
|
3.9
|
%
|
|
|
3,523
|
|
|
|
3.6
|
%
|
|
|
99
|
|
|
|
2.9
|
%
|
Other
|
|
|
399
|
|
|
|
0.5
|
%
|
|
|
511
|
|
|
|
0.5
|
%
|
|
|
112
|
|
|
|
27.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total general and administrative expenses
|
|
$
|
18,225
|
|
|
|
20.9
|
%
|
|
$
|
20,906
|
|
|
|
21.1
|
%
|
|
$
|
2,681
|
|
|
|
14.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses increased $2.7 million
to $20.9 million, or 21.1% of net sales in the
13 weeks ended April 29, 2011, compared to
$18.2 million, or 20.9% of net sales in the 13 weeks
ended April 30, 2010. The $2.7 million increase was
primarily due to a $1.3 million increase in professional
fees, a $0.5 million increase in salaries, wages and
benefit costs due to increased headcount to support our growth,
and a $0.5 million increase in depreciation and software
amortization resulting from increased capital spending. The
increase in professional fees was primarily due to increased use
of outsourced and contract labor to support our growth.
Loss from
Derivatives in Our Own Equity
Loss from derivatives in our own equity increased to
$14.9 million in the 13 weeks ended April 29,
2011 compared to zero in the 13 weeks ended April 30,
2010. The increase was primarily due to the $11.6 million
increase in the value of the conversion feature of the Preferred
Stock and the $3.4 million increase in the fair value of
the common stock warrants. The increase in value of both the
conversion feature and the common stock warrants are due to the
estimated increase in the value of the company.
Interest Expense,
net
Interest expense (net of interest income) decreased to
$7.4 million in the 13 weeks ended April 29, 2011
from $8.2 million in the 13 weeks ended April 30,
2010 due to the benefit of the overall lower interest rates
resulting from our August 2010 refinancing, partially offset by
higher average debt balances during the 13 weeks ended
April 29, 2011. Weighted-average borrowings outstanding in
the 13 weeks ended April 29, 2011 were
$310.8 million compared with $253.9 million in the
13 weeks ended April 30, 2010. See
Liquidity and Capital Resources.
Income
Taxes
Income tax expense in the 13 weeks ended April 29,
2011 was $3.2 million compared to $1.2 million in the
13 weeks ended April 30, 2010. Our marginal income tax
rate for the 13 weeks ended April 29, 2011 was 35.7%
compared to 36.6% in the 13 weeks ended April 30,
2010. The decrease in the marginal income tax rate was primarily
due to interest accruals on income tax contingencies being lower
as a percentage of our loss before income taxes in the
13 weeks ended April 29, 2011 compared to the
13 weeks ended April 30, 2010. Our effective
63
tax rate for the 13 weeks ended April 29, 2011 was
negative 51.6% compared to 36.6% in the 13 weeks ended
April 30, 2010 due to the increase in loss from derivatives
in our own equity which are permanent differences between
taxable and book income.
Preferred Stock
Accretion
Preferred stock accretion increased to $3.5 million for the
13 weeks ended April 29, 2011 compared to
$3.3 million for the 13 weeks ended April 30,
2010. The increase in accretion is due to cumulative compounded
dividends on our Series B Preferred Stock and Series A
Preferred Stock and is calculated based on an annual rate of 6%
on Series B Preferred Stock, and an annual rate of 8% on
the Series A Preferred Stock.
Comparison of
Fiscal Year 2010 to Fiscal Year 2009
Net (Loss)
Income
Net loss was $11.5 million in 2010 compared to net income
of $9.2 million in 2009, primarily due to a
$26.1 million increase in loss from derivatives in our own
equity, a $20.7 million increase in sales and marketing
expenses, a $14.9 million increase in general and
administrative expenses, a $5.1 million loss on early
extinguishment of debt, and a $2.7 million increase in
income tax expense, partially offset by a $33.7 million
increase in gross profit, a $14.6 million improvement in
net credit expense (income), and a $0.5 million reduction
in interest expense (net of interest income), as noted below.
Contribution
Margin
Contribution Margin increased $27.6 million, or 22.1%, to
$152.6 million in 2010 from $125.0 million in 2009,
primarily due to a 19.0% increase in net sales. Contribution
Margin as a percentage of net sales improved 75 basis
points. The primary driver of the increase in Contribution
Margin as a percentage of net sales was a 198 basis point
improvement in net credit expense (income) as a percentage of
net sales, partially offset by a lower gross profit rate of
124 basis points. The improvement in net credit expense
(income) reflected the continued benefits from our credit
underwriting and account management strategies executed in 2008
and 2009. These strategies included a tightening of our new
credit account underwriting standards which lowered the number
of new credit customers acquired in 2008 and 2009 as well as
lowered the delinquency and loss rates experienced on the new
credit customers acquired. These strategies also included
tightening of credit to the riskiest of our existing customer
base by lowering credit lines or not approving sales, which also
lowered delinquencies and losses. The impact of these actions
was to reduce our provision rate from 24.4% of average customer
accounts receivable in 2008 to 19.9% and 18.3% in 2009 and 2010,
respectively. The lower provision rate was due to a reduction in
delinquencies from 16.5% as of January 30, 2009, to 13.2%
as of January 28, 2011, and our net charge-offs as a
percentage of average customer accounts receivable from 22.0% in
2008, to 19.5% in 2009 and 16.1% in 2010. The lower gross profit
rate was primarily due to product mix and obsolescence costs as
noted below.
Net
Sales
Net sales increased 19.0% to $521.3 million in 2010 from
$438.2 million 2009. The $83.1 million net sales
increase was primarily due to strong sales to existing customers
as a result of our account management strategies which led to an
increase in average order size of $13.21, or 7.9% over the prior
year, a 36% increase in new customers, and $11.3 million of
additional net sales resulting from a full fiscal year of
marketing the Gettington.com brand. We added 599,000 new
customers in 2010 compared to 439,000 new customers in 2009.
64
The percentage of our merchandise sales (including shipping and
handling revenue but excluding sales returns and net of sales
discounts) derived from our internal merchandise categories are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
Increase/
|
|
|
|
January 29, 2010
|
|
|
January 28, 2011
|
|
|
(Decrease)
|
|
|
|
$
|
|
|
% of Sales
|
|
|
$
|
|
|
% of Sales
|
|
|
$
|
|
|
%
|
|
|
|
(in thousands)
|
|
|
Sales by Merchandise Category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home
|
|
$
|
207,177
|
|
|
|
45.7
|
%
|
|
$
|
236,555
|
|
|
|
44.1
|
%
|
|
$
|
29,378
|
|
|
|
14.2
|
%
|
Entertainment
|
|
|
189,157
|
|
|
|
41.7
|
%
|
|
|
225,060
|
|
|
|
42.0
|
%
|
|
|
35,903
|
|
|
|
19.0
|
%
|
Fashion
|
|
|
57,339
|
|
|
|
12.6
|
%
|
|
|
74,232
|
|
|
|
13.9
|
%
|
|
|
16,893
|
|
|
|
29.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total merchandise sales
|
|
|
453,673
|
|
|
|
100.0
|
%
|
|
|
535,847
|
|
|
|
100.0
|
%
|
|
|
82,174
|
|
|
|
18.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Returns and allowances
|
|
|
(26,871
|
)
|
|
|
|
|
|
|
(27,871
|
)
|
|
|
|
|
|
|
1,000
|
|
|
|
3.7
|
%
|
Commissions
|
|
|
11,387
|
|
|
|
|
|
|
|
13,331
|
|
|
|
|
|
|
|
1,944
|
|
|
|
17.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
438,189
|
|
|
|
|
|
|
$
|
521,307
|
|
|
|
|
|
|
$
|
83,118
|
|
|
|
19.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All of our merchandise categories experienced significant dollar
growth during 2010 compared to the comparable prior year period.
Our entertainment merchandise category contributed the largest
dollar volume increase to our merchandise sales growth, with
fashion being our fastest growing category in the 2010 period,
driven by an expanded assortment of cosmetics featured on our
Fingerhut website and customer demand for our 2010 assortment of
outerwear and footwear.
Gross Profit
Rate
The gross profit rate decreased 124 basis points to 47.1%
in 2010, compared to 48.4% in 2009. A 46 basis point
decrease in the gross profit rate was due to the
$11.3 million increase in merchandise sales from our
Gettington.com brand, which has lower
mark-ups,
39 basis points was due to the shift in the mix of sales to
our entertainment merchandise category, and 39 basis points
was due to lower costs for excess and obsolete merchandise
inventories during 2009.
Sales and
Marketing Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
|
|
|
|
|
|
January 29, 2010
|
|
|
January 28, 2011
|
|
|
Increase/
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
(Decrease)
|
|
|
|
$
|
|
|
Net Sales
|
|
|
$
|
|
|
Net Sales
|
|
|
$
|
|
|
%
|
|
|
|
(in thousands)
|
|
|
Sales and Marketing Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Catalog direct mail
|
|
$
|
89,435
|
|
|
|
20.4
|
%
|
|
$
|
103,912
|
|
|
|
19.9
|
%
|
|
$
|
14,477
|
|
|
|
16.2
|
%
|
Digital marketing
|
|
|
7,644
|
|
|
|
1.8
|
%
|
|
|
10,996
|
|
|
|
2.1
|
%
|
|
|
3,352
|
|
|
|
43.9
|
%
|
Order entry and customer service
|
|
|
9,113
|
|
|
|
2.1
|
%
|
|
|
11,752
|
|
|
|
2.3
|
%
|
|
|
2,639
|
|
|
|
29.0
|
%
|
Premium (free gift with purchase)
|
|
|
3,192
|
|
|
|
0.7
|
%
|
|
|
3,431
|
|
|
|
0.7
|
%
|
|
|
239
|
|
|
|
7.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales and marketing expenses
|
|
$
|
109,384
|
|
|
|
25.0
|
%
|
|
$
|
130,091
|
|
|
|
25.0
|
%
|
|
$
|
20,707
|
|
|
|
18.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65
Sales and marketing expenses in 2010 increased to
$130.1 million, or 25.0% of net sales, compared with
$109.4 million, or 25.0% of net sales in 2009. The
$20.7 million increase was primarily due to a
$14.5 million increase in catalog direct mail spending and
a $3.4 million increase in digital marketing expenses
compared with the prior year. The increase in catalog direct
mail was a result of our efforts to acquire new Fingerhut
customers. In 2010, we increased our catalog circulation to
prospective customers, and for certain new customer catalog
campaigns we mailed larger catalogs with a more diversified
product offering than had been previous practice. The increase
in digital marketing expense was primarily due to online
initiatives such as display advertising, online affiliate
marketing, and online chat designed to generate website traffic
and provide a better shopping experience to our Fingerhut and
Gettington.com customers. Gettington.com digital marketing
expenses in 2010 increased to $1.6 million, compared with
$0.8 million in 2009.
The increase in marketing spend on prospective customers was
partially offset by lower marketing costs for our existing
customers. We drove incremental efficiencies in marketing versus
those experienced in 2009 by further segmenting our existing
customers into groups based on their likelihood to respond to
catalogs, a combination of catalogs and digital marketing, or
digital marketing programs exclusively. This allowed us to
significantly reduce our use of catalogs to drive existing
customer sales.
Net Credit
Expense (Income)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
|
|
|
|
|
|
January 29, 2010
|
|
|
January 28, 2011
|
|
|
Increase/
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
(Decrease)
|
|
|
|
$
|
|
|
Net Sales
|
|
|
$
|
|
|
Net Sales
|
|
|
$
|
|
|
%
|
|
|
|
(in thousands)
|
|
|
Net Credit Expense (Income):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance charge and fee income
|
|
$
|
(136,924
|
)
|
|
|
(31.3
|
)%
|
|
$
|
(160,778
|
)
|
|
|
(30.9
|
)%
|
|
$
|
23,854
|
|
|
|
17.4
|
%
|
Provision for doubtful accounts
|
|
|
83,102
|
|
|
|
19.0
|
%
|
|
|
89,524
|
|
|
|
17.2
|
%
|
|
|
6,422
|
|
|
|
7.7
|
%
|
Credit management costs
|
|
|
31,506
|
|
|
|
7.2
|
%
|
|
|
34,358
|
|
|
|
6.6
|
%
|
|
|
2,852
|
|
|
|
9.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net credit expense (income)
|
|
$
|
(22,316
|
)
|
|
|
(5.1
|
)%
|
|
$
|
(36,896
|
)
|
|
|
(7.1
|
)%
|
|
|
14,580
|
|
|
|
65.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average customer accounts receivable
|
|
$
|
418,640
|
|
|
|
|
|
|
$
|
488,562
|
|
|
|
|
|
|
$
|
69,922
|
|
|
|
16.7
|
%
|
Finance charge and fee income as a percentage of average
customer accounts receivable
|
|
|
32.7
|
%
|
|
|
|
|
|
|
32.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for doubtful accounts as a percentage of average
customer accounts receivable
|
|
|
19.9
|
%
|
|
|
|
|
|
|
18.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Net credit expense (income) in 2010 was $(36.9) million
compared with net credit expense (income) of
$(22.3) million in 2009. The $14.6 million increase in
income was primarily due to a $23.9 million increase in
finance charge and fee income, partially offset by a
$6.4 million increase in the provision for doubtful
accounts and a $2.9 million increase in our credit
management costs compared to 2009. Finance charge and fee income
was higher due to an increase in average outstanding receivables
of $69.9 million, and yield was essentially flat year over
year. The provision for doubtful accounts increased due to the
increase in customer accounts receivable during the period,
partially offset by an improvement in the credit quality of the
accounts receivable portfolio. Balances of customer accounts
receivable 30 days or more delinquent improved to 13.2% of
total outstanding accounts receivable at January 28, 2011,
66
from 14.5% at January 29, 2010. Net principal charge-offs
(uncollectible principal net of recoveries of amounts previously
charged-off) in 2010 decreased $3.1 million to
$78.7 million, compared with $81.8 million in 2009.
Net principal charge-offs as a percentage of total average
outstanding customer accounts receivable improved to 16.1% in
2010, compared to 19.5% in 2009. The increase in credit
management costs reflected the $69.9 million increase in
average customer accounts receivable and the 36% increase in new
customer credit accounts.
For more information on the credit quality of our customer
accounts receivable and our credit management, see
Customer Accounts Receivable Asset Quality and
Management and Selected Consolidated Financial and
Other Data.
General and
Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
|
|
|
|
|
|
January 29, 2010
|
|
|
January 28, 2011
|
|
|
Increase/
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
(Decrease)
|
|
|
|
$
|
|
|
Net Sales
|
|
|
$
|
|
|
Net Sales
|
|
|
$
|
|
|
%
|
|
|
|
(in thousands)
|
|
|
General and Administrative Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, wages and benefits
|
|
$
|
30,384
|
|
|
|
6.9
|
%
|
|
$
|
32,921
|
|
|
|
6.3
|
%
|
|
$
|
2,537
|
|
|
|
8.3
|
%
|
Incentive based compensation
|
|
|
6,579
|
|
|
|
1.5
|
%
|
|
|
10,883
|
|
|
|
2.1
|
%
|
|
|
4,304
|
|
|
|
65.4
|
%
|
Professional fees
|
|
|
8,263
|
|
|
|
1.9
|
%
|
|
|
14,264
|
|
|
|
2.7
|
%
|
|
|
6,001
|
|
|
|
72.6
|
%
|
Depreciation and software amortization
|
|
|
7,246
|
|
|
|
1.7
|
%
|
|
|
8,066
|
|
|
|
1.6
|
%
|
|
|
820
|
|
|
|
11.3
|
%
|
Rents and occupancy costs
|
|
|
14,392
|
|
|
|
3.3
|
%
|
|
|
14,618
|
|
|
|
2.8
|
%
|
|
|
226
|
|
|
|
1.6
|
%
|
Other
|
|
|
2,223
|
|
|
|
0.5
|
%
|
|
|
3,279
|
|
|
|
0.6
|
%
|
|
|
1,056
|
|
|
|
47.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total general and administrative expenses
|
|
$
|
69,087
|
|
|
|
15.8
|
%
|
|
$
|
84,031
|
|
|
|
16.1
|
%
|
|
$
|
14,944
|
|
|
|
21.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses increased $14.9 million
to $84.0 million, or 16.1% of net sales in 2010, compared
to $69.1 million, or 15.8% of net sales in 2009. The
$14.9 million increase was primarily due to a
$6.0 million increase in professional fees, a
$4.3 million increase in incentive based compensation that
included a supplemental incentive of $2.0 million resulting
from our strong financial performance in 2010, a
$2.5 million increase in salaries, wages and benefit costs
due to increased headcount to support our growth, and a
$0.8 million increase in depreciation and software
amortization resulting from increased capital spending. The
increase in professional fees was primarily due to support of
our marketing, website and infrastructure initiatives.
Loss from
Derivatives in Our Own Equity
Loss from derivatives in our own equity increased to
$32.6 million in 2010 compared to $6.5 million in
2009. The increase was the result of the $23.7 million
increase in the value of the conversion feature of the Preferred
Stock and the $9.8 million increase in the fair value of
the common stock warrants. The increase in value of both the
conversion feature and the common stock warrants are due to the
estimated increase in the value of the Company.
Loss on Early
Extinguishment of Debt
On August 20, 2010, we entered into a $365 million
Secured Credit Facility (the A/R Credit Facility).
The $5.1 million loss on early extinguishment of debt was
recognized as a result of our early termination of our
predecessor Senior Secured Revolving Credit Facility. The loss
on
67
early extinguishment of debt was comprised of a
$2.8 million prepayment penalty and a $2.3 million
write-off of unamortized deferred financing fees from the
predecessor Senior Secured Revolving Credit Facility. The
unamortized deferred financing fees were previously classified
as prepaid and other current assets and long-term deferred
charges on our consolidated balance sheet.
Interest Expense,
net
Interest expense (net of interest income) decreased to
$30.8 million in 2010 from $31.2 million in 2009 due
to the benefit of the overall lower interest rates resulting
from our August 2010 refinancing, partially offset by higher
average debt balances during 2010. Weighted-average borrowings
outstanding in 2010 were $264.1 million compared with
$240.9 million in 2009. See Liquidity and
Capital Resources.
Income
Taxes
Income tax expense in 2010 was $11.6 million compared to
$9.0 million in 2009. Our marginal income tax rate for 2010
was 35.5% compared to 36.3% in 2009. The decrease in the
marginal income tax rate was primarily due to state income taxes
being lower as a percentage of our pretax income in 2010
compared to 2009. Our effective tax rate for 2010 was 12,381%
compared to 49.3% in 2009 due to the increase in loss from
derivatives in our own equity which are permanent differences
between taxable and book income.
Preferred Stock
Accretion
Preferred stock accretion increased to $13.5 million for
2010 compared to $12.6 million for 2009. The increase in
accretion is due to cumulative compounded dividends on our
Series B Preferred Stock and Series A Preferred Stock
and is calculated based on an annual rate of 6% on Series B
Preferred Stock, and an annual rate of 8% on the Series A
Preferred Stock.
Comparison of
Fiscal Year 2009 to Fiscal Year 2008
Net
Income
Net income was $9.2 million in 2009 compared to
$1.3 million in 2008, primarily due to a $23.4 million
improvement in net credit expense (income), a $9.0 million
increase in gross profit, and a $1.0 million decrease in
sales and marketing expenses, partially offset by a
$9.6 million increase in general and administrative
expenses, a $8.1 million increase in income tax expense, a
$6.5 million increase in loss from derivatives in our own
equity, and a $1.4 million increase in interest expense
(net of interest income), as noted below.
Contribution
Margin
Contribution Margin increased $33.4 million, or 36.5%, to
$125.0 million in 2009 from $91.5 million in 2008 due
to a 3.5% increase in net sales. Contribution Margin as a
percentage of net sales improved 690 basis points primarily
due to an improvement in net credit expense (income) and lower
sales and marketing expense as a percentage of net sales.
Beginning in late 2006 and continuing through 2008, in part in
response to the economic downturn in 2008, we focused our
efforts on profitability, credit portfolio management and
closely managing our liquidity, versus growing new customers. As
a result of our efforts, the overall credit quality of our
customer accounts receivable significantly improved.
Net
Sales
Net sales increased 3.5% to $438.2 million in 2009 from
$423.3 million in 2008. The $14.9 million net sales
increase was primarily due to strong sales to existing customer
account
68
holders as a result of our marketing, merchandising, and credit
line account management strategies resulting in an increase in
average order size of $4.69, or 2.9% over the prior year. We
also benefited from an improvement in the macroeconomic
environment, including increased consumer spending compared to
2008 and the launch of our Gettington.com brand during the
latter half of 2009 that contributed net sales of
$2.4 million. We added 439,000 new customers in 2009
compared to 430,000 in 2008.
The percentage of our merchandise sales (including shipping and
handling revenue but excluding sales returns and net of sales
discounts) derived from our internal merchandise categories are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
|
|
|
|
|
|
January 30, 2009
|
|
|
January 29, 2010
|
|
|
Increase/(Decrease)
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
$
|
|
|
Sales
|
|
|
$
|
|
|
Sales
|
|
|
$
|
|
|
%
|
|
|
|
(in thousands)
|
|
|
Sales by Merchandise Category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home
|
|
$
|
209,483
|
|
|
|
47.9
|
%
|
|
$
|
207,177
|
|
|
|
45.7
|
%
|
|
$
|
(2,306
|
)
|
|
|
(1.1
|
)%
|
Entertainment
|
|
|
179,439
|
|
|
|
41.0
|
%
|
|
|
189,157
|
|
|
|
41.7
|
%
|
|
|
9,718
|
|
|
|
5.4
|
%
|
Fashion
|
|
|
48,678
|
|
|
|
11.1
|
%
|
|
|
57,339
|
|
|
|
12.6
|
%
|
|
|
8,661
|
|
|
|
17.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total merchandise sales
|
|
|
437,600
|
|
|
|
100.0
|
%
|
|
|
453,673
|
|
|
|
100.0
|
%
|
|
|
16,073
|
|
|
|
3.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Returns and allowances
|
|
|
(25,862
|
)
|
|
|
|
|
|
|
(26,871
|
)
|
|
|
|
|
|
|
1,009
|
|
|
|
3.9
|
%
|
Commissions
|
|
|
11,600
|
|
|
|
|
|
|
|
11,387
|
|
|
|
|
|
|
|
(213
|
)
|
|
|
(1.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
423,338
|
|
|
|
|
|
|
$
|
438,189
|
|
|
|
|
|
|
$
|
14,851
|
|
|
|
3.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our entertainment and fashion merchandise categories contributed
the largest dollar volume increase to our merchandise sales
growth, with fashion being our fastest growing category in 2009.
The increase in the fashion category as a percentage of total
merchandise sales was due to a strategic expansion of the number
of products we offered in selected apparel, accessories,
footwear, and cosmetics.
Gross Profit
Rate
The gross profit rate increased to 48.4% in 2009 from 48.0% in
2008. The majority of the 43 basis point improvement in our
gross profit rate was due to lower costs for excess and obsolete
merchandise inventories in 2009. The reduction of our excess and
obsolete merchandise inventory costs was the result of the
better than estimated success of our website clearance
promotions and improved inventory management. The gross profit
rate also improved due to a sales mix shift to higher-margin
merchandise such as apparel, footwear, and cosmetics resulting
from our strategic expansion of merchandise assortment in our
fashion category.
69
Sales and
Marketing Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
|
|
|
|
|
|
January 30, 2009
|
|
|
January 29, 2010
|
|
|
Increase/(Decrease)
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
$
|
|
|
Net Sales
|
|
|
$
|
|
|
Net Sales
|
|
|
$
|
|
|
%
|
|
|
|
(in thousands)
|
|
|
Sales and Marketing Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Catalog direct mail
|
|
$
|
93,784
|
|
|
|
22.2
|
%
|
|
$
|
89,435
|
|
|
|
20.4
|
%
|
|
$
|
(4,349
|
)
|
|
|
(4.6
|
)%
|
Digital marketing
|
|
|
3,526
|
|
|
|
0.8
|
%
|
|
|
7,644
|
|
|
|
1.8
|
%
|
|
|
4,118
|
|
|
|
116.8
|
%
|
Order entry and customer service
|
|
|
9,474
|
|
|
|
2.2
|
%
|
|
|
9,113
|
|
|
|
2.1
|
%
|
|
|
(361
|
)
|
|
|
(3.8
|
)%
|
Premium (free gift with purchase)
|
|
|
3,620
|
|
|
|
0.9
|
%
|
|
|
3,192
|
|
|
|
0.7
|
%
|
|
|
(428
|
)
|
|
|
(11.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales and marketing expenses
|
|
$
|
110,404
|
|
|
|
26.1
|
%
|
|
$
|
109,384
|
|
|
|
25.0
|
%
|
|
$
|
(1,020
|
)
|
|
|
(0.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing expenses in 2009 decreased to
$109.4 million, or 25.0% of net sales, compared with
$110.4 million, or 26.1% of net sales in 2008. The
$4.3 million decrease in catalog direct mail expense was
primarily due to a reduction in catalog circulation to existing
Fingerhut brand account holders resulting from a new strategy to
increase Contribution Margin by segmenting our existing customer
account holders into groups based on their likelihood to respond
to either more or fewer traditional catalog mailings. For
customer account holders that we predicted would respond best to
multiple or frequent traditional mailings, we continued to send
multiple mailings. For customer account holders that we
predicted would be more likely to respond to email solicitations
or other digital advertising, we sent fewer traditional catalog
mailings.
The $4.1 million increase in digital marketing expenses was
primarily driven by the rollout of online display advertising,
growth of the affiliate marketing program and testing of new
online strategies intended to improve the Fingerhut
customers online shopping experience with online video,
ratings and reviews and an improved merchandise recommendation
engine. Digital marketing expenses for the launch and support of
the Gettington.com brand were $0.8 million in 2009 and zero
in 2008.
70
Net Credit
Expense (Income)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
|
|
|
|
|
|
January 30, 2009
|
|
|
January 29, 2010
|
|
|
Increase/(Decrease)
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
$
|
|
|
Net Sales
|
|
|
$
|
|
|
Net Sales
|
|
|
$
|
|
|
%
|
|
|
|
(in thousands)
|
|
|
Net Credit Expense (Income):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance charge and fee income
|
|
$
|
(122,896
|
)
|
|
|
(29.0
|
)%
|
|
$
|
(136,924
|
)
|
|
|
(31.3
|
)%
|
|
$
|
14,028
|
|
|
|
11.4
|
%
|
Provision for doubtful accounts
|
|
|
93,332
|
|
|
|
22.1
|
%
|
|
|
83,102
|
|
|
|
19.0
|
%
|
|
|
(10,230
|
)
|
|
|
(11.0
|
)%
|
Credit management costs
|
|
|
30,669
|
|
|
|
7.2
|
%
|
|
|
31,506
|
|
|
|
7.2
|
%
|
|
|
837
|
|
|
|
2.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net credit expense (income)
|
|
$
|
1,105
|
|
|
|
0.3
|
%
|
|
$
|
(22,316
|
)
|
|
|
(5.1
|
)%
|
|
|
23,421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average customer accounts receivable
|
|
$
|
382,595
|
|
|
|
|
|
|
$
|
418,640
|
|
|
|
|
|
|
$
|
36,045
|
|
|
|
9.4
|
%
|
Finance charge and fee income as a percentage of average
customer accounts receivable
|
|
|
32.1
|
%
|
|
|
|
|
|
|
32.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for doubtful accounts as a percentage of average
customer accounts receivable
|
|
|
24.4
|
%
|
|
|
|
|
|
|
19.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Net credit expense (income) in 2009 was $(22.3) million
compared with net credit expense (income) of $1.1 million
in 2008. The $23.4 million change was primarily due to a
$14.0 million increase in finance charge and fee income and
a $10.2 million decrease in the provision for doubtful
accounts. The increase in finance charge and fee income was due
to a $36.0 million increase in average outstanding
receivables and a 59 basis point increase in yield
primarily due to improvements in our late fee strategies. The
decrease in the provision for doubtful accounts was due to a
201 basis point reduction in delinquent balances.
As the economic environment deteriorated in 2007 and 2008, we
focused our efforts and resources on serving our existing
customers and managing the credit quality of our accounts
receivable portfolio, including eliminating marketing efforts to
our highest risk prospective customers. As a result, balances of
customer accounts receivable 30 days or more delinquent
improved to 14.5% of total outstanding customer accounts
receivable at January 29, 2010, from 16.5% at
January 30, 2009. Net principal charge-offs (uncollectible
principal net of recoveries of amounts previously charged-off)
in 2009 decreased $2.4 million to $81.8 million,
compared with $84.2 million in 2008. Net principal
charge-offs as a percentage of average outstanding customer
accounts receivable improved to 19.5% for 2009, compared to
22.0% for 2008.
For more information on the credit quality of our customer
accounts receivable and our credit management, see
Customer Accounts Receivable Asset Quality and
Management and Selected Consolidated Financial and
Other Data.
71
General and
Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
|
|
|
|
|
|
January 30, 2009
|
|
|
January 29, 2010
|
|
|
Increase/(Decrease)
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
$
|
|
|
Net Sales
|
|
|
$
|
|
|
Net Sales
|
|
|
$
|
|
|
%
|
|
|
|
(in thousands)
|
|
|
General and Administrative Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, wages and benefits
|
|
$
|
24,484
|
|
|
|
5.8
|
%
|
|
$
|
30,384
|
|
|
|
6.9
|
%
|
|
$
|
5,900
|
|
|
|
24.1
|
%
|
Incentive based compensation
|
|
|
1,823
|
|
|
|
0.4
|
%
|
|
|
6,579
|
|
|
|
1.5
|
%
|
|
|
4,756
|
|
|
|
260.9
|
%
|
Professional fees
|
|
|
8,880
|
|
|
|
2.1
|
%
|
|
|
8,263
|
|
|
|
1.9
|
%
|
|
|
(617
|
)
|
|
|
(6.9
|
)%
|
Depreciation and software amortization
|
|
|
6,285
|
|
|
|
1.5
|
%
|
|
|
7,246
|
|
|
|
1.7
|
%
|
|
|
961
|
|
|
|
15.3
|
%
|
Rents and occupancy costs
|
|
|
13,854
|
|
|
|
3.3
|
%
|
|
|
14,392
|
|
|
|
3.3
|
%
|
|
|
538
|
|
|
|
3.9
|
%
|
Other
|
|
|
4,207
|
|
|
|
1.0
|
%
|
|
|
2,223
|
|
|
|
0.5
|
%
|
|
|
(1,984
|
)
|
|
|
(47.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total general and administrative expenses
|
|
$
|
59,533
|
|
|
|
14.1
|
%
|
|
$
|
69,087
|
|
|
|
15.8
|
%
|
|
$
|
9,554
|
|
|
|
16.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses increased $9.6 million
to $69.1 million or 15.8% of net sales in 2009, compared to
$59.5 million or 14.1% of net sales in 2008. The
$9.6 million increase in general and administrative
expenses was primarily due to a $5.9 million increase in
salaries, wages and benefit costs due to increased headcount
supporting our growth, including the launch of our
Gettington.com brand, a $4.8 million increase in incentive
based compensation resulting from our stronger financial
performance in 2009 compared to 2008, and a $1.0 million
increase in depreciation and software amortization resulting
from increased capital spending in 2009 compared to 2008.
Loss from
Derivatives in Our Own Equity
Loss from derivatives in our own equity increased to
$6.5 million for 2009 from zero in 2008. The increase was
the result of the $6.0 million increase in the value of a
contingent fee agreement and a $0.5 million increase in the
value of the conversion feature of the Preferred Stock. The
increases in value of both the contingent fee agreement and the
conversion feature are due to the estimated increase in the
value of our company.
Interest Expense,
net
Interest expense (net of interest income) increased to
$31.2 million in 2009 from $29.8 million in 2008. The
$1.4 million increase in interest expense, net was driven
by increased interest expense from borrowings under our
revolving lines of credit at higher interest rates. We entered
into a Senior Secured Revolving Credit Facility in May 2008.
That facility carried a significantly higher interest rate
compared to the predecessor financing. Weighted-average
borrowings outstanding in 2009 were $240.9 million compared
with $241.1 million in 2008. See Liquidity and
Capital Resources.
Income
Taxes
Income tax expense in 2009 was $9.0 million compared to
$0.8 million in 2008. Our marginal income tax rate for 2009
was 36.3% compared to 38.3% in 2008. The decrease in the
marginal income tax rate was primarily due to the effect of
interest accruals on uncertain tax positions having a greater
effect on our 2008 marginal tax rate due to lower pre-tax book
income in 2008 compared to 2009. Our effective tax rate for 2009
was 49.3% compared to 38.3% in 2008 due to the increase in loss
from derivatives in our own equity which are permanent
differences between taxable and book income.
72
Preferred Stock
Accretion
Preferred stock accretion in 2009 was $12.6 million
compared to $11.3 million in 2008. The $1.3 million
increase was due to our May 2008 issuance of Series B
Preferred Stock being outstanding for a full year in 2009
compared to a partial year in 2008.
Quarterly Results
of Operations and Seasonal Influences
Our peak merchandise sales period is November through
mid-December and, as a result, our net sales are typically
highest in our fourth fiscal quarter. Our working capital needs
are typically greater in the months leading up to our peak
merchandise sales period. We anticipate our net sales will
continue to be seasonal in nature.
The following table sets forth our unaudited quarterly results
of operations during 2009 and 2010, and the first fiscal quarter
of 2011. This unaudited quarterly information has been prepared
on the same basis as our annual audited financial statements
appearing elsewhere in this prospectus, and includes all
adjustments, consisting only of normal recurring adjustments,
that we consider necessary to present fairly the financial
information for the fiscal quarters presented.
The quarterly data should be read in conjunction with our
selected financial data and consolidated financial statements
and the related notes appearing elsewhere in this prospectus.
Our quarterly operating results may fluctuate significantly as a
result of seasonality and a variety of other factors. As a
result, year over year quarterly comparisons may be more
meaningful than sequential quarterly comparisons. Furthermore,
certain factors, such as marketing events and new product
launches, as well as the timing of certain annual holidays and
other seasonal events, may cause year over year quarterly
results to fluctuate significantly. Operating results for any
quarter are not necessarily indicative of results for a full
fiscal year. See Risk Factors and
BusinessSeasonality.
73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
First
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
(in thousands)
|
|
|
Consolidated statements of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
76,099
|
|
|
$
|
93,931
|
|
|
$
|
93,344
|
|
|
$
|
174,815
|
|
|
$
|
87,106
|
|
|
$
|
106,376
|
|
|
$
|
107,214
|
|
|
$
|
220,611
|
|
|
$
|
99,206
|
|
Cost of sales
|
|
|
39,015
|
|
|
|
47,618
|
|
|
|
48,282
|
|
|
|
91,225
|
|
|
|
44,944
|
|
|
|
54,899
|
|
|
|
56,364
|
|
|
|
119,314
|
|
|
|
51,755
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
37,084
|
|
|
|
46,313
|
|
|
|
45,062
|
|
|
|
83,590
|
|
|
|
42,162
|
|
|
|
51,477
|
|
|
|
50,850
|
|
|
|
101,297
|
|
|
|
47,451
|
|
Sales and marketing expenses
|
|
|
21,603
|
|
|
|
24,881
|
|
|
|
24,711
|
|
|
|
38,189
|
|
|
|
23,706
|
|
|
|
27,848
|
|
|
|
29,870
|
|
|
|
48,667
|
|
|
|
24,761
|
|
Net credit expense (income)
|
|
|
(12,619
|
)
|
|
|
(8,021
|
)
|
|
|
(6,881
|
)
|
|
|
5,205
|
|
|
|
(11,156
|
)
|
|
|
(6,087
|
)
|
|
|
(19,362
|
)
|
|
|
(291
|
)
|
|
|
(14,444
|
)
|
General and administrative expenses
|
|
|
15,164
|
|
|
|
16,508
|
|
|
|
17,101
|
|
|
|
20,314
|
|
|
|
18,225
|
|
|
|
18,543
|
|
|
|
19,788
|
|
|
|
27,475
|
|
|
|
20,906
|
|
Loss from derivatives in our own equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,500
|
|
|
|
|
|
|
|
|
|
|
|
2,445
|
|
|
|
30,162
|
|
|
|
14,944
|
|
Loss on early extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,109
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
8,194
|
|
|
|
7,352
|
|
|
|
7,379
|
|
|
|
8,291
|
|
|
|
8,173
|
|
|
|
7,969
|
|
|
|
7,256
|
|
|
|
7,352
|
|
|
|
7,395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
4,742
|
|
|
|
5,593
|
|
|
|
2,752
|
|
|
|
5,091
|
|
|
|
3,214
|
|
|
|
3,204
|
|
|
|
5,744
|
|
|
|
(12,068
|
)
|
|
|
(6,111
|
)
|
Income tax expense
|
|
|
1,697
|
|
|
|
2,000
|
|
|
|
1,000
|
|
|
|
4,259
|
|
|
|
1,175
|
|
|
|
1,175
|
|
|
|
2,935
|
|
|
|
6,333
|
|
|
|
3,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
3,045
|
|
|
$
|
3,593
|
|
|
$
|
1,752
|
|
|
$
|
832
|
|
|
$
|
2,039
|
|
|
$
|
2,029
|
|
|
$
|
2,809
|
|
|
$
|
(18,401
|
)
|
|
$
|
(9,267
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales as a percentage of annual
|
|
|
17.4
|
%
|
|
|
21.4
|
%
|
|
|
21.3
|
%
|
|
|
39.9
|
%
|
|
|
16.7
|
%
|
|
|
20.4
|
%
|
|
|
20.6
|
%
|
|
|
42.3
|
%
|
|
|
|
|
Net income before loss from derivatives in our own equity
|
|
$
|
3,045
|
|
|
$
|
3,593
|
|
|
$
|
1,752
|
|
|
$
|
7,332
|
|
|
$
|
2,039
|
|
|
$
|
2,029
|
|
|
$
|
5,254
|
|
|
$
|
11,761
|
|
|
$
|
5,677
|
|
Net income before loss from derivatives in our own equity as a
percentage of annual
|
|
|
19.4
|
%
|
|
|
22.9
|
%
|
|
|
11.1
|
%
|
|
|
46.6
|
%
|
|
|
9.7
|
%
|
|
|
9.6
|
%
|
|
|
24.9
|
%
|
|
|
55.8
|
%
|
|
|
|
|
Customer Accounts
Receivable Asset Quality and Management
The Credit Issuers offer and directly extend to our qualifying
customers revolving credit accounts and installment loans. We
are obligated to purchase and assume ownership of the
receivables after a contractual holding period, generally one or
two business days. The purchase price includes the unpaid
balance of the receivable, plus accrued interest during the
Credit Issuers holding periods, plus an origination fee.
We assume the servicing of the receivables and bear risk of loss
for any uncollectible receivables that we purchase.
Customer accounts receivable, net as of fiscal year end 2008,
2009, and 2010, and the 13 weeks ended April 30, 2010
and April 29, 2011, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
January 30,
|
|
|
January 29,
|
|
|
January 28,
|
|
|
April 30,
|
|
|
April 29,
|
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
|
(in thousands)
|
|
|
Customer accounts receivable
|
|
$
|
439,507
|
|
|
$
|
489,236
|
|
|
$
|
602,047
|
|
|
$
|
455,804
|
|
|
$
|
573,014
|
|
Less allowance for doubtful accounts
|
|
|
(97,094
|
)
|
|
|
(98,394
|
)
|
|
|
(109,211
|
)
|
|
|
(99,025
|
)
|
|
|
(117,716
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer accounts receivable, net
|
|
$
|
342,413
|
|
|
$
|
390,842
|
|
|
$
|
492,836
|
|
|
$
|
356,779
|
|
|
$
|
455,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74
Delinquencies
We consider the entire balance of an account, including any
accrued interest and fees, delinquent if we do not receive the
minimum payment by the payment due date. We age customer
accounts receivable based on the number of completed billing
cycles during which a customer account holder has failed to make
a required payment.
Curing a delinquency may be the result of full payment of past
due amounts, or in specific situations, by re-aging the account.
Past due accounts are generally re-aged to current status if
they have been active at least nine months and after we receive
at least three consecutive minimum payments or the equivalent
cumulative amount. Accounts are re-aged to current status no
more than once in a twelve month period and no more than two
times every five years unless they have enrolled in a reduced
payment forbearance program, which we refer to as our workout
program. Accounts entering workout programs may receive an
additional workout re-age. Workout re-ages can only occur after
receipt of at least three consecutive minimum monthly payments,
or the equivalent cumulative amount. Workout re-ages can only
occur once in a five year period.
The following table shows customer accounts receivable balances
that were delinquent and re-aged balances as a percentage of
total outstanding customer accounts receivable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
|
April 29,
|
|
|
|
January 30, 2009
|
|
|
January 29, 2010
|
|
|
January 28, 2011
|
|
|
2010
|
|
|
2011
|
|
|
|
(in thousands)
|
|
|
Delinquent (a):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30 to 59 days
|
|
$
|
21,435
|
|
|
|
4.9
|
%
|
|
$
|
21,798
|
|
|
|
4.5
|
%
|
|
$
|
26,238
|
|
|
|
4.3
|
%
|
|
$
|
19,657
|
|
|
|
4.3
|
%
|
|
$
|
25,592
|
|
|
|
4.5
|
%
|
60 to 89 days
|
|
|
14,176
|
|
|
|
3.2
|
%
|
|
|
13,917
|
|
|
|
2.8
|
%
|
|
|
16,117
|
|
|
|
2.7
|
%
|
|
|
12,665
|
|
|
|
2.8
|
%
|
|
|
17,132
|
|
|
|
3.0
|
%
|
90 or more days
|
|
|
37,059
|
|
|
|
8.4
|
%
|
|
|
35,304
|
|
|
|
7.2
|
%
|
|
|
37,275
|
|
|
|
6.2
|
%
|
|
|
30,603
|
|
|
|
6.8
|
%
|
|
|
38,522
|
|
|
|
6.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30 or more days
|
|
$
|
72,670
|
|
|
|
16.5
|
%
|
|
$
|
71,019
|
|
|
|
14.5
|
%
|
|
$
|
79,630
|
|
|
|
13.2
|
%
|
|
$
|
62,925
|
|
|
|
13.9
|
%
|
|
$
|
81,246
|
|
|
|
14.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Re-aged balances
|
|
$
|
8,002
|
|
|
|
1.8
|
%
|
|
$
|
12,468
|
|
|
|
2.5
|
%
|
|
$
|
16,152
|
|
|
|
2.7
|
%
|
|
$
|
13,049
|
|
|
|
2.9
|
%
|
|
$
|
16,898
|
|
|
|
3.0
|
%
|
|
|
|
(a)
|
|
Delinquent customer accounts
receivable balances are as of the customers statement
cycle dates prior to or on fiscal period-end.
|
As a retailer, our delinquency rates have a seasonal pattern. We
generate a significant amount of current receivables during the
holiday shopping season causing the delinquency rate to be
lowest in our fourth fiscal quarter. The delinquency rate
generally peaks in the second or third fiscal quarter as holiday
sales are either paid off or become delinquent.
Balances of customer accounts receivable that are 30 days
or more delinquent as a percentage of total outstanding customer
accounts receivable increased to 14.3% as of April 29,
2011, compared to 13.9% at April 30, 2010 primarily due to
the growth in sales to new customers in the recent quarters
preceding the balance sheet date. As shown within the
Time Since Origination of Customer Accounts
table, as of April 29, 2011, 21.3% of the receivable
balance was related to accounts originated in the previous
12 months compared to 17.9% as of April 30, 2010.
Balances of customer accounts receivable that are 30 days
or more delinquent as a percentage of total outstanding customer
accounts receivable decreased to 13.2% as of January 28,
2011, compared to 14.5% at January 29, 2010. Since 2008, we
have taken several actions aimed at improving the overall
quality of our customer accounts receivable. These actions have
generally resulted in lower delinquencies. However, we
anticipate that these rates will level off or increase as we
invest in the acquisition of new customers and as net sales to
new customers becomes a larger portion of total net sales.
75
Balances of customer accounts receivable that are 30 days
or more delinquent as a percentage of total outstanding customer
accounts receivable decreased to 14.5% as of January 29,
2010, compared to 16.5% at January 30, 2009. During 2008,
in part in response to the economic downturn, we focused our
marketing to prospective customers we perceived as being lower
risk and as a result, our new customer credit accounts decreased
from 700,000 in 2007 to 430,000 in 2008. This action, coupled
with account management strategies to existing customers,
lowered our delinquent balances by 201 basis points as of
January 29, 2010 compared to January 30, 2009.
Charge-Offs
and Recoveries
Charge-offs reflect the uncollectible principal on a
customers account. Recoveries reflect the principal
amounts collected on previously charged-off accounts. We
generally charge-off customer accounts as of the statement cycle
date following the passage of 180 days without receiving a
qualifying payment, except in the case of customer bankruptcies
and customer deaths, which are charged off as of the statement
cycle date following the passage of 60 days after receipt
of formal notification regardless of delinquency status. Net
principal charge-offs for 2008, 2009 and 2010, and the
13 weeks ended April 30, 2010 and April 29, 2011,
are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
13 Weeks Ended
|
|
|
|
January 30,
|
|
|
January 29,
|
|
|
January 28,
|
|
|
April 30,
|
|
|
April 29,
|
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
|
(in thousands)
|
|
|
Principal charge-offs
|
|
$
|
90,180
|
|
|
$
|
89,094
|
|
|
$
|
86,813
|
|
|
$
|
20,873
|
|
|
$
|
21,690
|
|
Recoveries
|
|
|
(5,961
|
)
|
|
|
(7,292
|
)
|
|
|
(8,106
|
)
|
|
|
(2,608
|
)
|
|
|
(2,695
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
$
|
84,219
|
|
|
$
|
81,802
|
|
|
$
|
78,707
|
|
|
$
|
18,265
|
|
|
$
|
18,995
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average customer accounts receivable
|
|
$
|
382,595
|
|
|
$
|
418,640
|
|
|
$
|
488,562
|
|
|
$
|
464,552
|
|
|
$
|
575,418
|
|
Net charge-offs as a percentage of average customer accounts
receivable (a)
|
|
|
22.0
|
%
|
|
|
19.5
|
%
|
|
|
16.1
|
%
|
|
|
15.7
|
%
|
|
|
13.2
|
%
|
|
|
|
(a)
|
|
Net charge-offs each as a
percentage of average customer accounts receivable for the
13 weeks ended April 30, 2010 and April 29, 2011
have been annualized to a comparable 52-week basis.
|
As is the case with delinquent accounts, charge-offs depict a
similar seasonal pattern that lags the performance of overall
delinquencies. With the peak of delinquencies occurring in the
summer and early fall months, the peak in charge-offs tends to
occur in our fourth fiscal quarter.
Net principal charge-offs during the 13 weeks ended
April 29, 2011 compared to the 13 weeks ended
April 30, 2010 decreased as a percentage of total average
outstanding customer accounts receivable. Charge-offs decreased
as a result of improved delinquency rates in the recent quarter
preceding the balance sheet date. Balances 90 or more days
delinquent as a percentage of total outstanding customer
accounts receivable as of the end of the fourth quarter of 2010
were 103 basis points lower than the end of the fourth
quarter of 2009.
Net principal charge-offs during 2010 compared to 2009 decreased
as a percentage of total average outstanding customer accounts
receivable. Charge-offs declined as a result of improved
delinquency rates over this same period.
Net principal charge-offs during 2009 compared to 2008 decreased
as a percentage of total average outstanding customer accounts
receivable. The improvements made by management in 2008 and
2009, as discussed in Delinquencies, produced
lower delinquencies and therefore resulted in lower charge-offs
over the same period.
76
Allowance for
Doubtful Accounts
We maintain an allowance for doubtful accounts at a level
intended to absorb estimated probable losses inherent in
customer accounts receivable, including accrued finance charges
and fees as of the balance sheet date. The provision for
doubtful accounts is included in net credit expense (income) in
the consolidated statements of operations. Upon charge-off, any
unpaid principal is applied to the allowance for doubtful
accounts and any accrued but unpaid finance charges and fees are
netted against finance charge and fee income with an offsetting
equivalent reversal of the allowance for doubtful accounts
through the provision for doubtful accounts. See Note 2 to
the consolidated financial statements.
Changes in the allowance for doubtful accounts for 2008, 2009
and 2010, and the 13 weeks ended April 30, 2010 and
April 29, 2011, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
13 Weeks Ended
|
|
|
|
January 30,
|
|
|
January 29,
|
|
|
January 28,
|
|
|
April 30,
|
|
|
April 29,
|
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts at beginning of period
|
|
$
|
87,981
|
|
|
$
|
97,094
|
|
|
$
|
98,394
|
|
|
$
|
98,394
|
|
|
$
|
109,211
|
|
Provision for doubtful accounts
|
|
|
93,332
|
|
|
|
83,102
|
|
|
|
89,524
|
|
|
|
18,896
|
|
|
|
27,500
|
|
Principal charge-offs (a)
|
|
|
(90,180
|
)
|
|
|
(89,094
|
)
|
|
|
(86,813
|
)
|
|
|
(20,873
|
)
|
|
|
(21,690
|
)
|
Recoveries
|
|
|
5,961
|
|
|
|
7,292
|
|
|
|
8,106
|
|
|
|
2,608
|
|
|
|
2,695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts at end of period
|
|
$
|
97,094
|
|
|
$
|
98,394
|
|
|
$
|
109,211
|
|
|
$
|
99,025
|
|
|
$
|
117,716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percentage of period end receivables
|
|
|
22.1
|
%
|
|
|
20.1
|
%
|
|
|
18.1
|
%
|
|
|
21.7
|
%
|
|
|
20.5
|
%
|
As a percentage of balances 30+ days delinquent
|
|
|
133.6
|
%
|
|
|
138.5
|
%
|
|
|
137.1
|
%
|
|
|
157.4
|
%
|
|
|
144.9
|
%
|
|
|
|
(a)
|
|
Excludes accrued and unpaid finance
charges.
|
The quality of our customer accounts receivable portfolio at any
time reflects, among other factors: 1) the creditworthiness
of the account holders, 2) the success of our customer
account holder management strategies, 3) the growth in new
customer credit accounts, and 4) general economic
conditions.
Our allowance for doubtful accounts as a percentage of period
end receivables has steadily decreased over the comparable prior
year date since 2008. The decrease is the result of the overall
improvement in our customer accounts receivable portfolio, due
to account management strategies and less volatility in
macroeconomic conditions.
Time Since
Origination of Customer Accounts
The average time since origination of customer accounts affects
the stability of delinquency and loss rates. Older accounts are
typically more stable than more recently originated accounts.
The peak delinquency rate for a new account vintage is
approximately eight months after origination. Accounts past this
peak delinquency period exhibit greater stability in their
performance. To encourage mature accounts to continue their
relationship with us, we have a number of account management
initiatives in place to retain existing customers and encourage
repeat purchases.
77
The time since origination of customer accounts as a percentage
of total customer accounts and the related receivable balance as
a percentage of total receivables as of the end of 2008, 2009
and 2010, and the 13 weeks ended April 30, 2010 and
April 29, 2011, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
January 30, 2009
|
|
|
January 29, 2010
|
|
|
January 28, 2011
|
|
|
April 30, 2010
|
|
|
April 29, 2011
|
|
|
|
% of
|
|
|
% of
|
|
|
% of
|
|
|
% of
|
|
|
% of
|
|
|
% of
|
|
|
% of
|
|
|
% of
|
|
|
% of
|
|
|
% of
|
|
Time Since Origination
|
|
Accounts
|
|
|
Receivables
|
|
|
Accounts
|
|
|
Receivables
|
|
|
Accounts
|
|
|
Receivables
|
|
|
Accounts
|
|
|
Receivables
|
|
|
Accounts
|
|
|
Receivables
|
|
|
0 - 6 months
|
|
|
11.4
|
%
|
|
|
9.2
|
%
|
|
|
11.6
|
%
|
|
|
10.0
|
%
|
|
|
15.7
|
%
|
|
|
12.0
|
%
|
|
|
11.1
|
%
|
|
|
9.5
|
%
|
|
|
15.6
|
%
|
|
|
11.8
|
%
|
7 - 12 months
|
|
|
8.0
|
%
|
|
|
7.8
|
%
|
|
|
7.2
|
%
|
|
|
7.7
|
%
|
|
|
7.8
|
%
|
|
|
8.6
|
%
|
|
|
7.7
|
%
|
|
|
8.4
|
%
|
|
|
9.4
|
%
|
|
|
9.5
|
%
|
13 - 24 months
|
|
|
24.2
|
%
|
|
|
28.4
|
%
|
|
|
14.2
|
%
|
|
|
16.5
|
%
|
|
|
13.0
|
%
|
|
|
17.6
|
%
|
|
|
13.6
|
%
|
|
|
16.2
|
%
|
|
|
12.6
|
%
|
|
|
17.3
|
%
|
25+ months
|
|
|
51.6
|
%
|
|
|
53.8
|
%
|
|
|
60.6
|
%
|
|
|
64.8
|
%
|
|
|
56.7
|
%
|
|
|
61.0
|
%
|
|
|
60.7
|
%
|
|
|
64.9
|
%
|
|
|
55.5
|
%
|
|
|
60.4
|
%
|
Closed (a)
|
|
|
4.8
|
%
|
|
|
0.8
|
%
|
|
|
6.4
|
%
|
|
|
1.0
|
%
|
|
|
6.8
|
%
|
|
|
0.8
|
%
|
|
|
6.9
|
%
|
|
|
1.0
|
%
|
|
|
6.9
|
%
|
|
|
1.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Closed customer credit accounts in
the above table result from, (i) the absence of account
activity or suspicious account activity that results in our
decision to close the customers account, as well as
(ii) our response to our customers request to close
their account.
|
Credit Limits
and Account Balance Range
When we approve a customer credit application, we use automated
screening, modeling and credit-scoring techniques to establish
an initial credit line based on the individuals risk
profile. We may, at any time and without prior notice to a
customer, prevent or restrict further credit use by the
customer, usually as a result of poor payment performance or our
concern over the creditworthiness of the customer. We start
customers at a low credit limit and gradually increase that
limit for customers that meet their repayment obligations in a
timely manner. This allows us to better manage losses and
balance credit risk and profitability.
Credit limit and balance ranges have increased steadily over the
last several years. These increases are due to the maturation of
accounts and are managed through proactive credit line
strategies. Generally, the first two credit limit increases are
permanent and range from $200 to $350. Subsequent credit line
increases are temporary, requiring that customers utilize the
credit line increase within a certain period of time before the
credit limit is restored to its previous level, or increased
from the previous level in an amount equal to the
customers incremental purchase. Our active credit line
management gives us the opportunity to communicate with our
customers more frequently, which we believe leads to increased
customer sales and enables us to limit excessive unused credit
lines.
The following table shows account balance ranges of our customer
accounts receivable portfolio as a percentage of customer
accounts receivable balances outstanding as of the end of 2008,
2009 and 2010, and the 13 weeks ended April 30, 2010
and April 29, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
January 30,
|
|
|
January 29,
|
|
|
January 28,
|
|
|
April 30,
|
|
|
April 29,
|
|
Account Balance Range
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
$1 - $500
|
|
|
53.9
|
%
|
|
|
45.9
|
%
|
|
|
38.8
|
%
|
|
|
45.9
|
%
|
|
|
39.3
|
%
|
$501 - $1,000
|
|
|
36.7
|
%
|
|
|
38.8
|
%
|
|
|
34.9
|
%
|
|
|
37.6
|
%
|
|
|
33.5
|
%
|
$1,001 - $1,500
|
|
|
7.7
|
%
|
|
|
11.7
|
%
|
|
|
16.5
|
%
|
|
|
12.1
|
%
|
|
|
16.2
|
%
|
Over $1,501
|
|
|
0.9
|
%
|
|
|
2.6
|
%
|
|
|
8.9
|
%
|
|
|
3.4
|
%
|
|
|
10.0
|
%
|
Closed
|
|
|
0.8
|
%
|
|
|
1.0
|
%
|
|
|
0.9
|
%
|
|
|
1.0
|
%
|
|
|
1.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78
Credit
Score
We market to low to middle income consumers who typically pose
greater credit risk than higher income consumers. One of the
generally accepted industry measures of credit risk is the FICO
credit score. A vast majority of our customer accounts
receivable balance is with customers that have a FICO score
between 550 and 700. We refresh each customers FICO score
at least twice each year. The weighted-average FICO score of our
customer accounts receivable was 615, 617, 620, 612, and 614 as
of the end of 2008, 2009, 2010, and as of April 30, 2010
and April 29, 2011, respectively.
While FICO is used to compare the credit quality of our
receivables portfolio against industry benchmarks, it is not
relied upon heavily in our evaluation of prospective customers
or in our credit management. We primarily rely on proprietary
models and scorecards that utilize both internal attributes and
external attributes obtained from a wide variety of third-party
data providers. The higher predictive ability of our internal
behavioral models over external industry scorecards such as FICO
is primarily due to our ability to score our customer accounts
on a daily basis. Additionally, our internal customer behavioral
data is detailed and robust whereas bureau files on the
customers we target often have limited information for external
industry scoring purposes.
Liquidity and
Capital Resources
Our business requires a significant amount of debt financing and
capital to fund our operations and to grow our business. With
approximately 95% of sales on our customers revolving
credit accounts, merchandise sales do not generate immediate
positive cash flow. Ensuring adequate liquidity is, and will
continue to be, at the forefront of our business objectives.
Historical cash requirements relate to carrying customer
accounts receivable, purchases of inventory, purchases and
production of promotional materials, debt service, collateral
requirements, investments in our management information systems
and other infrastructure, and other general working capital
needs. We have historically financed our operations through a
combination of asset-backed securitizations, credit facilities
collateralized by our customer accounts receivable, credit
facilities collateralized by our merchandise inventory, private
equity issuances, issuance of subordinated debt, cash flows
generated from collection of our customer accounts receivable,
and extended payment terms provided to us by our vendors.
Our cash requirements are seasonal, with our peak cash
requirements arising in October through January as we experience
higher levels of sales and customer accounts receivable and
amounts due for holiday season inventory purchases and marketing
efforts. We also offer deferred payment terms to qualifying
customers, which delays the first principal installment on
holiday purchases until the first half of the following year.
While we generally have been able to manage our cash needs
during peak periods, if any disruption to our funding sources
occurs, or if we underestimate our cash needs, we may be unable
to carry customer accounts receivable, purchase inventory,
produce promotional materials and otherwise conduct our
business, which could result in reduced net sales and profits.
Any future acquisitions, joint ventures, or other similar
transactions will likely require additional capital and there
can be no assurance that any such capital will be available to
us on acceptable terms, or at all.
79
The following table summarizes our funding and liquidity as of
January 30, 2009, January 29, 2010, January 28,
2011, April 30, 2010 and April 29, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
Maturity or
|
|
Maximum
|
|
|
January 30, 2009
|
|
|
January 29, 2010
|
|
|
January 28, 2011
|
|
|
April 30, 2010
|
|
|
April 29, 2011
|
|
|
|
Extinguishment
|
|
Capacity
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Additional
|
|
Funding Source
|
|
Date
|
|
(as amended)
|
|
|
Outstanding
|
|
|
Availability
|
|
|
Outstanding
|
|
|
Availability
|
|
|
Outstanding
|
|
|
Availability
|
|
|
Outstanding
|
|
|
Availability
|
|
|
Outstanding
|
|
|
Availability
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A/R Credit Facility (a):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving Credit Tranche
|
|
Matures
|
|
$
|
290,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
215,000
|
|
|
$
|
24,474
|
|
|
|
|
|
|
|
|
|
|
$
|
181,000
|
|
|
$
|
40,322
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term Loan Tranche
|
|
August 2013
|
|
|
75,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
365,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving Credit
|
|
Extinguished
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facility
|
|
August 2010
|
|
$
|
280,000
|
|
|
$
|
253,000
|
|
|
$
|
27,000
|
|
|
$
|
241,000
|
|
|
$
|
39,000
|
|
|
|
|
|
|
|
|
|
|
$
|
206,000
|
|
|
$
|
74,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory Line of Credit
|
|
Matures August 2013
|
|
$
|
50,000
|
|
|
|
8,156
|
|
|
|
13,803
|
|
|
|
5,339
|
|
|
|
14,369
|
|
|
|
10,100
|
|
|
|
11,334
|
|
|
|
12,945
|
|
|
|
9,410
|
|
|
|
18,481
|
|
|
|
7,682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Subordinated
|
|
Matures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured Notes
|
|
November 2013
|
|
$
|
30,000
|
|
|
|
27,530
|
|
|
|
|
|
|
|
28,124
|
|
|
|
|
|
|
|
28,719
|
|
|
|
|
|
|
|
28,273
|
|
|
|
|
|
|
|
28,868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
Various
|
|
|
Various
|
|
|
|
1,192
|
|
|
|
|
|
|
|
1,280
|
|
|
|
|
|
|
|
1,164
|
|
|
|
|
|
|
|
1,599
|
|
|
|
|
|
|
|
973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
$
|
289,878
|
|
|
|
|
|
|
$
|
275,743
|
|
|
|
|
|
|
$
|
329,983
|
|
|
|
|
|
|
$
|
248,817
|
|
|
|
|
|
|
$
|
304,322
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Replaced the Senior Secured
Revolving Credit Facility.
|
Weighted-average borrowings outstanding and interest rates for
2008, 2009 and 2010, and the 13 weeks ended April 30,
2010 and April 29, 2011, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
13 Weeks Ended
|
|
|
|
|
|
January 30, 2009
|
|
|
January 29, 2010
|
|
|
January 28, 2011
|
|
|
April 30, 2010
|
|
|
April 29, 2011
|
|
|
|
|
|
Weighted-
|
|
|
Weighted-
|
|
|
Weighted-
|
|
|
Weighted-
|
|
|
Weighted-
|
|
|
Weighted-
|
|
|
Weighted-
|
|
|
Weighted-
|
|
|
Weighted-
|
|
|
Weighted-
|
|
|
|
Maturity or
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
Funding Source
|
|
Extinguishment Date
|
|
Outstanding
|
|
|
Rate (a)
|
|
|
Outstanding
|
|
|
Rate (a)
|
|
|
Outstanding
|
|
|
Rate (a)
|
|
|
Outstanding
|
|
|
Rate (a)
|
|
|
Outstanding
|
|
|
Rate (a)
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A/R Credit Facility:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving Credit Tranche
|
|
Matures August 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
67,907
|
|
|
|
6.7%
|
|
|
|
|
|
|
|
|
|
|
$
|
189,404
|
|
|
|
6.1%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term Loan Tranche
|
|
Matures August 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,288
|
|
|
|
15.8%
|
|
|
|
|
|
|
|
|
|
|
|
75,000
|
|
|
|
15.8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Revolving Credit Facility
|
|
Extinguished August 2010
|
|
$
|
136,090
|
|
|
|
13.1%
|
|
|
$
|
201,459
|
|
|
|
12.8%
|
|
|
|
116,847
|
|
|
|
12.7%
|
|
|
$
|
214,293
|
|
|
|
12.7%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory Line of Credit
|
|
Matures August 2013
|
|
|
12,219
|
|
|
|
7.4%
|
|
|
|
10,516
|
|
|
|
6.1%
|
|
|
|
16,514
|
|
|
|
7.4%
|
|
|
|
10,053
|
|
|
|
6.5%
|
|
|
|
16,543
|
|
|
|
8.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securitization Facility
|
|
Extinguished May 2008
|
|
|
64,715
|
|
|
|
10.7%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Subordinated Secured Notes
|
|
Matures November 2013
|
|
|
27,233
|
|
|
|
17.4%
|
|
|
|
27,827
|
|
|
|
17.3%
|
|
|
|
28,421
|
|
|
|
16.8%
|
|
|
|
28,199
|
|
|
|
17.1%
|
|
|
|
28,793
|
|
|
|
16.5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
Various
|
|
|
810
|
|
|
|
0% - 9%
|
|
|
|
1,079
|
|
|
|
0% - 9%
|
|
|
|
1,099
|
|
|
|
0% -9%
|
|
|
|
1,305
|
|
|
|
0% - 9%
|
|
|
|
1,052
|
|
|
|
0% - 9%
|
|
|
|
|
(a)
|
|
Weighted-average interest rates
include the effect of amortization of debt issuance costs and
any original issue discount. Refer to the notes to our
consolidated financial statements for a further discussion of
our debt financing.
|
We intend to use a portion of the net proceeds from the sale of
common stock by us in this offering to retire the
$30 million Senior Subordinated Secured Notes, plus accrued
and unpaid interest thereon. We intend to use the remaining net
proceeds to reduce the outstanding balance under the Revolving
Credit Tranche of our A/R Credit Facility. As a result,
immediately following this offering, we estimate our outstanding
debt will be approximately
$ million
under our A/R Credit Facility and
$ million
under our Inventory Line of Credit. The A/R Credit Facility also
has a $75 million Term Loan Tranche that cannot be prepaid
prior to August 21, 2011. On August 22, 2011, we
intend to use borrowings under the Revolving Credit Tranche to
repay in full the Term Loan Tranche, plus prepayment penalties
of $1.5 million and accrued and unpaid interest.
Although our A/R Credit Facility and our Inventory Line of
Credit do not expire until August 2013, deterioration in the
credit markets could jeopardize counterparty obligations of one
or more of the banks participating in our facilities, which
could have an adverse effect on our business if we are not able
to replace such facilities or find other sources of liquidity on
80
acceptable terms. We currently expect all participating banks
to provide funding as needed pursuant to the terms of our credit
agreements. The credit facilities described below are each
secured by interests in various assets of the Company and our
subsidiaries, including without limitation our equity interests
in our subsidiaries.
Accounts
Receivable Credit Facility
On August 20, 2010, through our consolidated wholly-owned
subsidiary, Fingerhut Receivables I, LLC (FRI),
we entered into the $365 million A/R Credit Facility which
matures on August 20, 2013. FRI is a special-purpose,
bankruptcy remote entity established for the purpose of
purchasing customer accounts receivable from Bluestem Brands,
Inc. to hold as collateral under applicable credit agreements.
The receivables transferred to FRI are not available to general
creditors of Bluestem Brands. The transfers of receivables are
recorded as secured borrowings on our balance sheet in
accordance with GAAP.
The A/R Credit Facility is segregated into two components, a
Revolving Credit Tranche and a Term Loan Tranche. The Term Loan
Tranche has a fixed outstanding balance of $75 million
which bears interest at a fixed rate of 14.75%. We cannot prepay
our Term Loan Tranche prior to August 21, 2011. If the Term
Loan Tranche is partially or fully prepaid between
August 21, 2011 and August 20, 2012, a prepayment
penalty up to 3% of the amount prepaid is due to the lenders.
The Revolving Credit Tranche is a revolving credit facility and
the daily outstanding balances bear interest at London InterBank
Offered Rate (LIBOR) plus 4.25%.
In July 2011, we obtained commitments from the lenders under our
A/R Credit Facility such that, effective upon our full repayment
of the Term Loan Tranche and the Senior Subordinated Secured
Notes (and satisfaction of other typical conditions), the
maximum commitment of the lenders under the Revolving Credit
Tranche will be increased from $290 million to
$350 million and certain of our covenants will be adjusted,
as described below. We refer herein to such commitments and the
related changes to the A/R Credit Facility as the July
2011 Amendment. We anticipate that the July 2011 Amendment
will become effective on or about August 22, 2011, which is
when we currently expect to repay in full the Term Loan Tranche.
Under the A/R Credit Facility, all of our customer accounts
receivable are held by FRI and are collateral against any
outstanding balances. However, not all customer accounts
receivable are used to calculate the borrowing base or
performance covenants. The pool of customer accounts receivable
from which the borrowing base and performance covenants are
calculated in accordance with the A/R Credit Facility is known
as Eligible Underlying Receivables. The A/R Credit Facility
agreement states that customer accounts receivable must meet
certain requirements before they can be placed in the pool of
Eligible Underlying Receivables. The primary requirements are
that the customer must have made at least one payment since
inception of the receivable and have an originated FICO score
greater than 525. Prior to effectiveness of the July 2011
Amendment, the combined borrowing capacity of Revolving Credit
Tranche and Term Loan Tranche is the lesser of
$365 million, or the product of (i) 68% and
(ii) the sum of the outstanding principal amount of
Eligible Underlying Receivables, and amounts on deposit
representing principal collections on customer accounts
receivable held by FRI subject to reserve adjustments and
concentration limits. After effectiveness of the July 2011
Amendment, the Term Loan Tranche will be eliminated and our
borrowing capacity under the Revolving Credit Tranche will be
the lesser of $350 million, or the product of (i) 54%
and (ii) the sum of the outstanding principal amount of
Eligible Underlying Receivables, and amounts on deposit
representing principal collections on customer accounts
receivable held by FRI subject to reserve adjustments and
concentration limits.
81
Eligible
Underlying Receivables Portfolio Covenants
Violation of any Eligible Underlying Receivables portfolio
covenants is an event of default under the A/R Credit Facility.
If an event of default is not cured within the agreed upon time
period, or if a waiver from the lenders is not granted, the
outstanding balance becomes due immediately. The following
Eligible Underlying Receivables portfolio covenant thresholds
are evaluated for compliance on a monthly basis. Capitalized
terms have the meanings given in the A/R Credit Facility as
described in Note 4Financing to
the consolidated financial statements included elsewhere in this
prospectus:
|
|
|
|
|
Three-month average Principal Payment Rate shall be greater than
5% (or, following effectiveness of the July 2011 Amendment,
greater than 4.75% from February through October and greater
than 4.5% from November through January).
|
|
|
|
|
|
Three-month average Principal Default Ratio shall be less than
24% from April through August and less than 28% from September
through March.
|
|
|
|
Three-month average Principal Delinquency Ratio shall be less
than 14.5%.
|
|
|
|
Three-month average Excess Spread Ratio shall be greater than 8%.
|
|
|
|
Three-month average Adjusted Excess Spread Ratio, defined as the
Adjusted Portfolio Yield less the Principal Default Ratio and
the Receivables Base Rate, shall be greater than −4%.
|
|
|
|
|
|
One month Principal Delinquency Ratio shall be less than 16%
(this covenant will be eliminated upon effectiveness of the July
2011 Amendment).
|
|
|
|
|
|
One month Total Payment Rate shall be greater than 6.5% (this
covenant will be eliminated upon effectiveness of the July 2011
Amendment).
|
The following table compares Eligible Underlying Receivables
portfolio covenant levels to actual as of January 28, 2011
and April 29, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
January 28, 2011
|
|
|
April 29, 2011
|
|
Covenant
|
|
Covenant Level
|
|
|
Actual
|
|
|
Covenant Level
|
|
|
Actual
|
|
|
Principal Payment Rate (three-month average)
|
|
|
> 5.00
|
%
|
|
|
5.60
|
%
|
|
|
> 5.00
|
%
|
|
|
6.33
|
%
|
Principal Default Ratio (three-month average)
|
|
|
< 28.00
|
%
|
|
|
19.37
|
%
|
|
|
< 24.00
|
%
|
|
|
15.28
|
%
|
Principal Delinquency Ratio (three-month average)
|
|
|
< 14.50
|
%
|
|
|
8.74
|
%
|
|
|
< 14.50
|
%
|
|
|
7.93
|
%
|
Excess Spread Ratio (three-month
average)
|
|
|
> 8.00
|
%
|
|
|
22.12
|
%
|
|
|
> 8.00
|
%
|
|
|
29.78
|
%
|
Adjusted Excess Spread Ratio
(three-month average)
|
|
|
> (4.00
|
)%
|
|
|
8.45
|
%
|
|
|
> (4.00
|
)%
|
|
|
22.84
|
%
|
Principal Delinquency Ratio (one month)
|
|
|
< 16.00
|
%
|
|
|
8.41
|
%
|
|
|
< 16.00
|
%
|
|
|
7.93
|
%
|
Total Payment Rate (one month)
|
|
|
> 6.50
|
%
|
|
|
8.14
|
%
|
|
|
> 6.50
|
%
|
|
|
9.10
|
%
|
In addition to Eligible Underlying Receivables portfolio
covenants, there are certain Eligible Underlying Receivables
portfolio performance thresholds that, if not met, require us to
provide cash collateral, as discussed below.
82
Cash
Collateral Requirements
If the Excess Spread Ratio drops below certain thresholds on a
three-month average basis, cash collateral expressed as a
percentage of the amount of outstanding borrowings on our A/R
Credit Facility is required as follows:
|
|
|
|
|
|
|
Cash
|
|
Excess Spread Ratio
|
|
Collateral
|
|
|
> 14.0%
|
|
|
|
%
|
> 12.5%
£14.0%
|
|
|
2
|
|
> 11.0%
£12.5%
|
|
|
4
|
|
> 9.5%
£11.0%
|
|
|
6
|
|
£ 9.5%
|
|
|
8
|
|
If the Total Payment Rate on a one month average basis drops
below certain thresholds cash collateral expressed as a
percentage of the amount of outstanding borrowings on our A/R
Credit Facility is required as shown in the following table
(this requirement will be eliminated upon effectiveness of the
July 2011 Amendment):
|
|
|
|
|
|
|
Cash
|
|
Total Payment Rate
|
|
Collateral
|
|
|
> 8.0%
|
|
|
|
%
|
> 7.25%
£
8.0%
|
|
|
1
|
|
£
7.25%
|
|
|
2
|
|
If the Principal Delinquency Ratio on a one month average
exceeds certain thresholds cash collateral expressed as a
percentage of the amount of outstanding borrowings on our A/R
Credit Facility is required as shown in the following table
(this requirement will be eliminated upon effectiveness of the
July 2011 Amendment):
|
|
|
|
|
|
|
Cash
|
|
Principal Delinquency Ratio
|
|
Collateral
|
|
|
< 12.5%
|
|
|
|
%
|
³
12.5% < 14.0%
|
|
|
1
|
|
³
14.0%
|
|
|
2
|
|
The Eligible Underlying Receivables portfolio must perform at a
higher level than noted above for three consecutive months for
cash collateral to be released. As of January 28, 2011,
total portfolio cash collateral was zero. As of January 29,
2010, in accordance with the Senior Secured Revolving Credit
Facility (the predecessor revolving credit facility) total
portfolio cash collateral was $17.4 million, or 7% of
outstanding borrowings.
Financial and
Other Covenants under Our Credit Facilities
In addition to the covenants discussed above, we are subject to
financial and other covenants under the A/R Credit Facility,
Inventory Line of Credit and Senior Subordinated Secured Notes.
Failure to comply with these covenants is an event of default,
subject to certain grace periods or waivers. The following
financial covenant levels are the most restrictive levels that
must be maintained in accordance with our credit agreements:
|
|
|
|
|
Minimum Net LiquidityThe sum of unrestricted cash
and cash equivalents, availability under the A/R Credit Facility
and availability under the Inventory Line of Credit must be at
least $25 million in each fiscal month from February
through November, and must be at least $20 million in the
fiscal months of December and January of each year (or,
following effectiveness of the July 2011 Amendment, at least
$22.5 million throughout the year).
|
83
|
|
|
|
|
Tangible Net WorthAt least $120 million, plus
75% of consolidated net earnings before gain or loss on
derivatives in our own equity (if positive) for each full fiscal
year following August 20, 2010, and 85% of the gross
proceeds on any issuance of equity as determined quarterly.
|
|
|
|
|
|
Last Twelve Months (LTM) Adjusted EBITDA
MarginLTM adjusted earnings before gain or loss on
derivatives in our own equity, interest expense, taxes,
depreciation, amortization, and certain other adjustments
(Adjusted EBITDA) margin must be at least 8.5% (this requirement
will be eliminated upon effectiveness of the July 2011
Amendment).
|
|
|
|
|
|
Fixed Charge Coverage RatioMust be at least 1.0x
through October 2011, 1.05x from November 2011 through October
2012 and 1.1x from November 2012 through August 2013.
|
In addition to the above financial covenants, we are also
subject to the following financial covenant under our Inventory
Line of Credit and Senior Subordinated Secured Notes:
|
|
|
|
|
Minimum Adjusted EBITDAAdjusted EBITDA must be at
least $52.3 million for 2011 and $57 million for 2012
and any fiscal year thereafter (this requirement will be
eliminated upon effectiveness of the July 2011 Amendment).
|
As of January 29, 2010, April 30, 2010,
January 28, 2011, and April 29, 2011, we were in
compliance with all portfolio, financial and other covenants.
We may or may not engage in future long-term borrowing
transactions to fund our operations or our growth plans. Whether
or not we undertake such borrowings will depend on a variety of
factors, including prevailing interest rates, our growth plans,
our financial strength, availability of alternative sources and
costs of funding, and our managements assessment of
potential returns on investment that may be realized from the
proceeds of such borrowings.
We are generally prohibited from paying dividends with the
following exceptions: (1) stock dividends, (2) up to
$1 million per fiscal year in accordance with equity
incentive plans, (3) cash dividends on the Series A or
Series B Preferred Stock with proceeds of an initial public
offering upon conversion of the preferred stock to common stock,
and (4) after an initial public offering, and so long as
there is not an event of default under the A/R Credit Facility
and certain financial covenants are satisfied.
Inventory Line
of Credit
We also have a line of credit for up to $50 million that is
secured by inventory and other unencumbered assets of the
Company which matures in August 2013 (the Inventory Line
of Credit). Borrowing capacity under the Inventory Line of
Credit is calculated as the lower of 85% of the liquidation
value from the latest inventory appraisal, less any reserves, or
65% of eligible inventory up to a maximum of $50 million.
Daily outstanding balances on the Inventory Line of Credit bear
interest at LIBOR plus 3.25% to 3.50%, or Prime plus 2.00% to
2.25%, subject to outstanding balances. The Inventory Line of
Credit agreement, as amended, requires the payment of an unused
commitment fee ranging from 0.375% to 0.500% on the average
daily-unused portion of the revolving commitment.
Senior
Subordinated Secured Notes
Our Senior Subordinated Secured Notes were issued in March 2006
in an aggregate principal amount at maturity of $30 million
and mature on November 21, 2013.
Upon completion of this offering, we will use the proceeds to
retire our Senior Subordinated Secured Notes for
$30 million, plus accrued and unpaid interest, with no
prepayment penalty.
84
In connection with the Senior Subordinated Secured Notes, the
investors under the Senior Subordinated Secured Notes were
issued warrants to purchase 41,742,458 shares of our
Series A Preferred Stock. The warrants were valued at
$4.2 million and accounted for as original issue discount
on the debt and a derivative liability in our own equity. The
original issue discount is being amortized to interest expense
over the term of the Senior Subordinated Secured Notes. The fair
value of derivative liabilities in our own equity is estimated
as of each balance sheet date with changes in fair value
recorded as a gain or loss from derivatives in our own equity.
Preferred
Stock
On May 15, 2008, we completed a private placement of
750,839,038 shares of Series B Preferred Stock at an
issue price of $0.0745 per share to certain existing
stockholders for aggregate cash proceeds of $55.9 million.
Proceeds from the issuance of Series B Preferred Stock were
used for general corporate purposes.
We completed various private placements prior to May 15,
2008, with the most significant during 2004 when we issued
771,097,377 shares of Series A Preferred Stock at an
issue price of $0.10511 per share to investors, affiliates and
management for aggregate cash proceeds of $81.1 million.
Proceeds from the Series A Preferred Stock were used to
fund operations and to repay certain indebtedness.
Upon completion of this offering, our preferred stockholders
will convert all of their shares of Preferred Stock, as well as
accrued and unpaid cumulative dividends, into common stock, and
the rights of the holders of our Preferred Stock will terminate.
As a result, the amount reported as Preferred Stock at that time
will be converted into common stock and additional paid-in
capital, and there will be an anti-dilution adjustment under
certain of our common stock warrants due to the payment of
accrued and unpaid dividends on our Preferred Stock in the form
of common stock. The amount of the adjustment is dependent upon
the number of shares of common stock required to satisfy accrued
and unpaid dividends on our Preferred Stock upon the completion
of this offering. The number of shares required to satisfy the
payment of accrued dividends is dependent on the price per share
of this offering net of underwriting commissions.
Cash
Flows
A summary of operating, investing and financing activities are
shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
13 Weeks Ended
|
|
|
|
January 30,
|
|
|
January 29,
|
|
|
January 28,
|
|
|
April 30,
|
|
|
April 29,
|
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
|
(in thousands)
|
|
|
Net cash (used in) provided by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
(24,878
|
)
|
|
$
|
11,943
|
|
|
$
|
(59,095
|
)
|
|
$
|
19,179
|
|
|
$
|
29,383
|
|
Investing activities
|
|
|
(33,431
|
)
|
|
|
4,766
|
|
|
|
14,784
|
|
|
|
5,736
|
|
|
|
(4,696
|
)
|
Financing activities
|
|
|
49,320
|
|
|
|
(14,653
|
)
|
|
|
42,752
|
|
|
|
(27,067
|
)
|
|
|
(25,436
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
$
|
(8,989
|
)
|
|
$
|
2,056
|
|
|
$
|
(1,559
|
)
|
|
$
|
(2,152
|
)
|
|
$
|
(749
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows
from Operating Activities
Cash (used in) provided by our operating activities primarily
consists of net income adjusted for certain non-cash items,
including depreciation and amortization, amortization of
deferred charges and original issue discount, loss from
derivatives in our own equity, non-cash
85
component of loss on early extinguishment of debt, stock-based
compensation, provision for doubtful accounts, provision for
merchandise returns, deferred taxes, and the effect of changes
in other working capital and other activities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
13 Weeks Ended
|
|
|
|
January 30,
|
|
|
January 29,
|
|
|
January 28,
|
|
|
April 30,
|
|
|
April 29,
|
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
|
(in thousands)
|
|
|
Net income (loss)
|
|
$
|
1,335
|
|
|
$
|
9,222
|
|
|
$
|
(11,524
|
)
|
|
$
|
2,039
|
|
|
$
|
(9,267
|
)
|
Adjustments to reconcile net income (loss) to net cash (used in)
provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
6,285
|
|
|
|
7,246
|
|
|
|
8,746
|
|
|
|
1,924
|
|
|
|
2,588
|
|
Amortization of deferred charges and original issue discount
|
|
|
4,076
|
|
|
|
4,168
|
|
|
|
4,328
|
|
|
|
1,034
|
|
|
|
1,126
|
|
Loss from derivates in our own equity
|
|
|
|
|
|
|
6,500
|
|
|
|
32,607
|
|
|
|
|
|
|
|
14,944
|
|
Non-cash component of loss on early extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
2,309
|
|
|
|
|
|
|
|
|
|
Loss on disposal of assets
|
|
|
411
|
|
|
|
37
|
|
|
|
497
|
|
|
|
|
|
|
|
|
|
Provision for doubtful accounts
|
|
|
93,332
|
|
|
|
83,102
|
|
|
|
89,524
|
|
|
|
18,896
|
|
|
|
27,500
|
|
Provision for merchandise returns
|
|
|
11,355
|
|
|
|
13,061
|
|
|
|
12,984
|
|
|
|
2,229
|
|
|
|
2,421
|
|
Deferred income taxes
|
|
|
(851
|
)
|
|
|
6,303
|
|
|
|
(1,969
|
)
|
|
|
(478
|
)
|
|
|
423
|
|
Stock-based compensation
|
|
|
110
|
|
|
|
321
|
|
|
|
282
|
|
|
|
90
|
|
|
|
55
|
|
Other non-cash items affecting income
|
|
|
12,645
|
|
|
|
10,788
|
|
|
|
13,423
|
|
|
|
3,006
|
|
|
|
2,565
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer accounts receivable
|
|
|
(150,937
|
)
|
|
|
(157,650
|
)
|
|
|
(218,350
|
)
|
|
|
9,611
|
|
|
|
2,848
|
|
Merchandise inventories
|
|
|
1,947
|
|
|
|
6,987
|
|
|
|
(1,649
|
)
|
|
|
(3,343
|
)
|
|
|
(6,548
|
)
|
Promotional material inventories
|
|
|
4,142
|
|
|
|
(576
|
)
|
|
|
(1,976
|
)
|
|
|
(425
|
)
|
|
|
(2,865
|
)
|
Prepaid expenses and other current assets
|
|
|
(1,080
|
)
|
|
|
(881
|
)
|
|
|
(910
|
)
|
|
|
1,955
|
|
|
|
483
|
|
Current income taxes payable
|
|
|
(6,346
|
)
|
|
|
3,117
|
|
|
|
3,001
|
|
|
|
(2,095
|
)
|
|
|
(4,054
|
)
|
Accounts payable and other liabilities
|
|
|
(1,610
|
)
|
|
|
20,466
|
|
|
|
9,582
|
|
|
|
(15,264
|
)
|
|
|
(2,836
|
)
|
Other
|
|
|
308
|
|
|
|
(268
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
$
|
(24,878
|
)
|
|
$
|
11,943
|
|
|
$
|
(59,095
|
)
|
|
$
|
19,179
|
|
|
$
|
29,383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operating activities was $29.4 million
during the 13 weeks ended April 29, 2011, reflecting a
$9.3 million net loss adjusted for $51.6 million of
non-cash items, consisting primarily of our provision for
doubtful accounts, provision for merchandise returns,
86
depreciation and amortization, loss from derivatives in our own
equity and amortization of deferred charges and original issue
discount, less $13.0 million of net cash used for working
capital purposes and other activities. For the 13 weeks
ended April 29, 2011, cash used primarily for working
capital and other activities reflected a $2.8 million
increase in customer accounts receivable, partially offset by a
$6.5 million increase in merchandise inventories, a
$2.9 million increase in promotional material inventories,
a $4.1 million decrease in current income taxes payable,
and a $2.8 million decrease in accounts payable and other
liabilities.
Cash provided by operating activities was $19.2 million
during the 13 weeks ended April 30, 2010, reflecting
net income of $2.0 million adjusted for $26.7 million
of non-cash items, consisting primarily of our provision for
doubtful accounts, provision for merchandise returns,
depreciation and amortization and amortization of deferred
charges and original issue discount, less $9.6 million of
net cash used for working capital purposes and other activities.
For the 13 weeks ended April 30, 2010, cash used
primarily for working capital and other activities reflected a
$15.3 million decrease in accounts payable and other
liabilities, a $3.3 million increase in merchandise
inventories, a $2.1 million decrease in current income
taxes payable, partially offset by a $9.6 million increase
in customer accounts receivable.
Cash used in operating activities was $59.1 million during
2010 and consisted of $11.5 million of net loss adjusted
for $162.7 million of non-cash items, consisting primarily
of our provision for doubtful accounts, provision for
merchandise returns, depreciation and amortization, loss from
derivatives in our own equity, loss on early extinguishment of
debt, and amortization of deferred charges and original issue
discount, less $210.3 million of net cash used for working
capital purposes and other activities. For 2010, cash used
primarily for working capital and other activities reflected a
$218.4 million increase in customer accounts receivable,
partially offset by a $9.6 million increase in accounts
payable and other liabilities.
Cash provided by operating activities was $11.9 million
during 2009 and consisted of $9.2 million of net income
adjusted for $131.5 million of non-cash items, consisting
primarily of our provision for doubtful accounts, provision for
merchandise returns, and depreciation and amortization, less
$128.8 million of net cash used for working capital
purposes and other activities. Cash used for working capital and
other activities during 2009 reflected a $157.7 million
increase in customer accounts receivable, partially offset by a
$20.5 million increase in accounts payable and other
liabilities.
Cash used in operating activities was $24.9 million during
2008 and consisted of $1.3 million of net income adjusted
for $127.4 million of non-cash items, consisting primarily
of our provision for doubtful accounts, provision for
merchandise returns, and depreciation and amortization, less
$153.6 million of net cash used for working capital
purposes and other activities. Cash used primarily for working
capital and other activities during 2008 reflected a
$150.9 million increase in customer accounts receivable.
Cash Flows
from Investing Activities
Investing activities consist of capital expenditures for
internal-use software and website development, corporate and
distribution facility enhancements, as well as changes in
restricted cash.
87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
13 Weeks Ended
|
|
|
|
January 30,
|
|
|
January 29,
|
|
|
January 28,
|
|
|
April 30,
|
|
|
April 29,
|
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Purchases of fixed assets, internal-use software and website
development
|
|
$
|
(6,635
|
)
|
|
$
|
(9,177
|
)
|
|
$
|
(12,570
|
)
|
|
$
|
(2,945
|
)
|
|
$
|
(2,268
|
)
|
Net (increase) decrease in restricted cash
|
|
|
(26,796
|
)
|
|
|
13,943
|
|
|
|
27,354
|
|
|
|
8,681
|
|
|
|
(2,428
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
$
|
(33,431
|
)
|
|
$
|
4,766
|
|
|
$
|
14,784
|
|
|
$
|
5,736
|
|
|
$
|
(4,696
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used in investing activities was $4.7 million during
the 13 week period ended April 29, 2011 compared to
net cash provided by investing activities of $5.7 million
during the 13 week period ended April 30, 2010
primarily due to changes in restricted cash balances. Cash
provided by investing activities was $14.8 million during
2010 compared to $4.8 million during 2009. The decrease in
restricted cash during 2010 resulted from less restrictive cash
collateral requirements under our A/R Credit Facility compared
to our predecessor Senior Secured Revolving Credit Facility.
Cash provided by investing activities was $4.8 million
during 2009 compared to cash used of $33.4 million during
2008. Our 2009 cash provided by investing activities reflected
the release of $13.9 million of restricted cash due to the
improved performance of our eligible portfolio under our Senior
Secured Revolving Credit Facility. Our 2008 cash used in
investing activities reflected a $26.8 million increase of
restricted cash due to the restricted cash requirements of our
Senior Secured Revolving Credit Facility which was put in place
in 2008, as well as the deteriorating performance of our credit
portfolio during 2008. The increase in purchases of fixed
assets, internal-use software and website development during the
three-year period reflects our continued investment in
information technology to support our growth, including the
development of our Gettington.com brand and information
technology that supported our new customer acquisition
strategies.
Cash Flows
from Financing Activities
Financing activities consist of borrowings and payments on our
revolving credit facilities and our issuances of convertible
preferred and common stock.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
13 Weeks Ended
|
|
|
|
January 30,
|
|
|
January 29,
|
|
|
January 28,
|
|
|
April 30,
|
|
|
April 29,
|
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Net (repayments) borrowings on revolving credit facilities
|
|
$
|
(6,197
|
)
|
|
$
|
(14,730
|
)
|
|
$
|
42,580
|
|
|
$
|
(27,075
|
)
|
|
$
|
(25,810
|
)
|
Issuance of Series B Preferred Stock
|
|
|
55,499
|
|
|
|
|
|
|
|
100
|
|
|
|
|
|
|
|
100
|
|
Issuance of common stock
|
|
|
18
|
|
|
|
77
|
|
|
|
72
|
|
|
|
8
|
|
|
|
274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
$
|
49,320
|
|
|
$
|
(14,653
|
)
|
|
$
|
42,752
|
|
|
$
|
(27,067
|
)
|
|
$
|
(25,436
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used in financing activities was $25.4 million during
the 13 weeks ended April 29, 2011 compared to cash
used in financing activities of $27.1 million during the
13 weeks ended April 30, 2010 primarily due to decreased
net repayments on our revolving credit facilities. Cash provided
by financing activities was $42.8 million during 2010
compared to cash used in financing activities of
$14.7 million during 2009 primarily due to increased net
borrowings on our revolving credit facilities primarily due to
the increase in net sales and our need to finance the resulting
growth in customer accounts receivable. Cash used in financing
activities was
88
$14.7 million during 2009 compared to cash provided of
$49.3 million during 2008. Our 2009 cash used in financing
activities reflected net repayments on revolving credit
facilities of $14.7 million. Our 2008 cash provided by
financing activities reflected our issuance of Series B
Preferred Stock of $55.5 million and net repayments on
revolving credit facilities of $6.2 million.
Future Liquidity
Requirements
Although we can provide no assurances, the net proceeds from
this offering, together with amounts available under our A/R
Credit Facility, Inventory Line of Credit, net cash provided by
operating activities, and available cash and cash equivalents
should be adequate to finance working capital and planned
capital expenditures for at least the next twelve months.
Thereafter, we may find it necessary to obtain additional equity
or debt financing as we continue to execute our business and
growth strategies.
Contractual
Obligations
As of January 28, 2011, our contractual obligations and the
effect such obligations are expected to have on our liquidity
and cash flows in future periods were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
2011
|
|
|
2012 and 2013
|
|
|
2014 and 2015
|
|
|
2016 +
|
|
|
|
|
|
|
Less Than 1
|
|
|
1 - 3
|
|
|
3 - 5
|
|
|
More Than
|
|
|
|
Total
|
|
|
Year
|
|
|
Years
|
|
|
Years
|
|
|
5 Years
|
|
|
|
(in thousands)
|
|
|
Operating lease commitments (a)
|
|
$
|
57,320
|
|
|
$
|
6,252
|
|
|
$
|
10,547
|
|
|
$
|
8,992
|
|
|
$
|
31,529
|
|
Long-term debt (b)
|
|
|
104,883
|
|
|
|
409
|
|
|
|
103,806
|
|
|
|
104
|
|
|
|
564
|
|
Interest paymentslong-term debt (c)
|
|
|
37,666
|
|
|
|
15,332
|
|
|
|
22,264
|
|
|
|
41
|
|
|
|
29
|
|
Series B Preferred Stock
|
|
|
78,099
|
|
|
|
|
|
|
|
|
|
|
|
78,099
|
(d)
|
|
|
|
|
Series A Preferred Stock
|
|
|
172,723
|
|
|
|
|
|
|
|
|
|
|
|
172,723
|
(e)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual obligations
|
|
$
|
450,691
|
|
|
$
|
21,993
|
|
|
$
|
136,617
|
|
|
$
|
259,959
|
|
|
$
|
32,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Operating lease commitments
primarily consist of leases for our office facilities in Eden
Prairie, Minnesota and our distribution center and additional
warehouse space in Saint Cloud, Minnesota. Refer to note 9
of the notes to consolidated financial statements for a further
description of leases. We did not have any current or future
capital lease commitments as of January 28, 2011.
|
|
(b)
|
|
Long-term debt consists of amounts
outstanding on the Term Loan Tranche of our A/R Credit Facility,
our Senior Subordinated Secured Notes, and other notes payable.
We expect to retire the Term Loan Tranche of our A/R Credit
Facility and our existing Senior Subordinated Secured Notes with
the proceeds of this offering. The Revolving Credit Tranche of
our A/R Credit Facility is classified as current on our
consolidated balance sheet and accordingly, is excluded from the
table above. In the event of a decrease in the quality of the
underlying receivables collateralizing the Revolving Credit
Tranche, accelerated repayment of our A/R Credit Facility may
occur.
|
|
(c)
|
|
We make quarterly interest payments
based on fixed rates of interest on our Senior Subordinated
Secured Notes and bi-monthly interest payments on amounts
outstanding on the Term Loan Tranche of our A/R Credit Facility.
|
|
(d)
|
|
Under our certificate of
incorporation in effect prior to completion of this offering, if
a Qualified Public Offering (as defined in such document) has
not occurred prior to February 28, 2014, we would be
required, upon demand of 66% of our Series B Preferred
Stock holders, to redeem all outstanding shares of our
Series B Preferred Stock for an amount equal to the greater
of (i) the Series B Purchase Price for all such
shares, plus accrued and unpaid dividends thereon (which is the
amount reflected in the table, assuming dividends have accrued
through February 28, 2014), or (ii) an amount mutually
agreed to by our board of directors and 66% of our Series B
Preferred Stock holders. Upon completion of the offering
contemplated hereby, all outstanding shares of preferred stock
will convert into common stock and thus the potential obligation
reflected hereby will no longer exist.
|
89
|
|
|
(e)
|
|
Under our certificate of
incorporation in effect prior to completion of this offering, if
the required holders of our Series B Preferred Stock demand
redemption as described in the preceding footnote, we would be
required, upon demand of 50% of our Series A Preferred
Stock holders, to redeem all outstanding shares of our
Series A Preferred Stock for an amount equal to the greater
of (i) the Series A Purchase Price for all such
shares, plus accrued and unpaid dividends thereon (which is the
amount reflected in the table, assuming dividends have accrued
through February 28, 2014), or (ii) an amount mutually
agreed to by our board of directors and 50% of our Series A
Preferred Stock holders. Upon completion of the offering
contemplated hereby, all outstanding shares of preferred stock
will convert into common stock and thus the potential obligation
reflected hereby will no longer exist. The amount reflected in
the table also includes the amount we could be required to pay
to redeem the shares of Series A Preferred Stock underlying
our existing Series A Preferred Stock warrants that were
issued in March 2006. The holders of such warrants have the
right to exercise and immediately redeem the shares upon a
redemption demand by the Series A Preferred Stock holders,
provided that they would not receive any amount in respect of
accrued dividends.
|
Estimated tax contingencies, including interest and penalties,
are not included in the table above because we are not able to
make reasonably reliable estimates of the period of cash
settlement. The above table also does not reflect our planned
use of proceeds from this offering to reduce outstanding
indebtedness or to pay estimated transaction fees in connection
with this offering. See Use of Proceeds.
The above table does not reflect any obligation we may have
under a contingent fee agreement we entered into with the
lenders under our May 2008 Senior Secured Revolving Credit
Facility. Pursuant to this agreement, we are obligated, upon the
occurrence of certain events, to pay to the lenders an amount
that varies depending on the period in which the event occurs
and the amount of our equity value at such time. The contingent
fee arrangement will terminate upon consummation of the offering
made hereby, and is described further below under Certain
Relationships and Related Party TransactionsMay 2008
Financings.
The above table also does not reflect our potential obligations
under put rights included in the common stock warrants that we
issued in May 2008 to the lenders in connection with the Senior
Secured Revolving Credit Facility. Under these warrants, we
would be required in certain circumstances, upon the demand of a
warrant holder, to redeem the holders warrants (or shares
of common stock acquired upon exercise by such holder). Such
redemption would be for fair market value, as determined by our
board of directors in good faith, or pursuant to an appraisal
procedure if the holder objects to the board of directors
determination. We are not obligated to redeem the warrants under
these put rights if the redemption would result in a default
under our indebtedness. The put rights under the May 2008
warrants will terminate upon consummation of the offering made
hereby.
We issue inventory purchase orders in the normal course of
business, which represent authorizations to purchase that may be
cancelable in accordance with the terms. We do not consider
purchase orders to be firm inventory commitments; therefore,
they are excluded from the table above.
The above table does not reflect our commitment to extend credit
to our customers up to the maximum amount of their credit
limits. The aggregate of unused customer credit lines totaled
$1.5 billion as of January 28, 2011.
In addition to the contractual obligations described above, we
expect that our 2011 capital expenditures will total
approximately $10.5 million.
We do not have any arrangements or relationships with entities
that are not consolidated into the financial statements that are
reasonably likely to materially affect our liquidity or the
availability of capital resources.
Off-Balance Sheet
Arrangements
We have no off-balance sheet arrangements.
90
Quantitative and
Qualitative Disclosure about Market Risk
We are exposed to interest rate risk through our customer
accounts receivable and, to a lesser extent, through our
merchandise procurement.
Interest Rate
Risk
Interest rate risk refers to changes in earnings or the net
present value of rate sensitive assets less liabilities (termed
economic value of equity) due to interest rate
changes. To the extent that interest income collected on
customer accounts receivables and interest expense do not
respond equally to changes in interest rates, or that rates do
not change uniformly, fee and finance charge income and economic
value of equity could be affected. Our net interest income on
customer accounts receivable are not affected by relatively
small changes in short-term interest rate indices such as LIBOR
and prime rate, as our customer accounts receivable are
non-variable but subject to significant interest rate floors.
However, our Inventory Line of Credit and the Revolving Credit
Tranche of our A/R Credit Facility are indexed to LIBOR and/or
prime rates without interest rate floors and expose us to
changes in short-term interest rates.
We have the ability to manage and mitigate our interest rate
sensitivity through several techniques, primarily by modifying
the contract terms with our customers, including interest rates
charged, in response to changing market conditions. During 2010,
we changed the terms and conditions governing our customer
accounts receivable to comply with the CARD Act. Our credit
plans are priced at non-variable interest rates ranging from
14.9% to 24.9%. No interest is charged if the account is paid in
full within 25 days of the billing cycle.
Management has performed an interest rate gap analysis to
measure the effects of the timing of the repricing of our
interest sensitive assets and liabilities. This analysis
suggests that, if there had been an immediate 100 basis
point, or 1.0%, adverse change in the market rates for which our
interest sensitive assets and liabilities were indexed effective
throughout 2010, our earnings before income taxes would be lower
by approximately $0.8 million.
Foreign
Currency Risk
We purchase a significant amount of inventory from vendors
outside of the U.S. in transactions that are
U.S. dollar transactions. A decline in the relative value
of the U.S. dollar to other foreign currencies could,
however, lead to increased merchandise costs.
Impact of
Inflation
We do not believe that our operating results have been
materially affected by inflation during the preceding three
fiscal years. We cannot assure you, however, that our operating
results will not be adversely affected by inflation in the
future.
Critical
Accounting Policies and Use of Estimates
The discussion and analysis of our financial condition and
results of operations are based on our consolidated financial
statements, which have been prepared in accordance with GAAP.
The preparation of these financial statements in accordance with
GAAP requires us to utilize accounting policies and make certain
estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingencies as of
the date of the financial statements and the reported amounts of
revenue and expenses during a fiscal period. Some of the
accounting estimates require us to make assumptions about
matters that are highly uncertain at the time we make the
accounting estimates. We base these assumptions and the
resulting estimates on authoritative pronouncements, historical
information and other factors that we believe to be reasonable
under the circumstances and we evaluate these assumptions and
estimates on an ongoing basis. We could reasonably use different
estimates, and changes in our accounting estimates could occur
from period to period, with the result in each case
91
being a material change in the financial statement presentation
of our financial position or results of operations.
The SEC considers an accounting policy to be critical if it is
important to a companys financial condition and results of
operations, and if it requires the exercise of significant
judgment and the use of estimates on the part of management in
its application. We believe the following to be our critical
accounting policies because they are important to the
presentation of our financial condition and results of
operations, and require critical management judgment and
estimates about matters that are uncertain:
|
|
|
|
|
allowance for doubtful accounts;
|
|
|
|
promotional material inventories;
|
|
|
|
income taxes; and
|
|
|
|
valuation of stock-based awards, warrants and derivatives in our
own equity.
|
Allowance for
Doubtful Accounts
We maintain an allowance for doubtful accounts at a level
intended to absorb estimated probable losses inherent in
customer accounts receivable, including accrued finance charges
and fees as of the balance sheet date. We use our judgment to
evaluate the adequacy of the allowance for doubtful accounts
based on a variety of quantitative and qualitative risk
considerations. Quantitative factors include, among other
things, customer credit risk and aging of accounts receivable.
Qualitative factors include, among other things, economic
factors that have historically been leading indicators of future
delinquency and losses such as national unemployment rates,
changing trends in the financial obligations ratio published by
the Federal Reserve and changes in the consumer price index. We
segment customer accounts receivable into vintage pools based on
date of account origination. Each vintage is further segmented
into pools based on delinquency status as of the balance sheet
date and risk profile. Our estimate of future losses is based on
historical losses on receivables with a similar vintage,
delinquency status, and risk profile, adjusted for current
trends and changes in underwriting. Customer receivables are
written off as of the statement cycle date following the passage
of 180 days without receiving a qualifying payment.
Accounts receivable relating to bankrupt or deceased account
holders are written off as of the statement cycle date following
the passage of 60 days after receipt of formal notification
regardless of delinquency status. Recoveries of receivables
previously written off are recorded when received.
Management believes the allowance for doubtful accounts is
adequate to cover anticipated losses in our customer accounts
receivable under current conditions; however, unexpected,
significant deterioration in any of the factors mentioned above
or in general economic conditions could materially change these
expectations.
Promotional
Material Inventories
Promotional material inventories includes raw materials, work in
process, and name list costs associated with direct response
advertising and premium (free gift) inventory. Production of
direct response advertising includes the costs associated with
photography, page design, development, separations, paper,
printing, and postage. Direct response advertising costs are
deferred and amortized over the period during which sales are
expected to occur, generally three to five months. Premiums are
expensed when shipped to the customer along with the product
order.
92
Income
Taxes
We recognize income taxes under the asset and liability method.
As such, deferred taxes are based on the temporary differences,
if any, between the financial statement and tax bases of assets
and liabilities that will result in future taxable or deductible
amounts. The deferred taxes are determined using the enacted tax
rates that are expected to apply when the temporary differences
reverse. Income tax expense is the tax payable for the period
plus the change during the period in deferred income taxes.
Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. We
record a liability for unrecognized tax benefits from uncertain
tax positions taken, or expected to be taken, in our tax returns.
Developing a provision for income taxes, including the effective
tax rate and the analysis of potential tax exposure items, if
any, requires significant judgment and expertise in federal and
state income tax laws, regulations and strategies, including the
determination of deferred tax assets. Our judgment and tax
strategies are subject to audit by various taxing authorities.
During 2010, the Internal Revenue Service completed its
examination of the tax loss generated in 2008 that was carried
back to our 2006 U.S. consolidated federal income tax
return. With few exceptions, we are no longer subject to income
tax examinations for years before 2006. While we believe we have
provided adequately for our income tax liabilities in the
consolidated financial statements, adverse determinations by
these taxing authorities could have a material adverse effect on
our consolidated financial condition, results of operations,
and/or cash
flows.
Valuation of
Stock-Based Awards, Warrants and Derivatives in Our Own
Equity
Stock-Based
Compensation
Prior to February 4, 2006, we accounted for our stock
options granted to employees using the intrinsic value method.
The intrinsic value method requires a company to recognize
compensation expense for stock options granted to employees
based on any differences between the exercise price of the stock
options granted and the fair value of the underlying common
stock. Under the intrinsic value method, any compensation cost
relating to stock options was recorded on the date of the grant
in stockholders equity as deferred compensation and was
thereafter amortized to expense over the vesting period of the
grant. We did not recognize stock-based compensation for stock
options granted to our employees prior to February 4, 2006
as we granted stock options with an exercise price equal to the
fair value of the underlying common stock.
Effective February 4, 2006, we adopted the fair value
method of accounting for our stock options granted to employees
which requires us to measure the cost of employee services
received in exchange for the stock options, based on the grant
date fair value of the award. The fair value of the awards is
estimated using the Black-Scholes-Merton (BSM)
option-pricing model. The resulting cost is recognized over the
period during which an employee is required to provide service
in exchange for the award, usually the vesting period, which is
generally four years.
We adopted the fair value method using the prospective
transition method as we used the minimum value method for the
previously required pro forma disclosures. The prospective
transition method requires us to continue to apply the intrinsic
value method in future periods to equity awards outstanding as
of February 4, 2006. Under the prospective transition
method, any compensation costs that will be recognized from
February 4, 2006 will include only: (a) compensation
cost for all stock-based awards granted prior to, but not yet
vested as of December 31, 2005, based on the intrinsic
value method; and (b) compensation cost for all stock-based
awards granted or modified subsequent to December 31, 2005,
net of estimated forfeitures, based on fair value. We amortize
the fair value of our stock-based compensation for
93
the equity awards granted after February 4, 2006 on an
accelerated amortization basis. In accordance with the
prospective transition method, results for prior periods were
not restated.
Beginning on February 4, 2006, the fair value of each new
employee option awarded was estimated on the grant date for the
periods below using the BSM option-pricing model with the
following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
13 Weeks Ended
|
|
|
|
January 30,
|
|
|
January 29,
|
|
|
January 28,
|
|
|
April 30,
|
|
|
April 29,
|
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
Expected volatility
|
|
|
33.8
|
%
|
|
|
35.5
|
%
|
|
|
30.0
|
%
|
|
|
30.0
|
%
|
|
|
38.3
|
%
|
Expected term (years)
|
|
|
5.0
|
|
|
|
5.0
|
|
|
|
2.9
|
|
|
|
3.0
|
|
|
|
2.0
|
|
Risk-free interest rate
|
|
|
3.0
|
%
|
|
|
1.8
|
%
|
|
|
1.3
|
%
|
|
|
1.4
|
%
|
|
|
0.6
|
%
|
Forfeiture rate
|
|
|
30.0
|
%
|
|
|
30.0
|
%
|
|
|
30.0
|
%
|
|
|
30.0
|
%
|
|
|
30.0
|
%
|
Expected dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
If in the future we determine that another method for
calculating the fair value of our stock options is more
reasonable, or if another method for calculating the above input
assumptions is prescribed by authoritative guidance, the fair
value calculated for our employee stock options could change
significantly.
The BSM option-pricing model requires inputs such as the
risk-free interest rate, expected term and expected volatility.
Further, the forfeiture rate also affects the amount of
aggregate compensation. These inputs are subjective and
generally require significant judgment.
The expected volatility incorporates the historical volatility
of stock prices of a public company peer group. The expected
term represents the period stock-based awards are expected to be
outstanding and were determined based on historical experience
and anticipated future exercise patterns, considering the
contractual terms of unexercised stock options. The risk-free
interest rate is based on the implied yield of
U.S. Treasury instruments whose maturities are similar to
those of the expected term of the award being valued. The
expected dividend yield was based on our expectation of not
paying dividends on our common stock for the foreseeable future.
The weighted-average grant date fair value per share of stock
options granted to employees during 2008, 2009 and 2010, and the
13 weeks ended April 30, 2010 and April 29, 2011, was
$0.003, $0.0003, $0.0009, $0.0008 and $0.0108, respectively.
In addition to stock option expense, our stock-based
compensation expense includes expense associated with awards of
restricted common stock. We account for restricted share awards
granted to employees based on the grant date fair value of the
award. The resulting cost is recognized over the period during
which an employee is required to provide service in exchange for
the award, usually the vesting period, which is generally four
years.
We recorded stock-based compensation expense of
$0.1 million, $0.3 million, $0.3 million,
$0.1 million, and $0.1 million during 2008, 2009 and
2010, and the 13 weeks ended April 30, 2010 and
April 29, 2011, respectively. As of January 28, 2011,
and April 29, 2011, we had $0.4 million and
$0.8 million of unrecognized stock-based compensation
costs, net of estimated forfeitures, that is expected to be
recognized over a weighted-average period of 1.6 and
2.1 years, respectively.
In future periods, our stock-based compensation expense is
expected to increase as a result of our existing unrecognized
stock-based compensation and as we issue additional stock-based
awards to continue to attract and retain employees and
non-employee directors.
94
Pre-IPO Common
Stock Valuation
We have historically granted stock options with exercise prices
equal to the fair value of our common stock as determined at the
date of grant by our Board of Directors. The fair value of our
common stock also impacts our expense recognition of restricted
share awards. Because there has been no public market for our
common stock, our Board of Directors has considered numerous
objective and subjective factors in valuing our common stock in
accordance with the guidance in the American Institute of
Certified Public Accountants Practice Aid, Valuation of
Privately-Held-Company Equity Securities Issued as
Compensation (the Practice Aid). These objective
and subjective factors include the arms length, third
party sales of our preferred stock, the relative liquidation and
other preferences of our capital stock, actual and forecasted
operating and financial performance, trends and risks in our
industry, the lack of a public market for our common stock, the
prospects for increased liquidity in our common stock through an
initial public offering or otherwise, and recent or
contemporaneous valuation analysis furnished by an unrelated
third party valuation specialist.
In determining the fair value of our common stock at each
valuation date, we used the market-comparable approach and
income approach to estimate the aggregate enterprise value.
Under the market-comparable approach, the total enterprise value
of the company is estimated by comparing our business to similar
businesses whose securities are actively traded in public
markets, or businesses that are involved in a public or private
transaction. Prior transactions in our stock are also considered
as part of the market approach methodology. We applied selected
EBITDA valuation multiples derived from trading multiples of
public companies that participate in the specialty retail and
consumer finance industries to the equivalent financial metric
of our business, giving consideration to differences between our
company and similar companies for such factors as company size
and growth prospects.
The income approach is a valuation technique that provides an
estimation of the fair value of a business based on the cash
flows that a business can be expected to generate over its
remaining life. This approach begins with an estimation of the
annual cash flows an investor would expect the subject business
to generate over a discrete projection period. The estimated
cash flows for each of the years in the discrete projection
periods are then converted to their present value equivalent
using a rate of return appropriate for the risk of achieving the
business projected cash flows. The present value of the
estimated cash flows are then added to the present value
equivalent of the residual value of the business at the end of
the discrete projection period to arrive at an estimate of the
fair value of the business enterprise. We have applied discount
rates that reflect the risks associated with our cash flow
projections. Our discounted cash flow calculations are sensitive
to highly subjective assumptions that we were required to make
at each valuation date relating to appropriate discount rates.
We prepared a financial forecast for each valuation to be used
in the computation of the enterprise value for both the
market-comparable approach and the income approach. The
financial forecasts took into account past experience and future
expectations. There is inherent uncertainty in these estimates.
95
The following table summarizes, by fiscal quarter, the number of
restricted shares and stock options granted since
February 2, 2008 and the fair value of our common stock for
each of these grants. For stock options, the per share exercise
price equaled the fair value of our common stock for each of
these grants.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
Number of Common Shares
|
|
|
Fair Value per
|
|
|
Vesting
|
|
|
|
Restricted
|
|
|
Stock
|
|
|
Share at Grant
|
|
|
Period
|
|
Fiscal Period of Grant
|
|
Shares
|
|
|
Options
|
|
|
Date
|
|
|
(Years)
|
|
|
Q1 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q2 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q3 2008
|
|
|
106,100,000
|
|
|
|
12,360,000
|
|
|
$
|
0.0090
|
|
|
|
4
|
|
Q4 2008
|
|
|
1,550,000
|
|
|
|
1,100,000
|
|
|
|
0.0090
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total 2008
|
|
|
107,650,000
|
|
|
|
13,460,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q1 2009
|
|
|
26,604,588
|
|
|
|
1,000,000
|
|
|
$
|
0.0010
|
|
|
|
4
|
|
Q2 2009
|
|
|
31,604,588
|
|
|
|
700,000
|
|
|
|
0.0010
|
|
|
|
4
|
|
Q3 2009
|
|
|
7,369,676
|
|
|
|
700,000
|
|
|
|
0.0010
|
|
|
|
4
|
|
Q4 2009
|
|
|
5,200,000
|
|
|
|
600,000
|
|
|
|
0.0010
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total 2009
|
|
|
70,778,852
|
|
|
|
3,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q1 2010
|
|
|
|
|
|
|
5,000,000
|
|
|
$
|
0.0040
|
|
|
|
4
|
|
Q2 2010
|
|
|
|
|
|
|
14,767,200
|
|
|
|
0.0040
|
|
|
|
4
|
|
Q3 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q4 2010
|
|
|
10,225,000
|
|
|
|
2,200,000
|
|
|
|
0.0110
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total 2010
|
|
|
10,225,000
|
|
|
|
21,967,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q1 2011
|
|
|
6,450,000
|
|
|
|
400,000
|
|
|
$
|
0.0490
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuations that we have performed require significant use of
estimates and assumptions. If different estimates and
assumptions had been used, our common stock valuations could be
significantly different and related stock-based compensation
expense may be materially impacted.
Warrants
As of April 29, 2011, we had outstanding warrants to
purchase shares of our preferred and common stock as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant Fair
|
|
|
Number of Warrants Outstanding
|
|
|
|
|
|
|
|
|
Value per
|
|
|
Series A
|
|
|
|
|
|
|
|
|
Exercise
|
|
|
Share at Grant
|
|
|
Preferred
|
|
|
Common
|
|
Issue Date
|
|
Expiration Date
|
|
Price
|
|
|
Date
|
|
|
Stock
|
|
|
Stock
|
|
|
February 24, 2004
|
|
June 21, 2012
|
|
|
0.01000
|
|
|
|
0.01000
|
|
|
|
|
|
|
|
31,689,078
|
|
November 1, 2004
|
|
June 21, 2012
|
|
|
0.01000
|
|
|
|
0.01000
|
|
|
|
|
|
|
|
1,427,076
|
|
March 24, 2006
|
|
March 23, 2016
|
|
|
0.01000
|
|
|
|
0.10000
|
|
|
|
41,742,458
|
|
|
|
|
|
May 15, 2008
|
|
May 15, 2018
|
|
|
0.01000
|
|
|
|
0.00000
|
|
|
|
|
|
|
|
216,045,882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41,742,458
|
|
|
|
249,162,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We issued the warrants to purchase our Series A Preferred
Stock in connection with the issuance of the Senior Subordinated
Secured Notes. In May 2008, we issued warrants to purchase
shares of our common stock to the lenders in connection with the
closing of the
96
Senior Secured Revolving Credit Facility. The warrants are
exercisable at any time prior to expiration.
We have estimated the fair value of our warrants at the date of
issuance using a BSM option-pricing model which used several
assumptions that are subject to significant management judgment,
as is the case for stock-based compensation discussed above. We
valued the March 2006 Series A Preferred Stock warrants at
$0.10 per share, or $4.2 million, and have accounted for
the value of such warrants as a discount to the face amount of
the Subordinated Notes that is amortized on a straight-line
basis to interest expense over the seven-year term of the
Subordinated Notes. We valued the May 2008 common stock warrants
at the date of issuance and assigned a zero value.
Estimation of
Fair Value of Derivatives in Our Own Equity
We have certain derivatives in our own equity that are required
to be accounted for at each balance sheet date with changes in
value between reporting dates being recorded in our consolidated
statement of operations. Our derivatives in our own equity
include conversion features embedded in our Series A
Preferred Stock and Series B Preferred Stock, certain of
our common stock warrants that contain put rights
and/or have
specified down-round financing anti-dilution features, and a
contingent fee agreement with one of our warrant holders that
requires a cash payment between zero and $28.9 million,
depending on the total value of the company at the time of a
qualified transaction.
To estimate the fair value of our derivative liabilities, we
estimate the companys enterprise value using a combination
of a market multiple approach and an income approach (discounted
free cash flows) following the guidelines set forth in the
Practice Aid. The equity value is then allocated to the
underlying classes of equity and embedded derivatives based on a
probability weighted expected return model taking into
consideration the liquidation preferences of the underlying
classes of equity consistent with the Practice Aid.
There is inherent uncertainty in these estimates, and if we had
made different assumptions, the amount of our loss from
derivatives in our own equity, net income (loss) and net income
(loss) per share amounts could have been significantly
different. Volatility in future net income (loss) and net income
(loss) per share could result from changes in our estimates of
our derivative liabilities and the resulting gain (loss) from
derivatives in our own equity.
Impact of Recent
Accounting Pronouncements
In August 2010, the FASB issued a proposed accounting standard
update on the proper accounting for leases (ASC 840). The
proposed requirements would supersede the current guidance in
ASC 840 that classifies leases into two categories: capital
leases and operating leases. Lessees would be most affected if
they have a significant portfolio of assets held under operating
leases, especially those with leases of property. At present, we
account for operating lease payments by recognizing them in the
period in which they occur. The proposals would require lessees
to recognize the assets and liabilities arising from those
leases.
Although the proposed changes may be less fundamental for leases
currently classified as capital leases, they would result in
significant changes in the measurement of the assets and
liabilities arising from those leases because of the way this
exposure draft proposes to account for options and contingent
rentals. In addition, the pattern of income and expense
recognition in the income statement would change significantly.
The proposed standard is still in the comment period and we are
not able to ascertain the likely impact on our financial
statements at this time.
97
BUSINESS
Company
Overview
We are a leading national multi-brand, multi-channel retailer of
a broad selection of name brand and private label general
merchandise. We sell a range of lifes necessities and
luxuries through our Fingerhut and Gettington.com brands to what
we believe is an underserved population of low to middle income
consumers who primarily rely on the credit products we offer to
pay for their purchases over time. We estimate that our target
customer demographic represents approximately 100 million
consumers, or approximately one-third of the
U.S. population. Very few retailers today combine the sale
of general merchandise with customized credit products,
particularly with respect to low to middle income consumers. We
believe that the breadth of the merchandise and the flexibility
and convenience of the credit products we offer, combined with
our high level of customer service, create value for our
customers and promote loyalty, as demonstrated by our high
customer repurchase rate of approximately 57% during 2010.
We market our products to our existing and prospective customers
through multi-channel marketing strategies and proprietary
targeted marketing and credit decision-making tools. We use an
extensive collection of customer data from both internal and
external sources and a proprietary marketing response scoring
algorithm to determine a customers likelihood to buy our
products. We also use a credit scoring algorithm to determine a
customers willingness and ability to pay. By applying
internally developed credit decision-making tools supported by
historical customer purchase and payment performance, we are
able to target customers with relevant offers structured to
optimize sales and profitability. Our sophisticated approach to
targeted marketing and credit decision-making allows us to drive
profitability by balancing marketing costs and credit risk while
driving revenue growth.
The Fingerhut brand has provided customers with extensive
branded, non-branded and private label general merchandise
selections, and monthly payment plans, for over 60 years.
Historically, catalogs have been the primary source of orders
for Fingerhut, although customers are increasingly making
purchases online. We launched Gettington.com in 2009 as an
alternative
e-commerce
brand targeting a slightly younger, more
e-commerce
focused customer. Overall, online orders accounted for 44% of
our total orders during 2010, compared to 25% in 2005.
Our merchandise offerings consist of over 30,000 active stock
keeping units, or SKUs. We offer hundreds of well recognized
name brands, including Columbia, Dyson, Fisher-Price,
KitchenAid, Skechers and Sony. In addition, we provide our
customers with targeted, high quality private label offerings
under our owned brands, including Chefs Mark, LifeMax,
Master Craft, McLeland Designs, Outdoor Spirit and Super Chef.
We continuously tailor our merchandise to combine new products
with trusted favorites across three key product categories:
|
|
|
|
|
Homeincluding housewares, bed and bath, lawn and
garden, home furnishings and hardware;
|
|
|
|
Entertainmentincluding electronics, video games,
toys and sporting goods; and
|
|
|
|
Fashionincluding apparel, footwear, cosmetics,
fragrances and jewelry.
|
In 2010, we had net sales of $521 million versus
$438 million in 2009, an increase of 19%. Our Adjusted
EBITDA grew 23% over the same period, from $64 million to
$78 million. Net income before loss from derivatives in our
own equity grew 34%, from $16 million to $21 million,
while GAAP net income declined from $9.2 million in fiscal
2009 to a loss of $11.5 million in fiscal 2010, due to
increases in the value of the conversion feature of our
preferred stock and the value of our common stock warrants.
Additionally, new customer
98
acquisitions increased over that same period from 439,000 to
599,000, a 36% increase, and average order size grew 8%, from
$166 to $180. For a discussion of Adjusted EBITDA and net income
before loss from derivatives in our own equity, and
reconciliations to net income, see notes (i) and (j) to
Selected Consolidated Financial and Other Data.
Our
History
Founded in 1948, the Fingerhut brand stands for offering
customers an extensive assortment of high quality general
merchandise and flexible monthly payment plans.
Our company, Bluestem Brands, Inc., formerly named Fingerhut
Direct Marketing, Inc., was established in 2002 when we acquired
certain assets of Fingerhut Companies, Inc. from FAC Acquisition
LLC, which had acquired the assets from Federated Department
Stores, Inc. The assets we acquired primarily included inventory
and intellectual property. In the transaction, FAC Acquisition
LLC, an entity 50% owned by Thomas Petters, received
substantially all of our capital stock. In February of 2004,
Brookside Capital Investors, L.P., funds affiliated with Bain
Capital, and funds affiliated with Battery Ventures, our current
primary equity sponsors, made the first of their investments in
us, and at that time the ownership interest of Thomas Petters
and his affiliates in our company was reduced to a minority
position. Brookside Capital Investors, L.P., funds affiliated
with Bain Capital, and funds affiliated with Battery Ventures
control approximately 49% of our fully diluted shares
immediately prior to this offering.
In 2002, we established the company and revived the Fingerhut
brand, which had been dormant for eight months, and undertook a
series of strategic initiatives designed to build our business
and position us for future growth. These initiatives and certain
financial milestones include:
|
|
|
|
|
|
2002-2004
|
|
Our new management team, including Brian Smith, our Chairman and
Chief Executive Officer, moved quickly to build essential
infrastructure and acquire a new customer base by targeting
historical Fingerhut brand purchasers and generating enough
revenue to support operations. Management also moved the company
towards a multi-channel, web-enabled model.
|
|
|
|
|
|
We achieved $135 million of net sales in 2003, our first
full year of operations.
|
|
|
|
|
|
We reached breakeven Adjusted EBITDA in 2004.
|
|
|
|
|
|
|
|
|
|
2005-2007
|
|
We introduced a new marketing strategy of extending pre-approved
credit offers to new prospects, accelerating growth in customers
and revenue.
|
|
|
|
|
|
We became net income positive in 2006.
|
|
|
|
|
|
|
|
|
|
2009
|
|
We launched the Gettington.com brand as an alternative
e-commerce
platform targeting a slightly younger, more
e-commerce
focused customer.
|
|
|
|
|
|
|
|
|
|
2010
|
|
We changed our name to Bluestem Brands, Inc. to reflect our
transition to a multi-branded company.
|
|
|
|
|
|
We introduced Fingerhut FreshStart, a new installment credit
product designed for customers unable to qualify for the
revolving credit products we offer.
|
|
|
|
|
|
We launched the 360 Degree Spanish language
initiative including catalogs, credit documentation, and website
that is fully translated in Spanish in an effort to improve our
marketing to this customer demographic.
|
|
|
|
|
|
We achieved $521 million of net sales in 2010.
|
99
Industry
Overview
We participate in the general merchandise segment of the
retailing industry and sell through complementary catalog and
e-commerce
channels. As the online channel becomes a larger portion of our
business we will increasingly benefit from the growth of the
e-commerce
market.
General
Merchandise
General merchandise is a well-established and growing segment of
the overall retail industry. The general merchandise segment is
highly fragmented, and consumer demand for general merchandise
has grown substantially over the last decade, as evidenced by
the increase in the number of general mass merchants, smaller
value-priced chains, warehouse/club stores, specialty retailers,
close-out retailers and dollar stores. According to the
U.S. Census Bureau, this segment generated
$610.3 billion of sales in 2010, representing a 2.9%
compounded annual growth rate from $527.9 billion of sales
in 2005.
Catalog
The catalog retailing industry, as defined by IBISWorld,
consists of retail goods purchased via mail order, catalog, or
other media channels. Catalog retailing has distinct advantages
over other marketing tools in acquiring and retaining customers.
For example, certain consumers prefer to shop via catalog and
order by phone because they prefer assistance to complete a
major purchase. In addition, catalogs allow retailers to reach
consumers who do not have access to the Internet. According to
the January 2011 IBISWorld report, Mail Order in the
U.S., the catalog segment generated $132.7 billion of
U.S. sales in 2010.
E-commerce
The Internets development into a significant global medium
for communication, content and commerce provides companies with
new opportunities to streamline their supply chain while
improving the shopping experience for consumers. The online
channel provides a number of distinct advantages to retailers,
including the ability to efficiently target and reach a large
and geographically dispersed group of customers.
E-commerce
retailers can quickly react to changing consumer tastes and
preferences by efficiently adjusting their featured selections,
editorial content, shopping interfaces, pricing and visual
presentations.
According to the February 2011 Forrester Research report,
U.S. Online Retail Forecast, 2010 to 2015,
U.S. online retail sales were $176.2 billion in 2010
and are expected to grow to $278.9 billion in 2015,
representing a 9.6% compounded annual growth rate. In addition,
Forrester predicts that online retail sales will grow from 8% of
total retail sales in 2010 to 11% of total retail sales by 2015.
Our Target
Market
Our target market is the low to middle income consumer that is
credit constrained. We target consumers with FICO scores between
500 and 700 who we believe will be responsive to our merchandise
and credit product offerings. Based on an Equifax report
provided in March 2011, the estimated size of the
U.S. population with FICO scores between 500 and 700 was
approximately 100 million. Within this group, we target a
subset of low to middle income consumers, which we define as
those with an annual household income below $75,000. Consumers
with household incomes below $75,000 represented approximately
68% of all U.S. consumers in 2009, according to the
U.S. Census Bureau. We believe the low to middle income
consumer typically does not have access to the same quality of
credit as consumers with higher incomes. As such, this subset of
the population faces challenges when purchasing
100
many of the consumer goods they want since few retailers have
the expertise to offer credit to, or adequately service, this
population.
Our Competitive
Strengths
We believe we have a number of competitive strengths that
distinguish us from our competitors and that are key to our
continuing success. These include:
Highly
Recognized Brand with Significant Customer Loyalty
Since its founding in 1948, the Fingerhut brand has offered a
broad selection of general merchandise to low to middle income
consumers seeking the flexibility of paying over time. By
consistently marketing our distinct combination of leading
general merchandise brands with credit offers to this large pool
of potential customers, Fingerhut has become a highly recognized
brand garnering significant customer loyalty. We believe our
focus on providing timely, relevant offers using our targeted
marketing capabilities, a user-friendly customer order process
and our transparent credit offers instills trust and helps build
positive customer relationships that drive repeat purchases.
Customers with positive repayment histories are rewarded with
targeted promotions and increased credit limits. We believe our
customer loyalty is demonstrated by our high customer repurchase
rate of approximately 57% during 2010.
Expertise in
Serving a Niche Customer Segment
We have developed significant expertise in serving low to middle
income credit constrained consumers by exclusively focusing on
the specific needs of this customer segment. We believe we have
a deep understanding of our customers merchandise
preferences, and utilize our extensive marketing experience to
develop a tailored message to attract their attention. Our
customer service representatives have extensive experience
addressing the unique issues and concerns of this customer
segment and educating them on credit. For example, we use
various credit instruction tools to educate our customers on
ways to build and maintain good credit.
Integrated and
Differentiated Business Model
We have created a differentiated business model by utilizing the
combination of our direct marketing and credit decision-making
expertise to offer integrated general merchandise and credit
products across multiple platforms. As a result, we are able to
successfully service a large customer segment that many other
retailers do not have the expertise to target. Although other
companies with whom we compete may possess high degrees of
expertise in the merchandising, marketing or credit
decision-making functions, we believe few companies integrate
these functions as well as we do or with the same level of
success in the low to middle income demographic. For example,
some retailers have substantial product and merchandising
expertise, but do not possess the credit expertise to serve low
to middle income consumers. Other companies possess expertise
that enables them to market credit to individuals with similar
credit profiles as those of our customers, but do not do so in
the context of Internet and catalog retailing.
Sophisticated,
Proprietary Marketing and Credit Decision-Making
Technologies
We have developed sophisticated prospect and customer databases
that support our ability to successfully offer financing through
the Credit Issuers to low to middle income, credit constrained
consumers. Our proprietary prospect database contains purchase
and payment histories on over 90 million consumers. Through
investments in our prospect database, targeted marketing and
credit decision-making tools, we have been able to significantly
101
decrease the time between identifying a prospective customer and
marketing to that customer. Additionally, we have developed
sophisticated models to generate proprietary credit and targeted
marketing scores for current and prospective customers. Our
technology and processes enable us to make credit decisions
utilizing the latest customer behavior information, and allow us
to make real time underwriting decisions, on behalf of the
Credit Issuers, at the point of sale. By creating these
proprietary models, analyzing multiple data sources and building
a robust technology infrastructure, we believe we acquire,
convert and retain customers in an efficient and cost effective
manner while maintaining a high level of risk management. We
believe our sophisticated and disciplined approach to managing
credit supported the performance of our credit portfolio during
the recent recession.
Established
Multi-Channel Platform
Historically, the success of the Fingerhut brand has been
largely associated with the strength of our catalog direct
marketing expertise and the mail and phone order channels. In
recent years we have created and developed Internet marketing
strategies and web order channels in order to capitalize on the
growing
e-commerce
market. For example, since 2008, we have made upgrades to our
website, including the use of video, chat, ratings and reviews
and interactive games. Our online customer orders have increased
from 25% of total orders placed in 2005 to 44% in 2010, and the
number of unique visits to our websites based on tracking of
cookies has increased from 5.3 million in 2005 to
13.9 million in 2010. Our internal data indicate that our
catalogs reinforce our Internet marketing channels, as many
customers respond to our catalogs by shopping and ordering
merchandise on the Fingerhut.com and Gettington.com websites.
Our growing Internet presence has reduced, and we believe will
continue to reduce, both the costs of marketing to existing
customers and acquiring new customers and will increase sales by
utilizing tools such as display advertising, Internet search and
affiliate marketing.
Highly
Experienced Management Team
Our business requires expertise across a diverse array of
specialties, including direct to consumer marketing,
merchandising, credit management, distribution and logistics and
technology. We believe that the breadth and experience of our
executive team is extremely valuable in driving the success of
our multi-faceted business. Our executive team members have
prior experience with large organizations and collectively have
significant analytical experience as it pertains to running
retail and credit businesses. Our executive officers have an
average of 22 years of experience with leading companies
across relevant areas; these companies include Kohls,
T-Mobile,
US Bancorp, Capital One, General Electric, Metris
Companies, Compaq/HP, PayPal, Target and American Express.
Our Growth
Strategy
We aspire to be the dominant direct to consumer retailer for low
to middle income consumers by enabling them to buy the
necessities and luxuries they want now and pay over time. We
expect to grow our sales and profits through a multi-pronged
approach that leverages our expertise in serving our target
market of approximately 100 million consumers. Key elements
of our growth strategy include:
Increasing
Penetration with Existing and Prospective
Customers
Our competencies across direct marketing, merchandising and
credit enable us to reach prospective customers and grow our
relationships with existing customers to drive future growth. We
continue to identify new data sources to expand and enhance our
proprietary database allowing us to better identify prospective
customers that can benefit from our value proposition. We update
and test our marketing materials and messages to continually
improve
102
our advertising effectiveness and increase sales. We believe our
focus on continually refreshing our merchandise offerings also
attracts new customers and drives repeat existing customer
purchases. For example, we offered over 1,000 new products in
the 2010 Holiday Big Book catalog. Additionally, we actively
manage and evaluate our credit portfolio in order to allow us to
quickly identify and reward customers with positive payment
histories with progressively higher credit line extensions
consistent with each customers debt service capabilities.
These credit line extensions provide us with the opportunity to
sell more merchandise, increase average order size and increase
the number of units per order. We will continue to actively
evaluate additional avenues for attracting new customers and
increasing sales to our existing customers.
Increasing
Internet Penetration
Our Internet marketing efforts allow us to reach existing and
prospective customers in a cost effective manner. We utilize a
highly flexible web platform that allows us to quickly respond
to consumer preferences in order to provide our customers with a
positive purchasing experience, including real time chat
capabilities,
ask-and-answer
functionality, and streamlined user ratings and reviews. As our
current catalog customers become increasingly comfortable
shopping online, we expect to continue to evolve into a more
web-centric model and realize cost savings through a reduction
in catalogs and other print marketing materials. We have seen
our unique website visits rise from 5.3 million in 2005 to
13.9 million in 2010, representing a 21.3% compounded
annual growth rate. Since 2008, we have consistently been ranked
as a top 100 Internet retailer based on online sales by
Internet Retailer.
Expanding Our
Demographic Reach
We are committed to expanding our reach to prospective customers
across various demographics who we believe will benefit from our
merchandise and credit offerings. As an example, we have
developed robust marketing and servicing capabilities targeting
the Spanish speaking
sub-population
of our target market. The U.S. Census Bureau reported that
in 2010, Hispanics in the U.S. comprised 1 in 6 of the
total population, and accounted for over 50% of the overall
population growth from 2000 to 2010. In April 2010, Fingerhut
launched a 360 Degree Spanish language initiative
with tools to engage existing customers and facilitate new
customer acquisition. We now offer catalogs, credit and other
support documentation, and a website that is fully translated in
Spanish. Bilingual customer service personnel are also available
to process orders and undertake credit and collection functions.
To support the launch of our Spanish language initiative, we
have expanded our marketing venues to include radio advertising,
a channel we have not traditionally utilized. We will continue
to explore other demographics within our target market and
intend to leverage our platform to promote our products to
select groups.
Growing
Gettington.com and Continuing to Introduce New
Concepts
In 2009 we launched Gettington.com as a complementary brand to
the Fingerhut brand under the Bluestem Brands umbrella,
targeting a slightly younger, more
e-commerce
focused customer. The Gettington.com customer possesses a higher
average credit score than the typical Fingerhut customer and
seeks a wide assortment of on-trend brands and items.
Gettington.com offers more competitive price points and credit
options than the Fingerhut brand, which makes it more appealing
to this customer segment. We leveraged our technological
capabilities, targeted marketing capabilities, credit
decision-making tools and proprietary databases to successfully
develop this new brand. Going forward, we intend to introduce
additional new concepts that target low to middle income
consumers utilizing our existing infrastructure, business
intelligence and technological capabilities.
103
Introducing
New Credit Offerings
We intend to continue to develop new credit products with the
goal of capturing additional consumer segments while further
solidifying relationships with existing customers. As a recent
example, we introduced Fingerhut FreshStart in 2010, which is
designed to offer customers, otherwise unable to qualify for
revolving credit, the alternative of purchasing merchandise on
installment credit terms. A modest down payment of $30
demonstrates the customers intention to repay the loan
while reducing our credit risk. Fingerhut FreshStart customers
who meet their debt repayment obligations qualify for revolving
credit access. This allows us to approve significantly more
prospective customers that would have been otherwise declined
prior to the introduction of the program. In addition, our
Gettington.com brand offers three different payment options.
These options provide Gettington.com customers with payment
flexibility and fulfill different customer preferences and
budget requirements. We believe that these and other new
financing options that we may introduce will drive sales and
profitable growth as well as enhance customer loyalty, while
retaining acceptable risk profiles.
Marketing
Our overall marketing model is based on targeted marketing with
relevant, continually refreshed messages across multiple
channels utilizing emails, online display, search, catalogs and
telemarketing. The message communicated is one of high quality,
relevant merchandise coupled with ready availability to
reasonable credit through the Credit Issuers.
Fingerhut
The Fingerhut brand has delivered
shop-at-home
convenience and a wide selection of merchandise to customers
across the U.S. for over 60 years. The brand generally
targets consumers with FICO scores ranging from 500 to 660 and
provides these consumers with the flexibility to pay for their
purchases over time via manageable monthly payments. Our
marketing emphasizes the depth and quality of our product
offerings, currently exceeding 30,000 discrete SKUs, and
capitalizes on a large array of highly visible and recognizable
brand names. We also highlight our 24/7
shop-at-home
convenience in our marketing efforts, including live customer
contact at all hours.
Marketing messages also emphasize credit availability through
the Credit Issuers. Fingerhut customers typically finance their
purchases using revolving credit offered through and extended by
the Credit Issuers, representing approximately 95% of our sales.
Customers are willing to pay premium pricing in return for
access to financing and an opportunity to get the goods they
want at the time of purchase while they build, or rebuild, their
credit. The Fingerhut customer tends to respond well to a
marketing approach that results in a feeling that
Fingerhut takes care of me, and has a primary focus
on the monthly payment associated with purchases. We remind
customers of upcoming payment obligations and provide them with
training tools on how to strengthen their credit ratings.
Gettington.com
Gettington.com is our new online brand launched in September
2009. The brand is generally positioned to target consumers with
FICO scores ranging from 590 to 700 and offers a wide assortment
of merchandise and recognized brand names with a focus on the
online shopping experience. Because of the higher credit scores
and competitive nature of online shopping, Gettington.coms
merchandise pricing strategies are driven more by market retail
pricing than the Fingerhut brand. We believe that this
positioning will attract a budget conscious online shopper
looking for choice and value.
Marketing for the Gettington.com brand highlights three ways to
pay for merchandise purchased through Gettington.com, which we
believe accommodates different customer
104
preferences and budgets. The Pay Now option entails payment at
the point of sale with credit cards. The FAST Option is a four
payment credit product. The final alternative, the EASY Option,
is most like our traditional Fingerhut credit option, with up to
24 months to pay.
The initial Gettington.com marketing contact with new customers
is primarily through catalog marketing. Once customer accounts
are established, marketing is predominately online. All existing
Gettington.com consumers have valid email addresses and we
regularly communicate pertinent and relevant marketing messages
to them via email. The Gettington.com website is the primary
portal for customers to place orders, and is available
24/7.
New Customer
Acquisition
Both the Fingerhut and Gettington.com brands are customer
acquisition businesses that depend upon repeat business to drive
profitability. We maintain a prospect database of approximately
90 million individuals. The information used to create this
database is obtained from credit bureaus, shared lists,
cooperative databases and vertical lists that augment our
internal records. Our prospect database is updated monthly and
uses proprietary matching technology to link disparate sources
of data. We use this database as the foundation for marketing
campaigns to addressable prospective consumers.
Addressable
Marketing
We solicit customers directly either by catalog mailed to the
home or by email. We use proprietary response and credit models
to identify prospective customers that are most likely to result
in long term and profitable purchasing relationships with us.
Proprietary response models are then used to further segment
prospects by their expected responsiveness to our product
offerings. In cases where prospects are expected to be
profitable, the Credit Issuers provide credit offers to our
customers. The Credit Issuers offer a maximum initial credit
limit of up to $800 for first time Fingerhut customers, or up to
$170 for Fingerhut FreshStart customers, and up to $1,000 for
Gettington.com customers. Long term customer profitability is
determined by customer responsiveness to marketing, order
frequency over time, average order size, the costs of goods
sold, variable operating costs and costs associated with the
credit offer. We drive customer responsiveness through the
quality merchandise we offer, targeted promotions, and the
availability of credit through the Credit Issuers that takes
into consideration risk associated with the customers
ability to pay.
Broad Based
Marketing
In addition to solicitations targeted at specific individual
prospects, we also use broad based media to create interest in
our proposition and drive traffic to our websites where
consumers may apply for an account. We use strategies such as
Internet display advertising, search, comparison shopping
engines and affiliate business partnerships with online
marketers to generate interest in our brands. Once a prospect
responds and applies for an account, the same proprietary risk
modeling is used as with addressable solicitations to determine
whether the application is approved and the initial credit line.
Given the low marketing costs associated with broad based
campaigns, a key determinant of our success is the speed,
efficiency and predictive nature of the credit approval process.
We anticipate that our credit approval rates through this
channel will increase as the Fingerhut FreshStart program
participation grows and our technological ability to match
credit offers to customer needs is enhanced.
The table below sets forth our new customer accounts, which we
define to be customers who made their initial order using our
credit offerings, and the marketing method used to acquire those
new customer accounts during each of the periods indicated.
105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
January 30,
|
|
|
January 29,
|
|
|
January 28,
|
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
Addressable Marketing
|
|
|
389,227
|
|
|
|
387,711
|
|
|
|
472,649
|
|
Broad Based Marketing
|
|
|
40,338
|
|
|
|
51,136
|
|
|
|
126,437
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
429,565
|
|
|
|
438,847
|
|
|
|
599,086
|
|
Customer
Retention
From our initial contact with our prospective customers onward,
we collect data that helps serve them and facilitates repeat
business, all the while assisting us in generating net sales and
enhancing profitability. We are also able to leverage this data
with information received from third parties to acquire
additional account prospects. We have gathered a comprehensive
database of customer information that is regularly supplemented
with data from external data providers. This information allows
us to evaluate individual customer profitability and to predict
customer response to our various promotions. We have been
successful in identifying and developing loyal customers that
rely on lending from the Credit Issuers. These are individuals
with an affinity for purchasing the types of household and
personal items that we offer and who exhibit characteristics
that lead them to honor their credit obligations. Repeat
customers are offered up to six months deferred payment terms on
purchases through our Credit Issuers programs.
Customer relationship management and customer retention are
critical to our success. We seek to convert each new customer
into a repeat purchaser and develop a long term and profitable
relationship. Sales to active customers are critically important
to our profitability, offsetting the costs of acquiring new
customers, credit review cycle analysis, and new account
set-up
processing. We believe our customer loyalty is demonstrated by
our high customer repurchase rate of approximately 57% during
2010. Our repurchase rate is calculated as the percentage of
customers that were considered active 12 months prior to
the balance sheet date and that made a purchase during the
12 month period preceding the balance sheet date. We
consider a customer to be active if the customer has made at
least one purchase using a credit account within the previous
12 months and has made at least one payment on that credit
account since the account was opened.
Credit
We view the extension of credit by the Credit Issuers to our
customers as a critical component of our retail business
strategy. The manner in which credit is extended by the Credit
Issuers and managed enables us to increase retail sales and
overall Contribution Margin, a key driver of profitability. Our
agreements with both Credit Issuers require us to purchase all
receivables generated from our customer sales.
We have traditionally appealed to credit constrained low to
middle income consumers. We believe that extension of credit to
this population generates loyalty and a compelling value
proposition to the customer. We also believe that well designed
and properly managed credit solutions for this customer
population, combined with appropriate merchandise offers, fill a
need for our customers and result in profitable opportunities
for us.
Fingerhut customers may be offered one of two credit products.
The standard Fingerhut credit account is a revolving line that
bears interest at a non-variable 24.9% annual percentage rate,
or APR. Customers that are not approved for the standard
Fingerhut credit account may be offered the Fingerhut FreshStart
credit account, which is a closed-end installment loan product
that requires a $30 down payment, with the remaining amount of
any purchase payable in six equal monthly installments with
interest at a non-variable 24.9% APR. The Gettington.com credit
account is a revolving line that offers two payment options:
either four
106
monthly payments with interest at a non-variable 14.9% APR, or
an extended payment term of up to 24 months with interest
at a non-variable 19.9% APR. For all of the Fingerhut and
Gettington.com credit products, late fees and return payment
fees are the lesser of (i) the minimum payment due or
(ii) an amount up to $30, depending on the customers
payment history. There is no penalty pricing, and we do not
charge over-limit, loan application or annual account fees on
any of the credit products.
The terms of the credit products are designed to allow rapid
collection of the outstanding principal debt, while sparing
consumers the burden of loan origination or annual account fees.
The credit offers that we communicate on behalf of the Credit
Issuers are designed to be fair and transparent, driving
customer loyalty and encouraging repeat purchase behavior.
Reasonable hardship accommodations and payment flexibility will
be considered for customers having difficulty in servicing their
debt.
See Managements Discussion and Analysis of Financial
Condition and Results of OperationsCustomer Accounts
Receivable Asset Quality and Management for a discussion
of the performance of our receivables portfolio and additional
information on our customer accounts.
Underwriting
Information in our prospect database and data from credit
bureaus and other third party sources is used to provide credit
to customers using criteria developed in conjunction with, and
determined by, the Credit Issuers. The credit offers are subject
to strict credit policies that target acceptable levels of
performance in the credit portfolio. Our fully automated loan
origination platform, sophisticated proprietary credit scoring
models and customer segmentation provide key points of
differentiation for us relative to other retailers. External
credit bureau information is used to judge the customers
likely repayment performance. This data allows for targeted
customer offers structured to achieve acceptable levels of sales
and profitability.
Account
Management
We take a complete lifecycle account management approach,
balancing risk versus reward as we seek not only profitable, but
sustainable growth. Our experience indicates that active and
constructive account management reduces the likelihood that
customers will become discouraged and nonresponsive to payment
demands. When customers initially fail to pay, many issuers of
traditional credit products immediately revert to collections
mode. We use credit management and credit education wherever
possible to return accounts to a performing level, retaining and
strengthening customer relationships for the long term.
Our account management practices are characterized by the
following:
|
|
|
|
|
Low and Grow Line Management: Our credit
philosophy involves starting new customers with low credit lines
of $330 on average for Fingerhut customers, or $140 on average
for Fingerhut FreshStart customers, and $600 on average for
Gettington.com customers during 2010. Subsequent line increases
are also low, typically $200 for the first increase and $260 for
the second increase, and generally occur at six month intervals
with demonstrated account performance. See
Managements Discussion and Analysis of Financial
Condition and Results of OperationsCredit Limits and
Account Balance Ranges.
|
|
|
|
Integrate Customer Basket with Customer Credit
Profile: For point of sale authorizations via the
Internet or telephone orders, our models integrate information
about both customer credit profile and product margins of the
merchandise in an attempt to make profitable real-time decisions.
|
107
|
|
|
|
|
Educate our Customers: We proactively educate
our customers about the importance of maintaining good credit
through various credit education tools, including how to read
your statement brochures, online credit education and credit
tips within each catalog to improve and build credit.
|
|
|
|
Reward Good Performance: We reward customers
with good credit payment history through a variety of credit and
merchandise enticements. Proactive credit line increase
programs, deferred payment promotions, free shipping, dollar or
percentage-off discounts and free gifts are some of the offers
we use to retain good customers.
|
|
|
|
Mitigate the Risk: We utilize credit line
decrease strategies at point of sale, as well as proactive
offline reductions and closures, to minimize the impact of high
risk accounts with significant balance at risk.
|
Collection and
Recoveries
The strategies employed in our collection efforts are forward
looking and focused on customer rehabilitation and retention.
Our debt collection practices are designed to address adverse
account developments earlier than other businesses would deem
accounts seriously delinquent. For purposes of collection
follow-up,
accounts are classified as delinquent when a single minimum
payment is not received by the payment due date. Internal or
third party collectors are employed at each stage of
delinquency. All delinquent accounts enter collections no later
than 15 days following missed payments.
New customer accounts, as well as those that we deem at higher
risk of default, are closely monitored. We initiate contact with
these customers 10 days prior to the payment due dates to
remind them of their upcoming payment obligations. Other
accounts are segregated by their propensity to pay and
collection efforts are tailored to address particular customer
performance attributes. This approach allows us to focus
resources where they are most productive. Low risk customers are
serviced with the least intrusive collection efforts, while high
risk accounts receive the greatest attention.
The company utilizes a variety of communications channels to
reach account holders, ranging from telephone contact to email
follow up, self service via our website to statement letters and
debt collection correspondence. The use of both internal teams
and outsourced agencies allows us to penetrate our delinquent
account base in the most efficient manner possible.
Additionally, technology is utilized to coordinate the
scheduling of collection activities and lend continuity to the
dialogue with customers. If, notwithstanding our best collection
efforts, accounts are more than 180 days delinquent, we may
place them with outside collection agencies or sell the accounts
receivable.
Credit
Issuers
In order to provide customers with access to credit, we have
entered into agreements with third party financial institutions.
Our current Credit Issuers are WebBank and MetaBank for credit
issued to Gettington.com and Fingerhut customers, respectively.
The agreements with WebBank and MetaBank were amended and
restated most recently in August 2010. WebBank is a
Utah-chartered industrial bank with deposits insured by the
Federal Deposit Insurance Corporation, or FDIC. MetaBank is a
federally-chartered savings bank with deposits insured by the
FDIC. Our agreements with WebBank and MetaBank have initial
terms ending in August 2013 and January 2015, respectively, with
automatic renewal for successive additional one year terms
unless either party provides notice of non-renewal to the other.
We have also entered into
back-up
agreements with each Credit Issuer, whereby WebBank serves as a
back-up
provider for the Fingerhut credit programs and MetaBank serves
as a back-up
provider for the Gettington.com credit programs.
108
Under our agreements with the Credit Issuers, we market and
promote the open end revolving loan accounts and installment
credit that they issue to our customers. We refer to such credit
offerings as the credit programs. Our agreements with the Credit
Issuers require us to purchase all receivables generated by
credit sales to our customers after a contractual holding
period, generally one or two business days. Consequently, we
bear the credit risk arising from credit extensions under the
credit programs. We purchase the receivables from the Credit
Issuers at a purchase price equal to the unpaid balance of the
receivable plus any interest that has accrued. This is in
addition to an origination fee based on a percentage of credit
account advances for the year, subject to annual or monthly
minimums. We do not view our relationships with the Credit
Issuers as partnerships or joint ventures. Rather, by
contractual arrangements, we have agreed to perform some of the
lending program functions as servicer for the Credit Issuers.
These responsibilities include:
|
|
|
|
|
Promoting the credit programs;
|
|
|
|
Processing applications;
|
|
|
|
Determining whether applicants meet the established credit
eligibility requirements;
|
|
|
|
Delivering customer communications and notices required by
applicable law;
|
|
|
|
Maintaining credit program records; and
|
|
|
|
Servicing accounts for as long as a Credit Issuer owns credit
program accounts.
|
All credit accounts opened under the credit programs identify
the Credit Issuer as the creditor. The Credit Issuers are not
obligated to open accounts or make advances if they determine
that doing so could be detrimental to their interests. We are
responsible for preparing and obtaining approval from the Credit
Issuer prior to distributing credit related materials to our
customers and bear the risk of compliance shortfalls attributed
to our actions.
We have agreed to indemnify the Credit Issuers against losses
arising from our obligations under the agreements, including
against losses arising from regulatory violations. Upon the
occurrence of certain conditions, an agreement with a Credit
Issuer could be terminated as a result of action by a Credit
Issuers regulators, a breach of a representation and
warranty or other defaults under the agreement, or if there is a
material adverse change in the financial condition of the
non-terminating party. In addition, with respect to our
agreement with WebBank, either party may terminate the agreement
if the related agreement to purchase receivables described above
is terminated by the other party. If we terminate an agreement,
the applicable Credit Issuer is obligated to operate the credit
programs for a period of 180 days following our notice of
termination, except in certain defined circumstances.
Merchandising
We offer our customers a broad selection of high quality,
name-brand, private label and non-branded merchandise consisting
of over 30,000 SKUs. We segment our products into three key
categories:
|
|
|
|
|
Homeincluding housewares, bed and bath, lawn and
garden, home furnishings and hardware;
|
|
|
|
Entertainmentincluding electronics, video games,
toys and sporting goods; and
|
|
|
|
Fashionincluding apparel, footwear, cosmetics,
fragrances and jewelry.
|
109
The following table illustrates the sales mix among our key
merchandising categories.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
January 30,
|
|
|
January 29,
|
|
|
January 28,
|
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
Percentage of Sales by Merchandise Category:
|
|
|
|
|
|
|
|
|
|
|
|
|
Home
|
|
|
47.9
|
%
|
|
|
45.7
|
%
|
|
|
44.1
|
%
|
Entertainment
|
|
|
41.0
|
%
|
|
|
41.7
|
%
|
|
|
42.0
|
%
|
Fashion
|
|
|
11.1
|
%
|
|
|
12.6
|
%
|
|
|
13.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total merchandise sales
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Merchandise
Assortment
We leverage the merchandising team to support both the Fingerhut
and Gettington.com brands in building relevant merchandise
assortments. Our products are sourced directly from over 1,000
suppliers worldwide. We purchase through U.S. distributors
where volumes or logistics warrant. When advantageous, we
utilize drop-shipment arrangements whereby vendors ship directly
to our customers. Our merchandising buyers travel to markets
both internationally and in the U.S. to source current,
relevant product assortments that appeal to our customers. We
value our relationships with our vendors and view them as true
partners in the growth of our business. During 2010, no single
vendor accounted for more than 4% of our total purchases.
We offer hundreds of highly recognizable consumer name brands,
including Cuisinart, Fossil, Hoover, JVC, KitchenAid, Lee,
Nintendo, Panasonic, Skechers and Sony. Also, as part of our
merchandise assortment, we offer celebrity brands such as George
Foreman, Paula Deen, Rachael Ray and Wolfgang Puck. Furthermore,
our private label brands continue to develop within our
merchandising mix, including Chefs Mark, LifeMax, Master
Craft, McLeland Designs, Outdoor Spirit and Super Chef. These
private label brands offer customers high quality products at
exceptional values while enhancing gross margins.
We utilize our business intelligence platform to assist in
building our merchandising strategies. We also take into
consideration historical merchandise product sales and
profitability as we determine new products for inclusion in our
assortment. We leverage our Gettington.com and Fingerhut
websites to introduce and test new items.
Our Fingerhut customers are trend followers rather than trend
leaders giving us the advantage of introducing products once a
trend has been established in the marketplace which results in
more reliable sell through and lower obsolescence risk and
expense. Our Gettington.com customers are closer to the peak of
the trend curve, still giving us the ability to identify trends
in the marketplace and time our introductions to the
Gettington.com customers while the trend is established and
still has longevity to maximize sales.
In addition to relevant name brand offers, our merchants develop
proprietary offers which have high appeal to our customers.
Leveraging our fulfillment center, we have the unique ability to
build multiple piece count product offers, for example a 100
piece cookware/dining set, where we source the component pieces
from multiple countries and vendors, and then combine these
pieces into one bundled set to offer to our customers.
Incremental to our core assortments, we work with our vendors
and the markets to source relevant closeouts and opportunistic
buys allowing us to offer a continuous supply of deals to our
customers.
110
Pricing
Strategy
Pricing for Fingerhut products is based on three key factors:
market retail pricing, product cost and marketing channel. These
factors are weighted differently depending on the product
category in question. In addition, pricing is affected by
monthly and seasonal pricing and product promotions. Low monthly
payment objectives are considered in each product segment,
assuring that a range of products is offered to meet various
customer credit line capacities. We are able to obtain full or
premium prices because our customers value our total offer,
which includes name brand and private label merchandise,
shop-at-home
convenience and a personalized credit program.
Pricing for Gettington.com products is driven more by market
retail pricing than the Fingerhut brand. Similar to the
Fingerhut brand business, product cost and margin objectives are
established by product category.
Quality
Assurance
We have a quality assurance team that establishes, communicates
and monitors quality standards by product category. Suppliers
are kept apprised of quality assurance expectations through a
vendor management portal environment. We contract with an
overseas third party logistics provider to perform quality
audits at vendor facilities, on site product testing and social
compliance audits for active suppliers on our behalf.
Fulfillment
The companys fulfillment infrastructure is designed to
provide flexible capabilities to meet our customers
expectations for timely and accurate order and delivery of
merchandise. A single 1.2 million square foot leased
distribution and fulfillment facility in St. Cloud, Minnesota,
is utilized for approximately 95% of our order fulfillment
requirements, with the remainder drop-shipped from vendors
directly to customers. The facility includes five packing and
assembly lines, 39 shipping doors, 55 receiving doors, and a
parcel sorting system capable of handling over 100,000 customer
parcels a day. We believe that this facility is sufficient to
handle annual sales of approximately $750 million before
additional fulfillment capacity is required. We ship products
primarily through the U.S. Postal Service, UPS and Federal
Express.
Information
Technology
We are highly dependent on the processing of information and
application of technology in every aspect of our business. Our
information technology infrastructure supports an integrated
credit processing capability and
business-to-consumer
web and catalog ordering channels. There is a significant and
ongoing demand for technology projects to continuously refine
our existing analytical capabilities and develop new solutions.
In order to satisfy our information technology requirements, we
use a flexible and scalable staffing model of both in-house
technology professionals and outside contractors sourced
globally. Our systems include a combination of licensed and
proprietary technologies, with
off-the-shelf
solutions utilized whenever feasible to maintain cost
effectiveness in the competitive retail marketplace. Presently,
our largest proprietary system involves order processing. We
continually evaluate, modify and update information technology
to improve our capabilities and efficiency, and reduce
obsolescence. The Fingerhut and Gettington.com websites, and in
particular our interactive search functionality and shopping
cart, are run on systems utilizing licensed technology.
111
Property
We do not own any real property. Our corporate headquarters are
located at 6509 Flying Cloud Drive, Eden Prairie, MN 55344, a
leased facility encompassing approximately 90,000 square
feet of office space. The ten-year lease commenced on
June 1, 2008 and is subject to two five-year extension
options. Annual base rent at the time the lease commenced was
$1.3 million, increasing annually to $1.6 million in
year ten, plus taxes, common area maintenance and other
operating expenses. It is expected that the existing Eden
Prairie office facility will provide sufficient space for
headquarters operations for the foreseeable future.
We also lease approximately 1.2 million square feet of
warehouse and ancillary office space in St. Cloud, Minnesota,
under a 15 year lease that expires in January 2024, subject
to two further five-year extension options. Annual base rent at
the time of lease commencement was $2.6 million, pro-rated
monthly, escalating annually to $3.7 million per year in
the fifteenth year of the lease. In addition to base rent, the
company is also responsible for the payment of taxes, utilities
and costs of operation. We believe that this facility is
sufficient to handle annual sales of approximately
$750 million before additional fulfillment capacity is
required.
Employees
As of March 2011, we employed approximately 831 employees,
97% of which were full time workers. Of our employees, 162
warehouse and order fulfillment employees located at our St.
Cloud, Minnesota fulfillment center are subject to a collective
bargaining agreement between our subsidiary Bluestem
Fulfillment, Inc. and Chicago & Midwest Regional Joint
Board, WORKERS UNITED/SEIU, that terminates on March 31,
2014. We also regularly utilize independent contractors and
other temporary employees across the organization to augment our
regular staff. We consider our employee relations to be good. We
believe that our future success will depend in part on our
continued ability to attract, hire and retain qualified
personnel.
Outsourcing
We rely on a number of contract service providers located
domestically, in countries located in the Caribbean and Central
America, and globally, for services such as phone and mail order
entry, credit application processing, customer payment
remittance, collections and transportation.
Under the terms of our agreements with these service providers,
contractors located outside the U.S. are required to abide
by certain U.S. laws and regulations as if physically
located within the U.S. when providing certain services,
including credit and collection activities, which are both
highly regulated. The use of contract service providers has
proven to be a dependable way to fill operational needs that
would be costly and difficult to satisfy with permanent company
personnel. This is particularly true with respect to redundant
capacity for call center outages, 24 hour order support,
Spanish language resources, and the ability to meet seasonal and
other high demand periods.
Intellectual
Property
We regard our copyrights, service marks, trademarks, trade
dress, trade secrets, domain names and other intellectual
property as critical to our success, and rely on trademark and
copyright law, trade secret protection and confidentiality
and/or
license agreements with our employees, customers, vendors and
others to protect our proprietary rights. We register our
trademarks and service marks in the U.S. as appropriate.
From time to time, we may license certain of our proprietary
rights, such as trademarks or copyrighted material, to third
parties. While we attempt to ensure that the value of our
proprietary rights is maintained, there can be no assurance that
such licensees will not take actions that might negatively
affect the value of
112
such rights or our reputation. There can be no assurance that
the steps we take to protect our proprietary rights will be
adequate or that third parties will not infringe or
misappropriate such rights. In addition, there can be no
assurance that other parties will not assert infringement claims
against us. We have been subject to claims and expect to be
subject to legal proceedings and claims from time to time in the
ordinary course of our business, including claims of alleged
infringement by us of the trademarks and other intellectual
property rights of third parties. Such claims, even if not
meritorious, could result in the expenditure of significant
financial and managerial resources.
Competition
We compete with a wide variety of retailers that offer similar
merchandise. Current and potential competitors include brick and
mortar retailers such as mass merchandisers, department stores,
discounters, home improvement centers, consumer electronics and
specialty retailers and other storefront based operations with
stores on a national, regional and local level. Examples include
Best Buy, Home Depot, JCPenney, Kohls, Lowes,
Macys, Sears, Target and Walmart. A second source of
competition arises from
e-commerce
retailers, examples of which include Amazon, Buy.com,
JCPenney.com, Overstock.com and Swiss Colony. Finally, we face
competition from indirect competitors, including web search
engines, price comparison websites and television shopping
networks, such as QVC and the Home Shopping Network.
While selection, price, and convenience are important
competitive factors, we believe we differentiate ourselves from
our competition by providing a ready conduit for credit to our
low to middle income customers, and by delivering a high level
of service in the fulfillment of their orders and account needs.
Seasonality
The retail business is seasonal in nature, and we generate a
high proportion of our net sales and operating income during the
fourth fiscal quarter that includes the holiday season. As a
result, our overall profitability is heavily impacted by our
fourth quarter operating results. Our sales and marketing
expenses as a percentage of net sales are lowest in the fourth
quarter due to higher existing customer purchases during the
holiday season which have lower marketing costs as a percent of
total sales. Our provision for doubtful accounts is typically
highest in the fourth quarter primarily due to the seasonal
buildup of customer accounts receivable balances resulting from
the seasonal peak in our merchandise sales. Additionally, in
preparation for the holiday sales season, we significantly
increase our merchandise inventory levels and as a result,
borrowings under our credit facilities. Fourth quarter reported
net sales accounted for approximately 40% of total net sales in
each of 2010, 2009 and 2008. See note 11 to our
consolidated financial statements for further information on net
sales by quarter in 2010 and 2009.
Government
Regulation
General
We are subject to federal and state consumer protection laws and
regulations, including laws protecting the privacy of customer
non-public information and regulations prohibiting unfair and
deceptive trade practices, as well as laws and regulations
governing businesses in general and the Internet and
e-commerce.
As the Internet becomes increasingly popular, additional laws
and regulations may be adopted with respect to the Internet, the
effect of which is uncertain on catalog and Internet retailers.
These laws may cover issues such as user privacy, spyware and
the tracking of consumer activities, marketing
e-mails and
communications, other advertising and promotional practices,
113
money transfers, freedom of expression, pricing, content and
quality of products and services, taxation, electronic contracts
and other communications, intellectual property rights,
information security and information sharing. Furthermore, it is
not clear how all of the existing laws, such as those governing
issues like property ownership, sales and other taxes, libel,
trespass, data mining and collection, and personal privacy apply
to catalog and Internet retailers. Any new legislation or
regulation in these areas, or the interpretation or application
of existing laws and regulations, may have a material adverse
effect on our business, prospects, financial condition and
results of operations by, among other things, impeding the
growth of
e-commerce
sales, subjecting us to fines, penalties, damages or other
liabilities, requiring costly changes in our business operations
and practices, and reducing customer demand.
For example, because our products are available through catalogs
and over the Internet in multiple states, certain states may
claim that we are required to qualify to do business in such
state. Currently, we are qualified to do business only in the
state of Minnesota and our state of incorporation, Delaware. Our
failure to qualify to do business in a jurisdiction where we are
required to do so could subject us to taxes and penalties. It
could also hamper our ability to enforce contracts in those
jurisdictions.
Similarly, we do not collect sales, use, or other state or local
taxes on sales of goods shipped to customers located in states
other than Minnesota, which is the only state in which we have
employees, facilities and inventory. We interpret existing
judicial rulings to support this approach. However, bills have
been introduced in the U.S. Congress to overturn these
judicial rulings. If Congress were to enact such legislation, we
might be required to collect sales and use taxes in all states
in which we have customers. Furthermore, several states have
enacted, and a number of states are considering, initiatives to
require the collection of sales and use taxes notwithstanding
the judicial rulings referred to above, or similar legislation
aimed at collecting taxes on goods delivered to states where the
seller does not have a physical presence. See Risk
FactorsRisks Related to the Operation of Our
BusinessWe do not collect state sales, use or other taxes,
which could subject us to liability for past sales and any
imposition of an obligation to do so in the future could
negatively impact our financial results.
Congress has enacted the Controlling the Assault of
Non-Solicited Pornography and Marketing Act, which requires
unsolicited commercial
e-mail
messages to be labeled and to include opt-out instructions and
the senders physical address, and which prohibits the use
of deceptive subject lines and false headers in such messages.
A substantial portion of our products are manufactured outside
the United States. These products are imported and are subject
to U.S. customs laws, which impose tariffs as well as
import quota restrictions for many products. Some of our
imported products are eligible for duty-advantaged programs.
Importation of goods from foreign countries from which we buy
our products may be subject to embargo by U.S. Customs
authorities if shipments exceed quota limits, although to date
the existence of import quotas has not had a material adverse
effect on our business.
Consumer
Lending
Because we are not a lender, we rely on the Credit Issuers to
extend credit to our customers. Extensions of consumer credit
are subject to extensive state and federal laws and regulations.
The laws and regulations are intended for the protection of
consumers and are constantly changing. We have agreed to perform
many of the functions normally performed in a consumer lending
program under our agreements with the Credit Issuers. The
failure to comply with, or adverse changes in, the laws or
regulations to which extensions of consumer credit are subject,
or adverse changes in their interpretation, could have a
materially adverse
114
effect on our ability to collect our receivables and generate
fees on the receivables, thereby adversely affecting our results
of operations.
Credit extensions are subject to a variety of federal laws, as
well as rules and regulations promulgated thereunder, including
the following:
|
|
|
|
|
The
Truth-in-Lending
Act, and Regulation Z adopted pursuant thereto, requires
disclosure of the principal terms of each transaction to every
customer. Disclosure is required of, among other things, the
pertinent elements of consumer credit transactions, including
the annual percentage rate, or APR, of periodic interest
charges, as well as other charges and fees associated with the
transaction. In May 2009, the Credit Card Accountability
Responsibility and Disclosure Act, or the CARD Act, was signed
into law. The CARD Act primarily amends the Truth in Lending Act
and establishes a number of new substantive and disclosure
requirements in connection with open-end consumer plans and
practices. The credit practices addressed by the CARD Act and
Regulation Z include, but are not limited to, restrictions
on the application of rate increases to existing and new
balances, payment allocation, default pricing, and imposition of
late fees.
|
|
|
|
The Equal Credit Opportunity Act prohibits discrimination
against any credit applicant on the basis of any protected
category such as race, color, religion, national origin, sex,
marital status or age. If an applicant is denied credit, we are
required to provide the applicant with a notice of adverse
action on the Credit Issuers behalf, informing the
applicant of the action taken regarding the credit application,
a statement of the prohibition on discrimination, the name and
address of both the creditor and the federal agency that
monitors compliance, and the applicants right to learn the
specific reasons for the denial.
|
|
|
|
The Fair Credit Reporting Act governs the assembly, evaluation
and dissemination of information about consumers that is to be
used for evaluating their qualification for credit. While it
primarily regulates consumer reporting agencies, it also governs
lenders that obtain consumer reports by limiting the reasons for
which they can obtain and use such reports and requiring
disclosures to consumers. The Act also governs lenders that
supply information to the consumer reporting agencies, imposing
duties regarding the accuracy of that information and an
obligation to reinvestigate the information if it is disputed.
|
|
|
|
The Gramm-Leach-Bliley Act requires financial institutions and
their servicer providers, such as Bluestem, to maintain a
written information security program that includes
administrative, technical and physical safeguards relating to
customer information and to provide an initial and annual
privacy notice to certain customers that describe in general
terms information sharing practices. The Act also limits the
ability of the Credit Issuers, or Bluestem, to share some of the
nonpublic personal information we collect about customers.
|
|
|
|
The Uniting and Strengthening America by Providing Appropriate
Tools Required to Intercept and Obstruct Terrorism Act, or the
PATRIOT Act, requires financial institutions to maintain an
anti-money laundering compliance program that includes the
development of internal policies, procedures, and controls to
ensure that an institution knows its customer and
takes other actions to prevent violations of federal law.
|
In some cases, the precise application of these statutes and
regulations is not clear. Even though we conduct our operations
in a manner that we believe excludes us from direct regulation
as a lender under these federal laws, we still have contractual
obligations to comply, or assist the Credit Issuers with
compliance, with these laws and regulations. In addition,
numerous legislative and regulatory proposals are advanced each
year which, if adopted, could have a material adverse effect on
the ability of the Credit Issuers to extend credit to our
customers. For example, in July 2010, the Dodd-Frank Wall Street
Reform and Consumer Protection Act, or the Dodd-Frank Act, was
signed into law. The legislative changes mandated
115
by the Dodd-Frank Act are intended to shield the financial
system from systemic risk and to address weaknesses in financial
services law and regulation that contributed to the severe
economic downturn and the related disruption in the financial
markets in 2008. Among the most significant topics covered by
the Dodd-Frank Act is the creation of a new regulatory bureau
that will focus exclusively on the protection of consumers who
are affected by, or purchase, consumer financial products or
services. The precise application of these statutes and
regulations, and their impact on our business, is not clear at
this time.
In addition to the federal laws regulating consumer credit,
states also have adopted statutes, regulations or other measures
governing licensing of lenders, the collection and distribution
of nonpublic personal information about consumers, the cost of
credit, including interest rates and other fees, terms and
conditions governing the relationship with a borrower, and
conditions related to collection of debts. In the past, many of
these state measures were preempted by federal law for federally
chartered institutions such as MetaBank. We and the Credit
Issuers must monitor (and do monitor on a regular and consistent
basis) and seek to comply with individual state laws in the
conduct of our business if the state laws are not preempted.
Based on changes included in the Dodd-Frank Act, we anticipate
the scope of preemption will be narrowed and both we and the
Credit Issuers will be subject to a broader range of state
consumer credit laws.
Recent
Developments for the Credit Issuers
In October 2010, MetaBank publicly disclosed that the Office of
Thrift Supervision, or OTS, had issued supervisory directives to
MetaBank in August and October of 2010. The OTS directives
require MetaBank to discontinue offering its iAdvance product,
based on a determination by OTS that MetaBank engaged in unfair
or deceptive acts or practices in connection with its operation
of the iAdvance program. While MetaBanks iAdvance product
is not directly relevant to us, the OTS directives also require
MetaBank to obtain prior written approval of OTS to, among other
things, enter into any new third party relationship agreements
concerning any credit or deposit product, or materially amend
any such existing agreements. This could adversely affect our
ability to amend our agreements with MetaBank or, should we
desire to do so, establish new credit programs through MetaBank.
This may also adversely affect MetaBanks ability to assume
under the
back-up
agreement the credit-related activities currently performed by
WebBank. We understand that OTS has informed MetaBank that it
will address in the future OTSs expectations with respect
to reimbursement of borrowers under the iAdvance program. Future
actions by OTS could assess civil money penalties, or seek to
address other concerns that MetaBank indicated were factors
leading to the OTS directives, including MetaBanks
third-party relationship risk, enterprise risk management and
rapid growth.
In December 2010, the Federal Deposit Insurance Corporation, or
FDIC, issued a consent order to which WebBank consented. The
FDIC consent order relates to certain alleged violations by
WebBank related to a balance transfer credit card program, which
has since been discontinued. It requires WebBank to take various
actions to improve its regulatory compliance, pay restitution to
consumers of certain of its credit products, and pay a civil
penalty of $300,000. The WebBank balance transfer credit card
program at issue is not directly relevant to us.
Legal
Proceedings
From time to time, we are subject to various legal proceedings
that arise in the normal course of our business activities. In
addition, from time to time, third parties may assert
intellectual property infringement claims against us in the form
of letters and other forms of communication. As of the date of
this prospectus, we are not a party to any litigation the
outcome of which, if determined adversely to us, would
individually or in the aggregate be reasonably expected to have
a material adverse effect on our results of operations,
prospects, cash flows, financial position or brand.
116
MANAGEMENT
Directors and
Executive Officers
The following table sets forth the name, age, position and a
description of the business experience of each of our executive
officers and directors as of July 7, 2011, including full
employment histories for each during the past five years.
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
Brian A. Smith
|
|
|
52
|
|
|
Chairman and Chief Executive Officer
|
John F. Damrow
|
|
|
56
|
|
|
President
|
Chidambaram A. Chidambaram
|
|
|
44
|
|
|
Executive Vice President and Chief Marketing Officer
|
Raymond G. Frigo
|
|
|
48
|
|
|
Executive Vice President and Chief Operating Officer
|
Sabyasachi Sengupta
|
|
|
45
|
|
|
Executive Vice President and Chief Credit Risk Officer
|
Gina D. Sprenger
|
|
|
49
|
|
|
Executive Vice President, Merchandising
|
Mark P. Wagener
|
|
|
51
|
|
|
Executive Vice President and Chief Financial Officer
|
Brad T. Atkinson
|
|
|
37
|
|
|
Vice President and Corporate Controller
|
Erica C. Street
|
|
|
53
|
|
|
Vice President, General Counsel and Secretary
|
Michael M. Brown
|
|
|
39
|
|
|
Director
|
John A. Giuliani
|
|
|
50
|
|
|
Director
|
Roy A. Guthrie
|
|
|
57
|
|
|
Director
|
Michael A. Krupka
|
|
|
46
|
|
|
Director
|
Alice M. Richter
|
|
|
57
|
|
|
Director
|
Scott L. Savitz
|
|
|
42
|
|
|
Director
|
Executive
Officers
Brian A. Smith has served as the companys Chief
Executive Officer since February 2004 and Chairman since January
2008. In addition, Mr. Smith served as President from
December 2002, shortly after the companys formation, to
November 2010. From July 2001 to October 2002, Mr. Smith
was the President of Lenders Trust, a financial services
consulting and investment company. He served at
U.S. Bancorp from June 1986 to February 2001, most recently
as Executive Vice President of Consumer Banking.
Mr. Smith has 24 years of management experience with
retail and financial services businesses, both commerce and
banking related. As a member of management since 2002, he has
significant knowledge of all facets of our company.
Mr. Smiths financial and retail experience, history
with our company, leadership skills and operating experience
make him particularly well suited to be our Chairman.
John F. Damrow has served as the companys President
since November 2010. Mr. Damrow joined the company in
September 2002 as Vice President, Merchandising, and served as
Executive Vice President, Merchandising between March 2005 and
November 2010. Prior to 2002, Mr. Damrow worked for
Fingerhut Companies, Inc. for 15 years, most recently
holding the position of Vice President, Hardgoods Merchandising.
In addition, Mr. Damrow has held merchandising positions at
Kohls and H.C. Prange department stores.
Chidambaram A. Chidambaram has served as the
companys Executive Vice President and Chief Marketing
Officer since May 2009. Prior to joining the company,
Mr. Chidambaram was
117
Vice President and General Manager of Credit at PayPal, an
online payment services company, from August 2008 to May 2009.
He served as Executive Vice President of Marketing for HSBC
Cards, a credit card company, from August 2006 to April 2008 and
was previously Vice President of Marketing for Customer and Web
Marketing at
T-Mobile USA
from April 2004 to August 2006.
Raymond G. Frigo has served as the companys
Executive Vice President and Chief Operating Officer since
February 2009. Previously, Mr. Frigo served in various
capacities with Capital One Financial Corp., a financial
services company, including as Chief Operating Officer for UK
operations from October 2006 to July 2008, Senior Vice
President, Global Financial Services from 2005 to 2006,
Divisional Chief Information Officer, Corporate Technology
Management from 2004 to 2005 and Vice President, Information
Technology Management Services from 2002 to 2004. Prior to
Capital One Financial Corp., Mr. Frigo was President and
Chief Operating Officer of a consumer-oriented Internet startup
and an executive at Compaq/HP in their Commercial Personal
Computing Group.
Sabyasachi Sengupta has served as the companys
Executive Vice President and Chief Credit Risk Officer since
January 2010. He joined the company in March 2008 as Senior Vice
President and Chief Risk Officer. Previously, Mr. Sengupta
was Vice President of Decision Sciences at GE Money, Americas, a
financial services company, from 2006 to 2008 and Vice President
of Enterprise Risk Strategy at GE Money, Americas from 2004 to
2006. Mr. Sengupta also previously held positions at GE
Retail Financial Services from 1997 to 2004, most recently as
Vice President, Decision Sciences.
Gina D. Sprenger has served as the companys
Executive Vice President, Merchandising since April 2011. Prior
to joining the company, Ms. Sprenger served in various
capacities with Target Corporation, most recently as Senior Vice
President Merchandising of the Home and Seasonal Businesses from
February 2003 until November 2009. Prior to that,
Ms. Sprenger held a variety of merchandising and planning
positions at Target Corporation from 1985 to 2003. From July
2010 until joining the company in April 2011, Ms. Sprenger
provided merchandise strategy consulting services to retail
companies.
Mark P. Wagener has served as the companys
Executive Vice President and Chief Financial Officer since
November 2006. Prior to joining Bluestem Brands,
Mr. Wagener was employed with Metris Companies Inc., a
financial services company, between June 2000 and April 2006,
completing his tenure there as Senior Vice President and
Controller. Mr. Wagener also previously worked for
13 years at Wells Fargo (formerly Norwest Corporation) in
various corporate finance positions, the last of which was
Director of Corporate Planning and Analysis.
Brad T. Atkinson has served as the companys Vice
President and Corporate Controller since March 2007. From March
2006 to March 2007, he served as Senior Manager, External
Reporting & Corporate Accounting at Medtronic, Inc.
Prior to that Mr. Atkinson was employed by Metris
Companies, Inc. from October 2001 to March 2006, most recently
as Director of Corporate Accounting. Mr. Atkinson held
auditor positions at Ernst & Young LLP from June 1999
through October 2001 and at KPMG LLP from August 1996 through
June 1999.
Erica C. Street has served as the companys Vice
President, General Counsel and Secretary since September 2010
and was previously Vice President and Associate General Counsel
from September 2008 to September 2010, and Associate General
Counsel from January 2007 to September 2008. From January 2003
through January 2007, Ms. Street provided various legal and
consulting services through E Street & Associates PLLC
and Kelly Services. From 1989 to 2003, Ms. Street held
various positions within Target Corporation (formerly Target
Stores, a division of Dayton Hudson Corporation), including
Senior Counsel, Assistant General Counsel and President, Target
Brands, Inc.
118
Directors
Michael M. Brown has served as a director of our company
since 2005 and has chaired the compensation committee and been a
member of the audit committee since that time. Mr. Brown
joined Battery Ventures, a venture capital firm, in 1998 where
he has been a managing member of various funds affiliated with
Battery Ventures since July 2007. Funds affiliated with Battery
Ventures hold 29% of our common stock on an as if converted
basis, which includes both shares of common stock currently
outstanding and shares of common stock issuable upon the
conversion of all outstanding shares of our preferred stock upon
completion of this offering, but excludes common shares to be
issued in payment of accrued and unpaid dividends on outstanding
preferred stock due upon conversion of the preferred stock.
Prior to July 2007, Mr. Brown held various positions with
Battery Ventures, including the position of partner, which he
held between September 2004 and July 2007. From 1996 to 1998,
Mr. Brown was a member of the High Technology Group at
Goldman, Sachs & Co., and from 1994 to 1996, he was a
financial analyst in Goldmans Financial Institutions Group.
Mr. Brown has extensive experience in the financial
industry which allows him to provide guidance and counsel in his
role as one of our audit committee members. His experiences
working with growth companies in the course of his role at
Battery Ventures enable Mr. Brown to provide important
context to compensation issues and insight on strategic plans
relating to our business.
John A. Giuliani has served as a director of our company
and a member of the compensation committee since 2005.
Mr. Giuliani has been the Chief Executive Officer and
Chairman of Dotomi, Inc., an Internet marketing firm, since
December 2005. From 1994, he was employed by Catalina Marketing
and served as President-North America for Catalina Marketing
Services until 2001. Prior to joining Catalina,
Mr. Giuliani spent four years with ACTMEDIA and eight years
in various sales and marketing roles at Beecham Products and
Frito-Lay, Inc. In addition, in 2001 Mr. Giuliani founded
Rainmaker Consulting Group Inc.
Mr. Giulianis numerous years of marketing experience
makes him well suited as a director of our company, as this
experience enables Mr. Giuliani to provide significant
insight into marketing strategy, which is a key component to the
success of our business.
Roy A. Guthrie has served as a director of our company
since November 2010 and is a member of the audit committee.
Mr. Guthrie is an Executive Vice President and was, until
April 2011, the Chief Financial Officer for Discover
Financial Services, a financial services company, a position he
held since 2005. From 2000 to 2004, Mr. Guthrie was
employed by Citigroup, Inc. serving as President and Chief
Executive Officer of Citifinancial International Ltd. and as a
member of the Citigroup Management Committee from 2001 to 2004,
and as President and Chief Executive Officer of CitiCapital from
2000 to 2001. From 1978 to 2000, Mr. Guthrie held various
positions with Associated First Capital Corporation, including
serving as Chief Financial Officer from 1996 to 2000 and as a
member of that companys board of directors and
Audit/Finance committee from 1998 to 2000. Mr. Guthrie is
currently on the board of directors of Discover Bank.
Mr. Guthries experience in the banking industry
enables him to provide insight on strategic plans relating to
our business. His current and previous experience as a board
member of companies in the financial industry and his extensive
financial, audit and accounting experience enables
Mr. Guthrie to provide guidance and counsel as a board
member of our company and as a financial expert and member of
our audit committee.
Michael A. Krupka has served as a director of our company
since 2004 and has served on the audit and compensation
committees since that time. Mr. Krupka is a Managing
Director at Bain Capital Venture Partners, LLC, a venture
capital firm, and has served in such capacity since 2000. Funds
affiliated with Bain Capital Venture Partners, LLC hold 14% of
our common
119
stock on an as if converted basis, which includes both shares of
common stock currently outstanding and shares of common stock
issuable upon the conversion of all outstanding shares of our
preferred stock upon completion of this offering, but excludes
common shares to be issued in payment of accrued and unpaid
dividends on outstanding preferred stock due upon conversion of
the preferred stock. Mr. Krupka joined Bain Capital in 1991
and from 1994 to 2000, Mr. Krupka was a Managing Director
and Principal with the Private Equity Group of Bain Capital
Partners, LLC. Prior to Bain Capital, Mr. Krupka spent
several years as a consultant at Bain & Company.
Mr. Krupka also currently serves as a board member of The
Princeton Review, Inc. and Vonage Holdings Corp.
Mr. Krupka has extensive experience in the financial
industry which enables him to provide guidance and counsel in
his role on our audit and compensation committees. His
experiences working with growth companies in the course of his
role at Bain Capital Venture Partners, LLC, as well as his
experience serving on the boards of two other public companies,
enables Mr. Krupka to provide insight on strategic plans
relating to our business.
Alice M. Richter has served as a director of our company
since February 2007 and has chaired the audit committee since
January 2008. Ms. Richter was a certified public
accountant with KPMG LLP for 26 years until her retirement
in June 2001. She joined KPMGs Minneapolis office in 1975
and was admitted to its partnership in 1987. Ms. Richter
also currently serves as a board member at West Marine, Inc.,
Thrivent Financial for Lutherans and G&K Services, Inc.
Ms. Richter brings extensive finance, audit and accounting
experience to our board. Along with her years of experience with
the auditing firm of KPMG LLP, serving many different companies
and industries, Ms. Richter is also a director for two
other publicly held companies. Ms. Richters
significant experience in the finance area enables her to
provide analysis and input to our finance, accounting and
internal audit functions. This experience, and her service on
other boards, qualifies Ms. Richter to serve as one of our
directors and act as a financial expert.
Scott L. Savitz has served as a director of our company
since March 2011 and is a member of the compensation committee.
Mr. Savitz founded Shoebuy.com, an online retailer of
footwear and related apparel, in 1999 and served as its Chief
Executive Officer from 1999 to 2011. Previously, Mr. Savitz
was a director at BankBoston Robertson Stephens, and was
employed by them from 1994 to 1999.
Mr. Savitzs experience in the online retail industry
and his success as an entrepreneur make him well-suited to serve
as a member of our board of directors. This prior experience
enables him to provide important insight and strategy on
targeted marketing, cultivating our customer base and growing
our business.
Corporate
Governance
Board
Composition
Our board of directors currently consists of seven directors. In
accordance with our amended and restated certificate of
incorporation to be effective immediately after this offering,
our board of directors will be divided into three classes with
staggered three-year terms. The board of directors will assign
members of the board already in office to such classes as of the
time of adoption of our amended and restated certificate of
incorporation. The term of office of the initial Class I
directors shall expire at the first regularly-scheduled annual
meeting of the stockholders following the closing of this
offering; the term of office of the initial Class II
directors shall expire at the second annual meeting of the
stockholders following the closing of this offering; and the
term of office of the initial Class III directors shall
expire at the third annual meeting of the stockholders following
the closing of this offering. At each annual meeting of
stockholders following the closing of this offering, each
director
120
elected at such meeting shall be elected to hold office until
the third annual meeting next succeeding his or her election and
until his or her respective successor shall have been duly
elected and qualified. If the number of directors is hereafter
changed, any newly created directorships or decrease in
directorships will be apportioned by the board of directors
among the classes so as to make all classes as nearly equal in
number as possible. The division of our board of directors into
three classes with staggered three-year terms may delay or
prevent a change of our management or a change in control.
Board
Independence
Our board of directors has determined that all of our directors
except for Mr. Smith, who is our Chief Executive Officer,
are independent as defined under the applicable rules of the
NASDAQ stock market. The independent directors are
Ms. Richter and Messrs. Brown, Giuliani, Guthrie,
Krupka and Savitz. In making this determination, the board
considered that Ms. Richters son is employed by our
independent auditors and that Mr. Giuliani is the Chief
Executive Officer and Chairman of a company to whom we have paid
fees for marketing services in the ordinary course, but
determined in each case that the relationship does not interfere
with such directors exercise of independent judgment in
carrying out his or her responsibilities as our director.
There is no family relationship between any director, executive
officer or person nominated to become a director or executive
officer.
Board
Representation and Observation Rights
We are a party to a stockholders agreement with certain of our
stockholders, most recently amended and restated on May 15,
2008, which we refer to herein as the stockholders
agreement. Under this agreement, the stockholders agree to
vote all owned shares of the companys preferred and common
stock to maintain the size of the board of directors at eight,
and to cause the election of the following directors:
(1) for so long as Bain Capital Venture Fund 2007,
L.P. and its affiliates own at least 2% of the common stock of
the company on an as-converted basis, one director designated by
Bain Capital, (2) for so long as Battery Ventures VI, L.P.
and its affiliates own at least 2% of the common stock of the
company on an as-converted basis, one director designated by
Battery Ventures, (3) for so long as Thomas J. Petters or
any of his affiliates own at least 2% of the common stock of the
company on an as-converted basis, one director designated by
Thomas J. Petters, (4) the chief executive officer and (5)
three independent directors mutually agreed by the chief
executive officer and 66% of the then-outstanding shares of
Series B Preferred Stock. In addition, for so long as each
of Bain Capital and Battery Ventures both have the right to
designate a director, their designated directors have the right
to mutually designate a third director.
Pursuant to the stockholders agreement, Michael Krupka was
elected as the Bain Capital-designated director and Michael
Brown was elected as the Battery Ventures-designated director.
There is presently no jointly designated director of Bain
Capital and Battery Ventures, nor any director designated by
Mr. Petters. The rights of Mr. Petters and his
affiliates under the stockholders agreement and investor rights
agreement described below are exercised by Douglas Kelley, as
trustee and receiver. See Certain Relationships and
Related Party Transactions for information concerning this
arrangement.
We are also a party to an investor rights agreement with certain
of our stockholders, most recently amended and restated on
May 15, 2008, which we refer to herein as the
investor rights agreement. Under this agreement, for
so long as Bain Capital and Battery Ventures or their respective
affiliates each owns 30% of the shares of Series B
Preferred Stock purchased by it or its affiliates (or the common
stock into which the Series B Preferred Stock is
converted), and for so long as Petters Group Worldwide, LLC and
its affiliates owns at least
121
30% of the shares of preferred stock purchased by it or its
affiliates (or the common stock into which the preferred stock
is converted) each of Bain Capital, Battery Ventures and Petters
Group Worldwide will have the right for one observer to attend
any board or committee meeting at any time it does not have a
designated director serving on the board. No observer has the
right to vote on any board or committee matter. Bain Capital and
Battery Ventures have not exercised their board observer rights.
Douglas Kelley, exercising the rights of Petters Group
Worldwide, has appointed an observer who currently attends all
board meetings.
The stockholders agreement and certain provisions of the
investor rights agreement, including the board representation
and observation rights described above, will terminate upon
completion of this offering. Provisions of the investor rights
agreement that give the parties thereto certain rights with
respect to the registration of our securities and related
matters will not terminate upon the completion of this offering.
See Certain Relationships and Related Party
Transactions for further information concerning these
agreements.
Board
Committees
Our board of directors has established an audit committee and a
compensation committee, and will establish a governance
committee prior to the completion of this offering. Each of our
committees will have a charter in effect upon the closing of
this offering and each charter will be posted on our website.
Our website is not part of this prospectus.
The composition and responsibilities of each committee that has
been established are described below. Members serve on these
committees until their resignation or until otherwise determined
by our board.
|
|
|
Audit Committee
|
|
Compensation
Committee
|
|
Ms. Richter (chair)
|
|
Mr. Brown (chair)
|
Mr. Brown
|
|
Mr. Giuliani
|
Mr. Krupka
|
|
Mr. Krupka
|
Mr. Guthrie
|
|
Mr. Savitz
|
Audit
Committee
Among other matters, our audit committee:
|
|
|
|
|
oversees managements processes for ensuring the quality
and integrity of the companys financial statements, the
companys accounting and financial reporting processes, and
other financial information provided by the company to an
governmental body or to the public;
|
|
|
|
evaluates the qualifications, independence and performance of
the companys independent auditor and internal audit
function; and
|
|
|
|
supervises managements processes for ensuring compliance
by the company with legal, ethical and regulatory requirements.
|
Each of the members of our audit committee upon closing of this
offering meets the requirements for financial literacy under the
applicable rules and regulations of the SEC and the NASDAQ stock
market. Our board of directors has determined that
Mr. Guthrie and Ms. Richter are audit committee
financial experts, as defined under the applicable rules of the
SEC. Upon the closing of this offering, each member of our audit
committee will satisfy the general NASDAQ stock market
independence standards and, except for Mr. Krupka, the
independence standards of
Rule 10A-3(b)(1)
of the Securities Exchange Act.
122
Compensation
Committee
Among other matters, our compensation committee:
|
|
|
|
|
reviews and approves compensation and employment arrangements
for executive officers;
|
|
|
|
administers compensation plans for employees;
|
|
|
|
evaluates the compensation structure for management
employees; and
|
|
|
|
determines the compensation of non-employee directors.
|
Each member of our compensation committee upon the closing of
this offering will satisfy the NASDAQ stock market independence
standards.
Governance
Committee
Among other matters, our governance committee will, when formed:
|
|
|
|
|
identify qualified individuals to become board members;
|
|
|
|
determine the composition of the board and its committees,
assess and enhance the effectiveness of the board and individual
directors;
|
|
|
|
develop and implement corporate governance guidelines for the
company;
|
|
|
|
evaluate the performance of our Chief Executive Officer; and
|
|
|
|
ensure that succession planning takes place for critical senior
management positions.
|
We expect that each member of our governance committee upon the
closing of this offering will satisfy the NASDAQ stock market
independence standards.
Board
Leadership Structure
Since January 2008, Mr. Smith has served in the combined
roles of Chairman and Chief Executive Officer. Our board of
directors understands there is no single, generally accepted
approach to providing board leadership and that given the
dynamic and competitive environment in which we operate, the
appropriate leadership may vary as circumstances warrant. Our
board of directors currently believes it is in our
companys best interests to have Brian Smith serve as
Chairman and Chief Executive Officer. Our board of directors
believes combining these roles promotes effective leadership and
provides the clear focus needed to execute our business
strategies and objectives. However, our board of directors does
not believe these roles must be combined, and may in the future
separate these roles. We do not have a lead independent
director. Our board of directors believes it will be able to
effectively provide independent oversight of our business and
affairs, including the risks facing our company, without an
independent chairman or a lead independent director through the
composition of our board of directors, the strong leadership of
the independent directors, the committees of our board of
directors and the other corporate governance policies and
processes that will be in place upon completion of this
offering. We expect our independent directors will actively
collaborate together and through their respective committees.
Board
Involvement in Risk Oversight
The companys management is responsible for defining the
various risks facing the company, formulating risk management
policies and procedures, and managing the companys risk
exposures on a
day-to-day
basis. The boards responsibility is to monitor the
companys risk management processes by using board
meetings, management presentations and other opportunities to
educate itself concerning the companys material risks and
evaluating whether
123
management has reasonable controls in place to address the
material risks; the board is not responsible, however, for
defining or managing the companys various risks. The full
board is responsible for monitoring managements
responsibility in the area of risk oversight. In addition, the
audit committee and compensation committee have risk oversight
responsibilities in their respective areas of focus, which they
report on to the full board. Management reports from time to
time to the full board, audit committee and compensation
committee on risk management. The board focuses on the material
risks facing the company, including operational, credit,
liquidity, legal and regulatory risks, to assess whether
management has reasonable controls in place to address these
risks.
Code of
Conduct
We have adopted a code of business conduct and ethics relating
to the conduct of our business by our employees, officers and
directors, which will be posted on our website.
Compensation
Committee Interlocks and Insider Participation
During 2010, Messrs. Giuliani, Brown and Krupka served as
the members of our compensation committee, and none of the
members of the compensation committee during 2010 have served as
employees or officers of the company. No executive officer of
the company served as a member of the board of directors or
compensation committee (or other board committee performing
equivalent functions or, in the absence of any such committee,
the entire board of directors) of another entity that had any of
its executive officers serving as a member of our board of
directors or compensation committee during 2010.
Compensation
of Directors
Directors who are also our employees receive no additional
compensation for serving on our board of directors. Each of our
non-employee directors who is not affiliated with any of our 5%
or greater stockholders currently receives an annual cash
retainer of $25,000, payable in quarterly installments, a
restricted stock award following his or her initial election to
the board, and the opportunity to purchase at fair market value
up to $100,000 of our Series B Preferred Stock. Such
purchases are not subject to any discount or subsidy of any kind.
The following table sets forth certain information concerning
annual compensation for our directors during the fiscal year
ended January 28, 2011.
Non-Employee
Director Compensation for Fiscal 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees Earned
|
|
|
|
|
|
|
|
|
|
or Paid
|
|
|
Stock Awards
|
|
|
Total
|
|
Name
|
|
in Cash ($)
|
|
|
($)(1)
|
|
|
($)
|
|
|
Michael M. Brown (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
John A. Giuliani
|
|
|
25,000
|
|
|
|
|
|
|
|
25,000
|
|
Michael A. Krupka (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
Alice M. Richter
|
|
|
25,000
|
|
|
|
14,025
|
(3)
|
|
|
39,025
|
|
Roy A. Guthrie
|
|
|
6,250
|
(4)
|
|
|
43,450
|
(4)
|
|
|
49,700
|
|
124
|
|
|
(1)
|
|
The following table summarizes for
each of our non-employee directors the number of unvested shares
subject to outstanding restricted stock awards and the number of
shares underlying unexercised option awards as of
January 28, 2011, the end of our most recent fiscal year.
|
|
|
|
|
|
|
|
|
|
|
|
As of January 28, 2011
|
|
|
|
|
|
|
Number of Shares
|
|
|
|
Number of Unvested
|
|
|
Underlying Unexercised
|
|
Name
|
|
Restricted Shares
|
|
|
Options
|
|
|
Michael M. Brown
|
|
|
|
|
|
|
|
|
John A. Giuliani
|
|
|
1,025,000
|
|
|
|
1,900,000
|
|
Michael A. Krupka
|
|
|
|
|
|
|
|
|
Alice M. Richter
|
|
|
2,456,250
|
|
|
|
|
|
Roy A. Guthrie
|
|
|
3,950,000
|
|
|
|
|
|
|
|
|
(2)
|
|
Messrs. Brown and Krupka are
affiliated with 5% or greater stockholders and therefore do not
receive compensation for service as non-employee directors of
the company.
|
|
(3)
|
|
In November 2010, Ms. Richter
received a supplemental restricted stock award of
1,275,000 shares to equalize her aggregate restricted stock
awards with those provided to Messrs. Giuliani and Guthrie.
The amount shown represents the grant date fair value of this
award computed in accordance with Financial Accounting Standards
Board Accounting Standards Codification Topic 718,
CompensationStock Compensation (FASB ASC
Topic 718) by multiplying the number of shares granted by
the fair market value of our common stock as of the grant date.
See Managements Discussion and Analysis of Financial
Condition and Results of OperationsCritical Accounting
Policies and Use of Estimates for discussion regarding the
determination of the fair market value of our common stock.
|
|
(4)
|
|
In connection with his initial
election as a director in November 2010, Mr. Guthrie
received a restricted stock award of 3,950,000 shares. The
amount shown in the Stock Awards column represents
the grant date fair value of this award computed in the manner
described in note 3 above. Mr. Guthrie also received
one-fourth of the annual cash retainer for his service as a
director during the fourth quarter of fiscal 2010.
|
Restricted stock awards to our non-employee directors are made
pursuant to our 2008 Plan. Restricted shares subject to such
awards are non-transferable and subject to possible forfeiture
until they vest, and will vest as to 25% of the shares subject
to the award on each of the first four anniversaries of the
grant date of the award so long as the recipients service
as a director continues. Vesting will be accelerated in full if
a recipients service as a director ends due to death or
disability, or if a change in control of the company occurs and
the surviving or successor entity either fails to continue or
assume the restricted stock award or terminates the
recipients service as a director in connection with the
change in control.
Mr. Giuliani received a nonqualified stock option award
covering 1,900,000 shares of our common stock on
November 1, 2005. The option has an exercise price of $0.02
per share, became vested and fully exercisable on
November 1, 2009, and has a ten-year term. If
Mr. Giulianis service as a director ends due to his
death or disability, the option will remain exercisable until
the earlier of (1) three years after the date his service
ends or (2) the expiration of the option term. If
Mr. Giulianis service as a director ends for any
other reason, the option will remain exercisable until the
earlier of (1) one year after the date his service ends or
(2) the expiration of the option term. Following a change
in control of the company, the option will remain exercisable
until the expiration of the option term or such earlier time as
the board of directors may provide in connection with the change
in control.
In June 2011, our compensation committee approved a revised
compensation program for our non-employee directors to be
effective following the completion of this offering. The revised
program was developed in consultation with Pearl
Meyer & Partners, compensation consultants retained by
our management, and reflected consideration of non-employee
director compensation provided by groups of comparative retail
industry companies and
125
retail/wholesale
companies that have had public offering within the past three
years. The revised compensation program consists of the
following elements:
|
|
|
|
|
Annual cash retainer$50,000;
|
|
|
|
|
|
Annual cash retainer for committee chairsAudit
Committee: $10,000; Compensation Committee: $6,000; Governance
Committee: $6,000;
|
|
|
|
|
|
Annual equity award$50,000 in restricted shares,
vesting in equal annual installments over three years.
|
In connection with the revised compensation program, our
compensation committee also approved stock ownership guidelines
for our non-employee directors. Non-employee directors will be
expected to own shares of Bluestem common stock with a market
value of at least three times their annual cash retainer within
five years of the date they join our board of directors, and to
retain until after their service on our board of directors ends
at least 50% of the net shares (after-tax value) granted to them
for service on our board of directors.
126
EXECUTIVE
COMPENSATION
Compensation
Discussion and Analysis
The purpose of this compensation discussion and analysis is to
provide information necessary to understand our compensation
policies and decisions regarding our principal executive
officer, principal financial officer and our three other most
highly compensated executive officers. As used throughout this
section, the term named executive officers or
NEOs means these five executive officers. As of
January 28, 2011, the last day of our 2010 fiscal year, our
NEOs were:
|
|
|
|
|
Brian A. Smith, Chairman and Chief Executive Officer (principal
executive officer),
|
|
|
|
John F. Damrow, President,
|
|
|
|
Chidambaram A. Chidambaram, Executive Vice President and Chief
Marketing Officer,
|
|
|
|
Raymond G. Frigo, Executive Vice President and Chief Operating
Officer, and
|
|
|
|
Mark P. Wagener, Executive Vice President and Chief Financial
Officer (principal financial officer).
|
Compensation
Philosophy and Objectives
Prior to this public offering, we were a privately-held company
with a relatively small number of stockholders. Our compensation
philosophy, programs and processes for determining executive
compensation have been established by the compensation
committee, with input from our Chief Executive Officer and other
members of senior management, to support our growth. While our
compensation philosophy is unlikely to change substantially, our
compensation programs and processes will likely evolve as we
move forward as a public company.
The compensation committee believes that compensation programs
for our NEOs should primarily reflect our performance and reward
actions that create value for our stockholders. In addition, our
compensation programs should support our short-term and
long-term strategic goals and values and should reward
individual commitment to us and contributions to our success.
At Bluestem, competitive total compensation plays an important
role in attracting, retaining, motivating and rewarding talented
and experienced executives and employees who are integral to our
success. Compensation also plays a role in encouraging employees
to grow, develop and take on additional responsibilities in our
organization.
Our executive compensation philosophy mirrors our overall
compensation philosophy. Specifically, our compensation
philosophy is based on the following key principles:
|
|
|
|
|
We pay for performance, focusing both on the results achieved
and how the results are achieved.
|
|
|
|
We provide greater compensation opportunities for the people who
have the most significant responsibilities and have the greatest
ability to influence our achievement of operating goals and
strategic initiatives.
|
|
|
|
Compensation structure and programs should be understandable and
easily communicated to executives, stockholders and other
constituencies.
|
|
|
|
We seek to maintain a high degree of symmetry between returns to
stockholders and compensation provided to management employees
responsible for developing and executing our business strategies
(employees in director-level and above positions).
|
127
|
|
|
|
|
We place more emphasis on incentive/variable compensation for
employees in director-level and above positions. The
incentive/variable percentage of total compensation increases as
the responsibilities of the position increase.
|
|
|
|
Benefit programs available to senior executives should be
consistent with those provided to salaried employees generally.
|
Our compensation policies and practices demonstrate our
commitment to these principles. For example, since the
April 24, 2010 expiration of the employment agreement with
our Chief Executive Officer, we do not have any employment,
severance or change in control agreements with any executive
officers. We generally do not provide perquisites or other
personal benefits to our executive officers, our only retirement
plan for non-union employees is our 401(k) plan, and the benefit
programs made available to executive officers are the same as
those made available to our non-union employees generally.
Compensation
Decisions and Processes
The compensation committee meets at least quarterly to review
and oversee our executive compensation and benefit policies and
programs. The compensation committee conducts an annual review
of the performance and compensation of our NEOs and other
executive officers and approves compensation actions for those
individuals that reflect our compensation philosophy, our
financial and operating performance and the individual
performance of each executive officer. When approving
compensation actions for our NEOs and other executive officers,
the compensation committee may exercise its discretion to take
into account additional and more subjective considerations when
circumstances warrant, such as when recruiting a new executive,
seeking to retain an executive in the face of a competing offer,
or seeking to maintain internal pay equity among executives.
Based on information provided by the Senior Vice President of
Human Resources, and consistent with the principles described
above, the compensation committee annually reviews our Chief
Executive Officers performance and compensation package
and makes recommendations to the non-employee members of the
board of directors regarding compensation actions. The
compensation committee has, from
time-to-time,
recommended long-term equity awards for our Chief Executive
Officer. Our non-employee directors approve all actions taken
with regard to the compensation of our Chief Executive Officer.
In addition, our non-employee directors and, in accordance with
our certificate of incorporation, our major stockholders have
historically approved all equity grants for employees, including
our NEOs.
Based on recommendations from our Chief Executive Officer and
our Senior Vice President of Human Resources, and consistent
with the principles described above, the compensation committee
reviews and approves the annual compensation packages of our
NEOs other than our Chief Executive Officer.
Following the completion of this public offering, we expect that
the compensation committee and our non-employee directors will
continue to be responsible for reviewing and approving
compensation actions for our Chief Executive Officer. We expect
that the compensation committee will continue to be responsible
for reviewing and approving compensation programs and processes
as well as individual compensation actions for all other NEOs.
We expect the grant approval process for equity-based incentive
awards will be changed and will no longer involve major
stockholder approval for individual grants. Instead, we expect
that our long-term incentive plan in use at that time will set
forth the general terms and conditions under which the
compensation committee
and/or our
board of directors can approve future equity grants that align
with and support our long-term business strategies and comply
with legal and stock exchange requirements governing equity
grants.
128
Compensation
Consultant
In late 2010, as part of our preparation for becoming a public
company, our management engaged Pearl Meyer & Partners
to provide executive compensation consulting services to the
company. These services include providing an annual compensation
market analysis for our executive officer positions,
recommendations on executive pay programs, review and comment on
executive compensation matters, and updates on trends and other
developments affecting executive compensation.
Going forward, the compensation committee may engage the
services of an independent executive compensation consultant to
provide input into the establishment and review of executive
compensation programs, practices and decisions with regard to
the individual compensation of NEOs.
Review of
Compensation Data
Our Chief Executive Officer, compensation committee and
non-employee directors take several factors into account in
determining total NEO compensation, including individual and
corporate performance, internal pay equity for executives, and
competitive compensation market data. For compensation provided
in fiscal 2010, we obtained market information about executive
compensation levels and practices from broad-based, third-party
compensation surveys involving companies in general industry,
primarily the Watson Wyatt Report on Top Management Compensation
and the Salary.com Data Analyst compensation database. We
focused primarily on the compensation practices of those
organizations considered most comparable to our company in terms
of annual revenue and number of employees. The compensation
information from these surveys helps provide a basis for
determining whether our compensation practices are reasonable,
but the compensation committee does not establish specific
compensation amounts or parameters for any executive officer
position based on the survey data. Instead, we use market data
for general compensation guidance in the context of our business
model and executive leadership structure. Because market data
does not necessarily reflect a valuation of executive officer
positions that is consistent with our internal valuation based
on our business model and leadership structure, we have not
sought to pay executive officers at a specific percentile of the
competitive market or to select a group of peer companies with
the intention of using their executive officer compensation as a
benchmark against which to set our compensation. Rather, because
we understand we have competition for executive officer talent,
we find it useful to examine competitive pay practices from time
to time to maintain a current perspective on market conditions.
In anticipation of compensation decisions to be made for fiscal
2011, our Chief Executive Officer, Chief Financial Officer,
Senior Vice President of Human Resources and Vice President,
General Counsel worked with consultants from Pearl
Meyer & Partners to identify a group of comparative
companies in the retail industry as well as a group of
comparative retail/wholesale companies that have had public
offerings within the past three years. Pearl Meyer &
Partners analyzed compensation information for specific
executive positions taken from public disclosures made by these
companies, data from retail and all-industry compensation
surveys, including the Watson Wyatt and Salary.com surveys
mentioned earlier as well as surveys from Hay Group and Mercer,
and information from the Presidio Pay Advisors IPO Executive
Compensation Survey. This enhanced compensation market
information was provided to the compensation committee for the
limited purposes described in the previous paragraph as part of
the annual review of executive compensation for fiscal 2011.
Elements of
Total Compensation
Our total compensation program is comprised of both direct and
indirect forms of compensation. Direct compensation includes
cash and equity-based forms of pay. Indirect
129
compensation is delivered through a variety of benefit plans
offered to NEOs and other employees based on certain eligibility
criteria.
Our total direct compensation program includes three
componentsbase salary, short-term incentives and long-term
incentivesand is established by the compensation committee
with input from our Chief Executive Officer and our Senior Vice
President of Human Resources. These three components were
selected to help us attract, retain, motivate and reward
executives and to provide a balance of short- and long-term
elements. The table below identifies the form and additional
specific purposes of each component of our total direct
compensation program.
|
|
|
|
|
|
|
Form(s) of
|
|
|
Compensation Component
|
|
Compensation
|
|
Purpose
|
|
Base Salary
|
|
Cash
|
|
Compensate each NEO relative to
individual experience and technical/functional contributions
Provide steady cash flow not contingent
on short-term variations in company performance during fiscal
year
|
Short-Term Incentives (a)
|
|
Cash
|
|
Align compensation with our annual
corporate performance and returns to stockholders
Provide participants with a meaningful
total cash compensation opportunity (base salary + short-term
incentive compensation)
Reward corporate and individual
performance results
|
Long-Term Incentives (b)
|
|
Non-Qualified Stock Options
Restricted Stock
|
|
Drive behaviors that lead to long-term
growth and financial success
Create a balance between a short-term
and a long-term performance focus
Align compensation with our long-term
corporate performance and returns to stockholders
Provide executive ownership
opportunities
|
|
|
|
(a)
|
|
In addition to our annual cash
incentive plan as described below under Short-Term
Incentive Plans, short-term incentives may include, at the
compensation committees discretion, supplemental
incentives such as hiring bonuses and other supplemental plans
designed to facilitate the achievement of specific short-term
objectives, such as the one-time 2010 Supplemental Executive
Incentive Plan described below under Short-Term
Incentive PlansSupplemental Executive Incentive Plan for
Fiscal 2010.
|
|
(b)
|
|
Equity-based awards have
historically been granted upon hire and promotion rather than on
an annual basis.
|
130
We do not have a stated policy for allocating total direct
compensation among the various elements, or between cash and
non-cash compensation or among different forms of non-cash
compensation. As noted earlier, however, we do place more
emphasis on incentive/variable forms of compensation for
executives with more significant responsibilities, reflecting
their greater capacity to affect our performance and results.
For example, in fiscal 2010, the relative percentages of base
salary and annual short-term incentive provided to the NEOs were
approximately as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual Short-Term
|
|
Total Annual Cash
|
|
|
Base Salary
|
|
Incentive (1)
|
|
Compensation
|
|
Chief Executive Officer
|
|
|
39
|
%
|
|
|
61
|
%
|
|
|
100
|
%
|
Other NEOs (averaged)
|
|
|
51
|
%
|
|
|
49
|
%
|
|
|
100
|
%
|
|
|
|
(1)
|
|
Does not reflect the additional
incentive paid to each NEO under the one-time 2010 Supplemental
Executive Incentive Plan.
|
Additionally, we have delivered long-term incentive compensation
in the form of equity grants that vest over time in the form of
stock options and restricted stock. As a privately-held company,
we have awarded our Chief Executive Officer equity grants of
approximately 3% of our fully diluted shares,
representing our outstanding shares of common stock plus the
number of common shares that would be issued upon conversion of
our outstanding preferred stock, exercise of outstanding stock
options and warrants and usage of all shares still available for
awards under the 2008 Plan. We have awarded each of our other
NEOs equity grants of approximately 1% of our fully diluted
shares. We have not established a targeted cash value for equity
grants for our NEOs.
Base
Salary
The compensation committee reviews the Chief Executive
Officers base salary and makes recommendations to our
non-employee directors, who approve all base salary actions for
the Chief Executive Officer. The compensation committee
considers a number of factors when making its recommendations
regarding the Chief Executive Officers base salary,
including information from the Senior Vice President of Human
Resources regarding the internal relationship between the Chief
Executive Officers base salary and the base salaries of
executives who report directly to him, the Chief Executive
Officers responsibilities and industry experience,
external compensation market data and an assessment of the Chief
Executive Officers achievements against performance
expectations and corporate financial objectives.
The Chief Executive Officer recommends a base salary for each
NEO other than himself based on a review of a number of factors,
including information from the Senior Vice President of Human
Resources about each executives pay relative to our other
senior executives, each individuals responsibilities and
industry experience, external compensation market data, the
Chief Executive Officers assessment of each NEOs
achievements against performance expectations and corporate
financial performance. The compensation committee reviews the
NEO base salary recommendations from our Chief Executive Officer
and approves NEO base salaries.
2010 Base
Salaries
As part of our annual review process in February 2010, the
compensation committee approved base salary increases for each
of our NEOs other than our Chief Executive Officer that ranged
from 2.5% to 4% of annualized base salary. These base salary
increases were based on performance against fiscal 2009
corporate financial objectives (achieved $438.2 million in
revenue against an objective of $437 million and achieved
$63.8 million in Adjusted EBITDA against an objective of
$45 million), each NEOs achievement of individual
objectives and the other factors noted above.
131
Also in February 2010, our non-employee directors approved a
base salary increase of 8.3% for our Chief Executive Officer.
This increase reflected his leadership role in the achievement
of financial and strategic objectives for fiscal 2009 and his
role in the successful hiring and integration of three new
members of the executive team.
In November 2010, the board of directors approved a base salary
increase of 15.4% for Mr. Damrow in recognition of his
promotion to President from Executive Vice President,
Merchandising.
2011 Base
Salaries
As part of the annual review process conducted in February 2011,
the compensation committee approved base salary increases (merit
increases and market adjustments) for each of our NEOs other
than our Chief Executive Officer that ranged from 2.6% to 11.5%
of annualized base salary. These base salary increases reflected
fiscal 2010 financial performance in which we exceeded both our
maximum revenue and our maximum Adjusted EBITDA objectives, high
levels of achievement by each NEO with respect to individual
objectives in fiscal 2010, and the other factors noted above.
Also in February 2011, our non-employee directors approved a
base salary increase of 23.1% for our Chief Executive Officer.
This increase reflected his leadership role in our achievement
of fiscal 2010 financial and strategic objectives and an
intention to more appropriately position his base salary
relative to the other NEOs in recognition of his more
significant role and responsibilities, and relative to the base
salaries of other chief executive officers in similar companies
and industries.
Short-Term
Incentive Plans
We provide our NEOs the opportunity to earn an annual cash
incentive payout under the annual Bluestem Brands, Inc.
Incentive Plan, which we refer to in this prospectus as the
short-term incentive plan. The short-term incentive plan rewards
NEOs who make a positive impact on corporate results while
striking a balance between motivating high performance and
ensuring that results stem from reasonable risk-taking. See
Compensation Risk Assessment. The short-term
incentive plan may be revised
and/or
suspended at any time at the discretion of the compensation
committee
and/or the
Chief Executive Officer. The board of directors reserves the
right to modify any payouts under the short-term incentive plan,
but it did not exercise this discretion in determining payouts
to NEOs for fiscal 2010.
The short-term incentive plans for fiscal years 2010 and 2011
are described below. In fiscal 2010, our non-employee directors
established a one-time Supplemental Executive Incentive Plan,
also described below.
2010 Short-Term
Incentive Plan
The 2010 short-term incentive plan provided NEOs with an
incentive compensation opportunity based on achievements against
corporate financial objectives and individual objectives.
Corporate financial objectives for the short-term incentive plan
were established prior to the beginning of fiscal 2010.
The 2010 short-term incentive plan included objectives within
the following two major components:
|
|
|
|
|
Corporate financial objectives:
|
|
|
|
|
|
Revenue; and
|
|
|
|
Adjusted EBITDA.
|
132
We selected revenue and Adjusted EBITDA as the corporate
financial objectives for the short-term incentive plan because
we believe they are important and well-understood measures of
financial success. Because we believe that these measures are
equally important, they are weighted equally in the short-term
incentive plan design.
Threshold, target and maximum levels of achievement were
established for each corporate financial objective. No payouts
could be earned for achievements below the threshold levels, and
payouts were capped at the maximum levels of achievement.
|
|
|
|
|
The non-employee directors reviewed and agreed upon the
individual objectives for the Chief Executive Officer at the
beginning of the short-term incentive plan year.
|
|
|
|
Individual objectives for the other NEOs were agreed upon by
each executive officer and the Chief Executive Officer and
documented at the beginning of the short-term incentive plan
year.
|
We believe individual objectives are an important part of our
short-term incentive plan design. The individual objectives for
all NEOs align with and support our strategic objectives and
annual financial plan and document the individual performance
expectations for each NEO. The companys strategic
objectives for 2010 included increasing market share, making the
Fingerhut brand more web-centric, and building the
Gettington.com brand. Each NEOs individual objectives for
fiscal 2010 were established to support these strategic
objectives.
In order for any NEO to receive a payout under the 2010
short-term incentive plan, regardless of the NEOs
performance in relation to individual objectives, our
performance had to meet or exceed the threshold level for both
corporate revenue and Adjusted EBITDA.
The following table shows the weightings for each objective and
the potential payouts as a percentage of base salary for various
levels of achievement in relation to the targets under the 2010
short-term incentive plan.
2010
Short-Term Incentive Plan Objectives and
Weightings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive Position
|
|
Objectives
|
|
Threshold (1)
|
|
|
Target (1)
|
|
|
Maximum (1)
|
|
|
Chief Executive Officer
|
|
Revenue
|
|
|
5.6
|
%
|
|
|
28
|
%
|
|
|
56
|
%
|
|
|
Adjusted EBITDA
|
|
|
5.6
|
%
|
|
|
28
|
%
|
|
|
56
|
%
|
|
|
Individual
Objectives
|
|
|
4.8
|
%
|
|
|
24
|
%
|
|
|
48
|
%
|
|
|
Totals
|
|
|
16
|
%
|
|
|
80
|
%
|
|
|
160
|
%
|
Other NEOs
|
|
Revenue
|
|
|
3.5
|
%
|
|
|
17.5
|
%
|
|
|
35
|
%
|
|
|
Adjusted EBITDA
|
|
|
3.5
|
%
|
|
|
17.5
|
%
|
|
|
35
|
%
|
|
|
Individual
Objectives
|
|
|
3
|
%
|
|
|
15
|
%
|
|
|
30
|
%
|
|
|
Totals
|
|
|
10
|
%
|
|
|
50
|
%
|
|
|
100
|
%
|
|
|
|
(1)
|
|
Expressed as a percentage of actual
base salary. Performance between the specified levels of
achievement results in the application of a pro-rated percentage
between the two amounts indicated.
|
For fiscal 2010, our non-employee directors increased the target
incentive opportunity for our Chief Executive Officer from 60%
to 80% of base salary for achieving target levels of performance
against all incentive objectives, and correspondingly increased
his threshold and maximum payout opportunities. Our non-employee
directors determined that this increase was necessary
(1) to provide a more competitive total compensation
opportunity for our Chief
133
Executive Officer, (2) to more appropriately position his
short-term variable compensation relative to the short-term
variable compensation of the other NEOs and executives who
report directly to him and (3) in recognition of the more
significant responsibilities of our Chief Executive Officer in
comparison to other executives.
The following table summarizes the payout factors for the
corporate financial objectives portion of the 2010 short-term
incentive plan:
|
|
|
|
|
|
|
|
|
Fiscal 2010
|
Fiscal 2010 Revenue
|
|
Payout Factor (1)
|
|
Adjusted EBITDA
|
(In $ millions)
|
|
|
|
(In $ millions)
|
|
Less than 468
|
|
No Payout
|
|
Less than 48.0
|
468 to less than 470
|
|
Threshold Level = 20% of Target Payout
|
|
48.0 to less than 49.0
|
484 to less than 486
|
|
Target Level = 100% of Target Payout
|
|
53.0 to less than 53.5
|
508 and above
|
|
Maximum Level = 200% of Target Payout
|
|
60.0 and above
|
|
|
|
(1)
|
|
Payout factors increase in 10%
increments for revenue and Adjusted EBITDA performance between
the indicated ranges.
|
The table below details our actual results in relation to our
corporate financial objectives for fiscal 2010:
Fiscal 2010
Corporate Financial Objectives and Actual
Achievements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual Payout
|
|
|
Threshold
|
|
Target
|
|
Maximum
|
|
Actual Achievement
|
|
Factors For NEOs
|
|
Revenue
|
|
$
|
468 million
|
|
|
$
|
484 million
|
|
|
$
|
508 million
|
|
|
$
|
521.3 million
|
|
|
|
200
|
%
|
Adjusted EBITDA
|
|
$
|
48 million
|
|
|
$
|
53 million
|
|
|
$
|
60 million
|
|
|
$
|
78.4 million
|
|
|
|
200
|
%
|
The individual performance objectives established for each NEO
for fiscal 2010 primarily related to the NEOs role in
enabling us to achieve our overall strategic objectives for
which he was most responsible and, to a lesser extent,
individual development goals or department-specific goals. Our
Chief Executive Officer made recommendations to the compensation
committee regarding the degree to which NEOs other than himself
had satisfied their individual objectives. In doing so, he
exercised discretion in determining the degree to which these
objectives, which are not necessarily quantitative, had been
satisfied at year-end, and was not limited to considering these
pre-determined individual objectives in assessing an
individuals performance over the course of the year. The
compensation committee and non-employee directors also exercised
discretion in reviewing and approving our Chief Executive
Officers recommendations regarding the achievements of
NEOs other than himself against individual objectives, and in
evaluating our Chief Executive Officers performance on his
individual objectives.
In assessing individual performance for fiscal 2010, our
non-employee directors specifically recognized Mr. Smith
for his leadership in our achievement of corporate financial and
strategic objectives (detailed above), his role in rekindling
growth initiatives and CEO succession planning. In assessing the
individual performance of the other NEOs for fiscal 2010, the
compensation committee specifically recognized Mr. Damrow
for collaborating with Credit and Marketing to develop
strategies aimed at acquiring new customers;
Mr. Chidambaram for developing a long-term plan to improve
the creative process, providing speed to market and flexibility;
Mr. Frigo for delivering key business initiatives on time,
on budget and according to specification; and Mr. Wagener
for implementing a new financing plan. As a result, the fiscal
2010 payouts with respect to individual performance objectives,
expressed as a percentage of the target objective for that
component of the short-term incentive plan, were 188% for
Mr. Smith, 183% for Mr. Damrow, 179% for
Mr. Chidambaram, 170% for Mr. Frigo, and 184% for
Mr. Wagener.
134
Payouts under the short-term incentive plan were calculated for
each component of the plan using the following formulas:
|
|
|
|
|
Revenue Payout = Payout factor for revenues achieved X
target revenue weighting X salary
|
|
|
|
Adjusted EBITDA Payout = Payout factor for Adjusted EBITDA
achieved X target Adjusted EBITDA weighting X
salary
|
|
|
|
Individual Objectives Payout for each objective = Percent of
individual objectives achieved X target weighting for
individual objectives X salary
|
The payouts for each objective were then added together to
arrive at the total short-term incentive plan payout for each
NEO.
|
|
|
|
|
|
|
|
|
Revenue Payout
|
|
|
+
|
|
Adjusted EBITDA Payout
|
|
|
+
|
|
Sum of Payouts for Individual Objectives
|
|
|
|
|
|
|
|
|
|
|
Total Payout
|
For example, the total 2010 short-term incentive payout for our
Chief Executive Officer was calculated as follows:
|
|
|
|
|
|
|
|
|
|
|
Revenue Payout
|
|
=
|
|
200% X 28% X $323,077
|
|
=
|
|
$
|
180,923
|
|
Adjusted EBITDA Payout
|
|
=
|
|
200% X 28% X $323,077
|
|
=
|
|
$
|
180,923
|
|
Individual Objectives Payout
|
|
=
|
|
188% X 24% X $323,077
|
|
=
|
|
$
|
145,772
|
|
|
|
|
|
Total Payout
|
|
=
|
|
$
|
507,618
|
|
The table below details the actual 2010 short-term incentive
plan payouts for each of the NEOs by incentive plan objective:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
Adjusted
|
|
|
Individual
|
|
|
|
|
NEOs
|
|
($)
|
|
|
EBITDA ($)
|
|
|
Objectives ($)
|
|
|
Total ($)
|
|
|
Brian A. Smith
Chairman and Chief Executive Officer
|
|
|
180,923
|
|
|
|
180,923
|
|
|
|
145,772
|
|
|
|
507,618
|
|
John F. Damrow
President
|
|
|
93,423
|
|
|
|
93,423
|
|
|
|
73,404
|
|
|
|
260,250
|
|
Chidambaram A. Chidambaram
EVP and Chief Marketing Officer
|
|
|
98,512
|
|
|
|
98,512
|
|
|
|
75,572
|
|
|
|
272,596
|
|
Raymond G. Frigo
EVP and Chief Operating Officer
|
|
|
93,585
|
|
|
|
93,585
|
|
|
|
68,183
|
|
|
|
255,353
|
|
Mark P. Wagener
EVP and Chief Financial Officer
|
|
|
90,731
|
|
|
|
90,731
|
|
|
|
71,548
|
|
|
|
253,010
|
|
Supplemental
Executive Incentive Plan for Fiscal 2010
For fiscal 2010, our non-employee directors approved a
Supplemental Executive Incentive Plan, which we refer to in this
prospectus as the Supplemental EIP, for the Chief Executive
Officer and the executives who report directly to him, including
the NEOs. These executives are most directly responsible for
helping us achieve and sustain high levels of profitable growth
and for making investment decisions that contribute to top and
bottom line growth in a manner that is consistent with our
values.
The purpose of the Supplemental EIP was to provide additional
incentives for executives to lead the achievement of revenue
growth exceeding the maximum short-term incentive plan revenue
growth objective, which itself represented a significant
increase over 2009 actual revenue results.
135
Additionally, there was to be no payout under this Supplemental
EIP unless we exceeded the maximum short-term incentive plan
Adjusted EBITDA objective. This Adjusted EBITDA gating factor
was designed to ensure that executives made prudent investment
decisions that contributed to both top and bottom line growth.
A payment pool was created from revenue in excess of the maximum
revenue objective ($508 million) in the 2010 short-term
incentive plan. For every $1 million of revenue over the
maximum, supplemental incentive payouts in specified amounts
were to be made to the NEOs, as summarized in the following
table. Because our fiscal 2010 revenue of $521.3 million
exceeded the $508 million maximum, and because we exceeded
our maximum Adjusted EBITDA objective for fiscal 2010, each NEO
received a payout under the Supplemental EIP as summarized in
the following table.
|
|
|
|
|
|
|
|
|
|
|
Incentive Payout
|
|
|
|
|
|
|
for each
|
|
|
|
|
|
|
Incremental $1
|
|
|
|
|
|
|
million of Revenue
|
|
|
|
|
|
|
over the Maximum
|
|
|
|
|
|
|
2010 Short-Term
|
|
|
Actual Payouts
|
|
|
|
Incentive Plan
|
|
|
Under the
|
|
|
|
Revenue Objective
|
|
|
Supplemental EIP
|
|
Named Executive Officer
|
|
($)
|
|
|
($)
|
|
|
Brian A. Smith
Chairman and Chief Executive Officer
|
|
|
37,500
|
|
|
|
487,500
|
|
John F. Damrow
President
|
|
|
18,750
|
|
|
|
243,750
|
|
Chidambaram A. Chidambaram
EVP and Chief Marketing Officer
|
|
|
18,750
|
|
|
|
243,750
|
|
Raymond G. Frigo
EVP and Chief Operating Officer
|
|
|
18,750
|
|
|
|
243,750
|
|
Mark P. Wagener
EVP and Chief Financial Officer
|
|
|
18,750
|
|
|
|
243,750
|
|
2011 Short-Term
Incentive Plan
The structure of the 2011 short-term incentive plan is very
similar to the structure of the 2010 short-term incentive plan.
The 2011 short-term incentive plan includes objectives within
the following two major components:
|
|
|
|
|
Corporate financial objectives, established based on the annual
financial plan and weighted equally:
|
|
|
|
|
|
Revenue; and
|
|
|
|
Adjusted EBITDA.
|
|
|
|
|
|
Individual objectives for the 2011 short-term incentive plan
were established using the same process described above for the
2010 short-term incentive plan.
|
|
|
|
Individual objectives for NEOs in fiscal 2011 were established
to support our strategic objectives, which again include
increasing market share, making the Fingerhut brand more
web-centric, and building the Gettington.com brand.
|
For fiscal 2011, the compensation committee increased the target
incentive opportunity for our President to 60% of base salary
(from 50%) for achieving target levels of performance against
all incentive objectives, and correspondingly increased his
threshold and maximum payout opportunities. The compensation
committee determined that this increase was necessary
(1) to provide a competitive total compensation opportunity
for our President, (2) to
136
more appropriately position his short-term variable compensation
relative to the short-term variable compensation of the other
NEOs and to executives who report directly to him and
(3) in recognition of the more significant responsibilities
of the President in comparison to other executives. Threshold,
target and maximum incentive opportunities for the other NEOs
for fiscal 2011 were unchanged from fiscal 2010.
The following table shows the weightings for each objective and
the potential payouts as a percentage of base salary under the
2011 short-term incentive plan for various levels of achievement
in relation to the targets under the 2011 short-term incentive
plan.
2011
Short-Term Incentive Plan Objectives and
Weightings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive Position
|
|
Objectives
|
|
Threshold (1)
|
|
|
Target (1)
|
|
|
Maximum (1)
|
|
|
Chief Executive Officer
|
|
Revenue
|
|
|
5.6
|
%
|
|
|
28
|
%
|
|
|
56
|
%
|
|
|
Adjusted EBITDA
|
|
|
5.6
|
%
|
|
|
28
|
%
|
|
|
56
|
%
|
|
|
Individual Objectives
|
|
|
4.8
|
%
|
|
|
24
|
%
|
|
|
48
|
%
|
|
|
Totals
|
|
|
16
|
%
|
|
|
80
|
%
|
|
|
160
|
%
|
President
|
|
Revenue
|
|
|
4.2
|
%
|
|
|
21
|
%
|
|
|
42
|
%
|
|
|
Adjusted EBITDA
|
|
|
4.2
|
%
|
|
|
21
|
%
|
|
|
42
|
%
|
|
|
Individual Objectives
|
|
|
3.6
|
%
|
|
|
18
|
%
|
|
|
36
|
%
|
|
|
Totals
|
|
|
12
|
%
|
|
|
60
|
%
|
|
|
120
|
%
|
Other NEOs
|
|
Revenue
|
|
|
3.5
|
%
|
|
|
17.5
|
%
|
|
|
35
|
%
|
|
|
Adjusted EBITDA
|
|
|
3.5
|
%
|
|
|
17.5
|
%
|
|
|
35
|
%
|
|
|
Individual Objectives
|
|
|
3
|
%
|
|
|
15
|
%
|
|
|
30
|
%
|
|
|
Totals
|
|
|
10
|
%
|
|
|
50
|
%
|
|
|
100
|
%
|
|
|
|
(1)
|
|
Expressed as a percentage of actual
base salary.
|
The payout schedule for the fiscal 2011 corporate financial
objectives is similar in structure to the 2010 short-term
incentive plan payout schedule, with fiscal 2011 revenue and
Adjusted EBITDA threshold, target and maximum numerical goals
set at higher levels than the threshold, target and maximum
numerical goals used in fiscal 2010 and higher than the actual
revenue and Adjusted EBITDA results for fiscal 2010.
For fiscal 2011, the relative percentages of base salary and
annual short-term incentive to be provided to our Chief
Executive Officer would be as follows, if payouts were earned
under the 2011 short-term incentive plan at target and at
maximum payout levels:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual Short-Term
|
|
Total Annual Cash
|
Assumptions
|
|
Base Salary
|
|
Incentive
|
|
Compensation
|
|
Short-Term Incentive Payout at Target
|
|
|
56
|
%
|
|
|
44
|
%
|
|
|
100
|
%
|
Short-Term Incentive Payout at Maximum
|
|
|
38
|
%
|
|
|
62
|
%
|
|
|
100
|
%
|
Long-Term
Equity-Based Compensation
Long-term compensation is also an important part of the total
compensation for our NEOs. Our current long-term compensation
takes the form of equity grants with time-based vesting.
Under our 2008 Plan, the compensation committee may grant equity
in the form of stock options, restricted stock, restricted stock
units, stock appreciation rights and other stock-based awards or
other cash-based awards under terms and conditions specified by
the compensation
137
committee in an award agreement. Awards may be granted with
value and payment contingent upon time-based vesting or upon the
achievement of performance goals that relate to periods of
performance in excess of one calendar year. The compensation
committee determines the terms and conditions of awards at the
date of grant. Payments earned may be decreased or increased in
the sole discretion of the compensation committee based on such
factors as it deems appropriate. The compensation committee has
not used this discretion to date.
We have typically granted equity, with time-based vesting, upon
hire and for promotion to director-level employees and above.
Equity grants to new hires, including NEO new hires, are
generally communicated as part of the offer with language
specifically stating that the grant is subject to approval by
our board of directors at a regularly-scheduled meeting
following the employees hire date. Equity grants are based
on the value of our stock on the grant date. From time to time,
our board of directors has also approved equity grants to NEOs
and other employees at times other than upon hiring. The
criteria for awarding equity grants at times other than upon
hiring include use of grants as a reward for performance and as
a retention tool for key employees.
Equity grants to NEOs generally provide for ratable vesting over
a period of years, with accelerated vesting occurring in the
event of termination of employment due to death or disability
and potentially in connection with a change in control of our
company, as described more fully below under the caption
Potential Payments upon Termination or Change in
Control.
2010 Equity
Grants to NEOs
In July 2010, John F. Damrow was offered and accepted a
non-qualified stock option grant of 339,500 shares with an
exercise price of $0.001 per share in exchange for a
non-qualified stock option grant of 339,500 shares granted
to him in April 2003 with an exercise price of $0.80 per share
and an expiration date of April 9, 2013. Although the 2003
grant was fully vested and exercisable at the time of the
exchange, the replacement 2010 grant will vest in two equal
installments on the first two anniversaries of the grant date,
and will expire on July 22, 2020. The Compensation
Committee decided to offer this exchange opportunity to
Mr. Damrow in recognition of his contributions to the
success of the company.
In November 2010, Mr. Damrow was awarded
5,000,000 shares of restricted stock in recognition of his
promotion to President. The award vests in equal installments
over four years, with the initial vesting of 25% of the total
award on the first anniversary of the award date.
Other
Executive Benefits and Perquisites
We provide the following benefits to our NEOs:
|
|
|
|
|
Health, Dental and Vision Insurance;
|
|
|
|
Paid Time Off and Holidays;
|
|
|
|
Company-paid disability benefits;
|
|
|
|
Company-paid Life and Accidental Death & Dismemberment
Insurance;
|
|
|
|
Voluntary Life and Accidental Death & Dismemberment
Insurance; and
|
|
|
|
401(k) Retirement Savings Plan with discretionary company
matching contributions.
|
Mr. Chidambaram was hired in 2009 and lived outside of
Minnesota at the time he agreed to join us. We agreed to pay
relocation expenses to him as part of his employment offer.
Mr. Chidabarams relocation was completed in 2010, and
the relocation expenses paid to him
138
in 2010 and related tax
gross-up
payments are included in the All Other Compensation
column in the Summary Compensation Table below.
We do not generally provide any other benefits or perquisites to
our NEOs.
Employment
Agreements and Severance and Change in Control
Benefits
We entered into an employment agreement with our Chief Executive
Officer for the period April 25, 2007 through
April 24, 2010. This agreement was implemented as a
retention tool in recognition of our Chief Executive
Officers crucial role in leading us to achieve our growth
strategies and of the value he brought to the organization in
light of the dynamic and uncertain environment during the period
covered by the agreement. Our Chief Executive Officers
employment agreement was not extended or replaced, consistent
with our current policy that all of our employees, including
executive officers, are employed at will without employment
agreements, severance agreements, or payment arrangements that
would be triggered by a change in control of our company. This
policy reflects our principles regarding pay for performance and
consistency of benefits across the employee population.
As discussed in more detail below under Potential Payments
upon Termination or Change in Control, our equity-based
compensation plans and award agreements generally provide for
accelerated vesting and exercisability of awards if an executive
officers employment terminates due to death or disability,
or if an executive officers employment is terminated
within 18 months after a change in control either by us
without cause or by the executive officer for good reason. This
double trigger acceleration of vesting and exercisability,
requiring both a change in control and a termination of
employment, assumes that the equity awards continue in effect or
are assumed or replaced with new awards by the acquiring or
surviving entity in connection with the change in control; if
they are not, then the awards vest and become exercisable in
full upon the change in control. Restricted stock awards to our
Chief Executive Officer do, however, vest in full upon a change
in control, which is referred to as a single trigger.
We believe a double trigger structure is generally appropriate
because it avoids an unintended windfall to executives who
retain their employment and their equity awards in the event of
a friendly change in control, while still providing them
appropriate incentives to cooperate in negotiating any change in
control in which they believe they could lose their jobs. The
choice of a single trigger structure for our Chief Executive
Officer reflects (1) the greater likelihood that he would
not retain his position following a change in control and
(2) the need to insure that he is both effectively incented
to obtain the highest value possible in such a transaction and
subject to a strong retention device during the uncertain times
preceding the transaction.
Section 162(m)
Compliance
Section 162(m) of the Internal Revenue Code disallows a tax
deduction for any publicly held corporation with respect to
individual compensation exceeding $1 million in any taxable
year paid to the corporations chief executive officer and
each of the corporations three other most highly
compensated executive officers, other than its chief financial
officer, unless the compensation is performance-based, as
defined under Section 162(m). As we are not currently
publicly traded, the compensation committee has not previously
taken the deductibility limit imposed by Section 162(m)
into consideration in setting compensation. At such time in the
future as the requirements of Section 162(m) become
applicable to us and the compensation of our NEOs approaches the
$1 million limit, we expect that the compensation committee
will consider the effects of Section 162(m) on the
compensation paid to our NEOs and the degree to which it would
be advisable to structure the amount and form of compensation to
our NEOs so as to maximize our ability to deduct it.
139
Summary
Compensation Table
The following table provides information concerning the
compensation for our NEOs for fiscal year 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
|
|
|
Option
|
|
|
Incentive Plan
|
|
|
All Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards
|
|
|
Awards
|
|
|
Compensation
|
|
|
Compensation
|
|
|
|
|
Name and Principal Position
|
|
Year
|
|
|
Salary ($)
|
|
|
($)(1)
|
|
|
($)(2)
|
|
|
($)(3)
|
|
|
($)(4)
|
|
|
Total ($)
|
|
|
Brian A. Smith,
Chairman and Chief Executive Officer
|
|
|
2010
|
|
|
|
323,077
|
|
|
|
|
|
|
|
|
|
|
|
995,118
|
|
|
|
960
|
|
|
|
1,319,155
|
|
John F. Damrow,
President
|
|
|
2010
|
|
|
|
266,924
|
|
|
|
55,000
|
|
|
|
272
|
|
|
|
504,000
|
|
|
|
2,768
|
|
|
|
828,964
|
|
Chidambaram A. Chidambaram,
EVP and Chief Marketing Officer
|
|
|
2010
|
|
|
|
281,462
|
|
|
|
|
|
|
|
|
|
|
|
516,346
|
|
|
|
418,703
|
|
|
|
1,216,511
|
|
Raymond G. Frigo,
EVP and Chief Operating Officer
|
|
|
2010
|
|
|
|
267,385
|
|
|
|
|
|
|
|
|
|
|
|
499,103
|
|
|
|
832
|
|
|
|
767,320
|
|
Mark P. Wagener,
EVP and Chief Financial Officer
|
|
|
2010
|
|
|
|
259,231
|
|
|
|
|
|
|
|
|
|
|
|
496,760
|
|
|
|
2,787
|
|
|
|
758,778
|
|
|
|
|
(1)
|
|
The amount shown for stock awards
represents the grant date fair value of the restricted stock
award granted during the year computed in accordance with FASB
ASC Topic 718 by multiplying the number of shares granted by the
fair market value of our common stock as of the grant date. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations Critical
Accounting Policies and Use of Estimates for discussion
regarding the determination of the fair market value of our
common stock.
|
|
(2)
|
|
The amount shown for option awards
represents the incremental fair value of an exchange option
granted to Mr. Damrow in July 2010 to replace an option
granted to him in April 2003. The incremental fair value
represents the difference between the grant date fair value of
the exchange option and the fair value of the earlier option
determined as of the grant date of the exchange option, such
values computed in accordance with FASB ASC Topic 718 utilizing
the assumptions discussed in Note 6 to our consolidated
financial statements for the fiscal year ended January 28,
2011 and disregarding the effects of any estimate of forfeitures
related to service-based vesting.
|
|
(3)
|
|
The Non-Equity Incentive Plan
Compensation column presents cash incentives earned during
fiscal 2010 under our short-term incentive plan and under our
2010 supplemental executive incentive plan. Payouts earned under
both plans were made within 75 days of the close of the
2010 fiscal year.
|
|
(4)
|
|
Amounts shown in the All
Other Compensation column for fiscal 2010 include company
contributions to the 401(k) Retirement Savings Plan, the value
of long-term disability insurance premiums paid on behalf of our
NEOs for insurance benefits between $75,000 and $300,000 in
annual earnings, the reimbursement of relocation expenses and
tax gross-up
payments in connection with the relocation expenses, as shown in
the following table. The relocation expenses for
Mr. Chidambaram represent costs related to house hunting,
temporary living, movement of household goods and closing costs
related to his new home (totaling approximately $116,721); costs
related to the sale of his former home (approximately $72,202);
and a payment to Mr. Chidambaram related to the loss on the
sale of his former home (approximately $95,000).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Disability
|
|
|
|
|
|
Gross-up on
|
|
|
|
|
|
|
401(k) Plan
|
|
|
Insurance
|
|
|
Relocation
|
|
|
Relocation
|
|
|
|
|
Name
|
|
Contributions ($)
|
|
|
Imputed Income ($)
|
|
|
Expenses ($)
|
|
|
Expenses ($)
|
|
|
Total ($)
|
|
|
Brian A. Smith
|
|
|
|
|
|
|
960
|
|
|
|
|
|
|
|
|
|
|
|
960
|
|
John F. Damrow
|
|
|
1,808
|
|
|
|
960
|
|
|
|
|
|
|
|
|
|
|
|
2,768
|
|
Chidambaram A. Chidambaram
|
|
|
1,048
|
|
|
|
879
|
|
|
|
283,923
|
|
|
|
132,853
|
|
|
|
418,703
|
|
Raymond G. Frigo
|
|
|
|
|
|
|
832
|
|
|
|
|
|
|
|
|
|
|
|
832
|
|
Mark P. Wagener
|
|
|
2,035
|
|
|
|
752
|
|
|
|
|
|
|
|
|
|
|
|
2,787
|
|
140
Grants of
Plan-Based Awards in Fiscal 2010
The table below presents the plan-based awards that our NEOs
were granted in fiscal 2010. The material terms of equity awards
made during the fiscal year are described in the
Compensation Discussion and Analysis section above.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Other Stock
|
|
|
All Other Option
|
|
|
Exercise of
|
|
|
Grant Date
|
|
|
|
|
|
|
Estimated Possible Payouts Under
|
|
|
Awards: Number
|
|
|
Awards: Number
|
|
|
Base Price
|
|
|
Fair Value
|
|
|
|
|
|
|
Non-Equity Incentive Plan Awards
|
|
|
of Shares of
|
|
|
of Securities
|
|
|
of Option
|
|
|
of Stock
|
|
|
|
|
|
|
Threshold
|
|
|
Target
|
|
|
Maximum
|
|
|
Stock or Units
|
|
|
Underlying
|
|
|
Awards
|
|
|
and Option
|
|
Name
|
|
Grant Date
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
(#)
|
|
|
Options (#)
|
|
|
($/Sh)
|
|
|
Awards ($)
|
|
|
Brian A. Smith
|
|
|
(1
|
)
|
|
|
51,692
|
|
|
|
258,462
|
|
|
|
516,923
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
37,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John F. Damrow
|
|
|
(1
|
)
|
|
|
26,692
|
|
|
|
133,462
|
|
|
|
266,924
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
18,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7/22/2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
339,500
|
(3)
|
|
|
0.004
|
|
|
|
272
|
(3)
|
|
|
|
11/15/2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,000,000
|
(4)
|
|
|
|
|
|
|
|
|
|
|
55,000
|
(4)
|
Chidambaram A. Chidambaram
|
|
|
(1
|
)
|
|
|
28,146
|
|
|
|
140,731
|
|
|
|
281,462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
18,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Raymond G. Frigo
|
|
|
(1
|
)
|
|
|
26,738
|
|
|
|
133,692
|
|
|
|
267,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
18,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mark P. Wagener
|
|
|
(1
|
)
|
|
|
25,923
|
|
|
|
129,616
|
|
|
|
259,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
18,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The amounts associated with these
awards represent possible payouts under our 2010 short-term
incentive plan. The actual payouts for fiscal 2010 under this
plan are included in the Summary Compensation Table in the
column titled Non-Equity Incentive Plan
Compensation. Additional information regarding the design
of the 2010 short-term incentive plan, including a description
of the corporate and individual performance objectives
applicable to fiscal 2010 awards and actual payouts for fiscal
2010, is provided above in Compensation Discussion and
AnalysisShort-Term Incentive Plans2010 Short-Term
Incentive Plan.
|
|
(2)
|
|
Each amount associated with these
awards represents the threshold payout that could have been
earned during fiscal 2010 under our 2010 supplemental executive
incentive plan. That plan provided that each NEO would receive a
payment equal to a specified percentage of the amount by which
our fiscal 2010 revenue exceeded $508 million. No estimated
target payout amounts under that plan were determinable at the
beginning of fiscal 2010, and payouts under the plan were not
limited to any maximum amount. The actual payouts for fiscal
2010 under this plan are included in the Summary Compensation
Table in the column titled Non-Equity Incentive Plan
Compensation. Additional information regarding the design
of the 2010 supplemental executive incentive plan, including a
description of the revenue objectives applicable to fiscal 2010
awards and actual payouts for fiscal 2010, is provided above in
Compensation Discussion and AnalysisShort-Term
Incentive PlansSupplemental Executive Incentive
Plan.
|
|
(3)
|
|
Mr. Damrow received this
option award under our 2008 Plan in exchange for an option award
issued to him in April 2003 with an exercise price of $0.80 per
share and an expiration date of April 9, 2013. The
replacement 2010 grant will vest in two equal installments on
the first two anniversaries of the grant date, and will expire
on July 22, 2020. The effect of a change in control on this
award is described below under the caption Potential
Payments Upon Termination or Change in Control. The
incremental fair value of this option award was computed in
accordance with FASB ASC Topic 718, as described in Note 2
to the Summary Compensation Table.
|
|
(4)
|
|
Mr. Damrow received this
restricted stock award under our 2008 Plan. This award vests and
becomes non-forfeitable as to 25% of the shares subject to the
award on each of the first four anniversaries of the grant date,
assuming the recipients continued employment. Termination
of employment results in the forfeiture of unvested shares,
unless the termination is due to death or disability, in which
case vesting is accelerated in full. The effect of a change in
control on this award is described below under the caption
Potential Payments upon Termination or Change in
Control. The grant date fair value of this award was
computed in accordance with FASB ASC Topic 718, as described in
Note 1 to the Summary Compensation Table.
|
141
Outstanding
Equity Awards at 2010 Fiscal Year End
The following table provides information on each NEOs
outstanding equity awards as of January 28, 2011, the last
day of our most recent fiscal year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
Stock Awards
|
|
|
|
|
|
|
|
|
|
|
|
|
Market
|
|
|
Number of
|
|
Number of
|
|
|
|
|
|
Number of
|
|
Value
|
|
|
Securities
|
|
Securities
|
|
|
|
|
|
Shares or
|
|
of Shares or
|
|
|
Underlying
|
|
Underlying
|
|
|
|
|
|
Units of
|
|
Units of
|
|
|
Unexercised
|
|
Unexercised
|
|
Option
|
|
Option
|
|
Stock
|
|
Stock
|
|
|
Options
|
|
Options
|
|
Exercise
|
|
Expiration
|
|
That Have
|
|
That Have Not
|
Name
|
|
(#) Exercisable
|
|
(#) Unexercisable
|
|
Price ($)
|
|
Date
|
|
Not Vested (#)
|
|
Vested ($)(1)
|
|
Brian A. Smith
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,130,000
|
(2)
|
|
|
741,370
|
|
John F. Damrow
|
|
|
1,000,000
|
(3)
|
|
|
|
|
|
$
|
0.02
|
|
|
|
6/15/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
250,000
|
(4)
|
|
|
|
|
|
$
|
0.02
|
|
|
|
4/13/2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
339,500
|
(5)
|
|
$
|
0.004
|
|
|
|
7/22/2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,523,816
|
(6)
|
|
|
515,667
|
|
Chidambaram A. Chidambaram
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,203,441
|
(7)
|
|
|
793 969
|
|
Raymond G. Frigo
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,203,441
|
(8)
|
|
|
793,969
|
|
Mark P. Wagener
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,453,442
|
(9)
|
|
|
414,219
|
|
|
|
|
(1)
|
|
The fair market value has been
determined based on the number of shares not vested as of
January 28, 2011 using the fair market value of our common
stock as of January 28, 2011 ($0.049 per share). See
Managements Discussion and Analysis of Financial
Condition and Results of Operations Critical
Accounting Policies and Use of Estimates for discussion
regarding the determination of the fair market value of our
common stock.
|
|
(2)
|
|
2,500,000 restricted shares were
granted on August 8, 2008 with 625,000 shares vesting
on each of January 29, 2009, 2010, 2011 and 2012; and
34,700,000 restricted shares were granted on August 8, 2008
with 6,940,000 shares vesting on November 21, 2008 and
on each of May 21, 2009, 2010, 2011 and 2012.
|
|
(3)
|
|
Option award became fully vested on
April 15, 2008.
|
|
(4)
|
|
Option award became fully vested on
April 13, 2009.
|
|
(5)
|
|
An option to acquire
339,500 shares was granted on July 22, 2010 with
169,750 shares vesting on each of July 22, 2011 and
2012.
|
|
(6)
|
|
10,500,000 restricted shares were
granted on August 8, 2008 with 2,100,000 shares
vesting on November 21, 2008 and on each of May 21,
2009, 2010, 2011 and 2012; and 1,765,088 restricted shares were
granted on August 1, 2009 with 441,272 shares vesting
on each of July 23, 2010, 2011, 2012 and 2013; 5,000,000
restricted shares were granted on November 15, 2010 with
1,250,000 shares vesting on each November 15, 2011,
2012, 2013 and 2014.
|
|
(7)
|
|
21,604,588 restricted shares were
granted on June 19, 2009 with 5,401,147 shares vesting
on each of June 19, 2010, 2011, 2012 and 2013.
|
|
(8)
|
|
21,604,588 restricted shares were
granted on April 7, 2009 with 5,401,147 shares vesting
on each of April 7, 2010, 2011, 2012 and 2013.
|
|
(9)
|
|
8,500,000 restricted shares were
granted on August 8, 2008 with 2,125,000 shares
vesting on each of May 21, 2009, 2010, 2011 and 2012; and
5,604,588 restricted shares were granted on August 1, 2009
with 1,401,147 shares vesting on each of July 23,
2010, 2011, 2012 and 2013.
|
142
Option Exercises
and Stock Vested During Fiscal 2010
No options were exercised by NEOs during fiscal 2010. The
following table provides information regarding the vesting of
restricted stock awards for NEOs during fiscal 2010.
|
|
|
|
|
|
|
|
|
|
|
Stock Awards
|
|
|
|
Number of Shares
|
|
|
Value Realized on
|
|
Name
|
|
Acquired on Vesting (#)
|
|
|
Vesting ($)(1)
|
|
|
Brian A. Smith
|
|
|
8,440,000
|
|
|
|
33,760
|
|
John F. Damrow
|
|
|
3,581,397
|
|
|
|
14,326
|
|
Chidabaram A. Chidambaram
|
|
|
5,401,147
|
|
|
|
21,605
|
|
Raymond G. Frigo
|
|
|
5,401,147
|
|
|
|
21,605
|
|
Mark P. Wagener
|
|
|
5,401,147
|
|
|
|
34,730
|
|
|
|
|
(1)
|
|
Represents the fair market value of
the shares on the date they vested during fiscal 2010, ranging
from $0.004 to $0.011 per share. See Managements
Discussion and Analysis of Financial Condition and Results of
Operations Critical Accounting Policies and Use of
Estimates for discussion regarding the determination of
the fair market value of our common stock.
|
Pension Benefits
and Non-Qualified Deferred Compensation for Fiscal
2010
We do not provide a defined benefit pension plan or a
non-qualified deferred compensation plan for our NEOs.
Potential
Payments upon Termination or Change in Control
Other than the arrangements involving equity awards described
below, we are not currently a party to any agreement, plan or
arrangement providing for payments or benefits to NEOs upon
termination of employment or in connection with a change in
control of our company. An employment agreement with our Chief
Executive Officer which expired on April 24, 2010 had
provided for the payment of severance benefits if his employment
had been terminated by us without cause or by him for good
reason during the term of the employment agreement. The
severance benefits generally consisted of payment over a
twelve-month period of an amount equal to his base salary and
target annual incentive compensation as in effect immediately
prior to his termination, and reimbursement for the cost of
continuation health, dental and life insurance coverage for up
to 18 months.
Under our 2008 Plan and the restricted stock and option award
agreements under that plan, if an NEOs employment ends
because of death or disability, all outstanding restricted stock
and options vest in full, and the options remain exercisable
until the earlier of (1) one year after the date employment
ends or (2) the expiration date of the option. If
employment ends for a reason other than death or disability or
termination by us for cause, an option will remain exercisable
until the earlier of (1) 90 days after the date
employment ends or (2) the expiration date of the option,
and may be exercised only to the extent it was exercisable
before employment ended. If employment is terminated by us for
cause, the unexercised portion of any option will immediately
expire. Restricted stock awards to our Chief Executive Officer
will also vest in full if his employment is terminated by us
without cause or by him for good reason.
Restricted stock awards to our Chief Executive Officer become
fully vested upon the occurrence of a change in control of our
company, as defined below. With respect to our other NEOs, if
outstanding restricted stock awards are continued, assumed or
replaced with new awards in connection with a change in control
by an acquiring or surviving entity, then vesting of the awards
will be accelerated only if the NEOs employment is
terminated by the acquiring or surviving entity without cause or
by the NEO for good reason within 18 months of the change
in control. If outstanding restricted stock awards will neither
be continued, assumed
143
nor replaced in connection with a change in control, the awards
will vest in full in connection with the change in control.
Restricted stock awards to individuals who report directly to
our Chief Executive Officer also provide for full vesting of the
awards if a qualifying change in control, which is
generally defined as a change in control in which a majority of
our outstanding Series A and Series B Preferred Stock
or any conversion shares are exchanged for consideration with a
per share value above a specified amount, occurs prior to the
occurrence of a qualified public offering of our
common stock as defined in our certificate of incorporation.
Mr. Damrow is the only NEO who holds outstanding and
unvested option awards. Option awards under the 2008 Plan are
generally subject to the same treatment in connection with a
change in control as described for restricted stock awards to
NEOs other than our Chief Executive Officer, except that if
vesting and exercisability is accelerated because the awards are
not continued, assumed or replaced with new awards, the options
will be fully vested and exercisable so as to provide the
optionee with the opportunity to participate in the change in
control transaction as a stockholder, and will terminate upon
consummation of the change in control.
Under the 2008 Plan and existing equity award agreements, a
change in control is generally deemed to have occurred if
(1) any person becomes the beneficial owner of 50% or more
of the voting power of our equity securities; (2) a
majority of our board of directors no longer consists of
individuals for whose election proxies have been solicited by
our board of directors or who were appointed by our board of
directors to fill a vacancy caused by death or resignation or a
newly-created directorship; (3) a merger or consolidation
involving the company, or a sale of all or substantially all of
the companys assets, is consummated (unless 50% or more of
the voting power of the then outstanding shares of voting stock
of the buyer or surviving party in the transaction is
beneficially owned in substantially the same proportions by
persons who were beneficial owners of our voting securities
before the transaction); or (4) our stockholders approve a
definitive plan to liquidate or dissolve our company.
The 2008 Plan and existing equity award agreements generally
define cause for termination to include
(1) being charged with a felony or convicted of any
criminal misdemeanor or more serious act; (2) any
intentional
and/or
willful act of fraud or dishonesty related to or connected with
employment by us; (3) willful
and/or
continued failure, neglect or refusal to perform employment
duties; (4) a material violation of our policies or code of
conduct; or (5) the willful
and/or
material breach of any agreement with us such as an employment
or noncompetition agreement.
Existing equity award agreements generally define good
reason to terminate employment to include (1) a
material diminution in an employees responsibilities or
duties; (2) the relocation of an employees principal
office, without the employees consent, to a location more
than one hundred miles from the location of the employees
prior principal office; or (3) any reduction in an
employees base compensation in the absence of a general
reduction affecting similarly situated employees.
The following table shows the value of restricted stock awards
and, in Mr. Damrows case, an outstanding stock option
award, whose vesting would have been accelerated under the 2008
Plan and the applicable award agreements if the NEOs
employment had terminated due to death or disability on
January 28, 2011, the last business day of our most recent
fiscal year, or if the vesting of such awards had been
accelerated on that date in connection with a change in control
of our company. In addition to the amounts shown in the table,
each NEO would receive payments for amounts of base salary and
vacation time accrued through the date of
144
termination and payment for any reimbursable business expenses
incurred prior to the date of termination.
|
|
|
|
|
|
|
Value Realized on Accelerated
|
|
|
|
Vesting ($)
|
|
Name
|
|
(1)(2)
|
|
|
Brian A. Smith
|
|
|
741,370
|
|
John F. Damrow
|
|
|
531,963
|
(3)
|
Chidambaram A. Chidambaram
|
|
|
793,969
|
|
Raymond G. Frigo
|
|
|
793,969
|
|
Mark P. Wagener
|
|
|
414,219
|
|
|
|
|
(1)
|
|
The amount shown for each NEO other
than Mr. Damrow represents the value of restricted stock
awards whose vesting would have been accelerated, and in each
case is equal to (1) the number of shares of restricted
stock that would vest as a direct result of the employment
termination due to death or disability or in connection with the
change in control, multiplied by (2) the fair market value
of a share of our common stock as of January 28, 2011
($0.049 per share). See Managements Discussion and
Analysis of Financial Condition and Results of
Operations Critical Accounting Policies and Use of
Estimates for discussion regarding the determination of
the fair market value of our common stock.
|
|
(2)
|
|
Accelerated vesting of an
NEOs restricted stock or option awards would occur in full
upon:
|
|
|
|
|
|
the death or disability of the NEO;
|
|
|
|
upon a change in control, in the
case of Mr. Smith, or, in the case of the other NEOs, if
the awards are not continued, assumed or replaced; or
|
|
|
|
if the awards to the other NEOs are
continued, assumed or replaced in connection with a change in
control, upon termination of the NEOs employment by the
company without cause or by the NEO for good reason within
18 months of the change in control.
|
|
|
|
(3)
|
|
The amount shown for
Mr. Damrow includes $515,667 representing the value of
restricted stock awards that would have been accelerated as
described in footnote 1, and $16,296 representing the value of a
stock option award whose vesting would have been accelerated.
The value of the option is calculated based on the difference
between the fair market value of our common stock on
January 28, 2011 (as discussed in footnote 1) and the
exercise price of that option.
|
Equity-Based
Compensation Plans
2011 Long-Term
Incentive Plan
Prior to the completion of this offering, we expect to adopt our
2011 Long-term Incentive Plan, which we refer to as our 2011
Plan. The purposes of the 2011 Plan are to attract and retain
the best available personnel, to provide them with additional
incentives and to align their interests with those of our
stockholders. The material terms of the 2011 Plan are summarized
below.
Share Reserve. Upon adoption of the 2011
Plan, shares
of our common stock will be reserved for issuance pursuant to
the plan. Shares that remain available for future awards under
our 2008 Plan on the effective date of the 2011 Plan will also
be available for issuance under the 2011 Plan. Shares subject to
awards under the 2011 Plan or the 2008 Plan that are forfeited,
expire, are settled for cash or otherwise do not result in the
issuance of all shares subject to the awards will, to the extent
of such forfeiture, expiration, cash settlement or non-issuance,
again become available for grant under the 2011 Plan. After the
effective date of the 2011 Plan, no further awards may be made
under the 2008 Plan.
Administration of Plan. The compensation
committee will administer the 2011 Plan. Subject to the terms of
the 2011 Plan, the compensation committee will have the
authority to, among other things, interpret the 2011 Plan and
determine who will be granted awards under the 2011 Plan, the
types of awards granted and the terms and conditions of the
awards, including the number of shares covered by awards, the
exercise price of awards and the vesting schedule or other
restrictions applicable to awards. The compensation committee
also
145
will have the power to make any determinations and take any
action necessary or desirable for the administration of the 2011
Plan.
To the extent permitted by law and stock exchange rules, the
2011 Plan permits the compensation committee to delegate its
authority under the 2011 Plan to one or more of its members or,
with respect to awards made to individuals who are neither
non-employee directors nor executive officers of our company, to
one or more of our executive officers.
Eligibility. Our employees, non-employee
directors and consultants and advisors who provide services to
us are eligible to receive awards under the 2011 Plan. Incentive
stock options may be granted only to our employees.
Awards. The 2011 Plan allows us to grant stock
options, stock appreciation rights, or SARs, restricted stock,
stock units, other stock-based awards and cash incentive awards.
Each award will be evidenced by an agreement with the award
recipient setting forth the terms and conditions of the award.
Awards under the 2011 Plan will have a maximum term of ten years
from the date of grant. The compensation committee may provide
that the vesting or payment of any award will be subject to the
attainment of specified performance measures in addition to the
satisfaction of any continued service requirements, and the
compensation committee will determine whether such measures have
been achieved. The compensation committee may generally amend
the terms of any award previously granted, except that no stock
option or SAR may be amended to decrease its exercise price or
in any other way be repriced without the approval of
our stockholders, and no award may be amended in a way that
materially impairs the rights of the recipient without the
recipients consent (unless the amendment is necessary to
comply with law or stock exchange rules).
|
|
|
|
|
Stock Options. Stock options permit the holder
to purchase a specified number of shares of our common stock at
a set price during a specified period of time. Options granted
under the 2011 Plan may be either incentive or non-statutory
stock options. The per share exercise price of options granted
under the 2011 Plan generally may not be less than the fair
market value of a share of our common stock on the date of grant.
|
|
|
|
|
|
Stock Appreciation Rights. SARs provide for
payment to the holder of all or a portion of the excess of the
fair market value of a specified number of shares of our common
stock on the date of exercise over a specified exercise price.
The per share exercise price of SARs granted under the 2011 Plan
generally may not be less than the fair market value of a share
of our common stock on the date of grant. Payment of an SAR may
be made in cash or shares of our common stock or a combination
of both, as determined by the compensation committee.
|
|
|
|
|
|
Restricted Stock. Restricted stock awards are
awards of shares of our common stock that are subject to
transfer restrictions and forfeiture conditions until such time
as the shares vest, as determined by the compensation committee.
Recipients of a restricted stock award will have the rights of a
stockholder except as limited by the 2011 Plan or the award
agreement.
|
|
|
|
|
|
Stock Units. Stock units provide the holder
with the right to receive, in cash or shares of our common stock
or a combination of both, the fair market value of a share of
our common stock and will be subject to such vesting and
forfeiture conditions and other restrictions as the compensation
committee determines.
|
|
|
|
|
|
Other Stock-Based Awards. The compensation
committee, in its discretion, may grant stock and other awards
that are valued by reference to
and/or
payable in whole or in part in shares of our common stock under
the 2011 Plan. The compensation committee will set the terms and
conditions of such awards.
|
146
|
|
|
|
|
Cash Incentive Awards. A cash incentive award
is to be a performance-based award, the payment of which is
contingent upon the degree to which one or more specified
performance goals have been achieved over the relevant
performance period. Payment of a cash incentive award may be
made in cash, in shares of our common stock, in other forms of
awards under the 2011 Plan, or in some combination of these
alternatives.
|
Dividends and Dividend Equivalents. Dividends
or distributions on unvested shares of restricted stock will
generally be subject to the same restrictions as the underlying
shares, but the compensation committee may permit the payment of
unrestricted regular cash dividends on restricted stock awards
that are subject only to service-based vesting conditions. Stock
unit awards may, at the discretion of the compensation
committee, provide the holder with the right to receive dividend
equivalent payments with respect to the shares subject to the
award.
Substitute Awards. The compensation committee
may grant awards under the 2011 Plan in substitution for awards
granted by another entity acquired by our company or with which
our company combines, and such awards will not count against the
2011 Plans share reserve. The terms and conditions of
these substitute awards will be comparable to the terms of the
awards replaced, and may therefore differ from the terms and
conditions otherwise set forth in the 2011 Plan.
Transferability. Awards granted under the 2011
Plan generally are not transferable except by will or the laws
of descent and distribution or to an appropriately designated
beneficiary. The compensation committee may, however, permit the
transfer of awards other than incentive stock options pursuant
to a qualified domestic relations order or by way of gift to a
family member.
Termination of Service. Unless otherwise
provided in an award agreement or in connection with a change in
control of our company, the effect of a termination of a
participants service with our company will be as described
in this paragraph. Upon termination for cause, all unvested
awards and all unexercised stock options and SARs will be
forfeited. Upon a voluntary termination of service by the
recipient, currently exercisable portions of options and SARs
will continue to be exercisable for three months. Upon an
involuntary termination without cause, any portion of an award
scheduled to become exercisable within six months will
immediately become vested and exercisable and exercisable
portions of options and SARs will continue to be exercisable for
six months. Upon termination due to death or disability, any
portion of an award scheduled to become exercisable within
twelve months will immediately become vested and exercisable and
exercisable portions of options and SARs will continue to be
exercisable for twelve months. Upon termination due to
retirement, any award will continue to vest for a period of
twelve months and exercisable portions of options and SARs will
continue to be exercisable for fifteen months after termination.
Any post-termination exercise period may not, however, extend
beyond the expiration date of any option or SAR. After giving
effect to any accelerated or continued vesting as described in
this paragraph, the unvested portion of any outstanding award
will be forfeited in connection with a termination of service.
Change in Control. Unless otherwise provided
in an award agreement, if a change in control occurs that
involves a sale of all or substantially all of our assets or a
merger, consolidation, or reorganization involving our company,
the surviving or successor entity may continue, assume or
replace some or all of the outstanding awards under the 2011
Plan. If awards are continued, assumed or replaced in connection
with such an event and if within 18 months after the event
a participant experiences an involuntary termination of service
other than for cause, or terminates his or her service for
good reason, the participants outstanding
awards will vest in full, will immediately become fully
exercisable and will remain exercisable for one year following
termination. If outstanding awards are not continued, assumed or
replaced, then all outstanding options and SARs will become
fully exercisable
147
prior to the event and will terminate at the time of the event,
and all outstanding restricted stock and stock unit awards will
fully vest immediately prior to the event. Further, if awards
are not continued, assumed or replaced, the compensation
committee may provide for the cancellation of any outstanding
award in exchange for payment to the holder of the amount of the
consideration that would have been received in the event for the
number of shares subject to the award, less the aggregate
exercise price (if any) of the award.
In the event of a change in control that does not involve a
merger, consolidation, reorganization, or sale of all or
substantially all of our companys assets, the compensation
committee, in its discretion, may provide that any outstanding
award will become fully vested and exercisable upon the change
in control or upon the termination of the participants
service without cause or for good reason within 18 months
after the change in control, or that any outstanding award will
be canceled in exchange for payment to the participant of the
amount of the consideration that would have been received in the
change in control for the number of shares subject to the award
less the aggregate exercise price (if any) of the award.
Adjustment of Awards. In the event of an
equity restructuring that affects the per share value of our
common stock, including a stock dividend, stock split, spinoff,
rights offering or recapitalization through an extraordinary
dividend, the compensation committee will make appropriate
adjustment to: (1) the number and kind of securities
reserved for issuance under the 2011 Plan, (2) the number
and kind of securities subject to outstanding awards under the
2011 Plan, (3) the exercise price of outstanding options
and SARs, and (4) any maximum limitations prescribed by the
2011 Plan as to grants of certain types of awards. The
compensation committee may also make similar adjustments in the
event of any other change in our companys capitalization,
including a merger, consolidation, reorganization or liquidation.
Amendment and Termination. Unless earlier
terminated, the 2011 Plan will automatically terminate ten years
after its effective date, which we expect will be shortly before
the completion of this offering. In addition, our board of
directors may terminate, suspend or amend the 2011 Plan at any
time, but, in general, no termination, suspension or amendment
may materially impair the rights of any participant with respect
to outstanding awards without the participants consent
(unless such action is necessary to comply with applicable laws
or stock exchange rules). Awards that are outstanding on the
2011 Plans termination date will remain in effect in
accordance with the terms of the 2011 Plan and the applicable
award agreements. Stockholder approval of any amendment of the
2011 Plan will be obtained if required by applicable law or the
rules of the Nasdaq stock market.
Registration. We intend to file with the SEC a
registration statement on
Form S-8
covering the shares of our common stock issuable under the 2011
Plan.
2008 Equity
and Incentive Plan
Our 2008 Plan provides for the grant of incentive and
nonqualified stock options, restricted stock, restricted stock
units and other stock- or cash-based awards. Awards may be made
to our employees, non-employee directors, and other consultants
who provide services to us, but only employees may receive
incentive stock option awards. A total
of shares
of our common stock were reserved for issuance under the 2008
Plan, supplemented by shares that remained available for future
awards as of the effective date of the 2008 Plan under the
Fingerhut Direct Marketing, Inc. 2003 Equity Incentive Plan,
which we refer to as our 2003 Plan, and the Fingerhut Direct
Marketing, Inc. Amended and Restated 2005 Non-Employee Directors
Equity Compensation Plan, which we refer to as our 2005 Plan. As
of ,
awards outstanding under our 2008 Plan consisted of options to
purchase a total
of shares
of our common stock with a weighted average exercise price of
$ per share,
and shares
of restricted stock,
and shares
remained available for future issuance
148
under the 2008 Plan. We do not intend to grant any additional
awards under the 2008 Plan once the 2011 Plan becomes effective,
and any shares available for issuance under the 2008 Plan on
that date will be become available for issuance under the 2011
Plan. All awards outstanding under the 2008 Plan will remain in
effect and will continue to be governed by their existing terms
after the completion of this offering.
Administration of Plan. Our compensation
committee administers the 2008 Plan and the awards granted under
it with authority and discretion comparable to that described
above in connection with the 2011 Plan.
Awards. Only stock options and restricted
stock have been awarded under the 2008 Plan, and no awards of
any other kind are expected to be made under the 2008 Plan.
|
|
|
|
|
Stock Options. Stock options granted under the
2008 Plan may only be nonqualified stock options. The per share
exercise price of options granted under the 2008 Plan generally
may not be less than the fair market value of a share of our
common stock on the date of grant. The stock options that are
outstanding under the 2008 Plan generally have a 10 year
term and are generally scheduled to vest and become exercisable
in four equal annual installments.
|
|
|
|
|
|
Restricted Stock. Restricted stock awards that
are outstanding under the 2008 Plan generally are scheduled to
vest in either four or five equal annual installments.
Recipients of such awards are entitled to vote and receive all
dividends on such restricted shares, but have no other rights of
a stockholder until such restricted shares vest.
|
Termination of Service. The effect of a
termination of service upon a participants stock option or
restricted stock award under the 2008 Plan is generally
described in the Potential Payments upon Termination or
Change in Control section above.
Transferability. Awards granted under the 2008
Plan generally are not transferable except by will or the laws
of descent and distribution.
Change in Control. The effect of a change in
control upon a participants stock option or restricted
stock award as provided in award agreements under the 2008 Plan
is generally described in the Potential Payments upon
Termination or Change in Control section above. With
respect to option award agreements that do not specify the
consequences of a change in control, the 2008 Plan provides that
unless an option is continued, assumed or replaced in connection
with a change in control, the compensation committee shall take
one of a number of specified actions to effectively enable the
optionee to participate as a stockholder in the change in
control transaction.
Adjustment of Awards. In the event of any
stock dividend, stock split, spinoff, recapitalization, merger,
consolidation, reorganization or other change in capital
structure affecting our company, the compensation committee will
make appropriate adjustment to: (1) the number and kind of
securities reserved for issuance under the 2008 Plan,
(2) the number and kind of securities subject to
outstanding awards under the 2008 Plan, (3) the exercise
price of outstanding options, and (4) any other provisions
of awards affected by the change.
Registration. We intend to file with the SEC a
registration statement on
Form S-8
covering the shares of our common stock issuable under the 2008
Plan.
2003 Equity
Incentive Plan
Our 2003 Plan provided for the grant of incentive and
nonqualified stock options, restricted stock and restricted
stock units. Awards could be made to our employees, non-employee
directors, and other consultants who provide services to us, but
only employees could receive
149
incentive stock option awards. As
of ,
the only awards outstanding under our 2003 Plan consisted of
options to purchase a total
of shares
of our common stock with a weighted average exercise price of
$ per share. When the 2008 Plan
became effective, all shares available for future issuance under
the 2003 Plan became available for issuance under the 2008 Plan,
and no additional awards have been granted under the 2003 Plan
since that time. Option awards outstanding under the 2003 Plan
will remain in effect and will continue to be governed by their
existing terms after the completion of this offering.
Administration. Our board of directors, or a
committee appointed by our board of directors, has the authority
to administer the 2003 Plan and the awards granted under it. Our
compensation committee currently administers the 2003 Plan with
authority and discretion comparable to that described above in
connection with the 2011 Plan.
Stock Options. In general, options granted
under the 2003 Plan have a maximum term of ten years from the
date of grant, and a per share exercise price equal to the fair
market value of a share of our common stock on the date of
grant. The stock options that are outstanding under the 2003
Plan generally have a 10 year term and are generally
scheduled to vest and become exercisable in four equal annual
installments.
Termination of Service. If a
participants service with our company is terminated for
cause, all unexercised stock options will be forfeited. If an
executive-level participants service terminates due to
death, disability or retirement, each outstanding stock option
will remain exercisable until the earliest of
(i) 24 months after the termination of employment,
(ii) 90 days after the completion of our
companys initial public offering, or (iii) the
expiration date of the option. If an executive-level
participants service terminates for any other reason, the
post-termination exercise periods will be the same for vested
options except that clause (ii) in the previous sentence
shall refer to a period ending 90 days after the date of
termination if our companys common stock was publicly
traded on the date of termination. Post-termination exercise
periods for other participants are generally twelve months in
the case of death or disability, and three months in other
circumstances, subject in all cases to the expiration date of
the option.
Transferability. Option awards under the 2003
Plan generally are not transferable except by will or the laws
of descent and distribution, but the compensation committee may
permit nonqualified options to be transferred by gift to a
participants family member.
Adjustment of Awards. In the event of any
stock dividend, stock split, spinoff, or subdivision or
consolidation of shares, our board of directors may make
appropriate adjustment to the number shares subject to
outstanding option awards and the exercise price of outstanding
options.
Registration. We intend to file with the SEC a
registration statement on
Form S-8
covering the shares of our common stock issuable under the 2003
Plan.
2005
Non-Employee Directors Stock Option Plan
There is only one unexercised option award currently outstanding
under our 2005 Plan, and that award is described in the
Compensation of Directors section above. When the
2008 Plan became effective, all shares available for future
issuance under the 2005 Plan became available for issuance under
the 2008 Plan, and no additional awards have been granted under
the 2005 Plan since that time. The option award outstanding
under the 2005 Plan will remain in effect and will continue to
be governed by its existing terms after the completion of this
offering.
Registration. We intend to file with the SEC a
registration statement on
Form S-8
covering the shares of our common stock issuable under the 2005
Plan.
150
PRINCIPAL AND
SELLING STOCKHOLDERS
The following table sets forth information as of June 1,
2011 regarding the beneficial ownership of our common stock
immediately prior to the completion of this offering, and as
adjusted to give effect to this offering, assuming no exercise
of the over-allotment option and full exercise of the
over-allotment option, by:
|
|
|
|
|
each person or group who is known by us to own beneficially more
than 5% of outstanding shares of any class of our stock;
|
|
|
|
each of our named executive officers;
|
|
|
|
each of our directors;
|
|
|
|
all of the executive officers and directors as a group; and
|
|
|
|
each selling stockholder.
|
Beneficial ownership for the purposes of the following table is
determined in accordance with the rules and regulations of the
SEC. These rules generally provide that a person is the
beneficial owner of securities if such person has or shares the
power to vote or direct the voting thereof, or to dispose or
direct the disposition thereof or has the right to acquire such
powers within 60 days. Common stock subject to options or
warrants that are currently exercisable or exercisable within
60 days of June 1, 2011 are deemed to be outstanding
and beneficially owned by the person holding the options or
warrants. These shares, however, are not deemed outstanding for
the purposes of computing the percentage ownership of any other
person.
Percentage of beneficial ownership prior to this offering is
based on 1,845,513,874 shares of common stock outstanding
as of June 1, 2011 on an as if converted basis, which
includes both shares of common stock currently outstanding and
shares of common stock issuable upon the conversion of all
outstanding shares of our preferred stock upon completion of
this offering, but excludes common shares to be issued in
payment of accrued and unpaid dividends on outstanding preferred
stock due upon conversion of the preferred stock, which are also
excluded from the number reported for each person prior to this
offering. Percentage of beneficial ownership after this offering
is based
on shares
of common stock to be outstanding after the completion of this
offering, including the issuance
of shares
of common stock estimated to be issued in satisfaction of
accrued and unpaid dividends payable upon conversion of our
outstanding preferred stock, based on an assumed conversion date
of ,
2011, which shares are also included in the number reported for
each person after this offering.
Except as disclosed in the footnotes to this table and subject
to applicable community property laws, we believe that each
stockholder identified in the table possesses sole voting and
investment power over all shares of common stock shown as
beneficially owned by the stockholder. Unless otherwise
indicated in the table or footnotes below, the address for each
151
beneficial owner is
c/o Bluestem
Brands, Inc., 6509 Flying Cloud Drive, Suite 101, Eden
Prairie, Minnesota 55344.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beneficial Ownership After this Offering
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
|
|
|
Percent
|
|
|
|
Beneficial Ownership
|
|
|
Shares to
|
|
|
|
|
|
(Assuming no
|
|
|
(Assuming Full
|
|
|
|
Prior to this Offering
|
|
|
be Sold in
|
|
|
|
|
|
Exercise of
|
|
|
Exercise of
|
|
Name
|
|
Number
|
|
|
Percent
|
|
|
this Offering
|
|
|
Number
|
|
|
Over-Allotment)
|
|
|
Over-Allotment)
|
|
|
Executive Officers and Directors:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brian A. Smith
|
|
|
85,295,564
|
(1)
|
|
|
5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
%
|
John F. Damrow
|
|
|
27,777,300
|
(2)
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
%
|
Chidambaram A. Chidambaram
|
|
|
21,604,588
|
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
%
|
Raymond G. Frigo
|
|
|
21,604,588
|
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
%
|
Mark P. Wagener
|
|
|
21,604,588
|
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
%
|
Michael M. Brown
|
|
|
535,299,432
|
(3)
|
|
|
29
|
%
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
%
|
John A. Giuliani
|
|
|
7,586,309
|
(4)
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
%
|
Roy A. Guthrie
|
|
|
5,292,462
|
(5)
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
%
|
Michael A. Krupka
|
|
|
265,208,692
|
(6)
|
|
|
14
|
%
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
%
|
Alice M. Richter
|
|
|
5,602,631
|
(7)
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
%
|
Scott L. Savitz
|
|
|
5,025,268
|
(17)
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
%
|
Executive officers and directors as a
group (15 persons)
|
|
|
1,017,576,422
|
(8)
|
|
|
55
|
%
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
%
|
5% and Selling Stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds affiliated with Bain Capital
|
|
|
265,208,692
|
(6)
|
|
|
14
|
%
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
%
|
Funds affiliated with Battery Ventures
|
|
|
535,299,432
|
(3)
|
|
|
29
|
%
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
%
|
Brookside Capital Partners Fund, L.P.
|
|
|
267,887,562
|
(9)
|
|
|
15
|
%
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
%
|
Petters Group Worldwide and affiliates
|
|
|
393,740,676
|
(10)
|
|
|
21
|
%
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
%
|
CCP Credit Acquisition Holdings, L.L.C.
|
|
|
23,147,772
|
(11)
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
%
|
CIGPF I Corp.
|
|
|
37,682,799
|
(12)
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
%
|
Eton Park Fund, L.P.
|
|
|
19,289,810
|
(13)
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
%
|
Goldman, Sachs & Co.
|
|
|
86,804,150
|
(14)
|
|
|
5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
%
|
Funds affiliated with Prudential Capital
|
|
|
108,865,562
|
(15)
|
|
|
6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
%
|
Funds affiliated with Fortress Investment Group LLC
|
|
|
86,804,150
|
(16)
|
|
|
5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
%
|
|
|
|
* |
|
Indicates ownership of less than 1%.
|
|
|
|
(1)
|
|
Includes 10,407,564 shares of
common stock issuable upon conversion of preferred stock.
|
|
(2)
|
|
Includes 1,342,462 shares of
common stock issuable upon conversion of preferred stock, and
26,434,838 shares of common stock owned by Mr. Damrow
and Michele Naze-Damrow as trustees of the John Damrow Trust.
|
|
(3)
|
|
Includes 513,887,455 shares of
common stock issuable upon conversion of preferred stock owned
by Battery Ventures VI, L.P. and 21,411,977 shares of
common stock issuable upon conversion of preferred stock owned
by Battery Investment Partners VI, LLC. Battery Partners VI,
LLC, the sole general partner of Battery Ventures VI, L.P., and
its managing members Thomas J. Crotty, Oliver D. Curme, Richard
D. Frisbie, Morgan M. Jones, Kenneth P. Lawler, R. David Tabors
and Scott R. Tobin may be deemed to have shared voting and
investment
|
152
|
|
|
|
|
power over the shares held by
Battery Ventures VI, L.P. Each of Messrs. Crotty, Curme,
Frisbie, Jones, Lawler, Tabors and Tobin disclaim beneficial
ownership of such shares except to the extent of his pecuniary
interest therein. Messrs. Crotty and Curme hold voting and
investment power over the shares held by Battery Investment
Partners VI, LLC, and Michael Brown is a member of Battery
Investment Partners VI, LLC. Each of Messrs. Crotty, Curme
and Brown disclaim beneficial ownership of such shares except to
the extent of his pecuniary interest therein. The address of the
funds affiliated with Battery Ventures is 930 Winter Street,
Suite 2500, Waltham, MA 02451.
|
|
(4)
|
|
Includes 3,636,309 shares of
common stock issuable upon conversion of preferred stock.
Includes 1,900,000 shares of common stock subject to
options that are exercisable within 60 days of the date of
the table.
|
|
(5)
|
|
Includes 1,342,462 shares of
common stock issuable upon conversion of preferred stock.
|
|
(6)
|
|
Includes 83,218,962 shares of
common stock issuable upon conversion of preferred stock owned
by Bain Capital Venture Fund 2001, L.P., whose sole general
partner is Bain Capital Venture Partners 2001, L.P., whose sole
general partner is Bain Capital Venture Investors, LLC
(BCVI), 14,826,222 shares of common stock
issuable upon conversion of preferred stock owned by BCIP
Associates III, LLC, whose manager is BCIP Associates III, whose
sole managing general partner is Bain Capital Investors, LLC
(BCI), which has appointed BCVI as attorney-in-fact
with respect to such shares, 1,033,824 shares of common
stock issuable upon conversion of preferred stock owned by BCIP
Associates III-B, LLC, whose manager is BCIP Associates III-B,
whose sole managing partner is BCI, which has appointed BCVI as
attorney-in-fact with respect to such shares,
20,586,298 shares of common stock issuable upon conversion
of preferred stock owned by BCIP Venture Associates,
325,131 shares of common stock issuable upon conversion of
preferred stock owned by BCIP Venture Associates-B, and
145,218,255 shares of common stock issuable upon conversion
of preferred stock owned by Bain Capital Venture Fund 2007,
L.P., whose sole general partner is Bain Capital Venture
Partners 2007, L.P., whose sole general partner is BCVI. By
virtue of the relationships of the funds affiliated with Bain
Capital, BCVI and Michael A. Krupka, sole managing member of
BCVI, may be deemed to have shared voting and investment power
over the shares held by funds affiliated with Bain Capital.
Mr. Krupka disclaims beneficial ownership of such shares
except to the extent of his pecuniary interests therein. The
address of the funds affiliated with Bain Capital is 7
Bennington Rd, Lexington, MA
02421-5602.
|
|
(7)
|
|
Includes 1,652,631 shares of
common stock issuable upon conversion of preferred stock. All
shares are owned by Ms. Richter and Charles H. Richter as
trustees of the Alice M. Richter Revocable Trust dated
February 25, 2000.
|
|
(8)
|
|
Includes 4,694,750 shares of
common stock subject to options that are exercisable within
60 days of the date of the table.
|
|
(9)
|
|
Includes 267,887,562 shares of
common stock issuable upon conversion of preferred stock.
Brookside Capital Investors, L.P., the sole general partner of
Brookside Capital Partners Fund, L.P., and Brookside Capital
Management, LLC, the sole general partner of Brookside Capital
Investors, L.P., and Domenic Ferrante, the sole managing member
of Brookside Capital Management, LLC, may be deemed to have
shared voting and investment power over the shares held by
Brookside Capital Partners Fund, L.P., however each disclaims
beneficial ownership of such shares except to the extent of
their pecuniary interest therein. The address of Brookside
Capital Partners Fund, L.P. is 7 Bennington Rd, Lexington, MA
02421-5602.
|
|
(10)
|
|
Includes 338,731,641 shares of
common stock issuable upon conversion of preferred stock owned
by Petters Group Worldwide, LLC, 53,687,483 shares of
common stock owned by EBP Select Holdings, LLC and
1,321,552 shares of common stock owned by RTB Holding, LLC.
Douglas A. Kelly, solely in his capacity as the court-appointed
trustee or receiver, as applicable, for Petters Group Worldwide,
LLC, Thomas Petters and entities formerly controlled by Thomas
Petters, may be deemed to have voting and investment power over
the shares held by Petters Group Worldwide and its affiliates.
Mr. Kelly disclaims beneficial ownership of such shares.
The address of Petters Group Worldwide and its affiliates is
Kelley, Wolter & Scott, P.A., 431 S. Seventh
Street, Suite 2530, Minneapolis, MN 55415.
|
|
(11)
|
|
Includes 23,147,772 shares of
common stock subject to warrants that are exercisable within
60 days of the date of the table. Amounts listed for
beneficial ownership after this offering
include
additional shares that will be subject to such warrants due to
anti-dilution adjustments thereunder as a result of the payment
of the accrued dividends on our Series B Preferred Stock in
connection with this offering. Centerbridge Credit Partners,
L.P., a Delaware limited partnership and Centerbridge Credit
Partners Master, L.P., a Cayman Islands exempted limited
partnership are the sole members of CCP Credit Acquisition
Holdings, L.L.C., a Delaware limited liability company. Mark T.
Gallogly and Jeffery H. Aronson, share the power to vote the
shares held by CCP Credit Acquisition Holdings, L.L.C. Each of
the funds and Mr. Gallogly and Mr. Aronson disclaim
beneficial ownership of the shares held by CCP Credit
Acquisition Holdings, L.L.C. The address of CCP Credit
Acquisition Holdings, L.L.C. is 375 Park Ave., Floor 12, New
York, NY
10152-1300.
|
|
(12)
|
|
Includes 33,116,154 shares of
common stock subject to warrants that are exercisable within
60 days of the date of the table and 4,566,645 shares
of common stock issuable upon conversion of preferred stock.
Citigroup, Inc. is a public company (NYSE: C) with ultimate
voting and dispositive power over the shares. The address of
CIGPF I Corp. is 390 Greenwich Street, Floor 4, New York, NY
10013-2375.
|
153
|
|
|
(13)
|
|
Includes 19,289,810 shares of
common stock subject to warrants that are exercisable within
60 days of the date of the table. Amounts listed for
beneficial ownership after this offering
include
additional shares that will be subject to such warrants due to
anti-dilution adjustments thereunder as a result of the payment
of the accrued dividends on our Series B Preferred Stock in
connection with this offering. Eton Park Associates, L.P., the
general partner of Eton Park Fund, L.P., Eton Park Associates,
L.L.C., the general partner of Eton Park Associates, L.P., and
Eric M. Mindich, the managing member of Eton Park Associates,
L.L.C., may be deemed to have shared voting and investment power
over the shares held by Eton Park Fund, L.P., however each
disclaims beneficial ownership of such shares except to the
extent of their pecuniary interest therein. Eton Park Fund, L.P.
is a client of Eton Park Capital Management, L.P. and Eton Park
Capital Management, L.L.C. serves as the general partner of Eton
Park Capital Management, L.P. Mr. Mindich is the managing
member of Eton Park Capital Management, L.L.C. and may, by
virtue of his position as managing member, be deemed to have
shared voting and investment power over the shares held by Eton
Park Fund, L.P., however Mr. Mindich disclaims beneficial
ownership of such shares except to the extent of his pecuniary
interest therein. The address of Eton Park Fund, L.P. is 825
Third Avenue, Floor 29, New York, NY 10022.
|
|
(14)
|
|
Includes 86,804,150 shares of
common stock subject to warrants that are exercisable within
60 days of the date of the table. Amounts listed for
beneficial ownership after this offering
include
additional shares that will be subject to such warrants due to
anti-dilution adjustments thereunder as a result of the payment
of the accrued dividends on our Series B Preferred Stock in
connection with this offering. The address of Goldman,
Sachs & Co. is 200 West Street, New York, NY
10282.
|
|
(15)
|
|
Includes
(i) 4,300,326 shares of common stock issuable upon
conversion of preferred stock subject to warrants that are
exercisable within 60 days of the date of the table and
6,915,051 shares of common stock issuable upon conversion
of preferred stock owned by Prudential Capital Partners
(Parallel Fund) II, L.P., (ii) 35,773,013 shares of
common stock issuable upon conversion of preferred stock subject
to warrants that are exercisable within 60 days of the date
of the table and 57,524,060 shares of common stock issuable
upon conversion of preferred stock owned by Prudential Capital
Partners II L.P., and (iii) 1,669,119 shares of
common stock issuable upon conversion of preferred stock subject
to warrants that are exercisable within 60 days of the date
of the table and 2,683,993 shares of common stock issuable
upon conversion of preferred stock owned by Prudential Capital
Partners Management Fund II, L.P. The Prudential Capital
Partners (Parallel Fund) II, L.P., Prudential Capital
Partners II L.P. and Prudential Capital Partners Management
Fund II, L.P. are related entities whose general partners
are ultimately under the common control of Prudential Investment
Management, Inc., a Delaware corporation and a wholly-owned
subsidiary of Prudential Financial, Inc. The address of the
funds affiliated with Prudential Capital is
180 N. Stetson Ave, Chicago, IL
60601-6710.
|
|
(16)
|
|
Fortress Investment Group, LLC, a
public company (NYSE: FIG) indirectly controls the voting and
disposition of the shares as follows: 55,940,452 shares of
common stock subject to warrants that are exercisable within
60 days of the date of the table owned by DB FHUT LLC,
15,431,849 shares of common stock subject to warrants that
are exercisable within 60 days of the date of the table
owned by FPF FHUT LLC and 15,431,849 shares of common stock
subject to warrants that are exercisable within 60 days of
the date of the table owned by FCOF UB Investments LLC. Amounts
listed for beneficial ownership after this offering
include
additional shares that will be subject to such warrants due to
anti-dilution adjustments thereunder as a result of the payment
of the accrued dividends on our Series B Preferred Stock in
connection with this offering. Drawbridge Special Opportunities
Fund LP (DBSO Fund LP) holds a 100%
interest in DB FHUT LLC. Drawbridge Special Opportunities GP LLC
(DBSO GP) is the general partner of DBSO
Fund LP. Fortress Principal Investment Holdings IV LLC
(Principal Holdings) is the managing member of DBSO
GP. Drawbridge Special Opportunities Advisors LLC (DBSO
Advisors) is the investment advisor for DBSO Fund LP.
Fortress Credit Opportunities Fund (A) LP (FCO
Fund A) holds a 29.419632% interest in FCOF UB
Investments LLC (FCOF UB). Fortress Credit
Opportunities Fund (B) LP (FCO Fund B)
holds a 38.509638% interest in FCOF UB. Fortress Credit
Opportunities Fund (C) LP (FCO Fund C)
holds a 32.070730% interest in FCOF UB. FCO Fund GP LLC
(FCO GP) is the general partner for each of FCO
Fund A, FCO Fund B and FCO Fund C. Fortress
Operating Entity I LP (FOE I) is the managing member
of FCO GP. Fortress Credit Opportunities Advisors LLC (FCO
Advisors) is the investment advisor for each of FCO
Fund A, FCO Fund B and FCO Fund C. Fortress
Partners Fund LP (FPF LP) holds a 100% interest
in FPF FHUT LLC. Fortress Partners GP LLC (FP GP
LLC) is the general partner of FPF LP. Principal Holdings
is the managing member of FP GP LLC. Fortress Partners Advisors
LLC (FP Advisors) is the investment advisor for FPF
LP. FIG LLC (FIG) holds a 100% interest in DBSO
Advisors, FCO Advisors and FP Advisors. FOE I is the sole
managing member of each of FIG and Principal Holdings. FIG Corp.
is the general partner of FOE I. FIG Corp. is wholly-owned by
Fortress Investment Group LLC. Fortress Investment Group LLC and
the affiliated entities listed above may be deemed to have
shared voting and investment power over the shares held by FPF
FHUT LLC, FCOF UB Investments LLC and DB FHUT LLC. Each of
Fortress Investment Group LLC and the affiliated entities
disclaim beneficial ownership of such shares. The address of the
funds affiliated with Fortress Investment Group is 1345 Avenue
of the Americas Floor 46, New York, NY
10105-2200.
|
|
(17)
|
|
Includes 1,075,268 shares of
common stock issuable upon conversion of preferred stock.
|
154
CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Since February 1, 2008, we have engaged in the transactions
described below with certain of our executive officers,
directors, holders of more than 5% of our voting securities and
their affiliates and immediate family members. We believe that
all such transactions since February 1, 2008 have been on
terms that we could have obtained from non-related third parties.
Issuance of
Series A Preferred Stock
In February, October and November of 2004, we entered into
agreements with certain investors, including Brookside Capital
Investors, L.P., funds affiliated with Bain Capital, funds
affiliated with Battery Ventures, Petters Group Worldwide and
affiliates, and Brian Smith, pursuant to which we issued and
sold a total of 749,995,554 shares of our Series A
Preferred Stock at a price per share of $0.10511. These 2004
transactions were the initial investments that Brookside Capital
Investors, L.P., funds affiliated with Bain Capital, and funds
affiliated with Battery Ventures made in us. In connection with
the sale of our Series A Preferred Stock, we and the
purchasing investors entered into a stockholders agreement and
investor rights agreement.
In connection with the initial Series A Preferred Stock
closing, certain promissory notes outstanding with affiliates of
Petters Group Worldwide were repaid by Bluestem in cash and
Series A Preferred Stock. Pursuant to the Stock Purchase
Agreement dated February 24, 2004, among Bluestem and the
Series A Preferred Stock investors, payment of accrued
interest on this indebtedness in the amount of $799,167 was
deferred. Payment of half of the accrued interest was deferred
until Bluestem achieved annual net income. This portion of the
deferred interest became due and was paid in 2007. The remaining
balance of the deferred interest, $399,583.50, is payable after
or in connection with a transaction or series of transactions in
which Brookside Capital Investors, L.P., funds affiliated with
Bain Capital, and funds affiliated with Battery Ventures receive
consideration, in the form of cash or readily tradable equity
securities, with a value in excess of 250% of the total amount
invested in Bluestem by such entities. No such transaction has
occurred to date.
The 2004 stockholder and investor rights agreements were amended
and restated in March 2006 in connection with a financing funded
by certain affiliates of Prudential Capital, as described below
under the heading March 2006 Financing. These
agreements were further amended and restated in May 2008 in
connection with the issuance of Series B Preferred Stock
described below, and again in 2011 in anticipation of our
initial public offering contemplated hereby.
March 2006
Financing
In March 2006 we entered into a financing arrangement with
Prudential Capital Partners II, L.P. as subordinated collateral
agent pursuant to which we sold $30 million in initial
aggregate principal amount of Senior Subordinated Secured Notes
due November 21, 2013 and in connection with which we
issued to Prudential Capital Partners II, L.P. and certain of
its affiliates warrants to purchase 41,742,458 shares of
our Series A Preferred Stock at a per share exercise price
of $0.01. Pursuant to these warrants, and together with other
shares of our capital stock held by them, Prudential and its
affiliates beneficially own approximately 5% of our outstanding
common stock on an as if converted basis. We intend to use a
portion of the net proceeds from this offering to retire the
outstanding $30 million Senior Subordinated Secured Notes.
155
May 2008
Financings
Issuance of
Series B Preferred Stock
In May 2008 we entered into an agreement with investors pursuant
to which we issued and sold 750,839,038 shares of our
Series B Preferred Stock at a price per share of $0.0745.
The following table summarizes sales by us of our Series B
Preferred Stock to certain of our present and former directors,
executive officers, holders of more than 5% of our voting
securities and their affiliates in connection with this private
placement financing transaction:
|
|
|
|
|
|
|
Shares of Series B
|
|
Investors
|
|
Preferred Stock
|
|
|
Directors and executive officers:
|
|
|
|
|
John Giuliani
|
|
|
2,684,924
|
|
William Dunlap (1)
|
|
|
872,600
|
|
Alice Richter
|
|
|
872,600
|
|
Brian Smith (also a 5% stockholder)
|
|
|
6,712,310
|
|
John Damrow
|
|
|
1,342,462
|
|
Other 5% stockholders:
|
|
|
|
|
Funds affiliated with Bain Capital (2)
|
|
|
166,129,684
|
|
Funds affiliated with Battery Ventures (3)
|
|
|
335,615,518
|
|
Brookside Capital Partners Fund, L.P.
|
|
|
167,807,760
|
|
Funds affiliated with Prudential Capital (4)
|
|
|
67,123,104
|
|
|
|
|
(1)
|
|
At the time of the sale of our
Series B Preferred Stock, Mr. Dunlap was serving on
our board of directors.
|
|
(2)
|
|
Includes 145,218,255 shares
purchased by Bain Capital Venture Fund 2007, L.P.,
20,586,298 shares purchased by BCIP Venture Associates, and
325,131 shares purchased by BCIP Venture Associates-B.
|
|
(3)
|
|
Includes 322,190,898 shares
purchased by Battery Ventures VI, L.P. and
13,424,620 shares purchased by Battery Investment Partners
VI, LLC.
|
|
(4)
|
|
Includes 57,524,060 shares
purchased by Prudential Capital Partners II, L.P.,
6,915,051 shares purchased by Prudential Capital Partners
(Parallel Fund) II, L.P. and 2,683,993 shares purchased by
Prudential Capital Partners Management Fund II, L.P.
|
Accounts
Receivable Credit Facility
In May 2008 we entered into a $280 million revolving credit
facility maturing May 15, 2011 with Goldman Sachs Specialty
Lending Group, L.P. and Fortress Credit Corp, each of whom was
committed to 50% of the total amount of the facility. This
facility was secured by the customer accounts receivable we
purchase daily from the Credit Issuers and by cash collateral.
Daily outstanding balances on this facility bore interest at
LIBOR plus 8% with a 3% LIBOR floor. During the time the
facility was outstanding, we paid a total of $573.5 million
in principal and $51.4 million in interest, as well as
$12.2 million in fees and prepayment penalties.
We also entered into a contingent fee agreement with these
lenders whereby we agreed to pay them a fee contingent upon the
occurrence of a defined liquidation, sale or change of control
transaction (including, in certain circumstances, an initial
public offering). The contingent fee ranges from $0 to
$28.9 million based on the timing and proceeds from a
triggering event occurring before May 15, 2018. The
offering made hereby will not trigger any payment under this
agreement, and the contingent fee agreement will terminate upon
consummation of this offering.
Upon closing of this financing, we also issued to each of
Goldman, Sachs & Co. and Fortress Credit Corp.
warrants to purchase 108,022,941 shares of our common
stock, which totaled 5% each of our fully diluted common stock,
at a per share exercise price of $0.01.
156
Certain of these warrants were subsequently transferred to other
lenders in the syndicate, and now each of Goldman and Fortress
with their affiliates hold warrants to purchase
86,804,150 shares of our common stock. As described in more
detail below under Conversion of Preferred Stock and
Payment of Dividends, these warrants have anti-dilution
protection that will be triggered by the anticipated payment of
the accrued and unpaid dividends on our Series B Preferred
Stock in connection with the conversion of such shares upon
consummation of this offering. These warrants include put rights
that could, in certain circumstances, require us to repurchase
the warrants, or the shares issued upon exercise thereof, from
the warrant holders. However, the put rights will terminate upon
completion of this initial public offering. These warrants
expire in 2018. This revolving credit facility was refinanced in
August 2010, as described below under August 2010 Debt
Refinancing.
Stockholders
Agreement
In May 2008, in connection with the issuance of our
Series B Preferred Stock, we amended and restated the
stockholders agreement that was originally entered into in 2004
in connection with the issuance of our Series A Preferred
Stock. Under this agreement, we and certain of our stockholders
have agreed to take all necessary action, including voting of
shares, to cause persons designated in accordance with the
agreement to be elected to our board of directors. See
Management for a more detailed description of these
arrangements. The agreement also grants each of the stockholders
and the company certain rights of first refusal and preemptive
rights to participate in the sale of equity securities in
connection with the sale of equity securities by the company or
another party to the agreement. This agreement will terminate
upon completion of this offering. The parties to this agreement
include certain parties with relationships with Bluestem,
including certain of our present and former directors, executive
officers, holders of more than 5% of our voting securities and
their affiliates. The following is a list of the related parties
who are parties to this agreement:
|
|
|
Directors:
|
|
John Giuliani, William Dunlap, who resigned from our board in
2008, Alice Richter, Roy Guthrie and Scott Savitz
|
Executive Officers:
|
|
Brian Smith, who is also a director and 5% stockholder of the
company, and John Damrow
|
Other 5% Stockholders:
|
|
Brookside Capital Investors, L.P., funds affiliated with Bain
Capital, funds affiliated with Battery Ventures, Petters Group
Worldwide and affiliates, affiliates of Prudential Capital,
Goldman Sachs & Co., Fortress Credit Corp. and affiliates
and CIGPF I Corp.
|
Investor
Rights Agreement
In May 2008, in connection with the issuance of our
Series B Preferred Stock, we amended and restated the
investor rights agreement that was originally entered into in
2004 in connection with the issuance of our Series A
Preferred Stock. Under this agreement, we have granted certain
of our stockholders certain registration rights, inspection and
board observer rights. See Description of Capital
Stock and Management for a more detailed
description of these rights. Certain provisions of this
agreement, including the inspection and board observer rights,
will terminate upon completion of this offering. Provisions of
this agreement that give the parties thereto certain rights with
respect to the registration of our securities and related
matters will not terminate upon the completion of this offering.
The parties to this agreement include certain parties with
relationships with Bluestem, including certain of our present
and former directors, executive officers, holders of more than
5% of our voting
157
securities and their affiliates. The following is a list of the
related parties who are parties to this agreement:
|
|
|
Directors:
|
|
John Giuliani, William Dunlap, who resigned from our board in
2008, Alice Richter, Roy Guthrie and Scott Savitz
|
Executive Officers:
|
|
Brian Smith, who is also a director and 5% stockholder of the
company, and John Damrow
|
Other 5% Stockholders:
|
|
Brookside Capital Investors, L.P., funds affiliated with Bain
Capital, funds affiliated with Battery Ventures, Petters Group
Worldwide and affiliates, affiliates of Prudential Capital,
Goldman Sachs & Co., Fortress Credit Corp. and affiliates,
and CIGPF I Corp.
|
Thomas J.
Petters and Affiliates
As of the date of this prospectus, three affiliated entities,
Petters Group Worldwide, LLC (PGW), RTB Holdings,
LLC (RTB) and EBP Select Holdings LLC
(EBP), hold 338,731,641 shares of our
Series A Preferred Stock and 55,009,035 shares of
common stock, or approximately 21% of our outstanding common
stock on an as if converted basis (excluding common shares to be
issued in payment of accrued and unpaid dividends on outstanding
preferred stock due upon conversion of the preferred stock). We
refer to these three entities collectively as the Petters
Affiliates and the shares of capital stock as the
Petters Shares. PGW is presently in Chapter 11
proceedings under the U.S. Bankruptcy Code, and each of RTB
and EBP is presently in federal receivership. The bankruptcy of
PGW is under the supervision of the United States Bankruptcy
court for the District of Minnesota and the receivership is
under the supervision of the United States District Court for
the District of Minnesota. These courts have approved the
appointment of Douglas A. Kelley, Minneapolis, Minnesota, as
trustee and receiver (the Trustee) for these
entities.
The bankruptcy and receivership proceedings and subsequent
appointment of the Trustee for the Petters Affiliates (and
Mr. Petters, individually) followed the arrest in October
2008 of Thomas J. Petters on charges of wire and mail fraud,
conspiracy and money laundering. Mr. Petters was the sole
or controlling member of the Petters Affiliates.
Mr. Petters was tried and convicted in December 2009 on all
charges. A company half-owned by Mr. Petters founded the
current company when it acquired the key operating assets of the
Fingerhut brand from Federated Department Stores. None of the
fraudulent activity of which Mr. Petters was convicted was
at any time alleged directly to involve our company or its
subsidiaries, nor has our company or any subsidiary been the
subject of or participated in any civil or criminal proceeding
arising out of his fraudulent activity. The Trustee has
furnished to us a letter dated April 14, 2011 (the
Trustee Letter), to the effect that based on
information actually known to the Trustee at the date of the
letter, it does not know of any actual or potential claim in its
capacity as trustee or receiver against the company or its
subsidiaries.
Although we and our subsidiaries have not been the subject of
any such demand, the Trustee has made demand of, and in some
cases instigated litigation against, numerous individuals,
charitable organizations, businesses and other persons to
recover for the benefit of creditors certain amounts received by
these persons from Mr. Petters or his affiliates, at a time
when they were insolvent, for which the Trustee does not believe
that legally sufficient consideration was received in return,
commonly referred to as a clawback. Among the individuals
subject to these demands and litigation are one current and one
former employee who have made claims for indemnification against
the company arising out of the Trustees actions. The
company reimbursed to these employees settlement payments made
by them to the Trustee aggregating $10,000 upon a determination
that the applicable standard of conduct and other requirements
for indemnification had been satisfied.
Based on information furnished in publicly filed Trustee
litigation or furnished to Bluestem by the Trustee, the Trustee
has asserted additional clawback claims known to the Trustee
158
aggregating approximately $12.7 million against four former
Bluestem directors who Bluestem believes were acting as
employees of, or lenders or consultants to, Petters affiliates
other than Bluestem when the payments which are the subject of
the Trustees clawback claims were made. The Trustee has
advised that similar clawback claims against a former Bluestem
director and executive officer, who was also believed to be
acting in a capacity unrelated to Bluestem in connection with
receipt of the payments which are the subject of the clawback
demand, were resolved by such individual by payment to the
Trustee of $2.1 million. No claim for indemnification or
advancement of litigation expenses has been made against
Bluestem in respect of any of these asserted Trustee claims
except for a claim by one of these former directors, William
Dunlap. The Trustee has commenced litigation against
Mr. Dunlap seeking recovery of approximately
$3.8 million. Mr. Dunlap has made a demand for
advancement of expenses and indemnification from the company
because he alleges he has been made a defendant in the
proceeding in part by reason of his official capacity as a
director of Bluestem. Based on information currently
available to it and in part the absence of any evidence that the
disputed amounts were in any way related to
Mr. Dunlaps service as a director of the company or
as to which Bluestem accepted any intended benefit, the company
disputes Mr. Dunlaps claim and has rejected his
demand for indemnification and advancement of expenses. The
Trustee proceeding to which Mr. Dunlap is a party is in its
early stages. The foregoing Trustee claims or other claims by
the Trustee against persons who have had a relationship with the
company could possibly result in claims for indemnification,
advancement of expenses or other claims for damages against the
company that could be successful and could result in significant
payments by us for the benefit of such persons for which
insurance may not be available.
Brian Smith, our Chairman and Chief Executive Officer and a
beneficial holder of approximately 5% of our common stock, was
also the subject of a Trustee clawback demand in respect of two
cash bonus payments in 2003 and 2005 in aggregate of $110,000
received by him from a Petters affiliate while acting as an
employee of Bluestem and in consideration of services to
Bluestem. The Trustee also made a clawback demand in respect of
a transfer in 2005 of shares of our common stock from
Mr. Petters to Mr. Smith in consideration of services
to Bluestem. The value of these shares was recorded as
compensation by Bluestem at the time of transfer at $158,440.
Mr. Smith responded to these demands by reimbursing the
Trustee in the amount of the bonus payments and paying to the
Trustee the full value of the shares at the time of transfer.
Mr. Smith made a demand for indemnification to Bluestem for
reimbursement of $166,569, an amount equal to the $158,440
payment to the Trustee and $8,129 in attorneys fees
relating to resolution of that clawback demand. The company
reimbursed to Mr. Smith $166,569 upon a determination by
our board of directors that the applicable standard of conduct
and other requirements for indemnification had been satisfied
and upon receipt from Mr. Smith of a release of Bluestem of
any claim arising out of these clawback demands.
Except as disclosed in the three immediately preceding
paragraphs, the Trustee has advised Bluestem pursuant to the
Trustee Letter that it does not know of any actual or potential
claim in its capacity as trustee or receiver against any of
Bluestems current or former officers or directors, its
significant securityholders or the underwriters named on the
cover page of this prospectus. Further, the Trustee has agreed
to provide at the time of closing of this offering a release of
all claims, known or unknown, that the Trustee may then or in
the future have against Bluestem, current or former officers and
directors of the company (other than the asserted and pending
claims of the Trustee described above), our significant
securityholders or the underwriters named on the cover page of
this prospectus, arising out of any act, omission, transaction,
event or occurrence that relates to Bluestem and takes place
prior to the time of closing of this offering. The Trustee would
reserve any rights he may have as a stockholder arising
following the closing of this offering under the surviving
provisions of the investor rights agreement (relating to
registration rights) and under our certificate of incorporation
and by-laws. The Trustee has obtained approval from the
supervising courts to
159
furnish the release. The obligation of the underwriters to take
and pay for the common stock offered by this prospectus is
conditioned on delivery by the Trustee of the release.
At the present time, Mr. Petters and his affiliates have no
relationship with Bluestem except in respect of the Petters
Affiliates minority stock ownership in Bluestem and the
continuing contractual rights of the Petters Affiliates under
the amended and restated stockholders agreement and the amended
and restated investor rights agreement, originally entered into
in connection with the companys 2004 Series A
Preferred Stock financing, and under the related stock purchase
agreement (including the companys deferred interest
obligation), each as described above.
The Trustee exercises all ownership rights with respect to the
Petters Shares and all rights of Mr. Petters and the
Petters Affiliates under the stockholders agreement and the
investor rights agreement. Pursuant to the investor rights
agreement, the Trustee has designated Richard Evans as an
observer to our board of directors. The stockholders agreement
and the investor rights agreement, each of which will terminate
upon completion of this offering, except with respect to the
registration and related rights included in the investor rights
agreement, are more fully described above and elsewhere in this
prospectus.
Following its organizational phase, Mr. Petters was never
an officer of the company or responsible for its day to day
operations, and following April 2005 was not a director of the
company. Historical transactional relationships included certain
shared administrative services between Petters affiliates and
Bluestem, debt financings, merchandise sales and purchases, real
property leases and third party guaranties by Petters
affiliates. All these arrangements were satisfied or terminated
prior to 2008, except as follows. Since February 1, 2008,
neither Mr. Petters nor his affiliates has had any
relationship with Bluestem, other than the minority equity
related interests and deferred interest obligation referred to
above, the ordinary course rental and inventory transactions
described below, and the Petters Affiliates interest in
the license of the Master Craft and Master Craft Pro trademarks
described below.
In 2008, we had a number of ordinary course transactions with
Petters affiliates. We subleased warehouse space to Petters
Warehouse Direct, Inc., recognizing rental income of $23,000 in
2008. We also sold excess and customer return merchandise and
vendor samples to Petters Warehouse Direct, Inc., receiving
$51,000 in 2008. Finally, we purchased inventory from MLO
Appliance Co. LLC, paying $743,000 in 2008.
For several years beginning in November 2003 we used the
trademarks Master Craft and Master Craft Pro in connection with
the sale of hand tools and related goods pursuant to a license
from PGW. In early 2008, a dispute arose between our company and
PGW as to that license and rights to use the trademarks going
forward. In December 2010, we entered into a settlement
agreement and mutual release regarding these trademarks with the
Trustee whereby, among other things, we acquired all of
PGWs rights in the trademarks for $100,000. The
transaction was consummated in February 2011.
August 2010 Debt
Refinancing
In August 2010, we replaced with a syndicate of lenders,
including Goldman Sachs Bank USA and JPMorgan Chase Bank, our
May 2008 accounts receivable credit facility with a new
$365 million secured credit facility, which included two
tranches: the $290 million Revolving Credit Tranche that
bears interest at LIBOR plus 4.25% and the $75 million Term
Loan Tranche that bears interest at a fixed rate of 14.75%. This
facility matures August 20, 2013. As of April 29,
2011, the total principal outstanding on the Revolving Credit
Tranche was $181 million and the total principal
outstanding on the Term Loan Tranche is $75 million.
Through April 29, 2011, we had paid a total of
$102 million in principal and $5.6 million in interest
on the Revolving Credit Tranche, zero in principal and
$7.7 million in interest on the Term Loan Tranche, and
$9.7 million in up front origination and legal fees in
connection with the overall
160
facility. As more fully described under Use of
Proceeds, we ultimately intend to retire the
$75 million Term Loan Tranche and pay the applicable
prepayment penalty of $1.5 million with a portion of the
proceeds of this offering, and use any other net proceeds of
this offering that are not used to retire our Senior
Subordinated Secured Notes to pay down the outstanding principal
on the Revolving Credit Tranche.
In July 2011, we obtained commitments from the lenders under
this credit facility such that, effective upon our full
repayment of the Term Loan Tranche and the Senior Subordinated
Secured Notes (and satisfaction of other typical conditions),
the maximum commitment of the lenders under the Revolving Credit
Tranche will be increased from $290 million to
$350 million and certain of our covenants will be adjusted.
In connection with these commitments and the related changes to
the A/R Credit Facility, we expect to pay the lenders an
additional $1.9 million in upfront fees. For additional
information concerning this credit facility, see
Managements Discussion and Analysis of Financial
Condition and Results of OperationsLiquidity and Capital
ResourcesAccounts Receivable Credit Facility.
Sale of
Series B Preferred Stock to New Directors
In December 2010, we sold to our director Roy Guthrie
1,342,462 shares of our Series B Preferred Stock for
an aggregate purchase price of $100,000, and in April 2011 we
sold to our director Scott Savitz 1,075,268 shares of our
Series B Preferred Stock for an aggregate purchase price of
$100,000. At the time of such sales, Mr. Guthrie and
Mr. Savitz also became party to our stockholders agreement
and our investor rights agreement.
Conversion of
Preferred Stock and Payment of Dividends
In connection with the closing of this offering, pursuant to our
fourth amended and restated certificate of incorporation, by
consent of 66% of the holders of Series B Preferred Stock,
all of the outstanding shares of our preferred stock will
convert into shares of our common stock, and the holders of such
stock will be entitled to receive the accrued and outstanding
dividends thereon in either cash or common stock, at our
election. We intend to pay such dividends by issuing shares of
common stock, as set forth in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of
|
|
|
Number of
|
|
|
|
|
|
|
Common
|
|
|
Accrued and
|
|
|
Dividend
|
|
|
|
|
|
|
Shares
|
|
|
Unpaid
|
|
|
Shares
|
|
|
|
|
|
|
Issuable
|
|
|
Dividends
|
|
|
Issuable
|
|
|
|
Preferred
|
|
|
upon
|
|
|
Payable upon
|
|
|
Upon
|
|
Preferred Stockholder
|
|
Shares
|
|
|
Conversion
|
|
|
Conversion (1)
|
|
|
Conversion (1)
|
|
|
Funds affiliated with Bain Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A Preferred Stock
|
|
|
99,079,008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series B Preferred Stock
|
|
|
166,129,684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brookside Capital Partners Fund, L.P.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A Preferred Stock
|
|
|
100,079,802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series B Preferred Stock
|
|
|
167,807,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds affiliated with Battery Ventures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A Preferred Stock
|
|
|
199,683,914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series B Preferred Stock
|
|
|
335,615,518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Petters Affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A Preferred Stock
|
|
|
338,731,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliates of Prudential Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series B Preferred Stock
|
|
|
67,123,104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brian Smith
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A Preferred Stock
|
|
|
3,695,254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series B Preferred Stock
|
|
|
6,712,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of
|
|
|
Number of
|
|
|
|
|
|
|
Common
|
|
|
Accrued and
|
|
|
Dividend
|
|
|
|
|
|
|
Shares
|
|
|
Unpaid
|
|
|
Shares
|
|
|
|
|
|
|
Issuable
|
|
|
Dividends
|
|
|
Issuable
|
|
|
|
Preferred
|
|
|
upon
|
|
|
Payable upon
|
|
|
Upon
|
|
Preferred Stockholder
|
|
Shares
|
|
|
Conversion
|
|
|
Conversion (1)
|
|
|
Conversion (1)
|
|
|
John Giuliani
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A Preferred Stock
|
|
|
951,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series B Preferred Stock
|
|
|
2,684,924
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alice Richter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A Preferred Stock
|
|
|
780,031
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series B Preferred Stock
|
|
|
872,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Roy Guthrie
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series B Preferred Stock
|
|
|
1,342,462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John Damrow
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series B Preferred Stock
|
|
|
1,342,462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scott Savitz
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series B Preferred Stock
|
|
|
1,075,268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
At ,
2011 there was an aggregate
of
in accrued and unpaid dividends on our preferred stock.
Dividends in the aggregate will continue to accrue at a rate of
$
per day until the closing of this offering. Common stock to be
issued as a dividend is valued based on the price to the public
set forth on the cover page of this prospectus, less the
underwriting discount. Based on the midpoint of the range set
forth on the cover page of this prospectus, the price to the
public is assumed to
be ,
the discount of the underwriters is assumed to
be ,
the accrued and unpaid preferred stock dividends on the assumed
conversion date are assumed to
be ,
and the number of shares of common stock to be issued in
satisfaction of accrued and unpaid dividends is assumed to
be .
|
In addition to the foregoing, the warrants to purchase a total
of 216,045,882 shares of our common stock that were
originally issued to Goldman, Sachs & Co. and Fortress
Credit Corp. in connection with our May 2008 debt financing have
anti-dilution protection that will be triggered by the payment
of the accrued and outstanding dividends on our Series B
Preferred Stock. Without an increase in the aggregate exercise
price payable upon exercise of such warrants, they will be
exercisable for an
additional shares,
for an aggregate
of shares
of our common stock.
Brian A. Smith
Employment Agreement
The company entered into an employment agreement with
Mr. Smith on April 25, 2007 which expired on
April 24, 2010. Pursuant to this agreement Mr. Smith
received a base salary of $250,000, was eligible to receive
incentive compensation of up to 120% of his base salary and was
entitled to severance benefits upon the termination of his
employment with the company under certain circumstances.
Provisions of the agreement that remain in effect include
restrictions on Mr. Smiths ability to compete with
the company, to hire our employees or to solicit our employees
or customers during his employment with the company and for a
period of 12 months thereafter.
Policy for
Approval of Related Party Transactions
In connection with this offering, our board of directors adopted
a written statement of policy regarding transactions with
related persons, which we refer to as our related person policy.
Subject to the exceptions described below, our related person
policy requires our audit committee to review and approve any
proposed related person transaction and all material facts with
respect thereto. In reviewing a transaction, our audit committee
will consider all relevant facts and circumstances, including
(1) whether the terms are fair to the company,
(2) whether the transaction is material to the company,
(3) the role the related person played in arranging the
transaction (4) the structure of the transaction,
(5) the interests of all related
162
persons in the transaction, and (6) whether the transaction
has the potential to influence the exercise of business judgment
by the related person or others. Our audit committee will not
approve or ratify a related person transaction unless it
determines that, upon consideration of all relevant information,
the transaction is beneficial to our company and stockholders
and the terms of the transaction are fair to our company. No
related person transaction will be consummated without the
approval or ratification of our audit committee. It will be our
policy that directors interested in a related person transaction
will recuse themselves from any vote relating to a related
person transaction in which they have an interest. Under our
related person policy, a related person includes any of our
directors, director nominees, executive officers, any beneficial
owner of more than 5% of our common stock and any immediate
family member of any of the foregoing. Related party
transactions exempt from our policy include payment of
compensation by the company to a related person for the related
persons service to the company as an employee, director or
executive officer, transactions available to all of our
employees and stockholders on the same terms and transactions
between us and the related person that, when aggregated with the
amount of all other transactions between us and the related
person or its affiliates, involve $120,000 or less in a fiscal
year. We did not have a formal review and approval policy for
related party transactions at the time of any transaction
described in this Certain Relationships and Related Party
Transactions section.
163
DESCRIPTION OF
CAPITAL STOCK
The following is a description of the material terms of our
amended and restated certificate of incorporation and amended
and restated bylaws as they will be in effect upon completion of
this offering. This description may not contain all of the
information that is important to you. To understand them fully,
you should read our amended and restated certificate of
incorporation and amended and restated bylaws, copies of which
are filed with the SEC as exhibits to the registration
statement, of which this prospectus is a part.
Authorized
Capital
Prior to the completion of this offering, our authorized capital
stock consists of: (1) 2,592,550,586 shares of common
stock and (2) 1,545,261,974 shares of preferred stock,
including 791,738,012 shares of Series A Preferred
Stock and 753,523,962 shares of Series B Preferred
Stock. As of June 1, 2011, there were 85 holders of record
of our common stock, 14 holders of record of our Series A
Preferred Stock, and 17 holders of record of our Series B
Preferred Stock.
Upon completion of this offering our certificate of
incorporation will provide that our authorized capital stock
will consist
of shares
of common stock
and shares
of undesignated preferred stock. Upon completion of this
offering, all currently outstanding shares of our preferred
stock will be converted into shares of a single class of common
stock. Immediately following the completion of this offering, we
expect to
have shares
of common stock and no shares of preferred stock outstanding.
Common
Stock
Voting
Rights
Each share of common stock entitles the holder to one vote with
respect to each matter presented to our stockholders on which
the holders of common stock are entitled to vote. Our common
stock votes as a single class on all matters relating to the
election and removal of directors on our board of directors and
as provided by law. Holders of our common stock will not have
cumulative voting rights. Except in respect of matters relating
to the election and removal of directors on our board of
directors and as otherwise provided in our amended and restated
certificate of incorporation or required by law, all matters to
be voted on by our stockholders must be approved by a majority
of the shares present in person or by proxy at the meeting and
entitled to vote on the subject matter. In the case of election
of directors, all matters to be voted on by our stockholders
must be approved by a plurality of the votes entitled to be cast
by all shares of common stock.
Dividend
Rights
Subject to preferences that may be applicable to any outstanding
series of preferred stock, the holders of our common stock will
receive ratably any dividends declared by our board of directors
out of funds legally available for the payment of dividends. It
is our present intention not to pay dividends on our common
stock for the foreseeable future. Our board of directors may, at
its discretion, modify or repeal our dividend policy. Future
dividends, if any, with respect to shares of our common stock
will depend on, among other things, our results of operations,
cash requirements, financial condition, contractual
restrictions, provisions of applicable law and other factors
that our board of directors deems relevant. Our credit
facilities, including our A/R Credit Facility, Inventory Line of
Credit, and Senior Subordinated Secured Notes, currently limit
our ability to pay cash dividends. See Dividend
Policy.
164
Liquidation
and Preemptive Rights
In the event of our liquidation, dissolution or
winding-up,
the holders of our common stock are entitled to share ratably in
all assets remaining after payment of liabilities, subject to
prior distribution rights of preferred stock, if any, then
outstanding. The holders of our common stock have no preemptive
or other subscription rights.
Preferred
Stock
Our amended and restated certificate of incorporation provides
that we may issue up
to shares
of preferred stock in one or more series as may be determined by
our board of directors. Our board has broad discretionary
authority with respect to the rights of any new series of
preferred stock and may establish the following with respect to
the shares to be included in each series, without any vote or
action of the stockholders:
|
|
|
|
|
the number of shares;
|
|
|
|
the designations, preferences and relative rights, including
voting rights, dividend rights, conversion rights, redemption
privileges and liquidation preferences; and
|
|
|
|
any qualifications, limitations or restrictions.
|
We believe that the ability of our board to issue one or more
series of preferred stock will provide us with flexibility in
structuring possible future financings and acquisitions, and in
meeting other corporate needs that may arise. The authorized
shares of preferred stock, as well as authorized and unissued
shares of common stock, will be available for issuance without
action by our stockholders, unless such action is required by
applicable law or the rules of any stock exchange or automated
quotation system on which our securities may be listed or traded.
Our board may authorize, without stockholder approval, the
issuance of preferred stock with voting and conversion rights
that could adversely affect the voting power and other rights of
holders of common stock. Although our board has no current
intention of doing so, it could issue a series of preferred
stock that could, depending on the terms of such series, impede
the completion of a merger, tender offer or other takeover
attempt of our company. Our board could also issue preferred
stock having terms that could discourage an acquisition attempt
through which an acquiror may be able to change the composition
of our board, including a tender offer or other transaction that
some, or a majority, of our stockholders might believe to be in
their best interests or in which stockholders might receive a
premium for their stock over the then-current market price. Any
issuance of preferred stock therefore could have the effect of
decreasing the market price of our common stock.
Our board will make any determination to issue such shares based
on its judgment as to our best interests of our company and
stockholders. We have no current plan to issue any preferred
stock after this offering.
Warrants
As of April 29, 2011, we have issued and outstanding
warrants to purchase 249,162,036 shares of our common stock with
a weighted average exercise price of $0.01 per share and
warrants to purchase 41,742,458 shares of our Series A
Preferred Stock with a weighted average exercise price of $0.01
per share outstanding. Certain of our warrants have
anti-dilution protection that will be triggered by the payment
of the accrued and outstanding dividends on our Series B
Preferred Stock upon closing of this offering, which will result
in an
additional shares
of common stock being subject to warrants, with no increase in
the aggregate exercise price payable for all outstanding
warrants. Such warrants are also subject to put rights that will
terminate upon closing of this offering. After the completion of
this offering, any unexercised warrants to purchase shares of
our common stock will remain outstanding and any unexercised
warrants to purchase shares of
165
our Series A Preferred Stock will entitle the holders
thereof to purchase common stock rather than Series A
Preferred Stock.
Registration
Rights
Prior to the completion of this offering, the holders of
approximately shares
of our common stock, including shares of our preferred stock on
an as if converted basis, and the holders of warrants to
purchase an additional
approximately shares
of our common stock are entitled to certain registration rights
pursuant to the investor rights agreement described in
Certain Relationships and Related Party
Transactions. Certain of the selling stockholders will be
exercising these registration rights pursuant to which they will
sell shares of common stock
and be entitled to the reimbursement of their registration
expenses equal to approximately $ .
After the completion of this offering, the holders of
approximately shares
of our common stock and the holders of warrants to purchase an
additional
approximately shares
of our common stock will continue to hold those certain
registration rights. All parties to the investor rights
agreement have these registration rights, which are described in
more detail in the following paragraphs. The parties to the
investor rights agreement are the related parties listed under
Certain Relationships and Related Party
TransactionsMay 2008 FinancingsInvestor Rights
Agreement, as well as other investors none of whom will
beneficially own more than approximately 1% of the amount of
common stock to be outstanding upon completion of this offering.
Demand
Registration Rights
After the completion of this offering, we will be obligated to
effect up to four registrations as requested by the holders of
our common stock and the holders of warrants to purchase our
common stock having registration rights, including two such
registrations on
Form S-1,
and up to two registrations on
Form S-3
in any
12-month
period. A request for registration on
Form S-1
for which the gross aggregate offering price is reasonably
expected to be at least $10,000,000 must be made by holders of
at least 7.5% of the then outstanding registrable securities,
defined as common stock owned, common stock issued or issuable
upon conversion of preferred stock, exercise of warrants or by
way of stock dividend or stock split or in connection with
certain transactions, in each case held by a party with such
registration rights, entitled to registration rights. A request
for registration on
Form S-1
for which the gross aggregate offering price is reasonably
expected to be at least $30,000,000 may be made by any holder of
registrable securities. After we become eligible to file a
registration statement on
Form S-3,
one or more holders of then outstanding registrable securities
may request that the company effect a registration on
Form S-3
of a number of registrable securities for which the gross
aggregate offering price is reasonably expected to be at least
$5,000,000. We may delay the filing of a registration statement
in connection with a demand registration for a period of up to
60 calendar days if our board of directors determines in good
faith that such postponement is necessary in order to avoid
premature disclosure of a material transaction, the disclosure
of which would have a materially detrimental effect on the
company. If the managing underwriter advises us that the number
of shares to be included in a demand registration should be
limited due to market conditions or otherwise, all shares other
than registrable securities will initially be excluded from the
registration, and if additional shares must be excluded from the
registration, holders of registrable securities will share pro
rata in the number of shares to be excluded from the
registration based on the respective numbers of registrable
securities owned by such holders.
Piggyback
Registration Rights
In the event that we propose to register any of our securities
under the Securities Act, including this offering, but excluding
the registration of securities to be offered pursuant to a
merger, acquisition, exchange offer, dividend reinvestment plan
or stock option or other
166
employee benefit plan, we are required to include in these
registrations all securities with respect to which we have
received written requests for inclusion under our investor
rights agreement, subject to certain limitations. If the
managing underwriter advises us that the number of shares to be
included in such a registration should be limited due to market
conditions or otherwise, and we initiated the registration, all
shares other than registrable securities, excluding shares to be
issued by us, will initially be excluded from the registration,
and if additional shares must be excluded from the registration,
holders of registrable securities will share pro rata in the
number of shares to be excluded from the registration based on
the respective numbers of registrable securities owned by such
holders, and if further additional shares must be excluded from
the registration, shares to be issued by us will be excluded. If
the managing underwriter advises us that the number of shares to
be included in such a registration should be limited due to
market conditions or otherwise, and the registration was
initiated by stockholders of the company other than holders of
registrable securities, shares to be issued by the company will
be excluded first, and if additional shares must be excluded
from the registration, holders of registrable securities will
share pro rata in the number of shares to be excluded from the
registration based on the respective numbers of registrable
securities owned by such holders, and if further additional
shares must be excluded from the registration, shares to be
registered by stockholders of the company other than holders of
registrable securities will be excluded in amounts as agreed by
such other stockholders.
We are also required not to make any public sale or distribution
of any of our securities during the 15 days prior to and
the 120 days after the effective date of any underwritten
demand registration or any underwritten piggyback registration
unless the managing underwriters agree otherwise. We will pay
substantially all of the registration expenses of the holders of
the shares registered pursuant to the demand and piggyback
registrations described above.
Indemnification
Rights
Pursuant to the investor rights agreement, we agree to indemnify
each party to that agreement and each holder or seller of
registrable securities against certain losses in connection with
any registration statement or any other disclosure document
produced by the company in relation to a registration under the
agreement, and each selling holder of registrable securities
agrees to indemnify the company against certain losses in
connection with any statement or omission furnished to the
company by such holder and included in a registration statement
or prospectus.
Anti-Takeover
Provisions
Delaware
Law
We are subject to Section 203 of the Delaware General
Corporation Law. Section 203 generally prohibits a public
Delaware corporation from engaging in a business
combination with an interested stockholder for
a period of three years after the date of the transaction in
which the person became an interested stockholder, unless:
|
|
|
|
|
prior to the date of the transaction, the board of directors of
the corporation approved either the business combination or the
transaction which resulted in the stockholder becoming an
interested stockholder;
|
|
|
|
the interested stockholder owned at least 85% of the voting
stock of the corporation outstanding at the time the transaction
commenced, excluding for purposes of determining the number of
shares outstanding (a) shares owned by persons who are
directors and also officers and (b) shares owned by
employee stock plans in which employee participants do not have
the right to determine confidentially whether shares held
subject to the plan will be tendered in a tender or exchange
offer; or
|
167
|
|
|
|
|
on or subsequent to the date of the transaction, the business
combination is approved by the board of directors and authorized
at an annual or special meeting of stockholders, and not by
written consent, by the affirmative vote of at least two-thirds
of the outstanding voting stock which is not owned by the
interested stockholder.
|
Section 203 defines a business combination to include:
|
|
|
|
|
any merger or consolidation involving the corporation and the
interested stockholder;
|
|
|
|
any sale, transfer, pledge or other disposition involving the
interested stockholder of 10% or more of the assets of the
corporation;
|
|
|
|
subject to exceptions, any transaction that results in the
issuance or transfer by the corporation of any stock of the
corporation to the interested stockholder; and
|
|
|
|
the receipt by the interested stockholder of the benefit of any
loans, advances, guarantees, pledges or other financial benefits
provided by or through the corporation.
|
In general, Section 203 defines an interested stockholder
as any entity or person beneficially owning 15% or more of the
outstanding voting stock of the corporation and any entity or
person affiliated with or controlling or controlled by the
entity or person. Because we were not subject to
Section 203 at the time they became stockholders, neither
the funds affiliated with Battery Ventures nor Petters Group
Worldwide and its affiliates are interested stockholders under
Section 203.
Certificate of
Incorporation and Bylaws
Provisions of our amended and restated certificate of
incorporation and amended and restated bylaws, each of which
will become effective upon the closing of this offering, may
delay or discourage transactions involving an actual or
potential change in control of our company or change in our
management, including transactions in which stockholders might
otherwise receive a premium for their shares, or transactions
that our stockholders might otherwise deem to be in their best
interests. Therefore, these provisions could adversely affect
the price of our common stock. Among other things, our amended
and restated certificate of incorporation and amended and
restated bylaws:
|
|
|
|
|
provide for our board of directors to be divided into three
classes with staggered three-year terms, with only one class of
directors being elected at each annual meeting of our
stockholders and the other classes continuing for the remainder
of their respective three-year terms;
|
|
|
|
permit our board of directors to issue up
to shares
of preferred stock, with any rights, preferences and privileges
as they may designate, including the right to approve an
acquisition or other change in our control;
|
|
|
|
provide that the authorized number of directors may only be
fixed by resolution of the board of directors;
|
|
|
|
provide that all vacancies, including newly created
directorships, may, except as otherwise required by law, be
filled by the affirmative vote of a majority of directors then
in office, even if less than a quorum;
|
|
|
|
provide that stockholders may not act by written consent in lieu
of a meeting;
|
|
|
|
provide that only directors may call a special meeting of
stockholders;
|
|
|
|
provide that any director may be removed from office only with
cause and only by the affirmative vote of the holders of
662/3%
or more of the outstanding shares of capital stock then entitled
to vote at an election of directors;
|
168
|
|
|
|
|
provide that stockholders seeking to present proposals before a
meeting of stockholders or to nominate candidates for election
as directors at a meeting of stockholders must provide notice in
writing in a timely manner, and also specify requirements as to
the form and content of a stockholders notice; and
|
|
|
|
do not provide for cumulative voting rights, therefore allowing
the holders of a majority of the shares of common stock entitled
to vote in any election of directors to elect all of the
directors standing for election, if they should so choose.
|
Limitation on
Liability of Directors and Indemnification
Our amended and restated certificate of incorporation, in the
form that will become effective upon the closing of this
offering, limits the liability of our directors to the fullest
extent permitted by Delaware law. Delaware law provides that
directors of a corporation will not be personally liable for
monetary damages for breach of their fiduciary duties as
directors, except for liability for any:
|
|
|
|
|
breach of their duty of loyalty to us or our stockholders;
|
|
|
|
act or omission not in good faith or that involves intentional
misconduct or a knowing violation of law;
|
|
|
|
unlawful payment of dividends or redemption of shares as
provided in Section 174 of the Delaware General Corporation
Law; or
|
|
|
|
transaction from which the directors derived an improper
personal benefit.
|
These limitations of liability do not apply to liabilities
arising under federal securities laws and do not affect the
availability of equitable remedies such as injunctive relief or
rescission.
Our amended and restated bylaws, in the form that will become
effective upon the closing of this offering, provide that we
will indemnify and advance expenses to our directors and
officers to the fullest extent permitted by law or, if
applicable, pursuant to indemnification agreements. They further
provide that we may choose to indemnify other employees or
agents of the corporation from time to time. Section 145(g)
of the Delaware General Corporation Law and our amended and
restated bylaws also permit us to secure insurance on behalf of
any officer, director, employee or other agent for any liability
arising out of his or her actions in connection with their
services to us, regardless of whether our bylaws permit
indemnification. We obtained a directors and
officers liability insurance policy.
Except as described above under Certain Relationships and
Related Party TransactionsThomas J. Petters and
Affiliates, at present there is no pending litigation or
proceeding involving any of our current or former directors or
officers as to which indemnification is required or permitted,
and we are not aware of any threatened litigation or proceeding
that may result in a claim for indemnification.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that
in the opinion of the SEC this indemnification is against public
policy as expressed in the Securities Act and is therefore
unenforceable.
Corporate
Opportunity
As permitted under the Delaware General Corporation Law, in our
certificate of incorporation, we will renounce any interest or
expectancy in, or in being offered an opportunity to participate
in, business opportunities that are presented to our officers,
directors or stockholders other than (i) business
opportunities presented to officers, directors or stockholders
who are employees of the company, or (ii) business
opportunities presented to an officer or director of the company
solely in his or her capacity as a director or officer of the
company.
169
Transfer Agent
and Registrar
The transfer agent and registrar for our common stock is Wells
Fargo Shareowner Services.
NASDAQ Stock
Market
We have applied to have our common stock listed on the NASDAQ
Global Select Market under the symbol BSTM.
170
SHARES ELIGIBLE
FOR FUTURE SALE
Prior to this offering, there has been no public market for our
common stock. Future sales of substantial amounts of our common
stock in the public market, or the perception that such sales
may occur, could adversely affect the prevailing market price of
our common stock. No prediction can be made as to the effect, if
any, future sales of shares, or the availability of shares for
future sales, will have on the market price of our common stock
prevailing from time to time. The sale of substantial amounts of
our common stock in the public market, or the perception that
such sales could occur, could harm the prevailing market price
of our common stock.
Sale of Restricted Shares
Upon the completion of this offering, based upon the number of
shares of our common stock outstanding as
of ,
and assuming the conversion of all outstanding shares of our
preferred stock
into shares
of common stock upon the completion of this offering and payment
of accrued and unpaid dividends on the conversion of the
preferred stock in the form of common stock estimated to
be shares,
and further assuming no exercise of outstanding options and
warrants, we will
have shares
of our common stock outstanding. Of these
shares, shares,
or in the event the underwriters over-allotment option is
exercised in
full, shares,
of our common stock sold in this offering will be freely
tradable without restriction under the Securities Act, except
for any shares of our common stock purchased by our affiliates,
as that term is defined in Rule 144 under the Securities
Act of 1933, which would be subject to the limitations and
restrictions described below.
The
remaining shares
of our common stock outstanding upon completion of this offering
are deemed restricted shares, as that term is defined under
Rule 144 of the Securities Act.
Restricted securities may be sold in the public market only if
registered or if they qualify for an exemption from registration
under Rule 144 or 701 under the Securities Act, which rules
are described below.
The restricted shares and the shares held by our affiliates will
be available for sale in the public market as follows:
|
|
|
|
|
shares
will be eligible for sale immediately on the date of this
prospectus pursuant to Rule 144;
|
|
|
|
shares
will be eligible for sale at various times beginning
90 days after the date of this prospectus pursuant to
Rules 144 and 701; and
|
|
|
|
shares
subject to the
lock-up
agreements will be eligible for sale at various times beginning
180 days after the date of effectiveness of the
registration statement of which this prospectus forms a part
pursuant to Rules 144 and 701 (or upon earlier waiver).
|
Rule 144
Under Rule 144, in general, persons who became the
beneficial owner of shares of our common stock prior to the
completion of this offering may not sell their shares until the
earlier of (i) the expiration of a six-month holding
period, if we have been subject to the reporting requirements of
the Exchange Act and have filed all required reports for at
least 90 days prior to the date of the sale, or
(ii) the expiration of a one-year holding period.
At the expiration of the six-month holding period, a person who
was not one of our affiliates at any time during the three
months preceding a sale would be entitled to sell an
171
unlimited number of shares of our common stock provided current
public information about us is available, and a person who was
one of our affiliates at any time during the three months
preceding a sale would be entitled to sell within any
three-month period only a number of shares of common stock that
does not exceed the greater of either of the following:
|
|
|
|
|
1% of the number of shares of our common stock then outstanding,
which will equal
approximately shares
immediately after this offering; or
|
|
|
|
the average weekly trading volume of our common stock on the
NASDAQ Global Select Market during the four calendar weeks
preceding the filing of a notice on Form 144 with respect
to the sale.
|
At the expiration of the one-year holding period, a person who
was not one of our affiliates at any time during the three
months preceding a sale would be entitled to sell an unlimited
number of shares of our common stock without restriction. A
person who was one of our affiliates at any time during the
three months preceding a sale would remain subject to the volume
restrictions described above.
Sales under Rule 144 by our affiliates are also subject to
manner of sale provisions and notice requirements and to the
availability of current public information about us.
Rule 701
In general, under Rule 701, any of our employees,
directors, officers, consultants or advisors who purchased
shares from us in connection with a compensatory stock or option
plan or other written agreement before the effective date of
this offering, or who purchased shares from us after that date
upon the exercise of options granted before that date, are
eligible to resell such shares in reliance upon Rule 144
beginning 90 days after the date of this prospectus. If
such person is not an affiliate, the sale may be made subject
only to the
manner-of-sale
restrictions of Rule 144. If such a person is an affiliate,
the sale may be made under Rule 144 without compliance with
its one-year minimum holding period, but subject to the other
Rule 144 restrictions.
Options and
Warrants
Upon completion of this offering, stock options to purchase a
total
of shares
of our common stock will be outstanding with a weighted average
per share exercise price of
$ .
We have
reserved shares
of common stock for issuance pursuant to our 2008 Plan. This
number is subject to increase on an annual basis and subject to
increase for shares of stock subject to awards under our prior
equity plans that expire unexercised or otherwise do not result
in the issuance of shares subject to the award. Upon completion
of this offering, warrants to purchase a total
of shares
of our common stock will be outstanding with a weighted average
per share exercise price of
$ .
In general, under Rule 701 of the Securities Act as
currently in effect, any of our employees, consultants or
advisors who purchase shares of our common stock from us
pursuant to options granted prior to the completion of this
offering under one of our current or former stock option plans
or other written agreement is eligible to resell those shares
90 days after the effective date of this offering in
reliance on Rule 144, but without compliance with some of
the restrictions, including the holding period, contained in
Rule 144. Additionally, following the consummation of this
offering, we intend to file one or more registration statements
on
Form S-8
under the Securities Act to register shares of our common stock
issued or reserved for issuance under our 2003 Plan, 2005 Plan
and 2008 Plan. The first such registration statement is expected
to be filed soon after the date of this prospectus and will
automatically become effective upon filing with the SEC.
Accordingly, shares registered under such registration statement
will be available for sale in the open market following the
effective date, unless such shares are
172
subject to vesting restrictions with us, Rule 144
restrictions applicable to our affiliates or the
lock-up
restrictions described below.
Lock-Up
Agreements
We, each of our officers, directors, the selling stockholders
and holders of substantially all of our capital stock and
warrants, have agreed, subject to certain exceptions, with the
underwriters not to dispose of or hedge any of the shares of
common stock or securities convertible into or exchangeable for
shares of common stock during the period ending 180 days
after the effectiveness of the registration statement of which
this prospectus forms a part without the prior written consent
of Deutsche Bank Securities Inc. and Piper Jaffray &
Co., except, in our case, for the issuance of common stock upon
either the exercise of outstanding warrants or the exercise of
options under existing option plans, the grant of equity awards
under existing option plans, and certain other exceptions.
Deutsche Bank Securities Inc. and Piper Jaffray & Co.
may, in their sole discretion, release any of these shares from
these restrictions at any time upon providing notice as required
by applicable FINRA rules. Deutsche Bank Securities Inc. and
Piper Jaffray & Co. have advised us that there are no
specific criteria for the waiver of the
lock-up
restrictions. See Underwriting.
Registration
Rights
Certain of our stockholders have registration rights pursuant to
an investor rights agreement amongst the company and those
stockholders. See Description of Capital Stock for a
more detailed description of registration rights.
173
MATERIAL U.S.
FEDERAL INCOME AND ESTATE TAX
CONSIDERATIONS TO
NON-U.S.
HOLDERS
The following is a summary of material U.S. federal income
and estate tax consequences of the purchase, ownership and
disposition of our common stock to a
non-U.S. holder
that purchases shares of our common stock in this offering. For
purposes of this summary, a
non-U.S. holder
means a beneficial owner of our common stock that is, for
U.S. federal income tax purposes:
|
|
|
|
|
a nonresident alien individual;
|
|
|
|
a foreign corporation or an entity treated as a foreign
corporation for U.S. federal income tax purposes;
|
|
|
|
a foreign estate; or
|
|
|
|
a foreign trust.
|
In the case of a holder that is classified as a partnership for
U.S. federal income tax purposes, the tax treatment of a
partner in such partnership generally will depend upon the
status of the partner and the activities of the partner and the
partnership. If you are a partner in a partnership holding our
common stock, then you should consult your own tax advisor.
This summary is based upon the provisions of the
U.S. Internal Revenue Code of 1986, as amended, which we
refer to as the Code, the Treasury regulations promulgated
thereunder and administrative and judicial interpretations
thereof, all as of the date hereof. Those authorities may be
changed, perhaps retroactively, so as to result in
U.S. federal income tax consequences different from those
summarized below. We cannot assure you that a change in law will
not alter significantly the tax considerations that we describe
in this summary. We have not sought and do not plan to seek any
ruling from the U.S. Internal Revenue Service, which we
refer to as the IRS, with respect to statements made and the
conclusions reached in the following summary, and there can be
no assurance that the IRS or a court will agree with our
statements and conclusions.
This summary does not address all aspects of U.S. federal
income taxes that may be relevant to
non-U.S. holders
in light of their personal circumstances, and does not deal with
federal taxes other than the U.S. federal income tax or
estate tax or with
non-U.S.,
state or local tax considerations. Special rules, not discussed
here, may apply to certain
non-U.S. holders,
including:
|
|
|
|
|
U.S. expatriates;
|
|
|
|
controlled foreign corporations;
|
|
|
|
passive foreign investment companies;
|
|
|
|
corporations that accumulate earnings to avoid U.S. federal
income tax; and
|
|
|
|
investors in pass-through entities that are subject to special
treatment under the Code.
|
Such
non-U.S. holders
should consult their own tax advisors to determine the
U.S. federal, state, local and other tax consequences that
may be relevant to them.
This summary applies only to a
non-U.S. holder
that holds our common stock as a capital asset (within the
meaning of Section 1221 of the Code).
If you are considering the purchase of our common stock, you
should consult your own tax advisor concerning the particular
U.S. federal income tax consequences to you of the
purchase, ownership and disposition of our common stock, as well
as the consequences to you arising under U.S. tax laws
other than the federal income tax law or under the laws of any
other taxing jurisdiction.
174
Dividends
As discussed under the section entitled Dividend
Policy above, we do not currently anticipate paying
dividends. In the event that we do make a distribution of cash
or property with respect to our common stock, any such
distributions will be treated as a dividend for
U.S. federal income tax purposes to the extent paid from
our current or accumulated earnings and profits, as determined
under U.S. federal income tax principles. Dividends paid to
you generally will be subject to withholding of
U.S. federal income tax at a 30% rate or such lower rate as
may be specified by an applicable income tax treaty. However,
dividends that are effectively connected with your conduct of a
trade or business within the United States and, if required by
an applicable income tax treaty, are attributable to a United
States permanent establishment, are not subject to the
withholding tax, provided certain certification and disclosure
requirements are satisfied. Instead, such dividends are subject
to U.S. federal income tax on a net income basis in the
same manner as if you were a United States person as defined
under the Code. Any such effectively connected dividends
received by a foreign corporation may be subject to an
additional branch profits tax at a 30% rate or such
lower rate as may be specified by an applicable income tax
treaty.
If the amount of a distribution paid on our common stock exceeds
our current and accumulated earnings and profits, such excess
will be allocated ratably among each share of common stock with
respect to which the distribution is paid and treated first as a
tax-free return of capital to the extent of your adjusted tax
basis in each such share, and thereafter as capital gain from a
sale or other disposition of such share of common stock that is
taxed to you as described below under the heading
Gain on Disposition of Common Stock.
If you wish to claim the benefit of an applicable treaty rate to
avoid or reduce withholding of U.S. federal income tax for
dividends, then you must (a) provide the withholding agent
with a properly completed IRS
Form W-8BEN
(or other applicable form) and certify under penalties of
perjury that you are not a U.S. person as defined under the
Code and are eligible for treaty benefits, or (b) if our
common stock is held through certain foreign intermediaries,
satisfy the relevant certification requirements of applicable
U.S. Treasury regulations. Special certification and other
requirements apply to certain
non-U.S. holders
that act as intermediaries (including partnerships).
If you are eligible for a reduced rate of U.S. federal
income tax pursuant to an income tax treaty, then you may obtain
a refund of any excess amounts withheld by filing timely an
appropriate claim for refund with the IRS.
Gain on
Disposition of Common Stock
You generally will not be subject to U.S. federal income
tax with respect to gain realized on the sale or other taxable
disposition of our common stock, unless:
|
|
|
|
|
the gain is effectively connected with your trade or business in
the United States (and, if required by an applicable income tax
treaty, is attributable to your United States permanent
establishment);
|
|
|
|
if you are an individual, you are present in the United States
for 183 days or more in the taxable year of the sale or
other taxable disposition, and you have a tax home
(as defined in the Code) in the United States; or
|
|
|
|
we are or have been during a specified testing period a
U.S. real property holding corporation for
U.S. federal income tax purposes, and certain other
conditions are met.
|
We believe that we have not been and are not, and we do not
anticipate becoming, a U.S. real property holding
corporation for U.S. federal income tax purposes.
175
If you are an individual
non-U.S. holder
described in the first bullet point immediately above, you will
be subject to tax on the net gain derived from the sale under
regular graduated United States federal income tax rates. If you
are an individual
non-U.S. holder
described in the second bullet point immediately above, you will
be subject to a flat 30% tax on the gain derived from the sale,
which may be offset by United States source capital losses, even
though you are not considered a resident of the United States.
If a
non-U.S. holder
that is a foreign corporation falls under the first bullet point
immediately above, it will be subject to tax on its net gain in
the same manner as if it were a United States person as defined
under the Code and, in addition, if a corporation, may be
subject to the branch profits tax equal to 30% of its
effectively connected earnings and profits or at such lower rate
as may be specified by an applicable income tax treaty.
Federal Estate
Tax
Common stock held by an individual
non-U.S. holder
at the time of death will be included in such holders
gross estate for U.S. federal estate tax purposes, unless
an applicable estate tax treaty provides otherwise.
Information
Reporting and Backup Withholding Tax
We must report annually to the IRS and to you the amount of
dividends paid to you and the amount of tax, if any, withheld
with respect to such dividends, regardless of whether
withholding was required. The IRS may make this information
available to the tax authorities in the country in which you are
resident.
In addition, you may be subject to information reporting
requirements and backup withholding tax (currently at a rate of
28%) with respect to dividends paid on, and the proceeds of
disposition of, shares of our common stock, unless, generally,
you certify under penalties of perjury (usually on IRS
Form W-8BEN)
that you are not a U.S. person or you otherwise establish
an exemption. Additional rules relating to information reporting
requirements and backup withholding tax with respect to payments
of the proceeds from the disposition of shares of our common
stock are as follows:
|
|
|
|
|
If the proceeds are paid to or through the U.S. office of a
broker, the proceeds generally will be subject to backup
withholding tax and information reporting, unless you certify
under penalties of perjury (usually on IRS
Form W-8BEN)
that you are not a U.S. person (and we do not have actual
knowledge or reason to know that you are a U.S. person) or
you otherwise establish an exemption.
|
|
|
|
If the proceeds are paid to or through a
non-U.S. office
of a broker that is not a U.S. person and is not a foreign
person with certain specified U.S. connections (a
U.S.-related
person), information reporting and backup withholding tax
generally will not apply.
|
|
|
|
If the proceeds are paid to or through a
non-U.S. office
of a broker that is a U.S. person or a
U.S.-related
person, the proceeds generally will be subject to information
reporting (but not to backup withholding tax), unless you
certify under penalties of perjury (usually on IRS
Form W-8BEN)
that you are not a U.S. person or you otherwise establish
an exemption.
|
Any amounts withheld under the backup withholding tax rules may
be allowed as a refund or a credit against your
U.S. federal income tax liability, provided the required
information is timely furnished by you to the IRS.
176
Additional
Withholding Requirements
Under recently enacted legislation, the relevant withholding
agent may be required to withhold 30% of any dividends and the
proceeds of a sale of our common stock paid after
December 31, 2012 to (i) a foreign financial
institution unless such foreign financial institution agrees to
verify, report and disclose its U.S. accountholders to the
IRS and meets certain other specified requirements or is
otherwise exempt from such withholding or (ii) a
non-financial foreign entity that is the beneficial owner of the
payment unless such entity certifies with the relevant
withholding agent that it does not have any substantial United
States owners or provides the name, address and taxpayer
identification number of each substantial United States owner
and such entity meets certain other specified requirements, or
is otherwise exempt from withholding.
THE SUMMARY OF MATERIAL U.S. FEDERAL INCOME AND ESTATE
TAX CONSEQUENCES ABOVE IS INCLUDED FOR GENERAL INFORMATION
PURPOSES ONLY. POTENTIAL PURCHASERS OF OUR COMMON STOCK ARE
URGED TO CONSULT THEIR OWN TAX ADVISORS TO DETERMINE THE
U.S. FEDERAL, STATE, LOCAL AND
NON-U.S. TAX
CONSIDERATIONS OF PURCHASING, OWNING AND DISPOSING OF OUR COMMON
STOCK.
177
UNDERWRITING
Subject to the terms and conditions of the underwriting
agreement, the underwriters named below, through their
representatives Deutsche Bank Securities Inc. and Piper
Jaffray & Co., have severally agreed to purchase from
us and from the selling stockholders the following respective
number of shares of common stock at a public offering price less
the underwriting discounts and commissions set forth on the
cover page of this prospectus:
|
|
|
|
|
|
|
Number of
|
|
Underwriters
|
|
Shares
|
|
|
Deutsche Bank Securities Inc.
|
|
|
|
|
Piper Jaffray & Co.
|
|
|
|
|
Oppenheimer & Co. Inc.
|
|
|
|
|
William Blair & Company, L.L.C.
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
The underwriting agreement provides that the obligations of the
several underwriters to purchase the shares of common stock
offered hereby are subject to certain conditions precedent and
that the underwriters will purchase all of the shares of common
stock offered by this prospectus, other than those covered by
the over-allotment option described below, if any of these
shares are purchased.
We have been advised by the representatives of the underwriters
that the underwriters propose to offer the shares of common
stock to the public at the public offering price set forth on
the cover of this prospectus and to dealers at a price that
represents a concession not in excess of
$
per share under the public offering price. The underwriters may
allow, and these dealers may re-allow, a concession of not more
than
$
per share to other dealers. After the initial public offering,
representatives of the underwriters may change the offering
price and other selling terms.
We have granted to the underwriters an option, exercisable from
time to time, not later than 30 days after the date of this
prospectus, to purchase up
to
additional shares of common stock at the public offering price
less the underwriting discounts and commissions set forth on the
cover page of this prospectus. The underwriters may exercise
this option only to cover over-allotments made in connection
with the sale of the common stock offered by this prospectus. To
the extent that the underwriters exercise this option, each of
the underwriters will become obligated, subject to conditions,
to purchase approximately the same percentage of these
additional shares of common stock as the number of shares of
common stock to be purchased by it in the above table bears to
the total number of shares of common stock offered by this
prospectus. We will be obligated, pursuant to the option, to
sell these additional shares of common stock to the underwriters
to the extent the option is exercised. If any additional shares
of common stock are purchased, the underwriters will offer the
additional shares on the same terms as those on which the shares
are being offered.
The underwriting discounts and commissions per share are equal
to the public offering price per share of common stock less the
amount paid by the underwriters to us per share of common stock.
The underwriting discounts and commissions
are % of the initial public
offering price. We and the selling stockholders have agreed to
pay the underwriters the
178
following discounts and commissions, assuming either no exercise
or full exercise by the underwriters of the underwriters
over-allotment option:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fees
|
|
|
|
|
Without Exercise of
|
|
With Full Exercise of
|
|
|
Fee per
|
|
Over-Allotment
|
|
Over-Allotment
|
|
|
share
|
|
Option
|
|
Option
|
|
Discounts and commissions paid by us
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Discounts and commissions paid by selling stockholders
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
In addition, we estimate that our share of the total expenses of
this offering, excluding underwriting discounts and commissions,
will be approximately $ .
We and the selling stockholders have agreed to indemnify the
underwriters, and Piper Jaffray & Co. in its role as
qualified independent underwriter under FINRA
Rule 5121, against some specified types of liabilities,
including liabilities under the Securities Act, and to
contribute to payments the underwriters may be required to make
in respect of any of these liabilities.
Each of our officers and directors, and holders of substantially
all of our capital stock and warrants, as well as the selling
stockholders have agreed not to offer, sell, contract to sell,
grant any option to purchase or otherwise dispose of, or enter
into any transaction that is designed to, or could be expected
to, result in the disposition of any shares of our common stock
or other securities convertible into or exchangeable or
exercisable for shares of our common stock or derivatives of our
common stock owned by these persons prior to this offering or
common stock issuable upon exercise of options or warrants held
by these persons during the period ending 180 days after
the effective date of the registration statement of which this
prospectus is a part without the prior written consent of the
representatives of the underwriters. Transfers or dispositions
can be made during the
lock-up
period in the case of:
|
|
|
|
|
transfers of shares of common stock made pursuant to this
offering;
|
|
|
|
transfers of shares of common stock acquired in the open market,
provided no filing under the Exchange Act shall be required or
shall be voluntarily made by the transferor in connection with
such transfers;
|
|
|
|
the establishment of a trading plan pursuant to
Rule 10b5-1
under the Exchange Act for the transfer of common stock,
provided that such plan does not provide for the transfer of
common stock during the restricted period;
|
|
|
|
transfers of shares of common stock or our other securities as a
bona fide gift;
|
|
|
|
transfers of shares of common stock or our other securities to a
family member or trust, or by will, revocable trust or similar
instrument, or intestate succession upon the death of the
transferor;
|
|
|
|
distributions of shares of common stock or our other securities
to a corporation, partnership, limited liability company or
other business entity that is an affiliate, as defined in
Rule 405 under the Securities Act, of the
transferor, or
|
|
|
|
as part of a distribution to shareholders, partners or members
of, or owners of a similar equity interest in, the transferor.
|
In addition, in the case of a transfer pursuant to the fourth,
fifth, sixth or seventh bullets above, the transfer will not be
permitted unless the transferee agrees in writing to be bound by
the terms of the
lock-up
agreement and no filing under the Exchange Act shall be required
or shall be voluntarily made by the transferor or transferee in
connection with such transfers. We have entered into a similar
agreement with the representatives of the underwriters except
that without such consent we may grant options and issue shares
pursuant to our equity incentive
179
plans, and we may issue shares of our common stock in connection
with the conversion of our outstanding preferred stock as
discussed in this prospectus.
There are no agreements between the representatives and any of
our stockholders or affiliates releasing them from these
lock-up
agreements prior to the expiration of the period ending
180 days after the effectiveness of the registration
statement of which this prospectus is a part.
The representatives of the underwriters have advised us that the
underwriters do not intend to confirm sales to any account over
which they exercise discretionary authority.
In connection with the offering, the underwriters may purchase
and sell shares of our common stock in the open market. These
transactions may include short sales, purchases to cover
positions created by short sales and stabilizing transactions.
Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the
offering. Covered short sales are sales made in an amount not
greater than the underwriters option to purchase
additional shares of common stock from us in the offering. The
underwriters may close out any covered short position by either
exercising their option to purchase additional shares or
purchasing shares in the open market. In determining the source
of shares to close out the covered short position, the
underwriters will consider, among other things, the price of
shares available for purchase in the open market as compared to
the price at which they may purchase shares through the
over-allotment option.
Naked short sales are any sales in excess of the over-allotment
option. The underwriters must close out any naked short position
by purchasing shares in the open market. A naked short position
is more likely to be created if underwriters are concerned that
there may be downward pressure on the price of the shares in the
open market prior to the completion of the offering.
Stabilizing transactions consist of various bids for or
purchases of our common stock made by the underwriters in the
open market prior to the completion of the offering.
The underwriters may impose a penalty bid. This occurs when a
particular underwriter repays to the other underwriters a
portion of the underwriting discount received by it because the
representatives of the underwriters have repurchased shares sold
by or for the account of that underwriter in stabilizing or
short covering transactions.
Purchases to cover a short position and stabilizing transactions
may have the effect of preventing or slowing a decline in the
market price of our common stock. Additionally, these purchases,
along with the imposition of the penalty bid, may stabilize,
maintain or otherwise affect the market price of our common
stock. As a result, the price of our common stock may be higher
than the price that might otherwise exist in the open market.
These transactions may be effected on the NASDAQ Global Select
Market, in the
over-the-counter
market or otherwise.
A prospectus in electronic format is being made available on
websites maintained by one or more of the lead underwriters of
this offering and may be made available on websites maintained
by other underwriters. Other than the prospectus in electronic
format, the information on any underwriters website and
any information contained in any other website maintained by an
underwriter is not part of the prospectus or the registration
statement of which the prospectus forms a part.
Conflict of
Interest
Deutsche Bank AG (an affiliate of Deutsche Bank Securities Inc.)
is a lender to us under the Revolving Credit Tranche of our A/R
Credit Facility. Because more than 5% of the net proceeds of
this offering will be used to repay Deutsche Bank AGs
share of the Revolving Credit Tranche of the A/R Credit
Facility, Deutsche Bank Securities Inc. is deemed to have a
conflict of interest
180
under FINRA Rule 5121 and consequently the offering will be
conducted in accordance with that rule. This rule requires,
among other things, that a qualified independent underwriter has
participated in the preparation of, and has exercised the usual
standards of due diligence in respect to, the
registration statement and this prospectus. Piper
Jaffray & Co. has agreed to act as qualified
independent underwriter for the offering. As required by FINRA
Rule 5121, Deutsche Bank Securities Inc. will not confirm
sales to any account over which it exercises discretionary
authority without the specific written approval of the
accountholder.
Other
Relationships
Some of the underwriters or their affiliates have provided
investment banking services to us in the past and may do so in
the future. They receive customary fees and commissions for
these services.
Pricing of this
Offering
Prior to this offering, there has been no public market for our
common stock. Consequently, the initial public offering price of
our common stock will be determined by negotiation among us, the
selling stockholders, and the representatives of the
underwriters. Among the primary factors that will be considered
in determining the public offering price are:
|
|
|
|
|
prevailing market conditions;
|
|
|
|
our results of operations in recent periods;
|
|
|
|
the present stage of our development;
|
|
|
|
the market capitalizations and stages of development of other
companies that we and the representatives of the underwriters
believe to be comparable to our business; and
|
|
|
|
estimates of our business potential.
|
181
MARKET AND
INDUSTRY DATA
We obtained the industry, market and competitive position data
throughout this prospectus from our own internal estimates and
research, as well as from industry and general publications and
research, surveys and studies conducted by third parties.
Industry publications, studies and surveys generally state that
they have been obtained from sources believed to be reliable,
although they do not guarantee the accuracy or completeness of
such information. While we believe that each of these studies
and publications is reliable, we have not independently verified
market and industry data from third party sources. While we
believe our internal company research is reliable and the
definitions of our market and industry are appropriate, neither
such research nor these definitions have been verified by any
independent source.
LEGAL
MATTERS
The validity of the common stock offered hereby will be passed
upon for us by Faegre & Benson LLP, Minneapolis,
Minnesota. The validity of the common stock offered hereby will
be passed upon for the underwriters by Cleary Gottlieb
Steen & Hamilton LLP.
EXPERTS
The consolidated financial statements of Bluestem Brands, Inc.
as of January 28, 2011 and January 29, 2010, and for
each of the three years in the period ended January 28,
2011, included in this prospectus and the related financial
statement schedule included elsewhere in the registration
statement have been audited by Deloitte & Touche LLP,
an independent registered public accounting firm, as stated in
their report appearing herein and elsewhere in the registration
statement which report expresses an unqualified opinion on the
consolidated financial statements and the financial statement
schedule and includes an explanatory paragraph relating to the
restatement discussed in Note 14 and an explanatory
paragraph relating to the adoption of Financial Accounting
Standards Board Accounting Standards Codification Topic
815-40,
Derivatives and Hedging, discussed in Note 1. Such
consolidated financial statements and financial statement
schedule have been so included in reliance upon the reports of
such firm given upon their authority as experts in accounting
and auditing.
WHERE YOU CAN
FIND MORE INFORMATION
We have filed with the SEC a registration statement on
Form S-1
under the Securities Act that registers the shares of our common
stock to be sold in this offering. The registration statement,
including the attached exhibits, contains additional relevant
information about us and our common stock. The rules and
regulations of the SEC allow us to omit from this document
certain information included in the registration statement.
You may read and copy the reports and other information we file
with the SEC at the SECs Public Reference Room at
100 F Street, N.E., Room 1580,
Washington, D.C. 20549. You may also obtain copies of this
information by mail from the public reference room of the SEC,
100 F Street, N.E., Washington, D.C. 20549, at
prescribed rates. You may obtain information regarding the
operation of the public reference room by calling
1-800-SEC-0330.
The SEC also maintains a website that contains reports, proxy
statements and other information about issuers, like us, who
file electronically with the SEC. The address of that website is
http://www.sec.gov.
This reference to the SECs website is an inactive textual
reference only and is not a hyperlink.
182
Upon completion of this offering, we will become subject to the
reporting, proxy and information requirements of the Exchange
Act and, as a result, will be required to file periodic reports,
proxy statements and other information with the SEC. These
periodic reports, proxy statements and other information will be
available for inspection and copying at the SECs public
reference room and the website of the SEC referred to above, as
well as on our
website, .
This reference to our website is an inactive textual reference
only and is not a hyperlink. The contents of our website are not
part of this prospectus, and you should not consider the
contents of our website in making an investment decision with
respect to our common stock.
We intend to furnish our stockholders with annual reports
containing audited financial statements and make available to
our stockholders quarterly reports for the first three quarters
of each fiscal year containing unaudited interim financial
information.
183
BLUESTEM BRANDS,
INC.
|
|
|
|
|
|
|
Page
|
|
Report of Independent Registered Public Accounting Firm
|
|
|
F-2
|
|
CONSOLIDATED FINANCIAL STATEMENTS:
|
|
|
|
|
Consolidated Balance Sheets as of January 28, 2011 and
January 29, 2010
|
|
|
F-3
|
|
Consolidated Statements of Operations for the Years Ended
January 28, 2011, January 29, 2010 and
January 30, 2009
|
|
|
F-4
|
|
Consolidated Statements of Cash Flows for the Years Ended
January 28, 2011, January 29, 2010 and
January 30, 2009
|
|
|
F-5
|
|
Consolidated Statements of Shareholders Deficit for the
Years Ended January 28, 2011, January 29, 2010 and
January 30, 2009
|
|
|
F-6
|
|
Notes to Consolidated Financial Statements
|
|
|
F-7 to F-42
|
|
|
|
|
|
|
UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
|
|
|
|
|
Condensed Consolidated Balance Sheets as of April 29, 2011,
January 28, 2011 and April 30, 2010
|
|
|
F-43
|
|
Condensed Consolidated Statements of Operations for the 13 Weeks
Ended April 29, 2011 and April 30, 2010
|
|
|
F-44
|
|
Condensed Consolidated Statements of Cash Flows for the 13 Weeks
Ended April 29, 2011 and April 30, 2010
|
|
|
F-45
|
|
Condensed Consolidated Statements of Shareholders Deficit
for the 13 Weeks Ended April 30, 2010 and April 29,
2011
|
|
|
F-46
|
|
Notes to Unaudited Condensed Consolidated Financial Statements
|
|
|
F-47 to F-63
|
|
|
|
|
|
|
CONDENSED PARENT ONLY FINANCIAL STATEMENTS:
|
|
|
|
|
Schedule
|
|
|
Exhibit 99.1
|
|
F-1
INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Bluestem Brands, Inc.
Eden Prairie, Minnesota
We have audited the accompanying consolidated balance sheets of
Bluestem Brands, Inc. (the Company) as of
January 28, 2011 and January 29, 2010, and the related
consolidated statements of operations, shareholders
deficit, and cash flows for each of the three years in the
period ended January 28, 2011. Our audits also included the
financial statement schedule listed in the Index to Financial
Information. These consolidated financial statements and
financial statement schedule are the responsibility of the
Companys management. Our responsibility is to express an
opinion on the consolidated financial statements and financial
statement schedule based on our audits.
We conducted our audits 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 the financial statements are
free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of
Bluestem Brands, Inc. as of January 28, 2011 and
January 29, 2010 and the results of their operations and
their cash flows for each of the three years in the period ended
January 28, 2011, in conformity with accounting principles
generally accepted in the United States of America. Also, in our
opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as
a whole, present fairly in all material respects the information
set forth therein.
As discussed in Note 14 to the consolidated financial
statements, the accompanying January 29, 2010 financial
statements have been restated.
As discussed in Note 1 to the consolidated financial
statements, the Company adopted the provisions of Financial
Accounting Standards Board Accounting Standards Codification
Topic 815-40,
Derivatives and Hedging, effective as of January 31,
2009.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
April 21, 2011
F-2
|
|
|
|
|
|
|
|
|
|
|
January 28,
|
|
|
January 29,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
as restated
|
|
|
|
|
|
|
- see Note 14
|
|
|
ASSETS
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,055
|
|
|
$
|
2,614
|
|
Restricted cash
|
|
|
8,303
|
|
|
|
35,657
|
|
Customer accounts receivablenet of allowance of $109,211
and $98,394, respectively
|
|
|
492,836
|
|
|
|
390,842
|
|
Merchandise inventories
|
|
|
44,396
|
|
|
|
41,534
|
|
Promotional material inventories
|
|
|
14,362
|
|
|
|
12,386
|
|
Deferred income taxes
|
|
|
11,576
|
|
|
|
8,465
|
|
Prepaid expenses and other assets
|
|
|
12,631
|
|
|
|
11,138
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
585,159
|
|
|
|
502,636
|
|
PROPERTY AND EQUIPMENTnet
|
|
|
22,526
|
|
|
|
19,169
|
|
DEFERRED CHARGES
|
|
|
6,223
|
|
|
|
1,783
|
|
OTHER ASSETS
|
|
|
94
|
|
|
|
741
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
614,002
|
|
|
$
|
524,329
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES, MEZZANINE EQUITY, AND SHAREHOLDERS EQUITY
(DEFICIT)
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
58,850
|
|
|
$
|
53,376
|
|
Current income taxes payable
|
|
|
6,900
|
|
|
|
3,899
|
|
Accrued costs and other liabilities
|
|
|
18,938
|
|
|
|
14,092
|
|
Derivative liabilities in our own equity
|
|
|
43,281
|
|
|
|
10,674
|
|
Short-term debt
|
|
|
225,509
|
|
|
|
246,828
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
353,478
|
|
|
|
328,869
|
|
LONG-TERM DEBT
|
|
|
104,474
|
|
|
|
28,915
|
|
OTHER LONG-TERM LIABILITIES
|
|
|
10,318
|
|
|
|
9,743
|
|
COMMITMENTS AND CONTINGENCIES (Note 9)
|
|
|
|
|
|
|
|
|
MEZZANINE EQUITY:
|
|
|
|
|
|
|
|
|
Series B convertible preferred stock, par value
$0.00001753,523,962 shares authorized; 752,181,500
and 750,839,038 shares issued and outstanding, respectively
|
|
|
65,199
|
|
|
|
61,389
|
|
Series A convertible preferred stock, par value
$0.00001791,738,012 shares authorized; 749,995,554
and 749,995,554 shares issued and outstanding, respectively
|
|
|
132,740
|
|
|
|
122,916
|
|
SHAREHOLDERS EQUITY (DEFICIT):
|
|
|
|
|
|
|
|
|
Common stock, par value $0.000012,592,550,586 shares
authorized; 333,670,246 and 322,028,884 shares issued and
outstanding, respectively, actual
|
|
|
3
|
|
|
|
3
|
|
Additional paid-in capital
|
|
|
|
|
|
|
|
|
Accumulated deficit
|
|
|
(52,210
|
)
|
|
|
(27,506
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders equity (deficit)
|
|
|
(52,207
|
)
|
|
|
(27,503
|
)
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES, MEZZANINE EQUITY, AND SHAREHOLDERS
EQUITY (DEFICIT)
|
|
$
|
614,002
|
|
|
$
|
524,329
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 28,
|
|
|
January 29,
|
|
|
January 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
as restated
|
|
|
|
|
|
|
|
|
|
- see Note 14
|
|
|
|
|
|
Net sales
|
|
$
|
521,307
|
|
|
$
|
438,189
|
|
|
$
|
423,338
|
|
Cost of sales
|
|
|
275,521
|
|
|
|
226,140
|
|
|
|
220,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
245,786
|
|
|
|
212,049
|
|
|
|
203,044
|
|
Sales and marketing expenses
|
|
|
130,091
|
|
|
|
109,384
|
|
|
|
110,404
|
|
Net credit expense (income)
|
|
|
(36,896
|
)
|
|
|
(22,316
|
)
|
|
|
1,105
|
|
General and administrative expenses
|
|
|
84,031
|
|
|
|
69,087
|
|
|
|
59,533
|
|
Loss from derivatives in our own equity
|
|
|
32,607
|
|
|
|
6,500
|
|
|
|
|
|
Loss on early extinguishment of debt
|
|
|
5,109
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
30,750
|
|
|
|
31,216
|
|
|
|
29,839
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
94
|
|
|
|
18,178
|
|
|
|
2,163
|
|
Income tax expense
|
|
|
11,618
|
|
|
|
8,956
|
|
|
|
828
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
(11,524
|
)
|
|
|
9,222
|
|
|
|
1,335
|
|
Series B convertible preferred stock accretion
|
|
|
(3,710
|
)
|
|
|
(3,491
|
)
|
|
|
(2,399
|
)
|
Series A convertible preferred stock accretion
|
|
|
(9,824
|
)
|
|
|
(9,111
|
)
|
|
|
(8,890
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to common shareholders
|
|
$
|
(25,058
|
)
|
|
$
|
(3,380
|
)
|
|
$
|
(9,954
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.1138
|
)
|
|
$
|
(0.0188
|
)
|
|
$
|
(0.0691
|
)
|
Diluted
|
|
|
(0.1138
|
)
|
|
|
(0.0188
|
)
|
|
|
(0.0691
|
)
|
Weighted average common shares used in computing net loss per
common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
220,181
|
|
|
|
179,757
|
|
|
|
144,114
|
|
Diluted
|
|
|
220,181
|
|
|
|
179,757
|
|
|
|
144,114
|
|
See notes to consolidated financial statements.
F-4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 28,
|
|
|
January 29,
|
|
|
January 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
as restated
|
|
|
|
|
|
|
|
|
|
- see Note 14
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(11,524
|
)
|
|
$
|
9,222
|
|
|
$
|
1,335
|
|
Adjustments to reconcile net (loss) income to net cash provided
by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation of fixed assetsincluding internal-use
software and website development amortization
|
|
|
8,746
|
|
|
|
7,246
|
|
|
|
6,285
|
|
Amortization of deferred charges and original issue discount
|
|
|
4,328
|
|
|
|
4,168
|
|
|
|
4,076
|
|
Loss from derivatives in our own equity
|
|
|
32,607
|
|
|
|
6,500
|
|
|
|
|
|
Non-cash component of loss on early extinguishment of debt
|
|
|
2,309
|
|
|
|
|
|
|
|
|
|
Loss on disposal of assets
|
|
|
497
|
|
|
|
37
|
|
|
|
411
|
|
Provision for doubtful accounts
|
|
|
89,524
|
|
|
|
83,102
|
|
|
|
93,332
|
|
Provision for merchandise returns
|
|
|
12,984
|
|
|
|
13,061
|
|
|
|
11,355
|
|
Deferred income taxes
|
|
|
(1,969
|
)
|
|
|
6,303
|
|
|
|
(851
|
)
|
Stock-based compensation
|
|
|
282
|
|
|
|
321
|
|
|
|
110
|
|
Other non-cash items affecting income
|
|
|
13,423
|
|
|
|
10,788
|
|
|
|
12,645
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer accounts receivable
|
|
|
(218,350
|
)
|
|
|
(157,650
|
)
|
|
|
(150,937
|
)
|
Merchandise inventories
|
|
|
(1,649
|
)
|
|
|
6,987
|
|
|
|
1,947
|
|
Promotional material inventories
|
|
|
(1,976
|
)
|
|
|
(576
|
)
|
|
|
4,142
|
|
Prepaid expenses and other current assets
|
|
|
(910
|
)
|
|
|
(881
|
)
|
|
|
(1,080
|
)
|
Current income taxes payable
|
|
|
3,001
|
|
|
|
3,117
|
|
|
|
(6,346
|
)
|
Accounts payable and other liabilities
|
|
|
9,582
|
|
|
|
20,466
|
|
|
|
(1,610
|
)
|
Other
|
|
|
|
|
|
|
(268
|
)
|
|
|
308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
|
(59,095
|
)
|
|
|
11,943
|
|
|
|
(24,878
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of fixed assetsincluding internal-use software
and website development
|
|
|
(12,570
|
)
|
|
|
(9,177
|
)
|
|
|
(6,635
|
)
|
Decrease (increase) in restricted cashnet
|
|
|
27,354
|
|
|
|
13,943
|
|
|
|
(26,796
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
14,784
|
|
|
|
4,766
|
|
|
|
(33,431
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings on revolving credit facilities
|
|
|
1,618,625
|
|
|
|
1,159,439
|
|
|
|
1,278,326
|
|
Repayments on revolving credit facilities
|
|
|
(1,576,045
|
)
|
|
|
(1,174,169
|
)
|
|
|
(1,284,523
|
)
|
Issuance of Series B convertible preferred stock
|
|
|
100
|
|
|
|
|
|
|
|
55,499
|
|
Issuance of common stock
|
|
|
72
|
|
|
|
77
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
42,752
|
|
|
|
(14,653
|
)
|
|
|
49,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
(1,559
|
)
|
|
|
2,056
|
|
|
|
(8,989
|
)
|
CASH AND CASH EQUIVALENTSBeginning of year
|
|
|
2,614
|
|
|
|
558
|
|
|
|
9,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTSEnd of year
|
|
$
|
1,055
|
|
|
$
|
2,614
|
|
|
$
|
558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
27,310
|
|
|
$
|
27,324
|
|
|
$
|
25,670
|
|
Income and franchise taxes paid
|
|
|
10,871
|
|
|
|
181
|
|
|
|
7,615
|
|
NON-CASH TRANSACTIONS:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment on account
|
|
$
|
30
|
|
|
$
|
1,278
|
|
|
$
|
817
|
|
Series B convertible preferred stock accretion
|
|
|
3,710
|
|
|
|
3,491
|
|
|
|
2,399
|
|
Series A convertible preferred stock accretion
|
|
|
9,824
|
|
|
|
9,111
|
|
|
|
8,890
|
|
See notes to consolidated financial statements.
F-5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Accumulated
|
|
|
Shareholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Deficit
|
|
|
BALANCEFebruary 1, 2008
|
|
|
162,245,335
|
|
|
$
|
2
|
|
|
$
|
|
|
|
$
|
(14,698
|
)
|
|
$
|
(14,696
|
)
|
Issuance of restricted common stock
|
|
|
107,650,000
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Issuance of common stock
|
|
|
869,713
|
|
|
|
|
|
|
|
18
|
|
|
|
|
|
|
|
18
|
|
Forfeitures of restricted common stock
|
|
|
(15,025,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
110
|
|
|
|
|
|
|
|
110
|
|
Series B convertible preferred stock accretion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,399
|
)
|
|
|
(2,399
|
)
|
Series A convertible preferred stock accretion
|
|
|
|
|
|
|
|
|
|
|
(128
|
)
|
|
|
(8,762
|
)
|
|
|
(8,890
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,335
|
|
|
|
1,335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCEJanuary 30, 2009
|
|
|
255,740,048
|
|
|
$
|
3
|
|
|
$
|
|
|
|
$
|
(24,524
|
)
|
|
$
|
(24,521
|
)
|
Issuance of restricted common stock
|
|
|
70,778,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
|
4,100,446
|
|
|
|
|
|
|
|
77
|
|
|
|
|
|
|
|
77
|
|
Forfeitures of restricted common stock
|
|
|
(8,590,462
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
321
|
|
|
|
|
|
|
|
321
|
|
Series B convertible preferred stock accretion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,491
|
)
|
|
|
(3,491
|
)
|
Series A convertible preferred stock accretion
|
|
|
|
|
|
|
|
|
|
|
(398
|
)
|
|
|
(8,713
|
)
|
|
|
(9,111
|
)
|
Net income, as restated, see Note 14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,222
|
|
|
|
9,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCEJanuary 29, 2010, as restated, see Note 14
|
|
|
322,028,884
|
|
|
$
|
3
|
|
|
$
|
|
|
|
$
|
(27,506
|
)
|
|
$
|
(27,503
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of restricted common stock
|
|
|
10,225,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
|
4,053,862
|
|
|
|
|
|
|
|
72
|
|
|
|
|
|
|
|
72
|
|
Forfeitures of restricted common stock
|
|
|
(2,637,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
282
|
|
|
|
|
|
|
|
282
|
|
Series B convertible preferred stock accretion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,710
|
)
|
|
|
(3,710
|
)
|
Series A convertible preferred stock accretion
|
|
|
|
|
|
|
|
|
|
|
(354
|
)
|
|
|
(9,470
|
)
|
|
|
(9,824
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,524
|
)
|
|
|
(11,524
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCEJanuary 28, 2011
|
|
|
333,670,246
|
|
|
$
|
3
|
|
|
$
|
|
|
|
$
|
(52,210
|
)
|
|
$
|
(52,207
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-6
BLUESTEM BRANDS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
As of January 28, 2011 and January 29, 2010 (Restated) and
For the Years Ended January 28, 2011, January 29, 2010
(Restated) and
January 30, 2009
|
|
1.
|
BUSINESS AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
BusinessBluestem Brands, Inc. (the
Company, we, our, or
us) is a national multi-channel retailer of general
merchandise targeting low to middle income consumers who
typically use the credit products we offer to finance their
purchases from our Fingerhut and Gettington.com brands. Both of
our brands offer a large selection of name-brand, private label,
and non-branded merchandise through our catalog and Internet
websites to customers in the United States. We primarily sell
consumer electronics, domestics, housewares, home furnishings,
childrens merchandise, and apparel. By combining our
proprietary marketing and credit decision-making technologies,
we are able to tailor merchandise and credit offers to
prospective as well as existing customers. Effective February
2010, the Company changed its name from Fingerhut Direct
Marketing, Inc. to Bluestem Brands, Inc.
Prior to February 17, 2010, our qualifying Fingerhut
customers were offered revolving credit accounts by CIT Bank.
Effective February 17, 2010, CIT Bank was replaced by
MetaBank as the originating bank for Fingerhut customer
revolving credit accounts. WebBank offers revolving credit
accounts to customers of our Gettington.com brand since our
launch of Gettington.com in September 2009. The Company
purchases all receivables resulting from the extension of credit
to our customers by MetaBank and WebBank (the Credit
Issuers), and did the same under the prior program with
CIT Bank, in each case after a contractual holding period by the
Credit Issuers, or CIT Bank. The Company also assumes the
servicing of the accounts and bears risk of loss due to
uncollectibility of the receivables. The revolving credit
account can only be used to purchase merchandise from Fingerhut,
Gettington.com, and from certain third parties that market their
products and services to our customers. See Note 2
Customer Accounts Receivable. Approximately 95% of sales
are on these revolving credit accounts.
Segment InformationWe manage our business as one
reportable segment where we market merchandise to individual
consumers through our catalog and Internet websites by including
a tailored revolving or installment credit plan offer. Our
customers value the combination of our merchandise and the
credit plan offer that affords them the convenience of paying
for their purchases over time. Our chief operating decision
maker assesses performance based on Contribution Margin, which
we define as net sales less cost of sales, sales and marketing
expenses, and net credit expense (income). Our use of
Contribution Margin as a key financial performance indicator
reflects the combined performance of our merchandising,
marketing and credit management, which we believe are
strategically indivisible.
Principles of ConsolidationThe consolidated
financial statements include the accounts of the Company and its
subsidiaries, all of which are wholly-owned. All intercompany
balances and transactions have been eliminated in the
consolidated financial statements.
Fiscal YearOur fiscal year ends on the Friday
closest to January 31. Fiscal year 2010 ended on
January 28, 2011, fiscal year 2009 ended on
January 29, 2010 and fiscal year 2008 ended on
January 30, 2009. These three fiscal years each included
52 weeks. References to years relate to fiscal years or
fiscal year ends rather than calendar years.
Use of EstimatesThe preparation of financial
statements in conformity with accounting principles generally
accepted in the United States of America (GAAP)
requires management
F-7
BLUESTEM BRANDS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those
estimates. Significant estimates in the consolidated financial
statements include revenue recognition, the allowance for
doubtful accounts, reserves for excess and obsolete merchandise
inventories, allowances for merchandise returns and customer
allowances, promotional material inventories, income taxes, and
valuation of stock-based awards, common stock and derivatives in
our own equity.
SeasonalityOur business is seasonal and
historically we have realized a higher portion of our net sales
and net income in the fourth fiscal quarter, attributable to the
impact of the holiday selling season. As a result, our working
capital requirements fluctuate during the year in anticipation
of the holiday selling season. The results of any interim period
may not be indicative of the results to be expected for the
entire year.
Cash and Cash EquivalentsCash and cash equivalents
include liquid investments with original maturities of three
months or less. All cash and cash equivalents are carried at
amounts that approximate fair value.
Restricted CashWe fund the majority of our customer
accounts receivable with borrowings under our Secured Credit
Facility (A/R Credit Facility). Under the A/R Credit
Facility and the predecessor Senior Secured Revolving Credit
Facility, payments on customer accounts receivable are
accumulated in restricted accounts and released to the Company
on a monthly or more frequent basis. As of January 28, 2011
and January 29, 2010, $6.9 million and
$17.9 million, respectively, of accumulated customer cash
receipts was reported as a component of restricted cash in the
Companys consolidated balance sheets.
In addition to payments on customer accounts receivable, cash
collateral ranging from 0% to 12% and 4% to 14% of outstanding
borrowings under the A/R Credit Facility and the Senior Secured
Revolving Credit Facility at January 28, 2011 and
January 29, 2010, respectively, is held in a restricted
account. The amount of cash collateral varies based on the
performance of the A/R Credit Facilitys or the predecessor
Senior Secured Revolving Credit Facilitys eligible
underlying receivables. As of January 28, 2011 and
January 29, 2010, zero and $17.4 million,
respectively, of cash collateral was reported as a component of
restricted cash in the Companys consolidated balance
sheets. For more information on minimum cash collateral and the
A/R Credit Facility and the predecessor Senior Secured Revolving
Credit Facility, see Note 4 Financing.
We have restricted depository accounts related to our agreement
with the Credit Issuers to originate customer revolving credit
accounts. Under our agreements with MetaBank, we are required to
maintain a segregated deposit account in an amount equivalent to
a minimum of $1.0 million, 75% of the highest daily volume
of receivables funded by MetaBank during the seven days most
recently completed, or 75% of the highest daily volume of
receivables projected for the then-current calendar week,
whichever is larger. At January 28, 2011, restricted cash
included $1.4 million related to MetaBanks
origination of customer revolving credit accounts.
At January 29, 2010, we were required pursuant to our
agreements with CIT Bank to maintain a segregated deposit
account in an amount equivalent to 10% of the aggregate
outstanding principal amount of the receivables owned by CIT
Bank during the holding period. At January 29, 2010,
restricted cash included $0.2 million related to CIT
Banks origination of customer revolving credit accounts.
F-8
BLUESTEM BRANDS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Under our agreements with WebBank, we are required to maintain a
segregated deposit account at WebBank in an amount equivalent to
a minimum of $0.1 million or 100% of the average of the
previous calendar months daily outstanding principal
balance, whichever is larger. At January 28, 2011 and
January 29, 2010, restricted cash included
$0.1 million related to WebBanks origination of
customer revolving credit accounts.
Allowance for Doubtful AccountsWe maintain an
allowance for doubtful accounts at a level intended to absorb
estimated probable losses inherent in customer accounts
receivable, including accrued finance charges and fees as of the
balance sheet date. We use our judgment to evaluate the adequacy
of the allowance for doubtful accounts based on a variety of
quantitative and qualitative risk considerations. Quantitative
factors include, among other things, customer credit risk and
aging of accounts receivable. Qualitative factors include, among
other things, economic factors that have historically been
leading indicators of future delinquency and losses such as
national unemployment rates, changing trends in the financial
obligations ratio published by the Federal Reserve and changes
in the consumer price index. We segment customer accounts
receivable into vintage pools based on date of account
origination. Each vintage is further segmented into pools based
on delinquency status as of the balance sheet date and risk
profile. Our estimate of future losses is based on historical
losses on receivables with a similar vintage, delinquency
status, and risk profile, adjusted for current trends and
changes in underwriting. Customer receivables are written off as
of the statement cycle date following the passage of
180 days without receiving a qualifying payment. Accounts
receivable relating to bankrupt or deceased account holders are
written off as of the statement cycle date following the passage
of 60 days after receipt of formal notification regardless
of delinquency status. Recoveries of receivables previously
written off are recorded when received.
Merchandise InventoriesMerchandise inventories are
valued at the lower of weighted-average cost or market value. We
write down inventory considered obsolete based on
managements best estimate of the amount of inventory that
is subject to obsolescence. The estimates are subject to change
in the near term, depending on changes in economic conditions
and other factors, which may affect the ending inventory
valuation as well as gross margin. Merchandise inventories were
$44.4 million and $41.5 million net of write-downs for
excess and obsolete merchandise of $6.3 million and
$5.1 million at January 28, 2011 and January 29,
2010, respectively. We record cash discounts and trade rebates
from vendors as reductions to merchandise inventories.
Promotional Material InventoriesPromotional
material inventories includes raw materials, work in process,
and costs associated with catalog direct response advertising
and premium (free gift) inventory. Production of catalog direct
response advertising includes costs associated with photography,
page design, development, separations, payroll and benefit costs
for employees involved in the creation of catalogs, as well as
costs of paper, printing, and postage. Catalog direct response
advertising costs are deferred and amortized to sales and
marketing expense over the period during which the sales are
expected to occur, generally over three to five months following
a mailing. Premiums are expensed when shipped to the customer
along with the product order. Catalog direct response
advertising expense for the years ended January 28, 2011,
January 29, 2010 and January 30, 2009 was
$103.9 million, $89.4 million and $93.8 million,
respectively.
F-9
BLUESTEM BRANDS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Promotional material inventories as of January 28, 2011 and
January 29, 2010 consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
January 28,
|
|
|
January 29,
|
|
|
|
2011
|
|
|
2010
|
|
|
Premium inventory
|
|
$
|
1,278
|
|
|
$
|
1,053
|
|
Catalog advertising work in process
|
|
|
8,229
|
|
|
|
6,171
|
|
Deferred promotional costs
|
|
|
4,855
|
|
|
|
5,162
|
|
|
|
|
|
|
|
|
|
|
Promotional material inventories
|
|
$
|
14,362
|
|
|
$
|
12,386
|
|
|
|
|
|
|
|
|
|
|
Property and EquipmentnetProperty and
equipment includes purchased and internally-developed software,
computer hardware, machinery and equipment used in our
distribution center, office furniture, and leasehold
improvements with estimated useful lives ranging from three to
five years. Property and equipment is recorded at cost and is
depreciated using the straight-line method over the estimated
useful lives of the assets. We depreciate leasehold improvements
over the shorter of the estimated useful lives of the assets or
the contractual term of the lease, with consideration of lease
renewal options if renewal appears probable. We amortize
purchased and internally-developed software over the estimated
useful lives of the assets not to exceed five years. We have
pledged unencumbered property and equipment as additional
collateral for the inventory line of credit (the Inventory
Line of Credit), with the Senior Subordinated Secured
Notes in a secondary position. See Note 4 Financing
for further information on the Inventory Line of Credit and
Senior Subordinated Secured Notes.
Property and equipmentnet as of January 28, 2011 and
January 29, 2010 consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
January 28,
|
|
|
January 29,
|
|
|
|
2011
|
|
|
2010
|
|
|
Software
|
|
$
|
39,893
|
|
|
$
|
31,620
|
|
Computer hardware
|
|
|
4,688
|
|
|
|
8,195
|
|
Machinery, equipment, and furniture
|
|
|
3,681
|
|
|
|
3,222
|
|
Leasehold improvements
|
|
|
4,050
|
|
|
|
3,773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52,312
|
|
|
|
46,810
|
|
Less accumulated depreciation and amortization
|
|
|
(29,786
|
)
|
|
|
(27,641
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipmentnet
|
|
$
|
22,526
|
|
|
$
|
19,169
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense for the years ended
January 28, 2011, January 29, 2010 and
January 30, 2009 was $8.7 million, $7.2 million
and $6.3 million, respectively. Routine maintenance and
repair costs, reported in general and administrative expenses,
were $4.6 million, $4.1 million and $3.1 million
for the years ended January 28, 2011, January 29, 2010
and January 30, 2009, respectively.
Deferred ChargesCosts incurred by us in securing
financing are capitalized and amortized as interest expense over
the term of the related debt using the straight-line method
which approximates the effective interest method. Amortization
of financing costs was $3.7 million, $3.6 million, and
$3.5 million for the years ended January 28, 2011,
January 29, 2010 and January 30, 2009, respectively.
Derivative Liabilities in Our Own EquityWe have
derivative liabilities relating to certain of our common stock
warrants, preferred stock warrants, embedded derivatives in
preferred
F-10
BLUESTEM BRANDS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
stock, and a contingent fee agreement. These derivative
liabilities are recorded at their estimated fair value at each
balance sheet date. Changes in fair value are reflected in the
consolidated statement of operations as gains or losses from
derivatives in our own equity. See Note 4 Financing
and Note 5 Shareholders Deficit for
further information.
Operating LeasesWe rent office and distribution
center space under operating leases which, in addition to the
minimum lease payments, require payment of a proportionate share
of the real estate taxes and certain building operating expenses.
Rent expense is recognized on a straight-line basis over the
lease term, after consideration of rent escalations and rent
holidays. We record any difference between the straight-line
rent amounts and amounts payable under the leases as deferred
rent, in other current liabilities or other long-term
liabilities, as appropriate. The lease term for purposes of the
calculation begins on the earlier of the lease commencement date
or the date we take possession of the property. Leasehold
improvements that are funded by landlord incentives or
allowances under an operating lease are recorded as deferred
rent in accrued costs and other current liabilities or other
long-term liabilities, as appropriate, and amortized as
reductions to rent expense over the lease term. As of
January 28, 2011 and January 29, 2010, deferred rent
included in accrued costs and other current liabilities in the
consolidated balance sheets was $0.5 million and
$0.5 million, respectively, and deferred rent included in
other long-term liabilities in the consolidated balance sheets
was $5.4 million and $5.4 million, respectively.
Revenue RecognitionNet sales consists of sales of
merchandise, shipping and handling revenue, and commissions
earned from third parties that market their products to our
customers. We record merchandise sales and shipping and handling
revenue at the estimated time of delivery to the customer. Net
sales is reported net of discounts and estimated sales returns,
and excludes sales taxes.
Net sales for the years ended January 28, 2011,
January 29, 2010 and January 30, 2009, consist of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 28,
|
|
|
January 29,
|
|
|
January 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
Sales by merchandise category:
|
|
|
|
|
|
|
|
|
|
|
|
|
Home
|
|
$
|
236,555
|
|
|
$
|
207,177
|
|
|
$
|
209,483
|
|
Entertainment
|
|
|
225,060
|
|
|
|
189,157
|
|
|
|
179,439
|
|
Fashion
|
|
|
74,232
|
|
|
|
57,339
|
|
|
|
48,678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total merchandise sales
|
|
|
535,847
|
|
|
|
453,673
|
|
|
|
437,600
|
|
Returns and allowances
|
|
|
(27,871
|
)
|
|
|
(26,871
|
)
|
|
|
(25,862
|
)
|
Commissions
|
|
|
13,331
|
|
|
|
11,387
|
|
|
|
11,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
521,307
|
|
|
$
|
438,189
|
|
|
$
|
423,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of SalesCost of sales includes the cost of
merchandise sold (net of vendor rebates, purchase discounts and
estimated returns), shipping and handling costs, inbound freight
costs, payroll and benefits for distribution center employees,
depreciation of distribution center assets, and estimates of
product obsolescence costs. We do not include distribution
center occupancy costs in cost of sales.
Sales and Marketing ExpensesSales and marketing
expenses include
e-commerce
advertising, catalog production and postage costs, premium
(i.e., free gift with purchase) expense, order entry, and
customer service costs. Catalog production and postage costs are
F-11
BLUESTEM BRANDS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
deferred and amortized over the period during which the future
benefits of the mailing are expected to be received.
Net Credit Expense (Income)We recognize finance
charge and fee income on customer accounts receivable according
to the contractual provisions of our customer account
agreements. We accrue finance charge income on all accounts
receivable until the account balance is paid off or charged off.
We impose a late fee if our customer does not pay at least the
minimum payment by the payment due date. We cease to charge a
late fee when an account is 90 or more days past due. Our
estimate of uncollectible finance charge and fee income is
included in the allowance for doubtful accounts.
Credit expenses include credit management costs (including
statement and payment processing, collections, origination fees
paid to the Credit Issuers, new account application and credit
bureau processing costs, as well as direct customer service
costs) and the provision for doubtful accounts. We record a
provision for doubtful accounts to maintain the allowance for
doubtful accounts at a level intended to absorb probable losses
in customer accounts receivable as of the consolidated balance
sheet date. Net credit expense (income) for the years ended
January 28, 2011, January 29, 2010 and
January 30, 2009, is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 28,
|
|
|
January 29,
|
|
|
January 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
Finance charge and fee income
|
|
$
|
(160,778
|
)
|
|
$
|
(136,924
|
)
|
|
$
|
(122,896
|
)
|
Provision for doubtful accounts
|
|
|
89,524
|
|
|
|
83,102
|
|
|
|
93,332
|
|
Credit management costs
|
|
|
34,358
|
|
|
|
31,506
|
|
|
|
30,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net credit expense (income)
|
|
$
|
(36,896
|
)
|
|
$
|
(22,316
|
)
|
|
$
|
1,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and Administrative ExpensesGeneral and
administrative expenses include payroll and benefit costs for
corporate and administrative employees, including information
technology, legal, human resources, finance, merchandising,
credit supervision, sales and marketing management; occupancy
costs of corporate and distribution center facilities;
depreciation related to corporate assets; insurance; software
amortization; maintenance; and other overhead costs.
Impairment of Long-Lived AssetsWe review long-lived
assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset
to future undiscounted cash flows expected to be generated by
the asset, plus net proceeds expected from disposition of the
asset (if any). When we recognize an impairment loss, the
carrying amount of the asset is reduced to estimated fair value
based on discounted cash flows, quoted market prices, or other
valuation techniques. Assets to be disposed of are reported at
the lower of the carrying amount of the asset or fair value less
costs to sell. There were no impairment losses recognized for
each of the years ended January 28, 2011, January 29,
2010 and January 30, 2009, respectively.
Stock-Based CompensationWe recognize stock-based
compensation expense in an amount equal to the fair value on the
date of the grant. Compensation expense is recognized over the
period the employees are required to provide services in
exchange for the stock-based awards. See Note 6
Stock-Based Compensation for a discussion of our
stock-based compensation plans.
Comprehensive IncomeDuring the years ended
January 28, 2011, January 29, 2010, and
January 30, 2009, we did not have any other comprehensive
income. Accordingly, net income equals comprehensive income for
all periods presented.
F-12
BLUESTEM BRANDS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Recently Adopted Accounting StandardsAccounting
Standards Codification (ASC)
815-40 (ASC
815-40),
formerly
EITF 07-5,
Determining Whether an Instrument (or Embedded Feature)
Is Indexed to an Entitys Own Stock requires
additional analysis as to whether or not our common stock
warrants and conversion features embedded in our Series A
convertible preferred stock (Series A Preferred
Stock) and Series B convertible preferred stock
(Series B Preferred Stock) are indexed to our
own equity, a condition that is required to attain equity
accounting and classification. The Series A Preferred Stock
and Series B Preferred Stock are collectively referred to
as Preferred Stock.
Our Series A Preferred Stock and Series B Preferred
Stock each contain an embedded conversion feature that contain
non-standard anti-dilution provisions, as discussed above. The
embedded conversion feature is not considered to be clearly and
closely related to the host instrument because the Preferred
Stock is redeemable outside of the control of the Company. Under
ASC 815-40,
the embedded conversion feature is required to be bifurcated and
accounted for as a freestanding derivative. See Note 4
Financing.
Accounting Standards Not Yet AdoptedIn August 2010,
the Financial Accounting Standards Board issued a proposed
accounting standard update on the proper accounting for leases
(ASC 840). The proposed requirements would supersede the current
guidance in ASC 840 that classifies leases into two
categories: capital leases and operating leases. Lessees would
be most affected if they have a significant portfolio of assets
held under operating leases, especially those with leases of
property. At present, we account for operating lease payments by
recognizing them in the period in which they occur. The
proposals would require lessees to recognize the assets and
liabilities arising from those leases.
Although the proposed changes may be less fundamental for leases
currently classified as capital leases, they would result in
significant changes in the measurement of the assets and
liabilities arising from those leases because of the way this
exposure draft proposes to account for options and contingent
rentals. In addition, the pattern of income and expense
recognition in the income statement would change significantly.
The proposed standard is still in the comment period and we are
not able to determine the likely impact on our financial
statements at this time.
|
|
2.
|
CUSTOMER ACCOUNTS
RECEIVABLE
|
Customer accounts receivable as of January 28, 2011,
January 29, 2010 and January 30, 2009 are as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 28,
|
|
|
January 29,
|
|
|
January 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
Customer accounts receivable
|
|
$
|
602,047
|
|
|
$
|
489,236
|
|
|
$
|
439,507
|
|
Less allowance for doubtful accounts
|
|
|
(109,211
|
)
|
|
|
(98,394
|
)
|
|
|
(97,094
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer accounts receivablenet
|
|
$
|
492,836
|
|
|
$
|
390,842
|
|
|
$
|
342,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period-end balances 30+ days delinquent (a)
|
|
$
|
79,630
|
|
|
$
|
71,019
|
|
|
$
|
72,670
|
|
Period-end balances 30+ days delinquent as a percentage of total
customer accounts receivable
|
|
|
13.2
|
%
|
|
|
14.5
|
%
|
|
|
16.5
|
%
|
|
|
|
(a)
|
|
Based on statement cycle date
|
F-13
BLUESTEM BRANDS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Credit Issuers extend credit directly to the Companys
customers. The Company is obligated to purchase and assume
ownership of the receivables after a contractual holding period
by the Credit Issuers, generally one or two business days. The
purchase price includes the unpaid balance of the loan
receivable, plus accrued interest during the Credit
Issuers holding periods, plus an origination fee.
Fingerhut customer credit is accepted on customary revolving
credit terms and offers the customer the option of paying the
entire balance during a grace period of at least
24 days without incurring finance charges. Alternatively,
customers may make scheduled minimum payments and incur finance
charges on the revolving balance. Depending on the dollar value
of the account balance, minimum payments range from $5.99 to
$69.99 for balances up to $1,399, or 5% of the account balance
for balances greater than $1,399. For balances of $5.99 or less,
the minimum payment is the outstanding balance. We also offer
qualifying customers credit on deferred billing terms.
Generally, the deferral periods are between 30 and
180 days. Unless the entire deferred account balance is
paid in full on or before the expiration of the deferred billing
period, the deferred billing account balance converts to a
revolving account at the end of the deferral period, and finance
charges are assessed from the date the sale is posted to the
customers account.
Gettington.com customer credit is accepted on customary
revolving credit terms and offers the customer the option of
paying the entire balance during a grace period of
at least 24 days without incurring finance charges.
Alternatively, customers may make scheduled minimum payments and
incur finance charges on the revolving balance. Minimum payments
depend on whether our customer has chosen the Fast Option or the
Easy Option. Our Fast Option calculates the minimum payment in
four equal monthly installments at the time of purchase, which
includes related interest charges. Our Easy Option minimum
payment amount is determined by the purchases and balances on
the Easy Option plan. The minimum payment is calculated on the
original purchase as either $20 or 5.5% of the beginning account
balance, whichever is greater. Our Easy Option payment is
recalculated after each additional purchase.
We recognize finance charge and fee income on customer accounts
receivable according to the contractual provisions of the credit
account agreements. An estimate of uncollectible finance charge
and fee income is included in the allowance for doubtful
accounts.
We maintain an allowance for doubtful accounts at a level
intended to absorb estimated probable losses inherent in
customer accounts receivable, including accrued finance charges
and fees as of the balance sheet date. The provision for
doubtful accounts is included in net credit expense (income) in
the consolidated statements of operations. Upon charge-off, any
unpaid principal is applied to the allowance for doubtful
accounts and any accrued but unpaid finance charges and fees are
netted against finance charge and fee income with an offsetting
equivalent reversal of the allowance for doubtful accounts
through the provision for doubtful accounts.
F-14
BLUESTEM BRANDS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Changes in the allowance for doubtful accounts for the years
ended January 28, 2011, January 29, 2010 and
January 30, 2009 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 28,
|
|
|
January 29,
|
|
|
January 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
Allowance for doubtful accountsbeginning of year
|
|
$
|
98,394
|
|
|
$
|
97,094
|
|
|
$
|
87,981
|
|
Provision for doubtful accounts
|
|
|
89,524
|
|
|
|
83,102
|
|
|
|
93,332
|
|
Principal charge-offs
|
|
|
(86,813
|
)
|
|
|
(89,094
|
)
|
|
|
(90,180
|
)
|
Recoveries
|
|
|
8,106
|
|
|
|
7,292
|
|
|
|
5,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accountsend of year
|
|
$
|
109,211
|
|
|
$
|
98,394
|
|
|
$
|
97,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percentage of period-end customer accounts receivable
|
|
|
18.1
|
%
|
|
|
20.1
|
%
|
|
|
22.1
|
%
|
As a percentage of balances 30+ days delinquent
|
|
|
137.1
|
%
|
|
|
138.5
|
%
|
|
|
133.6
|
%
|
The average time since origination of customer accounts affects
the stability of delinquency and loss rates. Older accounts are
typically more stable than more recently originated accounts.
The peak delinquency rate for a new account vintage is
approximately eight months after origination. Accounts past this
peak delinquency curve exhibit greater stability in their
performance. We estimate the allowance for doubtful accounts by
segmenting customer accounts receivable by time since
origination.
The time since origination of customer accounts and their
related accounts receivable balance as of January 28, 2011,
January 29, 2010 and January 30, 2009 are as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 28,
|
|
|
January 29,
|
|
|
January 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
Time since origination, as segmented in our estimate of the
allowance for doubtful accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
0 - 3 months
|
|
$
|
41,562
|
|
|
$
|
25,919
|
|
|
$
|
19,552
|
|
4 - 6 months
|
|
|
28,037
|
|
|
|
19,815
|
|
|
|
15,600
|
|
7 - 9 months
|
|
|
29,871
|
|
|
|
20,481
|
|
|
|
16,834
|
|
10 - 12 months
|
|
|
21,284
|
|
|
|
16,994
|
|
|
|
15,936
|
|
13 - 15 months
|
|
|
39,104
|
|
|
|
26,709
|
|
|
|
36,654
|
|
16 - 18 months
|
|
|
24,813
|
|
|
|
16,909
|
|
|
|
30,078
|
|
19+ months
|
|
|
393,365
|
|
|
|
342,812
|
|
|
|
291,160
|
|
Impaired(a)
|
|
|
24,011
|
|
|
|
19,597
|
|
|
|
13,693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period-end customer accounts receivable
|
|
$
|
602,047
|
|
|
$
|
489,236
|
|
|
$
|
439,507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Includes qualified hardship,
bankrupt, deceased, and re-aged customer accounts
|
|
|
3.
|
NET INCOME (LOSS)
PER SHARE
|
Basic net income (loss) per common share is computed under the
two-class method. This method requires net income to be reduced
by the amount of dividends or accretion
F-15
BLUESTEM BRANDS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(distributed earnings) during the period for each class of
stock. Undistributed earnings for the period are allocated to
participating securities based on the contractual participation
rights of the security to share in those current earnings
assuming all the earnings for the period are distributed. Our
Preferred Stock are participating securities due to preferred
stockholder participation rights related to cash dividends
declared by the Company. No allocation was made to Preferred
Stock for periods where an undistributed net loss existed.
Diluted net income (loss) per share is computed by dividing the
net income (loss) for the period by the weighted-average number
of common shares and common share equivalents. Common share
equivalents include, to the extent dilutive, incremental common
shares issuable upon the exercise of stock options, the exercise
of stock warrants, nonvested restricted stock awards, and the
conversion of Preferred Stock to common stock. The dilutive
effect of stock options, restricted stock awards and stock
warrants is computed using the treasury stock method. The
dilutive effect of Preferred Stock is computed using the
if-converted method as prescribed by the two-class method,
because it is more dilutive than the treasury method.
The following table sets forth the computation of basic and
diluted net income (loss) per share for the fiscal years ended
January 28, 2011, January 29, 2010 and
January 30, 2009, respectively, are as follows (in
thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 28,
|
|
|
January 29,
|
|
|
January 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
Basic and Diluted Earnings per Share
(Two-Class Method)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(11,524
|
)
|
|
$
|
9,222
|
|
|
$
|
1,335
|
|
Less: Preferred Stock accretion
|
|
|
(13,534
|
)
|
|
|
(12,602
|
)
|
|
|
(11,289
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Undistributed loss
|
|
$
|
(25,058
|
)
|
|
$
|
(3,380
|
)
|
|
$
|
(9,954
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributed Earnings per ShareBasic and Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock accretion
|
|
$
|
13,534
|
|
|
$
|
12,602
|
|
|
$
|
11,289
|
|
Weighted-average preferred shares outstanding
|
|
|
1,501,030
|
|
|
|
1,500,835
|
|
|
|
1,288,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributed earnings per share preferred
|
|
$
|
0.0090
|
|
|
$
|
0.0084
|
|
|
$
|
0.0088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Undistributed Earnings per ShareBasic
|
|
|
|
|
|
|
|
|
|
|
|
|
Undistributed loss
|
|
$
|
(25,058
|
)
|
|
$
|
(3,380
|
)
|
|
$
|
(9,954
|
)
|
Preferred ownership
|
|
|
87.2
|
%
|
|
|
89.3
|
%
|
|
|
89.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred shareholders interest in undistributed income
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average preferred shares
|
|
|
1,501,030
|
|
|
|
1,500,835
|
|
|
|
1,288,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Undistributed earnings per sharepreferred
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Undistributed loss
|
|
$
|
(25,058
|
)
|
|
$
|
(3,380
|
)
|
|
$
|
(9,954
|
)
|
Common ownership
|
|
|
12.8
|
%
|
|
|
10.7
|
%
|
|
|
10.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shareholders interest in undistributed loss
|
|
$
|
(25,058
|
)
|
|
$
|
(3,380
|
)
|
|
$
|
(9,954
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstandingbasic
|
|
|
220,181
|
|
|
|
179,757
|
|
|
|
144,114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total basic loss per sharecommon
|
|
$
|
(0.1138
|
)
|
|
$
|
(0.0188
|
)
|
|
$
|
(0.0691
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-16
BLUESTEM BRANDS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 28,
|
|
|
January 29,
|
|
|
January 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
Diluted Earnings per Share (If-Converted Method)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to common shareholders
|
|
$
|
(25,058
|
)
|
|
$
|
(3,380
|
)
|
|
$
|
(9,954
|
)
|
Earnings distributed to preferred shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
Undistributed earnings allocated to preferred shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss used in diluted earnings per share
|
|
$
|
(25,058
|
)
|
|
$
|
(3,380
|
)
|
|
$
|
(9,954
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstandingbasic
|
|
|
220,181
|
|
|
|
179,757
|
|
|
|
144,114
|
|
Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A Preferred Stock warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
Common share equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used to compute loss per common sharediluted
|
|
|
220,181
|
|
|
|
179,757
|
|
|
|
144,114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total diluted loss per share
|
|
$
|
(0.1138
|
)
|
|
$
|
(0.0188
|
)
|
|
$
|
(0.0691
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the fiscal years ended January 28, 2011,
January 29, 2010 and January 30, 2009, the following
securities were not included in the calculation of diluted
shares outstanding as the effect would have been anti-dilutive
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 28,
|
|
|
January 29,
|
|
|
January 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
Preferred Stock
|
|
|
13,989,796
|
|
|
|
38,884,414
|
|
|
|
1,698,347
|
|
Common stock warrants
|
|
|
261,054
|
|
|
|
261,054
|
|
|
|
200,851
|
|
Unvested restricted stock awards
|
|
|
104,843
|
|
|
|
120,795
|
|
|
|
67,363
|
|
Series A Preferred Stock warrants
|
|
|
41,742
|
|
|
|
41,742
|
|
|
|
41,742
|
|
Common stock options
|
|
|
42,907
|
|
|
|
36,110
|
|
|
|
36,628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,440,342
|
|
|
|
39,344,115
|
|
|
|
2,044,931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-17
BLUESTEM BRANDS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Outstanding financing agreements as of January 28, 2011 and
January 29, 2010, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
January 28,
|
|
|
January 29,
|
|
|
|
2011
|
|
|
2010
|
|
|
Short-term debt:
|
|
|
|
|
|
|
|
|
A/R Credit FacilityRevolving Credit Tranche
(Tranche A)
|
|
$
|
215,000
|
|
|
$
|
|
|
Revolving Credit Facility
|
|
|
|
|
|
|
241,000
|
|
Inventory Line of Credit
|
|
|
10,100
|
|
|
|
5,339
|
|
Other notes payable
|
|
|
409
|
|
|
|
489
|
|
|
|
|
|
|
|
|
|
|
Short-term debt
|
|
$
|
225,509
|
|
|
$
|
246,828
|
|
|
|
|
|
|
|
|
|
|
Long-term debt:
|
|
|
|
|
|
|
|
|
A/R Credit FacilityTerm Loan Tranche (Tranche B)
|
|
$
|
75,000
|
|
|
$
|
|
|
13% Senior Subordinated Secured Notesnet of discount
of $1,281 and $1,876, respectively
|
|
|
28,719
|
|
|
|
28,124
|
|
Debt Due to Affiliates
|
|
|
400
|
|
|
|
400
|
|
Other notes payable
|
|
|
355
|
|
|
|
391
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
104,474
|
|
|
$
|
28,915
|
|
|
|
|
|
|
|
|
|
|
Interest Expensenet for the years ended January 28,
2011, January 29, 2010 and January 30, 2009, is as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 28,
|
|
|
January 29,
|
|
|
January 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
Interest on debt
|
|
$
|
26,424
|
|
|
$
|
27,142
|
|
|
$
|
26,385
|
|
Amortization of deferred charges
|
|
|
3,733
|
|
|
|
3,573
|
|
|
|
3,481
|
|
Amortization of original issue discount
|
|
|
595
|
|
|
|
595
|
|
|
|
595
|
|
Interest income
|
|
|
(2
|
)
|
|
|
(94
|
)
|
|
|
(622
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expensenet
|
|
$
|
30,750
|
|
|
$
|
31,216
|
|
|
$
|
29,839
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refinancing of Senior Secured Revolving Credit
FacilityOn August 20, 2010, through our
consolidated wholly-owned subsidiary, Fingerhut
Receivables I, LLC (FRI), we entered into the
$365 million A/R Credit Facility which matures on
August 20, 2013. FRI is a special-purpose, bankruptcy
remote entity established for the purpose of purchasing customer
accounts receivable from Bluestem Brands, Inc. to hold as
collateral under applicable credit agreements. The receivables
transferred to FRI are not available to general creditors of
Bluestem Brands. The transfers of receivables are recorded as
secured borrowings on our balance sheet in accordance with GAAP.
The A/R Credit Facility is segregated into two components,
Tranche A (Revolving Credit Tranche) and
Tranche B (Term Loan Tranche). The Term Loan
Tranche has a fixed outstanding balance of $75 million
which bears interest at a fixed rate of 14.75%. We cannot prepay
our Term Loan Tranche prior to August 20, 2011. If the Term
Loan Tranche is partially or fully prepaid between
August 20, 2011 and August 20, 2012, a prepayment
penalty up to 3% of the amount prepaid is due to the lenders.
The $290 million Revolving Credit Tranche is a
F-18
BLUESTEM BRANDS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
revolving credit facility and the daily outstanding balances
bear interest at London InterBank Offered Rate
(LIBOR) plus 4.25%.
Under the A/R Credit Facility, all of our customer accounts
receivable are held by FRI and are collateral against any
outstanding balances. However, not all customer accounts
receivable are used to calculate the borrowing base or
performance covenants. The pool of customer accounts receivable
from which the borrowing base and performance covenants are
calculated in accordance with the A/R Credit Facility is known
as Eligible Underlying Receivables. The A/R Credit
Facility agreement states that customer accounts receivable must
meet certain requirements before they can be placed in the pool
of Eligible Underlying Receivables. The primary requirements are
that the customer must have made at least one payment since
inception of the receivable and have a FICO score greater than
525. The combined borrowing capacity of Revolving Credit Tranche
and Term Loan Tranche is the lesser of $365 million, or the
product of (i) 68% and (ii) the sum of the outstanding
principal amount of Eligible Underlying Receivables, and amounts
on deposit representing principal collections on customer
accounts receivable held by FRI (subject to reserve adjustments
and concentration limits).
Eligible Underlying Receivables portfolio
covenantsViolation of any Eligible Underlying
Receivables portfolio covenant is an event of default under the
A/R Credit Facility. If an event of default is not cured within
the agreed upon time period, or if a waiver from the lenders is
not granted, the outstanding balance becomes due immediately.
The following Eligible Underlying Receivables portfolio covenant
thresholds are evaluated for compliance on a monthly basis
(capitalized terms have the meanings given to them in the A/R
Credit Facility and are described in the notes to the table
below):
|
|
|
|
|
Three-month average Principal Payment Rate shall be greater than
5%.
|
|
|
|
Three-month average Principal Default Ratio shall be less than
24% from April through August and less than 28% from September
through March.
|
|
|
|
Three-month average Principal Delinquency Ratio shall be less
than 14.5%.
|
|
|
|
Three-month average Excess Spread Ratio shall be greater than 8%.
|
|
|
|
Three-month average Adjusted Excess Spread Ratio (defined as the
Adjusted Portfolio Yield less the Principal Default Ratio and
the Receivables Base Rate) shall be greater than −4%.
|
|
|
|
One month Principal Delinquency Ratio shall be less than 16%.
|
|
|
|
One month Total Payment Rate shall be greater than 6.5%.
|
The following table compares actual Eligible Underlying
Receivables portfolio covenant levels to actual as of
January 28, 2011:
|
|
|
|
|
|
|
|
|
Covenant
|
|
Covenant Level
|
|
|
Actual
|
|
|
Principal Payment Rate (three-month average) (a)
|
|
|
> 5.00
|
%
|
|
|
5.60
|
%
|
Principal Default Ratio (three-month average) (b)
|
|
|
< 28.00
|
%
|
|
|
19.37
|
%
|
Principal Delinquency Ratio (three-month average) (c)
|
|
|
< 14.50
|
%
|
|
|
8.74
|
%
|
Excess Spread Ratio (three-month average) (d)
|
|
|
> 8.00
|
%
|
|
|
22.12
|
%
|
Adjusted Excess Spread Ratio (three-month average) (e)
|
|
|
> (4.00
|
)%
|
|
|
8.45
|
%
|
Principal Delinquency Ratio (one month)
|
|
|
< 16.00
|
%
|
|
|
8.41
|
%
|
Total Payment Rate (one month) (f)
|
|
|
> 6.50
|
%
|
|
|
8.14
|
%
|
F-19
BLUESTEM BRANDS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
(a)
|
|
The Principal Payment
Rate is equal to, for a calendar month period, the
principal collections on Eligible Underlying Receivables,
divided by the principal portion of Eligible Underlying
Receivables outstanding as of the last day of the preceding
calendar month.
|
|
(b)
|
|
The Principal Default
Ratio is equal to, for a calendar month period, 12 times
the principal portion of Eligible Underlying Receivables that
became defaulted accounts during the month, divided by the
aggregate amount of the principal portion of Eligible Underlying
Receivables outstanding as of the last day of the preceding
calendar month.
|
|
(c)
|
|
The Principal Delinquency
Ratio is equal to, for a calendar month period, the
principal portion of Eligible Underlying Receivables that are
two or more cycles delinquent at the end of the month, divided
by the aggregate amount of the principal portion of Eligible
Underlying Receivables outstanding at the end of the month.
|
|
(d)
|
|
The Excess Spread Ratio
is equal to, for a calendar month period, the Portfolio Yield,
minus the Principal Default Ratio, minus the Receivables Base
Rate. The Portfolio Yield is equal to, for a
calendar month period, 12 times the aggregate amount of certain
finance charge collections including the intercompany 8%
merchant fee on sales related to Eligible Underlying
Receivables, recoveries on charged off accounts related to both
Eligible and Non-eligible Underlying Receivables, and investment
earnings on amounts on deposit in the finance charge collections
account, divided by the aggregate amount of the principal
portion of Eligible Underlying Receivables outstanding as of the
last day of the preceding calendar month. The Receivables
Base Rate is equal to 12 times the aggregate amount paid
to the servicer for Eligible Underlying Receivables, plus
interest and fees payable, and divided by the aggregate amount
of the principal portion of Eligible Underlying Receivables
outstanding as of the last day of the preceding calendar month.
|
|
(e)
|
|
The Adjusted Excess Spread
Ratio is equal to, for a calendar month period, the
Adjusted Portfolio Yield, less the Principal Default Ratio, less
the Receivables Base Rate. The Adjusted Portfolio
Yield is equal to, for a calendar month period, means,
with respect to any Monthly Period, 12 times the aggregate
amount of certain finance charge collections, divided by the
aggregate amount of principal portion of Eligible Underlying
Receivables outstanding as of the last day of the preceding
calendar month.
|
|
(f)
|
|
The Total Payment Rate
is equal to, for a calendar month period, the aggregate amount
of certain principal collections, certain finance charge
collections including the intercompany 8% merchant fee on sales
related to Eligible Underlying Receivables, recoveries on
charged off accounts related to both Eligible and Non-eligible
Underlying Receivables, and investment earnings on amounts on
deposit in the finance charge collections account, divided by
the aggregate amount of Eligible Underlying Receivables
outstanding as of the last day of the preceding calendar month.
|
In addition to Eligible Underlying Receivables portfolio
covenants, there are certain Eligible Underlying Receivables
portfolio performance thresholds that, if not met, require us to
provide cash collateral, as discussed below.
Cash collateral requirementsIf the Excess Spread
Ratio drops below certain thresholds on a three-month average
basis, cash collateral expressed as a percentage of the amount
of outstanding borrowings on our A/R Credit Facility is required
as follows:
|
|
|
|
|
|
|
Cash
|
|
Excess Spread Ratio
|
|
Collateral
|
|
|
> 14.0%
|
|
|
|
%
|
> 12.5%
£
14.0%
|
|
|
2
|
|
> 11.0%
£
12.5%
|
|
|
4
|
|
> 9.5%
£
11.0%
|
|
|
6
|
|
£
9.5%
|
|
|
8
|
|
F-20
BLUESTEM BRANDS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
If the Total Payment Rate on a one month average basis drops
below certain thresholds cash collateral expressed as a
percentage of the amount of outstanding borrowings on our A/R
Credit Facility is required as shown in the following table:
|
|
|
|
|
|
|
Cash
|
Total Payment Rate
|
|
Collateral
|
|
> 8.0%
|
|
|
|
%
|
> 7.25%
£
8.0%
|
|
|
1
|
|
£
7.25%
|
|
|
2
|
|
If the Principal Delinquency Ratio on a one month average
exceeds certain thresholds cash collateral expressed as a
percentage of the amount of outstanding borrowings on our A/R
Credit Facility is required as shown in the following table:
|
|
|
|
|
|
|
Cash
|
Principal Delinquency Ratio
|
|
Collateral
|
|
< 12.5%
|
|
|
|
%
|
³
12.5% < 14.0%
|
|
|
1
|
|
³
14.0%
|
|
|
2
|
|
The Eligible Underlying Receivables portfolio must perform at a
higher level than noted above for three consecutive months for
cash collateral to be released. As of January 28, 2011,
total portfolio cash collateral was zero. As of January 29,
2010, in accordance with the Senior Secured Revolving Credit
Facility (the predecessor revolving credit facility) total
portfolio cash collateral was $17.4 million, or 7% of
outstanding borrowings.
Financial and Other Covenants under Our Credit
FacilitiesIn addition to the covenants discussed
above, we are subject to financial and other covenants under the
A/R Credit Facility, Inventory Line of Credit and Senior
Subordinated Secured Notes. Failure to comply with these
covenants is an event of default, subject to certain grace
periods or waivers. The following financial covenant levels are
the most restrictive levels that must be maintained in
accordance with our credit agreements.
|
|
|
|
|
Minimum Net LiquidityThe sum of unrestricted cash
and cash equivalents, availability under the A/R Credit Facility
and availability under the Inventory Line of Credit must be at
least $25 million in each fiscal month from February
through November, and must be at least $20 million in the
fiscal months of December and January of each year.
|
|
|
|
Tangible Net WorthMust be at least
$120 million, plus 75% of consolidated net earnings before
gain or loss on derivatives in our own equity (if positive) for
each full fiscal year following August 20, 2010, and 85% of
the gross proceeds on any issuance of equity as determined
quarterly.
|
|
|
|
Last Twelve Months (LTM) Adjusted EBITDA
MarginLTM adjusted earnings before gain or loss on
derivatives in our own equity, interest expense, taxes,
depreciation, amortization, and certain other adjustments
(Adjusted EBITDA) margin must be at least 8.5%.
|
|
|
|
Fixed Charge Coverage RatioMust be at least 1.0x
through October 2011, 1.05x from November 2011 through October
2012 and 1.1x from November 2012 through August 2013.
|
F-21
BLUESTEM BRANDS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In addition to the above financial covenants, we are also
subject to the following financial covenant under our Inventory
Line of Credit and Senior Subordinated Secured Notes:
|
|
|
|
|
Minimum Adjusted EBITDAAdjusted EBITDA must be at
least $52.3 million for 2011 and $57 million for 2012
and any fiscal year thereafter.
|
Deferred ChargesDuring 2010, we recorded direct
loan origination fees of $11.1 million in connection with
our new A/R Credit Facility and the amendment to our Inventory
Line of Credit. The $11.1 million is reported as prepaid
and other current assets (equal to amortization scheduled to
occur within the next year) and long-term deferred charges on
our consolidated balance sheet, net of amortization. We are
amortizing the deferred charges on a straight-line basis (which
approximates the effective interest method) as interest expense
over the three-year terms of the A/R Credit Agreement and
Inventory Line of Credit.
Loss on Early Extinguishment of DebtThe loss on
early extinguishment of debt was recognized as a result of our
early termination of the Senior Secured Revolving Credit
Facility that was replaced with the A/R Credit Facility. The
$5.1 million loss recognized during 2010 included a
$2.8 million prepayment penalty paid to our former lenders
and a $2.3 million write-off of unamortized deferred
financing fees from the predecessor Senior Secured Revolving
Credit Facility.
Senior Secured Revolving Credit FacilityOn
May 15, 2008, the Company, through its subsidiary, FRI,
entered into a three-year $280 million Senior Secured
Revolving Credit Facility. We replaced the Senior Secured
Revolving Credit Facility with the A/R Credit Facility effective
August 20, 2010.
The receivables transferred to FRI were not available to general
creditors of the Company and were recorded as secured borrowings
on the balance sheet in accordance with FASB accounting
standards on transfers and servicing of financial assets.
Daily outstanding balances on the Senior Secured Revolving
Credit Facility incurred interest at LIBOR, plus 8% with a 3%
LIBOR floor. The borrowing capacity of the Senior Secured
Revolving Credit Facility was the lesser of $280 million or
the product of (i) 73.625% and (ii) the sum of the
outstanding principal amount of Eligible Underlying Receivables,
as defined, and amounts on deposit in the principal Collections
Account, as defined, and subject to reserve adjustments. As of
January 28, 2011 and January 29, 2010, the Company had
zero and $241 million outstanding with zero and
$39 million of available credit under the Senior Secured
Revolving Credit Facility, respectively.
Upon closing of the Senior Secured Revolving Credit Facility, we
issued warrants to purchase 216,045,882 shares of common
stock with an exercise price of $0.01 per share to the lenders.
The warrants expire ten years from the date of issuance, are
exercisable at any time prior to expiration, and were valued at
zero utilizing the Black-Scholes-Merton (BSM)
valuation model at the date of issuance. These common stock
warrants are recorded at their estimated fair value and
classified as derivative liabilities with changes in estimated
fair value recorded as a gain or loss from derivatives in our
own equity. See Note 5 Shareholders
DeficitWarrants.
We also entered into a contingent fee agreement
(Contingent Fee) whereby the Company agrees to pay
the lenders a fee contingent upon the occurrence of a defined
liquidation, sale, or change of control transaction. A fee is
also payable in connection with an initial public offering
(IPO) by the Company, unless no Preferred Stock is
outstanding thereafter, in which case no fee is payable and the
agreement terminates. The fee ranges from
F-22
BLUESTEM BRANDS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
$0 to $28.9 million based on the timing and value of the
Companys equity (including warrants outstanding) at the
time of a liquidation, sale, or change of control transaction
occurring before May 15, 2018. The Contingent Fee is
considered a derivative liability under
ASC 815-10.
Changes in the fair value of this derivative liability are
included in gain or loss from derivatives in our own equity in
the consolidated statement of operations. The liabilities
associated with these derivatives are recorded as derivative
liabilities in our own equity on our consolidated balance sheet.
We incurred $9.4 million of origination costs and fees that
were amortized to interest expense over the three-year term of
the agreement until its replacement on August 20, 2010 when
the remaining $2.3 million of unamortized deferred
financing fees was written-off and reported as a component of
the $5.1 million loss on early extinguishment of debt.
An undrawn commitment fee of 0.375% was required on undrawn
amounts if the average utilization of the facility was equal to
or greater than 50%, which increased to 0.500% if the average
utilization of the facility was less than 50%.
In addition to being secured by the customer accounts
receivable, the Senior Secured Revolving Credit Facility was
also secured by cash collateral. Cash collateral ranged from 4%
to 14% of outstanding borrowings (as defined) based on the
financial performance of the Eligible Underlying Receivables (as
defined), as follows.
If the cash-basis portfolio yield less principal defaults,
servicing costs and financing costs on Eligible Underlying
Receivables (Excess Spread) as a percentage of the
principal amount of Eligible Underlying Receivables
(Excess Spread Ratio) dropped below certain
thresholds on a three-month average basis, additional cash
collateral was required to be deposited in a restricted account
as follows:
|
|
|
|
|
|
|
Additional
|
|
|
|
Cash
|
|
Excess Spread Ratio
|
|
Collateral
|
|
|
> 15.5%
|
|
|
|
%
|
> 13.5%
£
15.5%
|
|
|
2
|
|
> 11.5%
£
13.5%
|
|
|
4
|
|
> 9.5%
£
11.5%
|
|
|
6
|
|
£
9.5%
|
|
|
8
|
|
Additional cash collateral was also required to be deposited in
a restricted account if the three-month average Total Payment
Ratio (as defined) dropped below certain thresholds as shown in
the following table:
|
|
|
|
|
|
|
Additional
|
|
|
Cash
|
Total Payment Ratio
|
|
Collateral
|
|
> 10%
|
|
|
|
%
|
> 9%
£
10%
|
|
|
1
|
|
£
9%
|
|
|
2
|
|
The Underlying Eligible Receivables must have performed at a
higher level than noted above for three consecutive months for
restricted cash to be released.
As of January 29, 2010, total cash collateral required by
the Senior Secured Revolving Credit Facility was
$17.4 million, or 7% of outstanding borrowings.
F-23
BLUESTEM BRANDS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Under the Senior Secured Revolving Credit Facility as amended,
the following portfolio performance covenants with respect to
Eligible Underlying Receivables were tested monthly (capitalized
terms are as defined in the Senior Secured Revolving Credit
Facility):
|
|
|
|
|
Three-month average Principal Payment Ratio shall be greater
than 5%.
|
|
|
|
Three-month average Principal Default Ratio shall be less than
29%.
|
|
|
|
Twelve-month average Principal Default Ratio shall be less than
24%.
|
|
|
|
More than 50% of the principal receivables relating to Eligible
Underlying Receivables with a credit score shall have an updated
credit score greater than 600.
|
|
|
|
More than 75% of the principal receivables relating to Eligible
Underlying Receivables with a behavior score shall have an
updated Behavior Score greater than 400.
|
|
|
|
More than 50% of the Principal Receivables relating to Eligible
Underlying Receivables with a behavior score shall have an
updated Behavior Score greater than 450.
|
|
|
|
Three-month average Principal Delinquency Ratio shall be less
than 15%.
|
|
|
|
Three-month average Excess Spread Ratio shall be greater than
7.5%.
|
|
|
|
Three-month average Total Payment Ratio shall be greater than 8%.
|
We were also subject to the following financial covenants:
|
|
|
|
|
Minimum Net Liquidity IThe sum of unrestricted cash
and cash equivalents, availability under the Senior Secured
Revolving Credit Facility and availability under the Inventory
Line of Credit must be at least $25 million in all fiscal
months February through November, and must be at least
$15 million in the fiscal months of December and January.
|
|
|
|
Minimum Net Liquidity IIThe sum of
unrestricted cash and cash equivalents and availability under
the Senior Secured Revolving Credit Facility must be at least
$10 million in all fiscal months February through November
and must be at least $7.5 million in the fiscal months of
December and January.
|
|
|
|
Tangible Net WorthTangible net worth must be at
least $105 million, plus 75% of net income for each full
fiscal year following May 15, 2008, and 85% of the gross
proceeds on any issuance of equity.
|
|
|
|
LTM EBITDA MarginLast 12 months EBITDA
margin must be at least 8.5%.
|
|
|
|
Fixed Charge Coverage RatioFixed Charge Coverage
Ratio must be at least 1.1:1.
|
Failure to comply with the portfolio performance covenants and
financial covenants would have been an event of default.
As of January 28, 2011 and January 29, 2010, we were
in compliance with all portfolio, financial and other covenants.
Inventory Line of CreditWe have a $50 million
line of credit, as amended effective August 20, 2010, that
is secured by inventory and other unencumbered assets of the
Company maturing August 20, 2013 (the Inventory Line
of Credit). Borrowing capacity under the Inventory Line of
Credit is calculated as the lower of 85% of the liquidation
value from the latest inventory appraisal, or 65% of eligible
inventory, in either case less any reserves, up to a maximum of
$50 million. Daily outstanding balances on the Inventory
Line of Credit bear
F-24
BLUESTEM BRANDS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
interest at LIBOR plus 3.25% to 3.50%, or prime plus 2.00% to
2.25%, subject to outstanding balances. The Inventory Line of
Credit agreement, as amended, requires the payment of an unused
commitment fee ranging from 0.375% to 0.500% on the average
daily-unused portion of the revolving commitment. The financial
covenants of the Inventory Line of Credit include the same
financial covenants of the A/R Credit Facility and predecessor
Senior Secured Revolving Credit Facility as well as a minimum
EBITDA requirement of $52.3 million for fiscal year 2011,
$57 million for fiscal year 2012 and any fiscal year
thereafter.
We amended our Inventory Line of Credit as of April 1, 2010
and as of August 20, 2010. Terms and conditions for each
amended agreement remained the same, with the exception of the
following:
|
|
|
|
|
Effective April 1, 2010 through August 19,
2010The maturity date became April 1, 2011. Daily
outstanding balances incurred interest at LIBOR plus 2.75% to
3.50%, or prime plus 1.50% to 2.25%, subject to outstanding
balances. The unused commitment fee ranged from 0.500% to 1.000%
based on the average daily-unused portion of the revolving
commitment.
|
|
|
|
Effective August 20, 2010The capacity increased from
$40 million to $50 million and the maturity date
became August 20, 2013. Daily outstanding balances incur
interest at LIBOR plus 3.25% to 3.50%, or prime (with a floor
not less than the one-month LIBOR rate) plus 2.00% to 2.25%,
subject to outstanding balances. The unused commitment fee
ranges from 0.375% to 0.500% based on the average daily-unused
portion of the revolving commitment. Prior to this amendment, we
were able to draw on the Inventory Line of Credit up to the
borrowing capacity less a minimum capacity covenant of
$4 million. This $4 million minimum availability
covenant was removed with this amendment.
|
As of January 28, 2011 and January 29, 2010, we had
outstanding borrowings on the Inventory Line of Credit of
$10.1 million and $5.3 million, respectively. As of
January 28, 2011 and January 29, 2010, we had
$11.3 million and $14.4 million available,
respectively, under our Inventory Line of Credit.
Senior Subordinated Secured NotesOn March 24,
2006, we issued the Senior Subordinated Secured Notes in an
aggregate principal amount of $30 million. We amended our
Senior Subordinated Secured Notes effective August 20, 2010
to extend the maturity from March 24, 2013 to
November 21, 2013, and change certain financial covenants,
consistent with changes to the Inventory Line of Credit. All
other terms and conditions remained materially the same.
The Senior Subordinated Secured Notes bear interest at 13% per
annum payable quarterly. In connection with the Senior
Subordinated Secured Notes, warrants were issued to purchase
41,742,458 shares of the Companys Series A
Preferred Stock. The warrants were valued at $0.10 per share or
$4.2 million utilizing the BSM valuation model and
accounted for as original issue discount on the debt and a
derivative liability in our own equity. The original issue
discount is being amortized to interest expense over the term of
the Senior Subordinated Secured Notes. The fair value of
derivative liabilities in our own equity is estimated as of each
balance sheet date with changes in fair value recorded as a gain
or loss from derivatives in our own equity. See
Note 5 Shareholders
DeficitWarrants. These Senior Subordinated
Secured Notes are secured by a second lien on the Companys
assets. Direct loan origination fees of $2.2 million were
capitalized and reported in deferred charges in the consolidated
balance
F-25
BLUESTEM BRANDS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
sheets and are amortized on a straight-line basis (which
approximates the effective interest method) as interest expense
over the term of the Senior Subordinated Secured Notes.
The aggregate principal amount is payable in full on the
notes maturity date of November 21, 2013. The
financial covenants of the Senior Subordinated Secured Notes are
similar in form but less restrictive than the financial
covenants of the Inventory Line of Credit. The financial
covenants include additional minimum Adjusted EBITDA
requirements of $47.5 million for fiscal year 2010,
$52.3 million for fiscal year 2011, $57 million for
fiscal year 2012 and any fiscal year thereafter.
Debt Due to AffiliatesWe have an obligation of
$0.4 million as of January 28, 2011 and
January 29, 2010, that is payable after, or in connection
with, a transaction or series of transactions in which the
holders of Series A Preferred Stock receive consideration
with a value in excess of 250% of the total amount invested by
such holders in the equity securities of the Company.
Other Notes PayableAs of January 28, 2011 and
January 29, 2010, we had $0.8 million and
$0.9 million of other notes payable with interest rates
ranging from 5% to 9% per annum, including a note payable to the
landlord of our corporate headquarters building that is being
repaid over the term of the lease. See Note 9
Commitments and Contingencies.
Certificate of Incorporation and Equity and Incentive Plan
AmendmentsEffective November 4, 2010, the Board
of Directors (the Board) amended our Fourth Amended
and Restated Certificate of Incorporation to increase the number
of authorized shares of the Companys Series B
Preferred Stock by an additional 2,684,924 shares. This
amendment brings the authorized capital stock of the Company to
4,137,812,560 shares consisting of
1,545,261,974 shares of Preferred Stock, $0.00001 par
value per share, of which 791,738,012 shares are designated
Series A Preferred Stock and 753,523,962 shares are
designated Series B Preferred Stock.
The Board also amended our 2008 Equity and Incentive Plan to
increase the number of shares of Common Stock of the Company
available for issuance or transfer thereunder by 15,900,000,
effective November 4, 2010. On December 8, 2009, the
Board increased the authorized and reserved shares under our
existing equity incentive plans by 21,604,588 shares. These
amendments brought the total shares of common stock authorized
for the grant of nonqualified stock options and restricted stock
awards to employees under our equity incentive plans to
315,297,319. As of January 28, 2011, we had
11,967,454 shares available for future grants.
Effective August 20, 2010, the Board amended our Fourth
Amended and Restated Certificate of Incorporation so that the
holders of 66% of the outstanding Series B Preferred Stock
can demand redemption of the Series B Preferred Stock if a
Qualified Public Offering (an underwritten public offering in
which the aggregate net proceeds to the Company equal or exceed
$75 million and the price per share to the public is not
less than $0.2235 and the Companys stock is listed with
the New York Stock Exchange or Nasdaq Global Market) has not
been consummated on or prior to February 28, 2014 (instead
of May 15, 2013, as previously permitted).
On May 14, 2008, the Board approved the Fourth Amended and
Restated Certificate of Incorporation, which increased the
authorized capital stock of the Company to
4,135,127,636 shares, consisting of
2,592,550,586 shares designated as common stock, and
F-26
BLUESTEM BRANDS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
1,542,577,050 shares designated as preferred stock,
$0.00001 par value per share, of which
791,738,012 shares were designated as Series A
Preferred Stock and a new series of preferred stock consisting
of 750,839,038 shares were designated as Series B
Preferred Stock.
On May 15, 2008, we completed a private placement of
750,839,038 shares of Series B Preferred Stock, at a
purchase price of $0.0745 per share to certain existing
shareholders of the Company for aggregate cash proceeds of
$55.9 million. Proceeds from the issuance of Series B
Preferred Stock were used for general corporate purposes.
The terms of the Fourth Amended and Restated Certificate of
Incorporation, Series B Preferred Stock and Series A
Preferred Stock include, but are not limited to, the following:
DividendsHolders of the Series B Preferred
Stock are entitled to receive, when and as declared by the
Board, cumulative cash dividends at an annual rate of 6% on the
Series B Preferred Stock purchase price, prior and in
preference to, any declaration or payment of any dividend to the
holders of shares of Series A Preferred Stock and common
stockholders. Dividends on the Series B Preferred Stock are
cumulative and accrue daily but compound annually on each
anniversary after the date of original issuance of each share of
Series B Preferred Stock, whether or not earned or
declared, and whether or not there are earnings or profits,
surplus, or other funds or assets of the Company legally
available for the payment of dividends. Accumulated unpaid
dividends on the Series B Preferred Stock were
$9.6 million and $5.9 million as of January 28,
2011 and January 29, 2010, respectively.
Holders of the Series A Preferred Stock are entitled to
receive, when and as declared by the Board, cumulative cash
dividends at an annual rate of 8% on the Series A Preferred
Stock purchase price, prior and in preference to, any
declaration or payment of any dividend to the holders of shares
of common stock. Dividends on the Series A Preferred Stock
are cumulative and accrue daily but compound annually on each
anniversary after the date of original issuance of each share of
Series A Preferred Stock, whether or not earned or
declared, and whether or not there are earnings or profits,
surplus, or other funds or assets of the Company legally
available for the payment of dividends. Accumulated unpaid
dividends on the Series A Preferred Stock were
$56.4 million and $46.6 million as of January 28,
2011 and January 29, 2010, respectively.
Dividends have been reflected as accretion in the consolidated
statements of shareholders deficit, decreasing additional
paid-in capital to the extent available, or increasing
accumulated deficit.
In the event that the Board declares a dividend payable on the
then outstanding shares of common stock (other than a stock
dividend on the common stock payable solely in the form of
additional shares of common stock), the holders of Preferred
Stock shall be entitled, in addition to any cumulative dividends
to which they may be entitled to receive, the amount of
dividends per share of such Preferred Stock that would be
payable on the number of whole shares of the common stock into
which each share of such Preferred Stock held by each holder
could be converted.
In the event that the Company has cumulative accrued and unpaid
dividends outstanding on the Preferred Stock immediately prior
to a conversion of any shares of Preferred Stock, the Company
has the option to either pay in cash or allow such dividends to
be converted into a number of shares of common stock with a
value equal to the amount of accrued and unpaid dividends.
F-27
BLUESTEM BRANDS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Redemption of Preferred StockIn the event that a
Qualified Public Offering has not been consummated on or prior
to February 28, 2014, the Series B Preferred Stock may
be redeemed for cash upon the request of holders of 66% of the
outstanding Series B Preferred Stock. In the event
redemption of the Series B Preferred Stock is requested,
holders of 50% or more of the Series A Preferred Stock may
also request redemption of the Series A Preferred Stock.
The redemption price calculation for both the Series B
Preferred Stock and the Series A Preferred Stock is based
on the greater of (i) the purchase price for such shares,
plus unpaid dividends, and (ii) the fair market value of
such shares. In the event funds are insufficient to effect
redemption of both classes of Preferred Stock, funds will be
utilized first to redeem Series B Preferred Stock and any
remaining funds will be made available for the holders of the
Series A Preferred Stock.
Liquidation PreferenceIn the event of a
liquidation, dissolution, or winding up of the Company, the
holders of the Series B Preferred Stock would be entitled
to an amount per share equal to the greater of (A) the sum
of (i) Series B Preferred Stock purchase price and
(ii) an amount equal to all accrued or declared but unpaid
dividends or (B) an amount that would be payable to the
holders of the Series B Preferred Stock had the
Series B Preferred Stock been converted into common stock
immediately prior to such liquidation, dissolution or
winding-up
of the Company. If the assets to be distributed are insufficient
to permit payment in full to the holders of the Series B
Preferred Stock, then the entire assets of the Company to be
distributed would be distributed ratably among the holders of
the Series B Preferred Stock. After payment has been made
in full to the holders of the Series B Preferred Stock, the
holders of the Series A Preferred Stock would be entitled
to an amount per share equal to the greater of (A) the sum
of (i) Series A Preferred Stock purchase price and
(ii) an amount equal to all accrued or declared but unpaid
dividends or (B) an amount that would be payable to the
holders of the Series A Preferred Stock had the
Series A Preferred Stock been converted into common stock
immediately prior to such liquidation, dissolution or
winding-up
of the Company. If the assets to be distributed after payment in
full is made to the holders of the Series B Preferred
Stock, are insufficient to permit payment in full to the holders
of the Series A Preferred Stock then the entire assets of
the Company to be distributed would be distributed ratably among
the holders of the Series A Preferred Stock.
ConversionHolders of Preferred Stock have the
option, at any time, to convert shares of Preferred Stock into
common stock, initially upon issuance on a
one-to-one
basis, subject to certain adjustments, including, but not
limited to, accrued and unpaid dividends on the Preferred Stock.
All outstanding shares of Preferred Stock shall be automatically
converted immediately upon the closing of a Qualified Public
Offering.
All outstanding shares of Preferred Stock shall, upon the vote
or written consent of holders of 66% of the Series B
Preferred Stock, be automatically converted into common stock.
Anti-dilution RightsHolders of Series A
Preferred Stock and Series B Preferred Stock have the right
to an adjustment of the conversion price applicable to their
shares in the event that shares are issued at a price per share
less than that paid by the holders of Series B Preferred
Stock, with the result that the number of common shares into
which the shares of Preferred Stock are convertible would
increase.
The ability of holders of Series A Preferred Stock and
Series B Preferred Stock to cash settle the fair value of
the conversion options upon a redemption causes the conversion
feature to be accounted for as a derivative liability. The
anti-dilution rights described above require the conversion
feature contained in our Preferred Stock to be accounted for as
an embedded derivative. We account for the fair value of the
conversion feature as a derivative
F-28
BLUESTEM BRANDS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
liability in our own equity while the Preferred Stock is
outstanding. Changes in the fair value of the conversion feature
are recorded as a gain or loss from derivatives in our own
equity. Once the Preferred Stock is converted, redeemed or
otherwise settled, the balance in the derivative liability will
be reclassified into shareholders equity (deficit). The
estimated fair value of the embedded derivative in the Preferred
Stock was $24.2 million and $0.5 million at
January 28, 2011 and January 29, 2010, respectively.
WarrantsAs of January 28, 2011, we had
outstanding warrants to purchase shares of our Series A
Preferred Stock and common stock as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant
|
|
|
Number of Warrants Outstanding
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
Series A
|
|
|
|
|
|
|
|
|
|
|
Exercise
|
|
|
per Share at
|
|
|
Preferred
|
|
|
Common
|
|
|
|
Issue Date
|
|
Expiration Date
|
|
Price
|
|
|
Grant Date
|
|
|
Stock
|
|
|
Stock
|
|
|
Classification
|
|
February 18, 2004
|
|
February 18, 2011
|
|
$
|
0.10511
|
|
|
$
|
0.00000
|
|
|
|
|
|
|
|
11,892,312
|
|
|
Equity
|
February 24, 2004
|
|
June 21, 2012
|
|
|
0.01000
|
|
|
|
0.01000
|
|
|
|
|
|
|
|
31,689,078
|
|
|
Liability
|
November 1, 2004
|
|
June 21, 2012
|
|
|
0.01000
|
|
|
|
0.01000
|
|
|
|
|
|
|
|
1,427,076
|
|
|
Liability
|
March 24, 2006
|
|
March 23, 2016
|
|
|
0.01000
|
|
|
|
0.10000
|
|
|
|
41,742,458
|
|
|
|
|
|
|
Liability
|
May 15, 2008
|
|
May 15, 2018
|
|
|
0.01000
|
|
|
|
0.00000
|
|
|
|
|
|
|
|
216,045,882
|
|
|
Liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41,742,458
|
|
|
|
261,054,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All of our warrants outstanding at January 28, 2011, except
for those issued February 18, 2004, contain a provision
that allows the holders to cash settle the warrant once a
qualifying contingent event occurs. Most of these events relate
to a sale or liquidation of the Company. As a result, we are
required to account for the warrants as derivatives with changes
in fair value being recorded as a gain or loss from derivatives
in our own equity. When the warrants expire, are exercised or
are otherwise settled, the derivative liability will be
reclassified into shareholders equity (deficit). As of
January 28, 2011 and January 29, 2010, the fair value
of the warrants was estimated to be $15.3 million and
$4.2 million, respectively.
We estimate the Companys enterprise value using
combination of a market multiple approach and an income approach
(discounted free cash flows) following the guidelines
established by the American Institute of Certified Public
Accountants Practice Aid, Valuation of Privately-Held-Company
Equity Securities Issued as Compensation (the Practice
Aid). The enterprise value is then allocated to the
underlying classes of equity and embedded derivatives based on a
probability weighted expected return model taking into
consideration the liquidation preferences of the underlying
classes of equity consistent with the Practice Aid.
Common stock warrants are valued using the BSM valuation model.
The following table summarizes the assumptions used in the BSM
valuation model.
|
|
|
|
|
|
|
|
|
|
|
January 28,
|
|
|
January 29,
|
|
|
|
2011
|
|
|
2010
|
|
|
Expected volatility
|
|
|
38.3
|
%
|
|
|
27.3
|
%
|
Expected time to a liquidity event (years)
|
|
|
1.9
|
|
|
|
2.9
|
|
Risk-free interest rate
|
|
|
0.58
|
%
|
|
|
1.36
|
%
|
The Series A Preferred Stock warrants are recorded at fair
value. The fair value is estimated using the BSM valuation model
and assumptions consistent with our common stock warrants.
See Note 12 Subsequent EventsWarrant Exercise.
F-29
BLUESTEM BRANDS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
6.
|
STOCK-BASED
COMPENSATION
|
We compensate officers, directors, and key employees with
stock-based compensation under three stock plans approved by
shareholders in 2003, 2005 and 2008 and administered under the
supervision of the Board. We have authorized
315,297,319 shares of common stock for the grant of
nonqualified stock options and restricted stock awards to
employees under the 2003, 2005 and 2008 Equity Incentive Plans
(the Equity Incentive Plans). As of January 28,
2011, there were 11,967,454 shares of common stock
available for grant under the Equity Incentive Plans.
Stock OptionsA summary of stock option activity for
the years ended January 28, 2011, January 29, 2010 and
January 30, 2009, respectively, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
Remaining
|
|
|
|
|
|
|
Price
|
|
|
Contractual
|
|
|
|
Stock Options
|
|
|
per Share
|
|
|
Term (Years)
|
|
|
OutstandingFebruary 1, 2008
|
|
|
34,742,233
|
|
|
$
|
0.080
|
|
|
|
7.5
|
|
Granted
|
|
|
13,460,000
|
|
|
|
0.009
|
|
|
|
|
|
Forfeited
|
|
|
(7,456,700
|
)
|
|
|
0.090
|
|
|
|
|
|
Exercised
|
|
|
(869,713
|
)
|
|
|
0.021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OutstandingJanuary 30, 2009
|
|
|
39,875,820
|
|
|
$
|
0.058
|
|
|
|
7.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
3,000,000
|
|
|
|
0.001
|
|
|
|
|
|
Forfeited
|
|
|
(4,966,900
|
)
|
|
|
0.091
|
|
|
|
|
|
Exercised
|
|
|
(4,100,446
|
)
|
|
|
0.019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OutstandingJanuary 29, 2010
|
|
|
33,808,474
|
|
|
$
|
0.053
|
|
|
|
6.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
21,967,200
|
|
|
|
0.005
|
|
|
|
|
|
Forfeited
|
|
|
(3,565,000
|
)
|
|
|
0.181
|
|
|
|
|
|
Exercised
|
|
|
(4,053,862
|
)
|
|
|
0.019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OutstandingJanuary 28, 2011
|
|
|
48,156,812
|
|
|
$
|
0.024
|
|
|
|
7.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ExercisableJanuary 28, 2011
|
|
|
19,233,014
|
|
|
$
|
0.050
|
|
|
|
5.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other information pertaining to options for the years ended
January 28, 2011, January 29, 2010 and
January 30, 2009, are as follows (in thousands, except per
share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 28,
|
|
|
January 29,
|
|
|
January 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
Weighted-average grant date fair value of stock options granted
|
|
$
|
0.0009
|
|
|
$
|
0.0003
|
|
|
$
|
0.003
|
|
Cash received from the exercise of stock options
|
|
|
72
|
|
|
|
77
|
|
|
|
18
|
|
Stock-based compensation expense
|
|
|
27
|
|
|
|
30
|
|
|
|
15
|
|
Our stock options generally vest proportionally over periods of
four years from the dates of the grant and expire after ten
years. At January 28, 2011, there was approximately
$0.1 million of unrecognized stock option compensation
expense related to nonvested stock options that is expected to
be recognized over a weighted-average period of approximately
1.4 years.
F-30
BLUESTEM BRANDS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Determining Fair ValueWe utilize a third-party
valuation advisor to assist management in determining the fair
value of options granted using the BSM option-pricing model
based on the grant price and assumptions regarding the expected
term, expected volatility, dividends, and risk-free interest
rates. A description of significant assumptions used to estimate
the expected volatility, expected term, and risk-free interest
rate are as follows:
|
|
|
|
|
Expected VolatilityExpected volatility was
determined based on historical volatility of stock prices of a
public company peer group.
|
|
|
|
Expected TermExpected term represents the period
that stock-based awards are expected to be outstanding and was
determined based on historical experience and anticipated future
exercise patterns, considering the contractual terms of
unexercised stock-based awards.
|
|
|
|
Risk-Free Interest RateThe risk-free interest rate
was based on the implied yield currently available on
U.S. Treasury zero-coupon issues with a term equal to the
expected term.
|
|
|
|
Forfeiture rateWe use historical data to estimate
forfeitures.
|
The assumptions used to calculate the fair value of awards
granted during the years ended January 28, 2011,
January 29, 2010 and January 30, 2009, using the BSM
option-pricing model were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 28,
|
|
|
January 29,
|
|
|
January 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
Expected volatility
|
|
|
30.0
|
%
|
|
|
35.5
|
%
|
|
|
33.8
|
%
|
Expected term (years)
|
|
|
2.9
|
|
|
|
5.0
|
|
|
|
5.0
|
|
Risk-free interest rate
|
|
|
1.3
|
%
|
|
|
1.8
|
%
|
|
|
3.0
|
%
|
Forfeiture rate
|
|
|
30.0
|
%
|
|
|
30.0
|
%
|
|
|
30.0
|
%
|
Expected dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
F-31
BLUESTEM BRANDS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Restricted Stock AwardsA summary of restricted
stock activity for the years ended January 28, 2011,
January 29, 2010 and January 30, 2009, respectively,
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
Restricted
|
|
|
Grant Date
|
|
|
|
Stock
|
|
|
Fair Value
|
|
|
OutstandingFebruary 1, 2008
|
|
|
29,841,512
|
|
|
$
|
0.020
|
|
Granted
|
|
|
107,650,000
|
|
|
|
0.009
|
|
Forfeited
|
|
|
(15,025,000
|
)
|
|
|
0.010
|
|
Vested
|
|
|
(24,630,838
|
)
|
|
|
0.040
|
|
|
|
|
|
|
|
|
|
|
OutstandingJanuary 30, 2009
|
|
|
97,835,674
|
|
|
$
|
0.010
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
70,778,852
|
|
|
|
0.001
|
|
Forfeited
|
|
|
(8,590,462
|
)
|
|
|
0.010
|
|
Vested
|
|
|
(29,810,087
|
)
|
|
|
0.012
|
|
|
|
|
|
|
|
|
|
|
OutstandingJanuary 29, 2010
|
|
|
130,213,977
|
|
|
$
|
0.005
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
10,225,000
|
|
|
|
0.011
|
|
Forfeited
|
|
|
(2,100,000
|
)
|
|
|
0.009
|
|
Vested
|
|
|
(40,718,588
|
)
|
|
|
0.007
|
|
|
|
|
|
|
|
|
|
|
OutstandingJanuary 28, 2011
|
|
|
97,620,389
|
|
|
$
|
0.005
|
|
|
|
|
|
|
|
|
|
|
Our restricted stock awards generally vest over four years. At
January 28, 2011, there was approximately $0.4 million
of unrecognized compensation expense related to nonvested
restricted stock awards that is expected to be recognized over a
weighted-average period of approximately 1.7 years.
The Company recognizes deferred tax assets and liabilities for
the future tax consequences attributable to temporary
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted
tax laws and rates expected to apply to taxable income in the
years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date. A valuation
allowance is established for any portion of deferred tax assets
that are not considered more likely than not to be realized.
F-32
BLUESTEM BRANDS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The tax effects of temporary differences that give rise to
deferred income taxes as of January 28, 2011 and
January 29, 2010, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
January 28,
|
|
|
January 29,
|
|
|
|
2011
|
|
|
2010
|
|
|
Allowance for doubtful accounts
|
|
$
|
31,024
|
|
|
$
|
26,512
|
|
Net operating loss and other credit carryforwards
|
|
|
1,826
|
|
|
|
2,423
|
|
Inventory
|
|
|
1,115
|
|
|
|
1,046
|
|
Net other deferred assets
|
|
|
4,108
|
|
|
|
3,520
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assetnet
|
|
|
38,073
|
|
|
|
33,501
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
|
(2,626
|
)
|
|
|
(2,063
|
)
|
Deferred advertising
|
|
|
(1,710
|
)
|
|
|
(1,822
|
)
|
Finance charge income not currently taxable
|
|
|
(21,646
|
)
|
|
|
(19,490
|
)
|
Net other deferred liabilities
|
|
|
(994
|
)
|
|
|
(998
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilitynet
|
|
|
(26,976
|
)
|
|
|
(24,373
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred taxes
|
|
$
|
11,097
|
|
|
$
|
9,128
|
|
|
|
|
|
|
|
|
|
|
Reflected as:
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
11,576
|
|
|
$
|
8,465
|
|
Noncurrent (liabilities) assets
|
|
|
(479
|
)
|
|
|
663
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11,097
|
|
|
$
|
9,128
|
|
|
|
|
|
|
|
|
|
|
The provision (benefit) for income taxes for the years ended
January 28, 2011, January 29, 2010 and
January 30, 2009, is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 28,
|
|
|
January 29,
|
|
|
January 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
13,395
|
|
|
$
|
2,354
|
|
|
$
|
1,046
|
|
State
|
|
|
192
|
|
|
|
299
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current provision
|
|
|
13,587
|
|
|
|
2,653
|
|
|
|
1,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(2,024
|
)
|
|
|
6,233
|
|
|
|
(303
|
)
|
State
|
|
|
55
|
|
|
|
70
|
|
|
|
78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred (benefit) provision
|
|
|
(1,969
|
)
|
|
|
6,303
|
|
|
|
(225
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision
|
|
$
|
11,618
|
|
|
$
|
8,956
|
|
|
$
|
828
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-33
BLUESTEM BRANDS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A reconciliation of our effective income tax rate compared to
the statutory federal income tax rate for the years ended
January 28, 2011, January 29, 2010 and
January 30, 2009, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 28,
|
|
|
January 29,
|
|
|
January 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
Statutory federal income tax rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State income taxesnet of federal benefit
|
|
|
173.4
|
|
|
|
1.3
|
|
|
|
0.3
|
|
Loss from derivatives in our own equity
|
|
|
12,162.6
|
|
|
|
12.5
|
|
|
|
|
|
Othernet
|
|
|
10.3
|
|
|
|
0.5
|
|
|
|
3.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
12,381.3
|
%
|
|
|
49.3
|
%
|
|
|
38.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains and losses from derivatives in our own equity are not
deductible for income tax purposes and therefore, have been
treated as permanent differences. Our marginal tax rate
excluding the impact of derivatives in our own equity was 35.5%,
36.3%, and 38.3% in 2010, 2009, and 2008 respectively.
For the years ended January 28, 2011, January 29, 2010
and January 30, 2009, federal and state net operating loss
carry forwards were $5.1 million, $6.7 million and
$14.1 million, respectively, which expire in 2022 through
2024.
Internal Revenue Code Section 382
(Section 382) limits the availability and
timing of the use of net operating loss carry forwards in the
event of a change in ownership. We determined that a change in
ownership under Section 382 occurred on November 1,
2004, thus we will utilize net operating loss carry forwards in
accordance with Section 382 regulations.
Management believes that it is more likely than not that the
full benefit of the deferred tax assets will be realized on the
basis of evaluating anticipated profitability over the years in
which the net operating losses may be used and when the
underlying temporary differences are expected to become tax
deductions. The actual realization of these deferred tax assets
depends on the ability of the Company to generate sufficient
taxable income in the future.
We file income tax returns in the U.S. federal
jurisdiction, Minnesota, and Michigan. In the normal course of
business, the Company is subject to examination by federal and
state taxing authorities. During 2010, the Internal Revenue
Service completed its examination of the tax loss generated in
2008 that was carried back to our 2006 U.S. consolidated
federal income tax return. With few exceptions, we are no longer
subject to income tax examinations for years before 2006. No
states are currently examining any of our state income tax
returns.
Our liability for unrecognized tax benefits was
$4.4 million including interest of $0.3 million, net
of tax benefit, at January 28, 2011. We do not anticipate
any material changes in unrecognized tax positions over the next
12 months.
F-34
BLUESTEM BRANDS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Unrecognized Tax BenefitsA reconciliation of the
beginning and ending amounts of unrecognized tax benefits for
2010, 2009 and 2008 was as follows (in thousands):
|
|
|
|
|
|
|
Federal
|
|
|
|
and
|
|
|
|
State Tax
|
|
|
Balance February 1, 2008
|
|
$
|
4,120
|
|
Change related to prior year tax positions
|
|
|
|
|
|
|
|
|
|
Balance January 30, 2009
|
|
$
|
4,120
|
|
Decreases related to prior year tax positions
|
|
|
(3
|
)
|
|
|
|
|
|
Balance January 29, 2010
|
|
|
4,117
|
|
Decreases related to prior year tax positions
|
|
|
(5
|
)
|
|
|
|
|
|
Balance January 28, 2011
|
|
$
|
4,112
|
|
|
|
|
|
|
We recognize interest (not included in the Federal and
State Tax above) as components of income tax expense. No
penalties related to income tax matters have been recognized in
the consolidated statements of operations. The amount of tax
related interest expense for the fiscal years ended
January 28, 2011, January 29, 2010 and
January 30, 2009, was $0.1 million, $0.1 million
and $0.1 million, respectively.
The amount of unrecognized tax benefits are not expected to
change materially within the next 12 months.
|
|
8.
|
EMPLOYEE BENEFIT
PLANS
|
The Fingerhut Direct Marketing 401(k) Retirement Savings Plan
(the Fingerhut 401(k) Plan) is open to eligible
employees who have attained age 21. Employees covered by a
collective bargaining agreement are not eligible for
participation. The Fingerhut 401(k) Plan allows for employee
pretax contributions up to the Internal Revenue Code
contribution limit. Employee contributions up to $4,000 are
matched by the Company at a rate of 50%. Employees are 100%
vested in their pretax contributions at all times. Employees
fully vest in the employer matching contribution after four
years of service. Our contributions have been expensed as
incurred and were $0.6 million, $0.5 million and
$0.5 million for the years ended January 28, 2011,
January 29, 2010 and January 30, 2009, respectively.
During the years ended January 28, 2011, January 29,
2010 and January 30, 2009, the Company participated in a
multiemployer retirement plan, Unite Here National Retirement
Plan (the Retirement Plan). The Retirement Plan is
open to eligible union employees at the Companys St.
Cloud, Minnesota, distribution center. The eligibility for
participation in the Retirement Plan is completion of
1,000 hours of service. The participants earn a right to
benefits after attaining five years of vesting service. The
union collective bargaining agreement sets forth terms of the
Companys participation. Our contributions were
$0.1 million for each of the years ended January 28,
2011, January 29, 2010 and January 30, 2009.
|
|
9.
|
COMMITMENTS AND
CONTINGENCIES
|
Operating Lease CommitmentsWe have operating lease
commitments for equipment and facilities that expire on various
dates through 2024. Rental expense was $7.3 million,
$7.2 million and $7.6 million for the years ended
January 28, 2011, January 29, 2010 and
January 30, 2009, respectively, and is included in general
and administrative expenses in the consolidated statements of
operations.
F-35
BLUESTEM BRANDS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Distribution CenterWe entered into a new lease of
our St. Cloud, Minnesota, distribution center effective
February 1, 2009, with an initial term of 180 months,
payments beginning February 1, 2009, and increasing at 2.5%
per annum. We are responsible for all operating expenses. The
lease contains tenant allowances that we amortize over the term
of the lease. We have an option to accelerate the termination of
the lease that we can exercise between January 31, 2022
through January 31, 2024, by providing written notice to
the landlord and incurring a termination fee. The termination
fee is determined based on a formula, including monthly minimum
and additional rentals, operating expenses, and the recapture of
the remaining unamortized portion of the tenant allowances and
real estate broker commissions paid by the landlord. We also
have an option to extend the lease for two consecutive five-year
terms.
Headquarters BuildingWe entered into a lease for a
new corporate headquarters building effective June 1, 2008,
with an initial term of 124 months, including a four-month
rent holiday, with payments beginning October 1, 2008, and
increasing at 2% per annum. We are responsible for all operating
expenses. The lease contains tenant allowances that we amortize
over the term of the lease. We have the option to reduce the
amount of space utilized or terminate the lease effective
July 1, 2015, by providing written notice to the landlord
and incurring a termination fee calculated based on a formula,
including monthly minimum and additional rentals, operating
expenses, direct costs incurred by the landlord to convert the
facility to a multitenant facility, and the recapture of the
remaining unamortized portion of the tenant allowances. In
addition, we have the option to extend the lease for two
consecutive five-year terms.
Additional Warehouse SpaceWe entered into a lease
for additional warehouse space effective January 30, 2009,
with an initial term of five years and rental payments
increasing at 2.5% per annum. We have the option to renew the
lease for an additional five-year term and are responsible for
all operating expenses.
The aggregate minimum rental commitments under operating leases
for subsequent years as of January 28, 2011 are as follows
(in thousands):
|
|
|
|
|
|
Fiscal Years
|
|
|
|
|
2011
|
|
$
|
6,252
|
|
2012
|
|
|
5,827
|
|
2013
|
|
|
4,720
|
|
2014
|
|
|
4,449
|
|
2015
|
|
|
4,543
|
|
Thereafter
|
|
|
31,529
|
|
|
|
|
|
|
|
|
$
|
57,320
|
|
|
|
|
|
|
Certain of our leases contain predetermined rent increases over
the lease term. These rent increases are included in the above
minimum rental commitments table in the year in which the rent
increase occurs.
Legal ProceedingsWe are periodically involved in
various legal proceedings arising in the ordinary course of
business. In the opinion of management, any losses that may
occur from these matters are adequately covered by insurance or
are provided for in the consolidated financial statements if the
liability is probable and estimable in accordance with GAAP. The
ultimate outcomes of these matters are not expected to have a
material effect on
F-36
BLUESTEM BRANDS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
our consolidated results of operations or financial position.
Legal costs for these matters are expensed as incurred.
During fiscal 2009, we received a letter from the North Carolina
Department of Revenue asserting the Companys potential
retroactive sales tax collection responsibility resulting from
new legislation enacted by the state relating to online Web
affiliate programs. We ceased our online affiliate relationship
in North Carolina prior to the effective date of the
states new law and are vigorously contesting North
Carolinas assertions of potential liability. At this time,
we are unable to accurately estimate the amount of potential
exposure, if any, for previously uncollected sales taxes on the
sales made prior to August 7, 2009, the effective date of
the newly enacted legislation.
|
|
10.
|
RELATED PARTY
TRANSACTIONS
|
We purchased online display advertising services from a related
party totaling $0.1 million, $0.1 million, and
$0.5 million during the years ended January 28, 2011,
January 29, 2010 and January 30, 2009, respectively.
We purchased merchandise inventory from related parties totaling
$0.7 million during the year ended January 30, 2009.
During fiscal year 2008, we liquidated excess and customer
return merchandise and vendor samples by sales to related
parties at selling prices below our weighted-average cost. We
received $51 thousand from these liquidation sales during the
year ended January 30, 2009.
We subleased warehouse space to a related party and recognized
rental income of $23 thousand during the year ended
January 30, 2009.
See Note 4 FinancingDebt Due to Affiliates.
F-37
BLUESTEM BRANDS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
11.
|
SELECTED
QUARTERLY FINANCIAL DATA (UNAUDITED)
|
Actual quarterly results for the fiscal years ended
January 28, 2011 and January 29, 2010, respectively,
are as follows (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 28, 2011
|
|
|
Fiscal Year Ended January 29, 2010 (a)
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Net sales
|
|
$
|
87,106
|
|
|
$
|
106,376
|
|
|
$
|
107,214
|
|
|
$
|
220,611
|
|
|
$
|
76,099
|
|
|
$
|
93,931
|
|
|
$
|
93,344
|
|
|
$
|
174,815
|
|
Cost of sales
|
|
|
44,944
|
|
|
|
54,899
|
|
|
|
56,364
|
|
|
|
119,314
|
|
|
|
39,015
|
|
|
|
47,618
|
|
|
|
48,282
|
|
|
|
91,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
42,162
|
|
|
|
51,477
|
|
|
|
50,850
|
|
|
|
101,297
|
|
|
|
37,084
|
|
|
|
46,313
|
|
|
|
45,062
|
|
|
|
83,590
|
|
Sales and marketing expenses
|
|
|
23,706
|
|
|
|
27,848
|
|
|
|
29,870
|
|
|
|
48,667
|
|
|
|
21,603
|
|
|
|
24,881
|
|
|
|
24,711
|
|
|
|
38,189
|
|
Net credit expense (income)
|
|
|
(11,156
|
)
|
|
|
(6,087
|
)
|
|
|
(19,362
|
)
|
|
|
(291
|
)
|
|
|
(12,619
|
)
|
|
|
(8,021
|
)
|
|
|
(6,881
|
)
|
|
|
5,205
|
|
General and administrative expenses
|
|
|
18,225
|
|
|
|
18,543
|
|
|
|
19,788
|
|
|
|
27,475
|
|
|
|
15,164
|
|
|
|
16,508
|
|
|
|
17,101
|
|
|
|
20,314
|
|
Loss from derivatives in our own equity
|
|
|
|
|
|
|
|
|
|
|
2,445
|
|
|
|
30,162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,500
|
|
Loss on early extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
5,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
8,173
|
|
|
|
7,969
|
|
|
|
7,256
|
|
|
|
7,352
|
|
|
|
8,194
|
|
|
|
7,352
|
|
|
|
7,379
|
|
|
|
8,291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
3,214
|
|
|
|
3,204
|
|
|
|
5,744
|
|
|
|
(12,068
|
)
|
|
|
4,742
|
|
|
|
5,593
|
|
|
|
2,752
|
|
|
|
5,091
|
|
Income tax expense (benefit)
|
|
|
1,175
|
|
|
|
1,175
|
|
|
|
2,935
|
|
|
|
6,333
|
|
|
|
1,697
|
|
|
|
2,000
|
|
|
|
1,000
|
|
|
|
4,259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
2,039
|
|
|
|
2,029
|
|
|
|
2,809
|
|
|
|
(18,401
|
)
|
|
|
3,045
|
|
|
|
3,593
|
|
|
|
1,752
|
|
|
|
832
|
|
Series B Preferred Stock accretion
|
|
|
(887
|
)
|
|
|
(942
|
)
|
|
|
(940
|
)
|
|
|
(941
|
)
|
|
|
(852
|
)
|
|
|
(880
|
)
|
|
|
(887
|
)
|
|
|
(872
|
)
|
Series A Preferred Stock accretion
|
|
|
(2,412
|
)
|
|
|
(2,451
|
)
|
|
|
(2,451
|
)
|
|
|
(2,510
|
)
|
|
|
(2,263
|
)
|
|
|
(2,269
|
)
|
|
|
(2,270
|
)
|
|
|
(2,309
|
)
|
Allocation of net income to participating preferred shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(397
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income available to common shareholders
|
|
$
|
(1,260
|
)
|
|
$
|
(1,364
|
)
|
|
$
|
(582
|
)
|
|
$
|
(21,852
|
)
|
|
$
|
(70
|
)
|
|
$
|
47
|
|
|
$
|
(1,405
|
)
|
|
$
|
(2,349
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.0064
|
)
|
|
$
|
(0.0062
|
)
|
|
$
|
(0.0025
|
)
|
|
$
|
(0.0932
|
)
|
|
$
|
(0.0004
|
)
|
|
$
|
0.0003
|
|
|
$
|
(0.0075
|
)
|
|
$
|
(0.0123
|
)
|
Diluted
|
|
|
(0.0064
|
)
|
|
|
(0.0062
|
)
|
|
|
(0.0025
|
)
|
|
|
(0.0932
|
)
|
|
|
(0.0004
|
)
|
|
|
0.0001
|
|
|
|
(0.0075
|
)
|
|
|
(0.0123
|
)
|
Weighted-average shares used in computing net (loss) income per
common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
195,672
|
|
|
|
219,297
|
|
|
|
231,403
|
|
|
|
234,351
|
|
|
|
160,096
|
|
|
|
181,498
|
|
|
|
187,044
|
|
|
|
190,392
|
|
Diluted
|
|
|
195,672
|
|
|
|
219,297
|
|
|
|
231,403
|
|
|
|
234,351
|
|
|
|
160,096
|
|
|
|
38,975,382
|
|
|
|
187,044
|
|
|
|
190,392
|
|
The sum of quarterly net (loss) income per share may not equal
fiscal year totals.
|
|
|
(a)
|
|
These financial statements that
have not been previously presented have been prepared on the
same restated basis as the consolidated financial statements of
Bluestem Brands, Inc. for the fiscal year ended January 29,
2010.
|
We have evaluated subsequent events occurring through
April 21, 2011 which is the date the consolidated financial
statements are issued.
On February 18, 2011, warrants to purchase
2,616,306 shares of our common stock issued on
February 18, 2004 were exercised for $275,000 and the
remaining warrants to purchase 9,276,006 shares of our common
stock issued February 18, 2004 expired.
On March 29, 2011 the put rights under the May 15,
2008 Common Stock Warrant Agreements were modified such that
they shall terminate upon the completion of an IPO.
Additionally, the Company will have no obligation to repurchase
or redeem any or all of the warrants after the put right is
terminated.
F-38
BLUESTEM BRANDS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
13.
|
FAIR VALUE
MEASUREMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS
|
Accounting standards define fair value, outline a framework for
measuring fair value, and detail the required disclosures about
fair value measurements. Under these standards, fair value is
defined as the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between
market participants at the measurement date in the principal or
most advantageous market. Standards establish a hierarchy in
determining the fair market value of an asset or liability. The
fair value hierarchy has three levels of inputs, both observable
and unobservable. Standards require the utilization of the
highest possible level of input to determine fair value.
Level 1 inputs include quoted market prices in an
active market for identical assets or liabilities.
Level 2 inputs are market data, other than
Level 1, that are observable either directly or indirectly.
Level 2 inputs include quoted market prices for similar
assets or liabilities, quoted market prices in an inactive
market, and other observable information that can be
corroborated by market data.
Level 3 inputs are unobservable and corroborated by
little or no market data.
The following table shows liabilities measured at fair value on
a recurring basis as of January 28, 2011, January 29,
2010 and January 30, 2009, and the input categories
associated with those assets and liabilities (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement Using Level 3
|
|
|
|
January 28,
|
|
|
January 29,
|
|
|
January 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
LiabilitiesFair value of warrants
|
|
$
|
15,281
|
|
|
$
|
4,174
|
|
|
$
|
4,174
|
|
LiabilitiesFair value of conversion feature in
|
|
|
|
|
|
|
|
|
|
|
|
|
preferred stock
|
|
|
24,200
|
|
|
|
500
|
|
|
|
|
|
LiabilitiesFair value of Contingent Fee
|
|
|
3,800
|
|
|
|
6,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
43,281
|
|
|
$
|
10,674
|
|
|
$
|
4,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The changes in Level 3 liabilities measured at fair value
on a recurring basis for the years ended January 28, 2011,
January 29, 2010 and January 30, 2009, are as follows
(in thousands):
|
|
|
|
|
|
|
Fair Value of
|
|
|
|
Derivative
|
|
|
|
Liabilities
|
|
|
Balance January 30, 2009
|
|
$
|
4,174
|
|
Change in fair value of conversion feature in preferred stock
|
|
|
500
|
|
Change in fair value of Contingent Fee
|
|
|
6,000
|
|
|
|
|
|
|
Balance January 29, 2010
|
|
|
10,674
|
|
Change in fair value of common stock warrants
|
|
|
9,817
|
|
Change in fair value of preferred warrants
|
|
|
1,290
|
|
Change in fair value of conversion feature in preferred stock
|
|
|
23,700
|
|
Change in fair value of Contingent Fee
|
|
|
(2,200
|
)
|
|
|
|
|
|
Balance January 28, 2011
|
|
$
|
43,281
|
|
|
|
|
|
|
F-39
BLUESTEM BRANDS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
14.
|
RESTATEMENT OF
2009 FINANCIAL STATEMENTS
|
Subsequent to the issuance of the 2009 consolidated financial
statements, we determined that we had incorrectly concluded that
the Contingent Fee did not meet the definition of a derivative
liability under
ASC 815-10.
After further analysis, we believe the Contingent Fee is a
derivative liability and as a result have restated the
accompanying 2009 consolidated financial statements to reflect
the proper derivative accounting treatment. Accordingly, we
recognized a $6.0 million derivative liability in our own
equity on the consolidated balance sheet as of January 29,
2010, and a $6.0 million loss on derivatives in our own
equity in the 2009 consolidated statement of operations.
In addition, we failed to identify and recognize the embedded
conversion feature as a derivative in accordance with
ASC 815 upon the initial adoption of the standard.
Accordingly, we recognized a $0.5 million derivative
liability relating to embedded derivatives in our Preferred
Stock on the consolidated balance sheet as of January 29,
2010, and a $0.5 million loss on derivatives in our own
equity in the 2009 consolidated statement of operations.
Additionally, we have 41,742,458 warrants for our Series A
Preferred Stock which previously were recorded at a value of
$4.2 million within shareholders equity (deficit).
The amount recorded represents the greater of their fair value
or their cash redemption value. These warrants have been
reclassified to be presented as a component of derivative
liabilities within our own equity for all periods presented as
the holders will receive a mandatory redeemable security when
exercised.
Further, in preparing these consolidated financial statements,
we corrected certain other errors identified in previously
issued 2009 consolidated financial statements. We reduced
stock-based compensation in the 2009 consolidated statement of
cash flows by $78,000, and we decreased prepaid expenses and
other assets and accounts payable by $0.9 million;
The Companys consolidated statement of operations for the
year ended January 29, 2010 was restated as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Previously
|
|
|
|
|
|
|
|
|
|
Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
|
Net sales
|
|
$
|
438,189
|
|
|
$
|
|
|
|
$
|
438,189
|
|
Cost of sales
|
|
|
226,140
|
|
|
|
|
|
|
|
226,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
212,049
|
|
|
|
|
|
|
|
212,049
|
|
Sales and marketing expenses
|
|
|
109,384
|
|
|
|
|
|
|
|
109,384
|
|
Net credit expense (income)
|
|
|
(22,316
|
)
|
|
|
|
|
|
|
(22,316
|
)
|
General and administrative expenses
|
|
|
69,087
|
|
|
|
|
|
|
|
69,087
|
|
Loss from derivatives in our own equity
|
|
|
|
|
|
|
6,500
|
|
|
|
6,500
|
|
Interest expense, net
|
|
|
31,216
|
|
|
|
|
|
|
|
31,216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
24,678
|
|
|
|
(6,500
|
)
|
|
|
18,178
|
|
Income tax expense
|
|
|
8,956
|
|
|
|
|
|
|
|
8,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
15,722
|
|
|
$
|
(6,500
|
)
|
|
$
|
9,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-40
BLUESTEM BRANDS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Companys consolidated balance sheet as of
January 29, 2010 was restated as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Previously
|
|
|
|
|
|
|
|
|
|
Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other assets
|
|
$
|
12,044
|
|
|
$
|
(906
|
)
|
|
$
|
11,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
503,542
|
|
|
|
(906
|
)
|
|
|
502,636
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
525,235
|
|
|
$
|
(906
|
)
|
|
$
|
524,329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
54,282
|
|
|
$
|
(906
|
)
|
|
$
|
53,376
|
|
Derivative liabilities in our own equity
|
|
|
|
|
|
|
10,674
|
|
|
|
10,674
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
319,101
|
|
|
|
9,768
|
|
|
|
328,869
|
|
Series A Preferred Stock
|
|
|
127,090
|
|
|
|
(4,174
|
)
|
|
|
122,916
|
|
SHAREHOLDERS DEFICIT:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
3
|
|
|
|
|
|
|
|
3
|
|
Accumulated deficit
|
|
|
(21,006
|
)
|
|
|
(6,500
|
)
|
|
|
(27,506
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders deficit
|
|
|
(21,003
|
)
|
|
|
(6,500
|
)
|
|
|
(27,503
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES, MEZZANINE EQUITY,
|
|
|
|
|
|
|
|
|
|
|
|
|
AND SHAREHOLDERS DEFICIT
|
|
$
|
525,235
|
|
|
$
|
(906
|
)
|
|
$
|
524,329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys consolidated statement of cash flows for the
year ended of January 29, 2010 was restated as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Previously
|
|
|
|
|
|
|
|
|
|
Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
15,722
|
|
|
$
|
(6,500
|
)
|
|
$
|
9,222
|
|
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from derivatives in our own equity
|
|
|
|
|
|
|
6,500
|
|
|
|
6,500
|
|
Stock-based compensation
|
|
|
399
|
|
|
|
(78
|
)
|
|
|
321
|
|
Prepaid expenses and other current assets
|
|
|
(1,787
|
)
|
|
|
906
|
|
|
|
(881
|
)
|
Accounts payable and other liabilities
|
|
|
21,372
|
|
|
|
(906
|
)
|
|
|
20,466
|
|
Other
|
|
|
(269
|
)
|
|
|
1
|
|
|
|
(268
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
12,020
|
|
|
$
|
(77
|
)
|
|
$
|
11,943
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
|
|
|
|
|
77
|
|
|
|
77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
$
|
(14,730
|
)
|
|
$
|
77
|
|
|
$
|
(14,653
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-41
BLUESTEM BRANDS,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Corrections have also been made in Note 6 Stock-Based
Compensation, to the weighted-average exercise price per
share of forfeited and exercised stock options in 2009 of $0.019
and $0.091, to the corrected amount of $0.091 and $0.019,
respectively. Additionally, restricted stock awards vested
increased and total outstanding awards were decreased by
625,000 shares for the fiscal year ended January 30,
2009, and restricted stock awards vested decreased by
625,000 shares for the fiscal year ended January 29,
2010. We also corrected the
weighted-average
grant date fair value of restricted stock awards granted and
vested in 2009 of $0.002 and $0.001, to the corrected amount of
$0.001 and $0.012, respectively. The
weighted-average
grant date fair value of restricted stock awards outstanding at
January 29, 2010 of $0.006 was corrected to $0.005.
F-42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
|
|
|
|
|
|
|
|
April 29,
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
April 29,
|
|
|
January 28,
|
|
|
April 30,
|
|
|
|
Note 10
|
|
|
2011
|
|
|
2011
|
|
|
2010
|
|
|
|
ASSETS
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
$
|
306
|
|
|
$
|
1,055
|
|
|
$
|
462
|
|
Restricted cash
|
|
|
|
|
|
|
10,731
|
|
|
|
8,303
|
|
|
|
26,976
|
|
Customer accounts receivablenet of allowance of $117,716,
$109,211, and $99,025, respectively
|
|
|
|
|
|
|
455,298
|
|
|
|
492,836
|
|
|
|
356,779
|
|
Merchandise inventories
|
|
|
|
|
|
|
51,447
|
|
|
|
44,396
|
|
|
|
44,768
|
|
Promotional material inventories
|
|
|
|
|
|
|
17,227
|
|
|
|
14,362
|
|
|
|
12,810
|
|
Deferred income taxes
|
|
|
|
|
|
|
11,180
|
|
|
|
11,576
|
|
|
|
8,943
|
|
Prepaid expenses and other assets
|
|
|
|
|
|
|
12,167
|
|
|
|
12,631
|
|
|
|
10,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
|
|
|
|
558,356
|
|
|
|
585,159
|
|
|
|
460,830
|
|
PROPERTY AND EQUIPMENTNet
|
|
|
|
|
|
|
22,283
|
|
|
|
22,526
|
|
|
|
20,956
|
|
DEFERRED CHARGES
|
|
|
|
|
|
|
5,227
|
|
|
|
6,223
|
|
|
|
898
|
|
OTHER ASSETS
|
|
|
|
|
|
|
94
|
|
|
|
94
|
|
|
|
742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
|
|
|
|
$
|
585,960
|
|
|
$
|
614,002
|
|
|
$
|
483,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES, MEZZANINE EQUITY, AND SHAREHOLDERS EQUITY
(DEFICIT)
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
|
|
|
$
|
63,622
|
|
|
$
|
58,850
|
|
|
$
|
43,373
|
|
Current income taxes payable
|
|
|
|
|
|
|
2,846
|
|
|
|
6,900
|
|
|
|
1,804
|
|
Accrued costs and other liabilities
|
|
|
|
|
|
|
9,729
|
|
|
|
18,938
|
|
|
|
10,085
|
|
Derivative liabilities in our own equity
|
|
$
|
7,975
|
|
|
|
58,225
|
|
|
|
43,281
|
|
|
|
10,674
|
|
Short-term debt
|
|
|
|
|
|
|
199,708
|
|
|
|
225,509
|
|
|
|
219,762
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
|
|
|
|
334,130
|
|
|
|
353,478
|
|
|
|
285,698
|
|
LONG-TERM DEBT
|
|
|
|
|
|
|
104,614
|
|
|
|
104,474
|
|
|
|
29,055
|
|
OTHER LONG-TERM LIABILITIES
|
|
|
|
|
|
|
10,322
|
|
|
|
10,318
|
|
|
|
9,734
|
|
COMMITMENTS AND CONTINGENCIES (Note 9)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MEZZANINE EQUITY:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series B Preferred Stock, par value
$0.00001753,523,962 shares authorized; 0,
753,256,768, 752,181,500, and 750,839,038 shares issued and
outstanding, respectively
|
|
|
|
|
|
|
66,230
|
|
|
|
65,199
|
|
|
|
62,276
|
|
Series A Preferred Stock, par value
$0.00001791,738,012 shares authorized; 0,
749,995,554, 749,995,554, and 749,995,554 shares issued and
outstanding, respectively
|
|
|
|
|
|
|
135,343
|
|
|
|
132,740
|
|
|
|
125,327
|
|
SHAREHOLDERS EQUITY (DEFICIT):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, par value $0.000012,592,550,586 shares
authorized; ,
342,236,552, 333,670,246, and 322,291,384 shares issued and
outstanding, respectively
|
|
|
3
|
|
|
|
3
|
|
|
|
3
|
|
|
|
3
|
|
Additional paid-in capital
|
|
|
251,823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated deficit
|
|
|
(64,682
|
)
|
|
|
(64,682
|
)
|
|
|
(52,210
|
)
|
|
|
(28,667
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity (deficit)
|
|
|
187,144
|
|
|
|
(64,679
|
)
|
|
|
(52,207
|
)
|
|
|
(28,664
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES, MEZZANINE EQUITY, AND SHAREHOLDERS
EQUITY (DEFICIT)
|
|
|
|
|
|
$
|
585,960
|
|
|
$
|
614,002
|
|
|
$
|
483,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
F-43
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
|
|
April 29,
|
|
|
April 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
Net sales
|
|
$
|
99,206
|
|
|
$
|
87,106
|
|
Cost of sales
|
|
|
51,755
|
|
|
|
44,944
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
47,451
|
|
|
|
42,162
|
|
Sales and marketing expenses
|
|
|
24,761
|
|
|
|
23,706
|
|
Net credit expense (income)
|
|
|
(14,444
|
)
|
|
|
(11,156
|
)
|
General and administrative expenses
|
|
|
20,906
|
|
|
|
18,225
|
|
Loss from derivatives in our own equity
|
|
|
14,944
|
|
|
|
|
|
Interest expense, net
|
|
|
7,395
|
|
|
|
8,173
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes
|
|
|
(6,111
|
)
|
|
|
3,214
|
|
Income tax expense
|
|
|
3,156
|
|
|
|
1,175
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
(9,267
|
)
|
|
|
2,039
|
|
Series B Preferred Stock accretion
|
|
|
(931
|
)
|
|
|
(887
|
)
|
Series A Preferred Stock accretion
|
|
|
(2,603
|
)
|
|
|
(2,412
|
)
|
|
|
|
|
|
|
|
|
|
Net loss available to common shareholders
|
|
$
|
(12,801
|
)
|
|
$
|
(1,260
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per common share:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.0531
|
)
|
|
$
|
(0.0064
|
)
|
Weighted-average common shares used in computing net loss per
common share:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
241,222
|
|
|
|
195,672
|
|
See notes to condensed consolidated financial statements.
F-44
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
|
|
April 29,
|
|
|
April 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(9,267
|
)
|
|
$
|
2,039
|
|
Adjustments to reconcile net (loss) income to net cash provided
by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation of fixed assetsincluding internal-use
software and website development amortization
|
|
|
2,588
|
|
|
|
1,924
|
|
Amortization of deferred charges and original issue discount
|
|
|
1,126
|
|
|
|
1,034
|
|
Loss from derivatives in our own equity
|
|
|
14,944
|
|
|
|
|
|
Provision for doubtful accounts
|
|
|
27,500
|
|
|
|
18,896
|
|
Provision for merchandise returns
|
|
|
2,421
|
|
|
|
2,229
|
|
Deferred income taxes
|
|
|
423
|
|
|
|
(478
|
)
|
Stock-based compensation
|
|
|
55
|
|
|
|
90
|
|
Other non-cash items affecting income
|
|
|
2,565
|
|
|
|
3,006
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Customer accounts receivable
|
|
|
2,848
|
|
|
|
9,611
|
|
Merchandise inventories
|
|
|
(6,548
|
)
|
|
|
(3,343
|
)
|
Promotional material inventories
|
|
|
(2,865
|
)
|
|
|
(425
|
)
|
Prepaid expenses and other current assets
|
|
|
483
|
|
|
|
1,955
|
|
Current income taxes payable
|
|
|
(4,054
|
)
|
|
|
(2,095
|
)
|
Accounts payable and other liabilities
|
|
|
(2,836
|
)
|
|
|
(15,264
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
29,383
|
|
|
|
19,179
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchases of fixed assetsincluding internal-use software
and website development
|
|
|
(2,268
|
)
|
|
|
(2,945
|
)
|
(Increase) decrease in restricted cashnet
|
|
|
(2,428
|
)
|
|
|
8,681
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
(4,696
|
)
|
|
|
5,736
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Borrowings on revolving credit facilities
|
|
|
317,053
|
|
|
|
270,464
|
|
Repayments on revolving credit facilities
|
|
|
(342,863
|
)
|
|
|
(297,539
|
)
|
Issuance of Series B Preferred Stock
|
|
|
100
|
|
|
|
|
|
Issuance of common stock
|
|
|
274
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(25,436
|
)
|
|
|
(27,067
|
)
|
|
|
|
|
|
|
|
|
|
NET DECREASE IN CASH AND CASH EQUIVALENTS
|
|
|
(749
|
)
|
|
|
(2,152
|
)
|
CASH AND CASH EQUIVALENTSBeginning of year
|
|
|
1,055
|
|
|
|
2,614
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTSEnd of year
|
|
$
|
306
|
|
|
$
|
462
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
6,190
|
|
|
$
|
7,252
|
|
Income and franchise taxes paid
|
|
|
6,828
|
|
|
|
3,890
|
|
NON-CASH TRANSACTIONS:
|
|
|
|
|
|
|
|
|
Purchases of property and equipment on account
|
|
$
|
77
|
|
|
$
|
767
|
|
Series B Preferred Stock accretion
|
|
|
931
|
|
|
|
887
|
|
Series A Preferred Stock accretion
|
|
|
2,603
|
|
|
|
2,412
|
|
See notes to condensed consolidated financial statements.
F-45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Accumulated
|
|
|
Shareholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Deficit
|
|
|
BALANCEJanuary 29, 2010
|
|
|
322,028,884
|
|
|
$
|
3
|
|
|
$
|
|
|
|
$
|
(27,506
|
)
|
|
$
|
(27,503
|
)
|
Issuance of common stock
|
|
|
262,500
|
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
9
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
90
|
|
|
|
|
|
|
|
90
|
|
Series B Preferred Stock accretion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(887
|
)
|
|
|
(887
|
)
|
Series A Preferred Stock accretion
|
|
|
|
|
|
|
|
|
|
|
(99
|
)
|
|
|
(2,313
|
)
|
|
|
(2,412
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,039
|
|
|
|
2,039
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCEApril 30, 2010
|
|
|
322,291,384
|
|
|
$
|
3
|
|
|
$
|
|
|
|
$
|
(28,667
|
)
|
|
$
|
(28,664
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCEJanuary 28, 2011
|
|
|
333,670,246
|
|
|
$
|
3
|
|
|
$
|
|
|
|
$
|
(52,210
|
)
|
|
$
|
(52,207
|
)
|
Issuance of restricted common stock
|
|
|
6,450,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
|
2,516,306
|
|
|
|
|
|
|
|
274
|
|
|
|
|
|
|
|
274
|
|
Forfeitures of restricted common stock
|
|
|
(400,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
55
|
|
|
|
|
|
|
|
55
|
|
Series B Preferred Stock accretion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(931
|
)
|
|
|
(931
|
)
|
Series A Preferred Stock accretion
|
|
|
|
|
|
|
|
|
|
|
(329
|
)
|
|
|
(2,274
|
)
|
|
|
(2,603
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,267
|
)
|
|
|
(9,267
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCEApril 29, 2011
|
|
|
342,236,552
|
|
|
$
|
3
|
|
|
$
|
|
|
|
$
|
(64,682
|
)
|
|
$
|
(64,679
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
F-46
BLUESTEM BRANDS,
INC.
As of and for the
13 Weeks Ended April 29, 2011 and April 30,
2010
BusinessBluestem Brands, Inc. (the
Company, we, our, or
us) is a national multi-channel retailer of general
merchandise targeting low to middle income consumers who
typically use the credit products we offer to finance their
purchases from our Fingerhut and Gettington.com brands. Both of
our brands offer a large selection of name-brand, private label,
and non-branded merchandise through our catalog and Internet
websites to customers in the United States. We primarily sell
consumer electronics, domestics, housewares, home furnishings,
childrens merchandise, and apparel. By combining our
proprietary marketing and credit decision-making technologies,
we are able to tailor merchandise and credit offers to
prospective as well as existing customers.
Our qualifying Fingerhut and Gettington.com brand customers are
offered revolving credit accounts by MetaBank and WebBank (the
Credit Issuers), respectively. The Company purchases
all receivables resulting from the extension of credit to our
customers by the Credit Issuers, in each case after a
contractual holding period by the Credit Issuers. The Company
also assumes the servicing of the accounts and bears risk of
loss due to uncollectibility of the receivables. The revolving
credit account can only be used to purchase merchandise from
Fingerhut, Gettington.com and from certain third-parties that
market their products and services to our customers. See
Note 3 Customer Accounts Receivable. Approximately
95% of sales are on these revolving credit accounts.
Interim Financial StatementsWe have prepared the
unaudited condensed interim consolidated financial statements
and related unaudited financial information in the notes in
accordance with GAAP and the rules and regulations of the SEC
for interim financial statements. These interim condensed
financial statements reflect all adjustments consisting of
normal recurring accruals, which, in the opinion of management,
are necessary to present fairly the Companys consolidated
financial position, the results of its operations and its cash
flows for the interim periods. These interim condensed
consolidated financial statements should be read in conjunction
with the Companys audited consolidated financial
statements for the fiscal year ended January 28, 2011 and
the notes thereto contained herein.
Segment InformationWe manage our business as one
reportable segment where we market merchandise to individual
consumers through our catalog and Internet websites by including
a tailored revolving or installment credit plan offer. Our
customers value the combination of our merchandise and the
credit plan offer that affords them the convenience of paying
for their purchases over time. Our chief operating decision
maker assesses performance based on Contribution Margin, which
we define as net sales, less cost of sales, sales and marketing
expenses, and net credit expense (income). Our use of
Contribution Margin as a key financial performance indicator
reflects the combined performance of our merchandising,
marketing and credit management, which we believe are
strategically indivisible.
Principles of ConsolidationThe consolidated
financial statements include the accounts of the Company and its
subsidiaries, all of which are wholly-owned. All intercompany
balances and transactions have been eliminated in the
consolidated financial statements.
F-47
BLUESTEM BRANDS,
INC.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
2.
|
SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
|
Fiscal YearOur fiscal year is 52 or 53 weeks
ending on the Friday closest to January 31. As used herein,
13 Weeks Ended April 29, 2011 and 13
Weeks Ended April 30, 2010 refer to our fiscal
year-to-date
2011 and 2010, respectively.
Use of EstimatesThe preparation of financial
statements in conformity with accounting principles generally
accepted in the United States of America (GAAP)
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could
differ from those estimates. Significant estimates in the
consolidated financial statements include revenue recognition,
the allowance for doubtful accounts, reserves for excess and
obsolete merchandise inventories, allowances for merchandise
returns and customer allowances, promotional material
inventories, income taxes, and valuation of stock-based awards,
common stock and derivatives in our own equity.
SeasonalityOur business is seasonal and
historically we have realized a higher portion of our net sales
and net income in the fourth fiscal quarter, attributable to the
impact of the holiday selling season. As a result, our working
capital requirements fluctuate during the year in anticipation
of the holiday selling season. The results of any interim period
may not be indicative of the results to be expected for the
entire year.
Allowance for Doubtful AccountsWe maintain an
allowance for doubtful accounts at a level intended to absorb
estimated probable losses inherent in customer accounts
receivable, including accrued finance charges and fees as of the
balance sheet date. We use our judgment to evaluate the adequacy
of the allowance for doubtful accounts based on a variety of
quantitative and qualitative risk considerations. Quantitative
factors include, among other things, customer credit risk and
aging of accounts receivable. Qualitative factors include, among
other things, economic factors that have historically been
leading indicators of future delinquency and losses such as
national unemployment rates, changing trends in the financial
obligations ratio published by the Federal Reserve and changes
in the consumer price index. We segment customer accounts
receivable into vintage pools based on date of account
origination. Each vintage is further segmented into pools based
on delinquency status as of the balance sheet date and risk
profile. Our estimate of future losses is based on historical
losses on receivables with a similar vintage, delinquency
status, and risk profile, adjusted for current trends and
changes in underwriting. Customer receivables are written off as
of the statement cycle date following the passage of
180 days without receiving a qualifying payment. Accounts
receivable relating to bankrupt or deceased account holders are
written off as of the statement cycle date following the passage
of 60 days after receipt of formal notification regardless
of delinquency status. Recoveries of receivables previously
written off are recorded when received.
F-48
BLUESTEM BRANDS,
INC.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Promotional Material InventoriesAs of
April 29, 2011, January 28, 2011, and April 30,
2010, consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 29,
|
|
|
January 28,
|
|
|
April 30,
|
|
|
|
2011
|
|
|
2011
|
|
|
2010
|
|
|
Premium inventory
|
|
$
|
1,171
|
|
|
$
|
1,278
|
|
|
$
|
1,022
|
|
Catalog advertising work in process
|
|
|
6,309
|
|
|
|
8,229
|
|
|
|
5,091
|
|
Deferred promotional costs
|
|
|
9,747
|
|
|
|
4,855
|
|
|
|
6,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Promotional material inventories
|
|
$
|
17,227
|
|
|
$
|
14,362
|
|
|
$
|
12,810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Liabilities in Our Own EquityWe have
derivative liabilities relating to certain of our common stock
warrants, preferred stock warrants, embedded derivatives in
preferred stock, and a contingent fee agreement. These
derivative liabilities are recorded at their estimated fair
value at each balance sheet date. Changes in fair value are
reflected in the consolidated statement of operations as gains
or losses from derivatives in our own equity. See Note 6
Fair Value Measurements and Fair Value of Financial
Instruments for further information.
Revenue RecognitionNet sales consists of sales of
merchandise, shipping and handling revenue, and commissions
earned from third parties that market their products to our
customers. We record merchandise sales and shipping and handling
revenue at the estimated time of delivery to the customer. Net
sales is reported net of discounts and estimated sales returns,
and excludes sales taxes.
Net sales for the 13 weeks ended April 29, 2011 and
April 30, 2010 consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
|
|
April 29,
|
|
|
April 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
Sales by merchandise category:
|
|
|
|
|
|
|
|
|
Home
|
|
$
|
53,100
|
|
|
$
|
46,588
|
|
Entertainment
|
|
|
36,214
|
|
|
|
31,458
|
|
Fashion
|
|
|
12,134
|
|
|
|
11,306
|
|
|
|
|
|
|
|
|
|
|
Total merchandise sales
|
|
|
101,448
|
|
|
|
89,352
|
|
Returns and allowances
|
|
|
(5,115
|
)
|
|
|
(4,937
|
)
|
Commissions
|
|
|
2,873
|
|
|
|
2,691
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
99,206
|
|
|
$
|
87,106
|
|
|
|
|
|
|
|
|
|
|
Net Credit Expense (Income)Net credit expense
(income) for the 13 weeks ended April 29, 2011 and
April 30, 2010, is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
|
|
April 29,
|
|
|
April 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
Finance charge and fee income
|
|
$
|
(51,260
|
)
|
|
$
|
(38,110
|
)
|
Provision for doubtful accounts
|
|
|
27,500
|
|
|
|
18,896
|
|
Credit management costs
|
|
|
9,316
|
|
|
|
8,058
|
|
|
|
|
|
|
|
|
|
|
Net credit expense (income)
|
|
$
|
(14,444
|
)
|
|
$
|
(11,156
|
)
|
|
|
|
|
|
|
|
|
|
F-49
BLUESTEM BRANDS,
INC.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Stock-Based CompensationWe recognize stock-based
compensation expense in an amount equal to the fair value on the
date of the grant. Compensation expense is recognized over the
period the employees are required to provide services in
exchange for the stock-based awards. See Note 7
Stock-Based Compensation for a discussion of our
stock-based compensation plans.
Comprehensive IncomeDuring the 13 weeks ended
April 29, 2011 and April 30, 2010, we did not have any
other comprehensive income. Accordingly, net income equals
comprehensive income for all periods presented.
|
|
3.
|
CUSTOMER ACCOUNTS
RECEIVABLE
|
Customer accounts receivable as of April 29, 2011,
January 28, 2011 and April 30, 2010 are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 29,
|
|
|
January 28,
|
|
|
April 30,
|
|
|
|
2011
|
|
|
2011
|
|
|
2010
|
|
|
Customer accounts receivable
|
|
$
|
573,014
|
|
|
$
|
602,047
|
|
|
$
|
455,804
|
|
Less allowance for doubtful accounts
|
|
|
(117,716
|
)
|
|
|
(109,211
|
)
|
|
|
(99,025
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer accounts receivablenet
|
|
$
|
455,298
|
|
|
$
|
492,836
|
|
|
$
|
356,779
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances 30+ days delinquent(a)
|
|
$
|
81,246
|
|
|
$
|
79,630
|
|
|
$
|
62,925
|
|
Balances 30+ days delinquent as a percentage of total customer
accounts receivable(b)
|
|
|
14.3
|
%
|
|
|
13.2
|
%
|
|
|
13.9
|
%
|
|
|
|
(a)
|
|
Delinquent balances as of the
customers statement cycle dates prior to or on fiscal
period end.
|
|
(b)
|
|
Delinquent balances as of the
customers statement cycle dates prior to or on fiscal
period end as a percentage of total customer accounts receivable
as of the customers statement cycle dates prior to or on
fiscal period end.
|
The Credit Issuers extend credit directly to the Companys
customers. The Company is obligated to purchase and assume
ownership of the receivables after a contractual holding period
by the Credit Issuers, generally one or two business days. The
purchase price includes the unpaid balance of the loan
receivable, plus accrued interest during the Credit
Issuers holding periods, plus an origination fee.
We recognize finance charge and fee income on customer accounts
receivable according to the contractual provisions of the credit
account agreements. An estimate of uncollectible finance charge
and fee income is included in the allowance for doubtful
accounts.
We maintain an allowance for doubtful accounts at a level
intended to absorb estimated probable losses inherent in
customer accounts receivable, including accrued finance charges
and fees as of the balance sheet date. The provision for
doubtful accounts is included in net credit expense (income) in
the consolidated statements of operations. Upon charge-off, any
unpaid principal is applied to the allowance for doubtful
accounts and any accrued but unpaid finance charges and fees are
netted against finance charge and fee income with an offsetting
equivalent reversal of the allowance for doubtful accounts
through the provision for doubtful accounts.
F-50
BLUESTEM BRANDS,
INC.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Changes in the allowance for doubtful accounts for the
13 weeks ended April 29, 2011 and April 30, 2010
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
|
|
April 29,
|
|
|
April 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
Allowance for doubtful accountsbeginning of period
|
|
$
|
109,211
|
|
|
$
|
98,394
|
|
Provision for doubtful accounts
|
|
|
27,500
|
|
|
|
18,896
|
|
Principal charge-offs
|
|
|
(21,690
|
)
|
|
|
(20,873
|
)
|
Recoveries
|
|
|
2,695
|
|
|
|
2,608
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accountsend of period
|
|
$
|
117,716
|
|
|
$
|
99,025
|
|
|
|
|
|
|
|
|
|
|
As a percentage of period-end customer accounts receivable
|
|
|
20.5
|
%
|
|
|
21.7
|
%
|
As a percentage of balances 30+ days delinquent
|
|
|
144.9
|
%
|
|
|
157.4
|
%
|
The average time since origination of customer accounts affects
the stability of delinquency and loss rates. Older accounts are
typically more stable than more recently originated accounts.
The peak delinquency rate for a new account vintage is
approximately eight months after origination. Accounts past this
peak delinquency curve exhibit greater stability in their
performance. We estimate the allowance for doubtful accounts by
segmenting customer accounts receivable by time since
origination.
The time since origination of customer accounts and their
related accounts receivable balance as of April 29, 2011,
January 28, 2011 and April 30, 2010 are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 29,
|
|
|
January 28,
|
|
|
April 30,
|
|
|
|
2011
|
|
|
2011
|
|
|
2010
|
|
|
Time since origination, as segmented in our estimate of the
allowance for doubtful accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
0 - 3 months
|
|
$
|
16,355
|
|
|
$
|
41,562
|
|
|
$
|
11,190
|
|
4 - 6 months
|
|
|
43,956
|
|
|
|
28,037
|
|
|
|
28,917
|
|
7 - 9 months
|
|
|
27,337
|
|
|
|
29,871
|
|
|
|
19,117
|
|
10 - 12 months
|
|
|
27,202
|
|
|
|
21,284
|
|
|
|
18,496
|
|
13 - 15 months
|
|
|
19,813
|
|
|
|
39,104
|
|
|
|
15,630
|
|
16 - 18 months
|
|
|
34,886
|
|
|
|
24,813
|
|
|
|
23,728
|
|
19+ months
|
|
|
377,071
|
|
|
|
393,365
|
|
|
|
317,392
|
|
Impaired(a)
|
|
|
26,394
|
|
|
|
24,011
|
|
|
|
21,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period-end customer accounts receivable
|
|
$
|
573,014
|
|
|
$
|
602,047
|
|
|
$
|
455,804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Includes qualified hardship,
bankrupt, deceased, and re-aged customer accounts.
|
|
|
4.
|
NET INCOME (LOSS)
PER SHARE
|
Basic net income (loss) per common share is computed under the
two-class method. This method requires net income to be reduced
by the amount of dividends or accretion (distributed earnings)
during the period for each class of stock. Undistributed
earnings for the period are allocated to participating
securities based on the contractual participation rights of the
security to share in those current earnings assuming all the
earnings for the period are distributed. Our Preferred Stock are
participating securities due to preferred stockholder
F-51
BLUESTEM BRANDS,
INC.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
participation rights related to cash dividends declared by the
Company. No allocation was made to Preferred Stock for periods
where an undistributed net loss existed. Diluted net income
(loss) per share is computed by dividing the net income (loss)
for the period by the weighted-average number of common shares
and common share equivalents. Common share equivalents include,
to the extent dilutive, incremental common shares issuable upon
the exercise of stock options, the exercise of stock warrants,
nonvested restricted stock awards, and the conversion of
Preferred Stock to common stock. The dilutive effect of stock
options, restricted stock awards and stock warrants is computed
using the treasury stock method. The dilutive effect of
Preferred Stock is computed using the if-converted method as
prescribed by the two-class method, because it is more dilutive
than the treasury method.
The following table sets forth the computation of basic and
diluted net income (loss) per share for the 13 weeks ended
April 29, 2011 and April 30, 2010, respectively (in
thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
|
|
April 29,
|
|
|
April 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
Basic and Diluted Earnings per Share
(Two-Class Method)
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(9,267
|
)
|
|
$
|
2,039
|
|
Less: Preferred Stock accretion
|
|
|
(3,534
|
)
|
|
|
(3,299
|
)
|
|
|
|
|
|
|
|
|
|
Undistributed loss
|
|
$
|
(12,801
|
)
|
|
$
|
(1,260
|
)
|
|
|
|
|
|
|
|
|
|
Distributed Earnings per ShareBasic and Diluted
|
|
|
|
|
|
|
|
|
Preferred Stock accretion
|
|
$
|
3,534
|
|
|
$
|
3,299
|
|
Weighted-average preferred shares outstanding
|
|
|
1,502,325
|
|
|
|
1,500,835
|
|
|
|
|
|
|
|
|
|
|
Distributed earnings per sharepreferred
|
|
$
|
0.0024
|
|
|
$
|
0.0022
|
|
|
|
|
|
|
|
|
|
|
Undistributed Earnings per ShareBasic
|
|
|
|
|
|
|
|
|
Undistributed loss
|
|
$
|
(12,801
|
)
|
|
$
|
(1,260
|
)
|
Preferred ownership
|
|
|
86.2
|
%
|
|
|
88.5
|
%
|
|
|
|
|
|
|
|
|
|
Preferred shareholders interest in undistributed income
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average preferred shares
|
|
|
1,502,325
|
|
|
|
1,500,835
|
|
|
|
|
|
|
|
|
|
|
Undistributed earnings per sharepreferred
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Undistributed loss
|
|
$
|
(12,801
|
)
|
|
$
|
(1,260
|
)
|
Common ownership
|
|
|
13.8
|
%
|
|
|
11.5
|
%
|
|
|
|
|
|
|
|
|
|
Common shareholders interest in undistributed loss
|
|
$
|
(12,801
|
)
|
|
$
|
(1,260
|
)
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstandingbasic
|
|
|
241,222
|
|
|
|
195,672
|
|
|
|
|
|
|
|
|
|
|
Total basic loss per sharecommon
|
|
$
|
(0.0531
|
)
|
|
$
|
(0.0064
|
)
|
|
|
|
|
|
|
|
|
|
F-52
BLUESTEM BRANDS,
INC.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
|
|
April 29,
|
|
|
April 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
Diluted Earnings per Share (If-Converted Method)
|
|
|
|
|
|
|
|
|
Net loss available to common shareholders
|
|
$
|
(12,801
|
)
|
|
$
|
(1,260
|
)
|
Earnings distributed to preferred shareholders
|
|
|
|
|
|
|
|
|
Undistributed earnings allocated to preferred shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss used in diluted earnings per share
|
|
$
|
(12,801
|
)
|
|
$
|
(1,260
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstandingbasic
|
|
|
241,222
|
|
|
|
195,672
|
|
Preferred Stock
|
|
|
|
|
|
|
|
|
Series A Preferred Stock warrants
|
|
|
|
|
|
|
|
|
Common share equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used to compute loss per common sharediluted
|
|
|
241,222
|
|
|
|
195,672
|
|
|
|
|
|
|
|
|
|
|
Total diluted loss per share
|
|
$
|
(0.0531
|
)
|
|
$
|
(0.0064
|
)
|
|
|
|
|
|
|
|
|
|
For the 13 weeks ended April 29, 2011 and
April 30, 2010, the following securities were not included
in the calculation of fully diluted shares outstanding as the
effect would have been anti-dilutive (in thousands):
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
|
|
April 29,
|
|
|
April 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
Preferred Stock
|
|
|
2,705,063
|
|
|
|
12,620,513
|
|
Common stock warrants
|
|
|
251,878
|
|
|
|
261,054
|
|
Unvested restricted stock awards
|
|
|
95,375
|
|
|
|
126,359
|
|
Series A Preferred Stock warrants
|
|
|
41,742
|
|
|
|
41,742
|
|
Common stock options
|
|
|
47,806
|
|
|
|
33,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,141,864
|
|
|
|
13,083,583
|
|
|
|
|
|
|
|
|
|
|
F-53
BLUESTEM BRANDS,
INC.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Outstanding financing agreements as of April 29, 2011,
January 28, 2011 and April 30, 2010, are as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 29,
|
|
|
January 28,
|
|
|
April 30,
|
|
|
|
2011
|
|
|
2011
|
|
|
2010
|
|
|
Short-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
A/R Credit FacilityRevolving Credit Tranche
(Tranche A)
|
|
$
|
181,000
|
|
|
$
|
215,000
|
|
|
$
|
|
|
Senior Secured Revolving Credit Facility
|
|
|
|
|
|
|
|
|
|
|
206,000
|
|
Inventory Line of Credit
|
|
|
18,481
|
|
|
|
10,100
|
|
|
|
12,945
|
|
Other notes payable
|
|
|
227
|
|
|
|
409
|
|
|
|
817
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt
|
|
$
|
199,708
|
|
|
$
|
225,509
|
|
|
$
|
219,762
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
A/R Credit FacilityTerm Loan Tranche (Tranche B)
|
|
$
|
75,000
|
|
|
$
|
75,000
|
|
|
$
|
|
|
13% Senior Subordinated Secured Notesnet of discount
of $1,132, $1,281 and $1,727, respectively
|
|
|
28,868
|
|
|
|
28,719
|
|
|
|
28,273
|
|
Debt due to affiliates
|
|
|
400
|
|
|
|
400
|
|
|
|
400
|
|
Other notes payable
|
|
|
346
|
|
|
|
355
|
|
|
|
382
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
104,614
|
|
|
$
|
104,474
|
|
|
$
|
29,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expensenet for the 13 weeks ended
April 29, 2011 and April 30, 2010, is as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
|
|
April 29,
|
|
|
April 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
Interest on debt
|
|
$
|
6,270
|
|
|
$
|
7,128
|
|
Amortization of deferred charges
|
|
|
977
|
|
|
|
897
|
|
Amortization of original issue discount
|
|
|
149
|
|
|
|
149
|
|
Interest income
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
Interest expensenet
|
|
$
|
7,395
|
|
|
$
|
8,173
|
|
|
|
|
|
|
|
|
|
|
F-54
BLUESTEM BRANDS,
INC.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Eligible Underlying Receivables portfolio
covenantsViolation of any Eligible Underlying
Receivables portfolio covenant is an event of default under the
A/R Credit Facility. If an event of default is not cured within
the agreed upon time period, or if a waiver from the lenders is
not granted, the outstanding balance becomes due immediately.
The following table compares portfolio covenant levels to actual
as of April 29, 2011:
|
|
|
|
|
|
|
|
|
Covenant
|
|
Covenant Level
|
|
|
Actual
|
|
|
Principal Payment Rate (three-month average)
|
|
|
> 5.00
|
%
|
|
|
6.33
|
%
|
Principal Default Ratio (three-month average)
|
|
|
< 24.00
|
%
|
|
|
15.28
|
%
|
Principal Delinquency Ratio (three-month average)
|
|
|
< 14.50
|
%
|
|
|
7.93
|
%
|
Excess Spread (three-month average)
|
|
|
> 8.00
|
%
|
|
|
29.78
|
%
|
Adjusted Excess Spread (three-month average)
|
|
|
> (4.00
|
)%
|
|
|
22.84
|
%
|
Principal Delinquency Ratio (one month)
|
|
|
< 16.00
|
%
|
|
|
7.93
|
%
|
Total Payment Rate (one month)
|
|
|
> 6.50
|
%
|
|
|
9.10
|
%
|
In addition to Eligible Underlying Receivables portfolio
covenants, there are certain Eligible Underlying Receivables
portfolio performance thresholds that, if not met, require us to
provide additional cash collateral. We are also subject to
financial and other covenants under the A/R Credit Facility,
Inventory Line of Credit, and Senior Subordinated Secured Notes
that, if not met, is an event of default, subject to certain
grace periods or waivers.
As of April 29, 2011 and April 30, 2010, we were in
compliance with all Eligible Underlying Receivables portfolio,
financial and other covenants.
|
|
6.
|
FAIR VALUE
MEASUREMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS
|
Accounting standards define fair value, outline a framework for
measuring fair value, and detail the required disclosures about
fair value measurements. Under these standards, fair value is
defined as the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between
market participants at the measurement date in the principal or
most advantageous market. Standards establish a hierarchy in
determining the fair market value of an asset or liability. The
fair value hierarchy has three levels of inputs, both observable
and unobservable. Standards require the utilization of the
highest possible level of input to determine fair value.
Level 1 inputs include quoted market prices in an
active market for identical assets or liabilities.
Level 2 inputs are market data, other than
Level 1, that are observable either directly or indirectly.
Level 2 inputs include quoted market prices for similar
assets or liabilities, quoted market prices in an inactive
market, and other observable information that can be
corroborated by market data.
Level 3 inputs are unobservable and corroborated by
little or no market data.
Conversion FeatureHolders of Preferred Stock have
the option, at any time, to convert shares of Preferred Stock
into common stock, initially upon issuance on a
one-to-one
basis, subject to certain adjustments, including, but not
limited to, accrued and unpaid dividends on the Preferred Stock.
All outstanding shares of Preferred Stock shall be automatically
converted immediately upon the closing of a Qualified Public
Offering.
All outstanding shares of Preferred Stock shall, upon the vote
or written consent of holders of 66% of the Series B
Preferred Stock, be automatically converted into common stock.
F-55
BLUESTEM BRANDS,
INC.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The conversion feature is considered a derivative liability
under
ASC 815-10.
Changes in the fair value of this derivative liability are
included in gain or loss from derivatives in our own equity in
the consolidated statement of operations. The liabilities
associated with these derivatives are recoded as derivative
liabilities in our own equity on the consolidated balance sheets.
Fair value of the conversion feature is estimated using the
probability weighted expected return method. In applying the
probability weighted expected return method, a range of
estimated equity values is determined at various assumed
liquidation dates. The aggregate estimated liquidity event date
equity value is then allocated to the Preferred Stock and common
stock based on each classs respective economic rights and
preferences. The estimated liquidity event date value of each
class of equity is then discounted to the present using discount
rates that reflect the relative risk inherent in each class of
stock. The aggregate estimated liquidity event date equity value
is also allocated to each class of stock assuming the
Series B Preferred Stock and Series A Preferred Stock
did not include a conversion feature. In this allocation the
aggregate value of the Series B Preferred Stocks and
Series A Preferred Stocks liquidation preference and
accrued dividends at the time of the liquidity event were
discounted to the present using risk adjusted rates for the
Companys fixed income securities. The estimated value of
the conversion feature included in the Series B Preferred
Stock and the Series A Preferred Stock for each scenario in
the probability weighted expected return analysis equals the
difference between the estimated fair value of the stock with
and without the conversion feature. The estimated value of the
conversion feature from each scenario was probability weighted
to estimate fair value.
The expected equity growth rate used in the analysis was based
on estimated Adjusted EBITDA over the period until the liquidity
event, and a range of valuation multiples based on observed
market multiples for a group of the Companys publicly
traded peers.
The assumptions used to estimate the fair value of the
conversion feature as of and for the 13 weeks ended
April 29, 2011 and the fiscal year ended January 28,
2011 were as follows:
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
|
Fiscal Year Ended
|
|
|
|
April 29, 2011
|
|
|
January 28, 2011
|
|
|
Average annual growth rates
|
|
|
13.5% to 22.5%
|
|
|
|
15.8% to 23.8%
|
|
Equity discount rate
|
|
|
19.0% to 20.0%
|
|
|
|
20.0% to 22.0%
|
|
Discount rate for the fixed income components of Preferred Stock
|
|
|
16.0% to 18.0%
|
|
|
|
18.0% to 20.0%
|
|
Probability of a liquidity event occurring in:
|
|
|
|
|
|
|
|
|
One year
|
|
|
60.0%
|
|
|
|
60.0%
|
|
Two years
|
|
|
30.0%
|
|
|
|
30.0%
|
|
Three years
|
|
|
5.0%
|
|
|
|
5.0%
|
|
Four years
|
|
|
5.0%
|
|
|
|
5.0%
|
|
F-56
BLUESTEM BRANDS,
INC.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
WarrantsAs of April 29, 2011, we had
outstanding warrants to purchase shares of our Series A
Preferred Stock and common stock as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant
|
|
|
Number of Warrants Outstanding
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
Series A
|
|
|
|
|
|
|
|
|
|
|
Exercise
|
|
|
per Share at
|
|
|
Preferred
|
|
|
Common
|
|
|
|
Issue Date
|
|
Expiration Date
|
|
Price
|
|
|
Grant Date
|
|
|
Stock
|
|
|
Stock
|
|
|
Classification
|
|
February 24, 2004
|
|
June 21, 2012
|
|
|
0.01000
|
|
|
|
0.01000
|
|
|
|
|
|
|
|
31,689,078
|
|
|
Liability
|
November 1, 2004
|
|
June 21, 2012
|
|
|
0.01000
|
|
|
|
0.01000
|
|
|
|
|
|
|
|
1,427,076
|
|
|
Liability
|
March 24, 2006
|
|
March 23, 2016
|
|
|
0.01000
|
|
|
|
0.10000
|
|
|
|
41,742,458
|
|
|
|
|
|
|
Liability
|
May 15, 2008
|
|
May 15, 2018
|
|
|
0.01000
|
|
|
|
0.00000
|
|
|
|
|
|
|
|
216,045,882
|
|
|
Liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41,742,458
|
|
|
|
249,162,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All of our warrants outstanding at April 29, 2011, contain
a provision that allows the holders to cash settle the award
once a qualifying contingent event occurs. Most of these events
relate to a sale or liquidation of the Company. As a result, we
are required to account for the warrants as derivatives with
changes in fair value being recorded as a gain or loss from
derivatives in our own equity. When the warrants expire,
exercise or are otherwise settled, the derivative liability will
be reclassified into shareholders equity (deficit).
The assumptions used to estimate the fair value of the common
stock warrants and Series A Preferred Stock warrants as of
and for the 13 weeks ended April 29, 2011 and the
fiscal year ended January 28, 2011 were as follows:
|
|
|
|
|
|
|
13 Weeks Ended
|
|
Fiscal Year Ended
|
|
|
April 29, 2011
|
|
January 28, 2011
|
|
Expected volatility
|
|
33.3%
|
|
38.3%
|
Expected term (years)
|
|
1.14-1.75
|
|
1.40-2.00
|
Risk-free interest rate
|
|
0.24%-0.64%
|
|
0.58%
|
Contingent FeeUpon closing of our Senior Secured
Revolving Credit Facility, we entered into a contingent fee
agreement (Contingent Fee) whereby the Company
agrees to pay the lenders a fee contingent upon the occurrence
of a defined liquidation, sale, or change of control
transaction. A fee is also payable in connection with an initial
public offering (IPO) by the Company, unless no
Preferred Stock is outstanding thereafter, in which case no fee
is payable and the agreement terminates. The fee ranges from $0
to $28.9 million based on the timing and value of the
Companys equity (including warrants outstanding) at the
time of a liquidation, sale, or change of control transaction
occurring before May 15, 2018. The Contingent Fee is
considered a derivative liability under
ASC 815-10.
Changes in the fair value of this derivative liability are
included in gain or loss from derivatives in our own equity in
the consolidated statement of operations. The liabilities
associated with these derivatives are recorded as derivative
liabilities in our own equity on our consolidated balance sheet.
Fair value of the Contingent Fee is estimated using the
probability weighted expected return method. In applying the
probability weighted expected return method, a range of
estimated equity values is determined at various assumed
liquidation dates. Based on the estimated liquidity event date
equity value the amount required to satisfy the contingent fee
is calculated. The aggregate value of the contingent fee is then
discounted to the present using discount rates based on the
estimated yield that would be required on the Companys
subordinated debt.
F-57
BLUESTEM BRANDS,
INC.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The expected equity growth rate used in the analysis was based
on estimated Adjusted EBITDA over the period until the liquidity
event, and a range of valuation multiples based on observed
market multiples for a group of the Companys publicly
traded peers.
The assumptions used to estimate the fair value of the
Contingent Fee as of and for the 13 weeks ended
April 29, 2011 and the fiscal year ended January 28,
2011 were as follows:
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
|
Fiscal Year Ended
|
|
|
|
April 29, 2011
|
|
|
January 28, 2011
|
|
|
Average annual growth rates
|
|
|
13.5% to 22.5%
|
|
|
|
15.8% to 23.8%
|
|
Discount rate
|
|
|
15.0
|
%
|
|
|
16.0
|
%
|
Probability of a liquidity event occurring in:
|
|
|
|
|
|
|
|
|
One year
|
|
|
60.0
|
%
|
|
|
60.0
|
%
|
Two years
|
|
|
30.0
|
%
|
|
|
30.0
|
%
|
Three years
|
|
|
5.0
|
%
|
|
|
5.0
|
%
|
Four years
|
|
|
5.0
|
%
|
|
|
5.0
|
%
|
The following table shows assets and liabilities measured at
fair value on a recurring basis as of April 29, 2011,
January 28, 2011, and April 30, 2010, and the input
categories associated with those assets and liabilities (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement Using Level 3
|
|
|
|
April 29,
|
|
|
January 28,
|
|
|
April 30,
|
|
|
|
2011
|
|
|
2011
|
|
|
2010
|
|
|
LiabilitiesFair value of warrants
|
|
$
|
19,425
|
|
|
$
|
15,281
|
|
|
$
|
4,174
|
|
LiabilitiesFair value of conversion feature in preferred
stock
|
|
|
35,800
|
|
|
|
24,200
|
|
|
|
500
|
|
LiabilitiesFair value of Contingent Fee
|
|
|
3,000
|
|
|
|
3,800
|
|
|
|
6,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
58,225
|
|
|
$
|
43,281
|
|
|
$
|
10,674
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The changes in Level 3 liabilities measured at fair value
on a recurring basis for the 13 weeks ended April 29,
2011 and April 30, 2010, are as follows (in thousands):
|
|
|
|
|
|
|
Fair Value of
|
|
|
|
Derivative
|
|
|
|
Liabilities
|
|
|
Balance January 29, 2010
|
|
$
|
10,674
|
|
Change in fair value of derivatives in our own equity
|
|
|
|
|
|
|
|
|
|
Balance April 30, 2010
|
|
$
|
10,674
|
|
|
|
|
|
|
Balance January 28, 2011
|
|
$
|
43,281
|
|
Change in fair value of common stock warrants
|
|
|
3,388
|
|
Change in fair value of preferred warrants
|
|
|
756
|
|
Change in fair value of conversion feature in preferred stock
|
|
|
11,600
|
|
Change in fair value of Contingent Fee
|
|
|
(800
|
)
|
|
|
|
|
|
Balance April 29, 2011
|
|
$
|
58,225
|
|
|
|
|
|
|
F-58
BLUESTEM BRANDS,
INC.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
7.
|
STOCK-BASED
COMPENSATION
|
Stock OptionsA summary of our stock option activity
for the 13 weeks ended April 30, 2010 and
April 29, 2011, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
Remaining
|
|
|
|
|
|
|
Price
|
|
|
Contractual
|
|
|
|
Stock Options
|
|
|
Per Share
|
|
|
Term (Years)
|
|
|
OutstandingJanuary 29, 2010
|
|
|
33,808,474
|
|
|
$
|
0.053
|
|
|
|
6.9
|
|
Granted
|
|
|
5,000,000
|
|
|
|
0.004
|
|
|
|
|
|
Forfeited
|
|
|
(1,443,750
|
)
|
|
|
0.012
|
|
|
|
|
|
Exercised
|
|
|
(112,500
|
)
|
|
|
0.046
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OutstandingApril 30, 2010
|
|
|
37,252,224
|
|
|
$
|
0.048
|
|
|
|
6.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OutstandingJanuary 28, 2011
|
|
|
48,156,812
|
|
|
$
|
0.024
|
|
|
|
7.6
|
|
Granted
|
|
|
400,000
|
|
|
|
0.049
|
|
|
|
|
|
Forfeited
|
|
|
(1,047,500
|
)
|
|
|
0.033
|
|
|
|
|
|
Exercised
|
|
|
(25,000
|
)
|
|
|
0.001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OutstandingApril 29, 2011
|
|
|
47,484,312
|
|
|
$
|
0.024
|
|
|
|
7.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ExercisableApril 29, 2011
|
|
|
20,694,264
|
|
|
$
|
0.045
|
|
|
|
5.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other information pertaining to options for the 13 weeks
ended April 29, 2011 and April 30, 2010, are as
follows (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
|
|
April 29,
|
|
|
April 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
Weighted-average grant date fair value of stock options granted
|
|
$
|
0.0108
|
|
|
$
|
0.0008
|
|
Cash received from the exercise of stock options
|
|
|
|
|
|
|
8
|
|
Stock-based compensation expense
|
|
|
6
|
|
|
|
7
|
|
At April 29, 2011, there was approximately
$0.1 million of unrecognized stock option compensation
expense related to nonvested stock options that is expected to
be recognized over a weighted-average period of approximately
2.6 years.
Determining Fair ValueWe utilize a third-party
valuation advisor to assist management in determining the fair
value of options granted using the BSM option-pricing model
based on the grant price and assumptions regarding the expected
term, expected volatility, dividends, risk-free interest rate,
and forfeiture rate. A description of significant assumptions
used to estimate the expected volatility, expected term,
risk-free interest rate, and forfeiture rate are as follows:
|
|
|
|
|
Expected VolatilityExpected volatility was
determined based on historical volatility of stock prices of a
public company peer group.
|
|
|
|
|
|
Expected TermExpected term represents the period
that stock-based awards are expected to be outstanding and was
determined based on historical experience and anticipated future
exercise patterns, considering the contractual terms of
unexercised stock-based awards.
|
F-59
BLUESTEM BRANDS,
INC.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
Risk-Free Interest RateThe risk-free interest rate
was based on the implied yield currently available on
U.S. Treasury zero-coupon issues with a term equal to the
expected term.
|
|
|
|
|
|
Forfeiture RateWe use historical data to estimate
forfeitures.
|
The assumptions used to calculate the fair value of awards
granted during the 13 weeks ended April 29, 2011 and
April 30, 2010, using the BSM option-pricing model were as
follows:
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
|
|
April 29,
|
|
|
April 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
Expected volatility
|
|
|
38.3
|
%
|
|
|
30.0
|
%
|
Expected term (years)
|
|
|
2.0
|
|
|
|
3.0
|
|
Risk-free interest rate
|
|
|
0.6
|
%
|
|
|
1.4
|
%
|
Forfeiture rate
|
|
|
30.0
|
%
|
|
|
30.0
|
%
|
Expected dividend yield
|
|
|
|
|
|
|
|
|
Restricted Stock AwardsA summary of our restricted
stock activity for the 13 weeks ended April 30, 2010
and April 29, 2011, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
Restricted
|
|
|
Grant Date
|
|
|
|
Stock
|
|
|
Fair Value
|
|
|
OutstandingJanuary 29, 2010
|
|
|
130,213,977
|
|
|
$
|
0.005
|
|
Granted
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(10,247,522
|
)
|
|
|
0.007
|
|
|
|
|
|
|
|
|
|
|
OutstandingApril 30, 2010
|
|
|
119,966,455
|
|
|
$
|
0.005
|
|
|
|
|
|
|
|
|
|
|
OutstandingJanuary 28, 2011
|
|
|
97,620,389
|
|
|
$
|
0.005
|
|
Granted
|
|
|
6,450,000
|
|
|
|
0.054
|
|
Forfeited
|
|
|
(400,000
|
)
|
|
|
0.009
|
|
Vested
|
|
|
(8,057,397
|
)
|
|
|
0.003
|
|
|
|
|
|
|
|
|
|
|
OutstandingApril 29, 2011
|
|
|
95,612,992
|
|
|
$
|
0.008
|
|
|
|
|
|
|
|
|
|
|
At April 29, 2011, there was approximately
$0.8 million of unrecognized compensation expense related
to nonvested restricted stock awards that is expected to be
recognized over a weighted-average period of approximately
2.0 years.
The provision for income taxes is based on the current estimate
of the annual effective tax rate and is adjusted as necessary
for discrete events occurring in a particular period. We
classify interest and penalties as an element of tax expense.
The amount of tax related interest and penalties for
13 weeks ended April 29, 2011 and April 30, 2010,
respectively, was not material.
We recognize income tax liabilities related to unrecognized tax
benefits in accordance with the FASBs authoritative
guidance related to uncertain tax positions and adjust these
liabilities when our judgment changes as the result of the
evaluation of new information. We do not
F-60
BLUESTEM BRANDS,
INC.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
anticipate any significant changes to the unrecognized tax
benefits recorded at the balance sheet date within the next
12 months.
|
|
9.
|
COMMITMENTS AND
CONTINGENCIES
|
We are periodically involved in various legal proceedings
arising in the ordinary course of business. In the opinion of
management, any losses that may occur from these matters are
adequately covered by insurance or are provided for in the
consolidated financial statements if the liability is probable
and estimable in accordance with GAAP. The ultimate outcomes of
these matters are not expected to have a material effect on our
consolidated results of operations or financial position. Legal
costs for these matters are expensed as incurred.
During fiscal 2009, we received a letter from the North Carolina
Department of Revenue asserting the Companys potential
retroactive sales tax collection responsibility resulting from
new legislation enacted by the state relating to online Web
affiliate programs. We ceased our online affiliate relationship
in North Carolina prior to the effective date of the
states new law and are vigorously contesting North
Carolinas assertions of potential liability. At this time,
we are unable to accurately estimate the amount of potential
exposure, if any, for previously uncollected sales taxes on the
sales made prior to August 7, 2009, the effective date of
the newly enacted legislation.
|
|
10.
|
PRO FORMA
(UNAUDITED)
|
Our Board of Directors has authorized the Company to file a
Registration Statement with the United States Securities and
Exchange Commission (SEC) permitting the Company to
sell shares of common stock in an IPO.
The unaudited pro forma balance sheet reflects the following
events as if they had occurred on April 29, 2011:
|
|
|
|
|
the conversion of all outstanding shares of our preferred stock
into shares of our common stock upon the closing of this
offering;
|
|
|
|
|
|
the payment of the accrued and unpaid dividends payable to our
preferred stockholders upon conversion of their shares of
preferred stock into shares of our common stock in the form of
additional shares of common stock on the closing of this
offering;
|
|
|
|
|
|
the lapse of certain anti-dilution rights of the holders of the
216,045,882 common stock warrants issued May 2008;
|
|
|
|
|
|
the termination of a contingent fee agreement; and
|
|
|
|
|
|
the issuance of additional common stock warrants as an
anti-dilution adjustment due to the payment of accrued and
unpaid dividends on our preferred stock in the form of common
stock.
|
F-61
BLUESTEM BRANDS,
INC.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Upon giving effect to the items discussed above as of
April 29, 2011 and January 28, 2011, basic and diluted
earnings per share would be as follows (in thousands, except per
share information):
|
|
|
|
|
|
|
|
|
|
|
13 Weeks
|
|
|
Fiscal Year
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
April 29,
|
|
|
January 28,
|
|
|
|
2011
|
|
|
2011
|
|
|
Net loss available to common shareholders, as presented
|
|
$
|
(12,801
|
)
|
|
$
|
(25,058
|
)
|
|
|
|
|
|
|
|
|
|
Impact of pro forma adjustments:
|
|
|
|
|
|
|
|
|
Loss from derivatives in our own equity
|
|
$
|
13,738
|
|
|
$
|
30,012
|
|
Series B Preferred Stock accretion
|
|
|
931
|
|
|
|
3,710
|
|
Series A Preferred Stock accretion
|
|
|
2,603
|
|
|
|
9,824
|
|
|
|
|
|
|
|
|
|
|
Impact of pro forma adjustments
|
|
|
17,272
|
|
|
|
43,546
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders, pro forma
|
|
$
|
4,471
|
|
|
$
|
18,488
|
|
|
|
|
|
|
|
|
|
|
Pro forma basic and diluted income per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
|
|
|
$
|
|
|
Diluted
|
|
$
|
|
|
|
$
|
|
|
Weighted-average
common stock outstanding:
|
|
|
|
|
|
|
|
|
Basic and diluted, as presented
|
|
|
|
|
|
|
|
|
Conversion of Series B Preferred Stock
|
|
|
|
|
|
|
|
|
Conversion of Series A Preferred Stock
|
|
|
|
|
|
|
|
|
Conversion of Series B Preferred Stock accretion
|
|
|
|
|
|
|
|
|
Conversion of Series A Preferred Stock accretion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma weighted-average basic common stock outstanding
|
|
|
|
|
|
|
|
|
Common stock warrants
|
|
|
|
|
|
|
|
|
Issuance of additional common stock warrants as an anti-dilution
adjustment to warrant holders
|
|
|
|
|
|
|
|
|
Unvested restricted stock awards
|
|
|
|
|
|
|
|
|
Common stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma weighted-average diluted common stock outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-62
BLUESTEM BRANDS,
INC.
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
For the 13 weeks ended April 29, 2011 and fiscal year
ended January 28, 2011, the following pro forma securities
were not included in the calculation of diluted shares
outstanding as the effect would have been anti-dilutive (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
13 Weeks
|
|
|
Fiscal Year
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
April 29,
|
|
|
January 28,
|
|
|
|
2011
|
|
|
2011
|
|
|
Common stock warrants
|
|
|
|
|
|
|
|
|
Issuance of additional common stock warrants as an anti-dilution
adjustment to warrant holders
|
|
|
|
|
|
|
|
|
Unvested restricted stock awards
|
|
|
|
|
|
|
|
|
Common stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Events that have occurred subsequent to April 29, 2011 have
been evaluated through June 10, 2011, the date the
condensed consolidated financial statements were issued. There
have been no subsequent events that occurred during such period
that would require recognition or disclosure in the condensed
consolidated financial statements as of or for the period ended
April 29, 2011.
F-63
Bluestem brands, inc.
Now you can
FiNGERHUT. Gettington.com |
You should rely only on the information contained in this
prospectus. We have not authorized anyone to provide information
different from that contained in this prospectus. We are
offering to sell, and seeking offers to buy, shares of common
stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is
accurate only as of the date of this prospectus, regardless of
the time of delivery of this prospectus or of any sale of our
common stock.
TABLE OF
CONTENTS
|
|
|
|
|
|
|
Page
|
|
Prospectus Summary
|
|
|
1
|
|
Risk Factors
|
|
|
12
|
|
Forward Looking Statements
|
|
|
38
|
|
Use of Proceeds
|
|
|
40
|
|
Dividend Policy
|
|
|
41
|
|
Capitalization
|
|
|
42
|
|
Dilution
|
|
|
45
|
|
Selected Consolidated Financial and Other Data
|
|
|
47
|
|
Managements Discussion and Analysis of Financial Condition
and Results of Operations
|
|
|
53
|
|
Business
|
|
|
98
|
|
Management
|
|
|
117
|
|
Executive Compensation
|
|
|
127
|
|
Principal and Selling Stockholders
|
|
|
151
|
|
Certain Relationships and Related Party Transactions
|
|
|
155
|
|
Description of Capital Stock
|
|
|
164
|
|
Shares Eligible for Future Sale
|
|
|
171
|
|
Material U.S. Federal Income and Estate Tax Considerations to
Non-U.S.
Holders
|
|
|
174
|
|
Underwriting
|
|
|
178
|
|
Conflict of Interest
|
|
|
180
|
|
Market and Industry Data
|
|
|
182
|
|
Legal Matters
|
|
|
182
|
|
Experts
|
|
|
182
|
|
Where You Can Find More Information
|
|
|
182
|
|
Index to Financial Information
|
|
|
F-1
|
|
Until ,
2011 (25 days after the date of this prospectus), all
dealers that effect transactions in these securities, whether or
not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers obligation
to deliver a prospectus when acting as an underwriter and with
respect to unsold allotments or subscriptions.
Bluestem Brands,
Inc.
Shares
Common
Stock
Deutsche Bank
Securities
Piper
Jaffray
Oppenheimer &
Co.
William
Blair & Company
Prospectus
,
2011
PART II
INFORMATION NOT
REQUIRED IN PROSPECTUS
|
|
Item 13.
|
Other Expenses
of Issuance and Distribution.
|
The following table sets forth all costs and expenses, other
than the underwriting discounts and commissions payable by us,
in connection with the offer and sale of the securities being
registered. All amounts shown are estimates except for the SEC
registration fee and the FINRA filing fee.
|
|
|
|
|
|
|
Amount
|
|
|
SEC registration fee
|
|
$
|
17,415
|
|
FINRA filing fee
|
|
|
15,500
|
|
NASDAQ Global Select Market listing fee
|
|
|
25,000
|
|
Legal fees and expenses
|
|
|
*
|
|
Accounting fees and expenses
|
|
|
*
|
|
Printing expenses
|
|
|
*
|
|
Transfer agent and registrar fees and expenses
|
|
|
*
|
|
Miscellaneous expenses
|
|
|
*
|
|
Total
|
|
|
|
|
|
|
|
*
|
|
To be filed by amendment.
|
|
|
Item 14.
|
Indemnification
of Directors and Officers.
|
We are a corporation organized under the laws of the State of
Delaware. Section 145 of the Delaware General Corporation
Law provides that a corporation may indemnify any person who was
or is a party or is threatened to be made a party to an action
by reason of the fact that he or she was a director, officer,
employee or agent of the corporation or is or was serving at the
request of the corporation against expenses (including
attorneys fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him or her in
connection with such action if he or she acted in good faith and
in a manner he or she reasonably believed to be in, or not
opposed to, the best interests of the corporation and, with
respect to any criminal action or proceeding, had no reasonable
cause to believe his or her conduct was unlawful, except that,
in the case of an action by or in right of the corporation, no
indemnification may generally be made in respect of any claim as
to which such person is adjudged to be liable to the
corporation. Our amended and restated certificate of
incorporation and amended and restated bylaws, in the form that
will become effective upon the closing of this offering, provide
that we will indemnify and advance expenses to our directors and
officers (and may choose to indemnify and advance expenses to
other employees and other agents) to the fullest extent
permitted by law; provided, however, that if we enter into an
indemnification agreement with such directors or officers, such
agreement controls.
Section 102(b)(7) of the Delaware General Corporation Law
permits a corporation to provide in its certificate of
incorporation that a director of the corporation shall not be
personally liable to the corporation or its stockholders for
monetary damages for breach of fiduciary duties as a director,
except for liability for any:
|
|
|
|
|
breach of a directors duty of loyalty to the corporation
or its stockholders;
|
|
|
|
act or omission not in good faith or that involves intentional
misconduct or a knowing violation of law;
|
II-1
|
|
|
|
|
unlawful payment of dividends or redemption of shares; or
|
|
|
|
transaction from which the director derives an improper personal
benefit.
|
Our amended and restated certificate of incorporation, in the
form that will become effective upon the closing of this
offering, provides that our directors are not personally liable
for breaches of fiduciary duties to the fullest extent permitted
by the Delaware General Corporation Law.
These limitations of liability do not apply to liabilities
arising under federal securities laws and do not affect the
availability of equitable remedies such as injunctive relief or
rescission.
Section 145(g) of the Delaware General Corporation Law
permits a corporation to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee
or agent of the corporation. Our amended and restated bylaws, in
the form that will become effective upon the closing of this
offering, permit us to secure insurance on behalf of any
officer, director, employee or other agent for any liability
arising out of his or her actions in connection with their
services to us, regardless of whether our bylaws permit
indemnification. We have obtained a directors and
officers liability insurance policy.
Prior to the closing of this offering we plan to enter into an
underwriting agreement, which will provide that the underwriters
are obligated, under some circumstances, to indemnify our
directors, officers and controlling persons against specified
liabilities.
|
|
Item 15.
|
Recent Sales
of Unregistered Securities.
|
In the three years preceding the filing of this registration
statement, we issued the securities indicated below that were
not registered under the Securities Act. All share and price
information in the table below does not reflect the impact of
the conversion of all of our preferred stock into common stock
upon the consummation of this offering, but does reflect
the
for 1 reverse stock split of our common stock that became
effective
on ,
2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Person or Class of Person to whom Securities Sold
|
|
Type of Securities
|
|
Date of Sale
|
|
Preferred
|
|
|
Common
|
|
|
Consideration
|
|
|
Various investors (1)
|
|
Series B Preferred Stock
|
|
May 2008
|
|
|
750,839,038
|
|
|
|
|
|
|
$
|
55,937,507
|
|
Director
|
|
Series B Preferred Stock
|
|
December 2010
|
|
|
1,342,462
|
|
|
|
|
|
|
$
|
100,000
|
|
Director
|
|
Series B Preferred Stock
|
|
April 2011
|
|
|
1,075,268
|
|
|
|
|
|
|
$
|
100,000
|
|
Employees and/or directors (option exercises)
|
|
common stock
|
|
January 2008
|
|
|
|
|
|
|
47,500
|
|
|
$
|
950
|
|
Employees and/or directors (restricted stock awards)
|
|
common stock
|
|
August 2008
|
|
|
|
|
|
|
103,800,000
|
|
|
|
|
*
|
Employees and/or directors (option exercises)
|
|
common stock
|
|
August 2008
|
|
|
|
|
|
|
789,200
|
|
|
$
|
15,784
|
|
Employees and/or directors (option exercises)
|
|
common stock
|
|
September 2008
|
|
|
|
|
|
|
60,900
|
|
|
$
|
1,907
|
|
Employees and/or directors (restricted stock awards)
|
|
common stock
|
|
September 2008
|
|
|
|
|
|
|
2,300,000
|
|
|
|
|
*
|
Employees and/or directors (option exercises)
|
|
common stock
|
|
November 2008
|
|
|
|
|
|
|
19,613
|
|
|
$
|
1,273
|
|
Employees and/or directors (restricted stock awards)
|
|
common stock
|
|
December 2008
|
|
|
|
|
|
|
1,550,000
|
|
|
|
|
*
|
Employees and/or directors (restricted stock awards)
|
|
common stock
|
|
February 2009
|
|
|
|
|
|
|
5,000,000
|
|
|
|
|
*
|
Employees and/or directors (restricted stock awards)
|
|
common stock
|
|
April 2009
|
|
|
|
|
|
|
21,604,588
|
|
|
|
|
*
|
Employees and/or directors (option exercises)
|
|
common stock
|
|
April 2009
|
|
|
|
|
|
|
200,000
|
|
|
$
|
4,809
|
|
Employees and/or directors (option exercises)
|
|
common stock
|
|
May 2009
|
|
|
|
|
|
|
1,950,000
|
|
|
$
|
39,000
|
|
II-2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Person or Class of Person to whom Securities Sold
|
|
Type of Securities
|
|
Date of Sale
|
|
Preferred
|
|
|
Common
|
|
|
Consideration
|
|
|
Employees and/or directors (option exercises)
|
|
common stock
|
|
June 2009
|
|
|
|
|
|
|
50,000
|
|
|
$
|
450
|
|
Employees and/or directors (restricted stock awards)
|
|
common stock
|
|
June 2009
|
|
|
|
|
|
|
31,604,588
|
|
|
|
|
*
|
Employees and/or directors (restricted stock awards)
|
|
common stock
|
|
August 2009
|
|
|
|
|
|
|
7,369,676
|
|
|
|
|
*
|
Employees and/or directors (option exercises)
|
|
common stock
|
|
October 2009
|
|
|
|
|
|
|
1,900,446
|
|
|
$
|
32,977
|
|
Employees and/or directors (restricted stock awards)
|
|
common stock
|
|
December 2009
|
|
|
|
|
|
|
5,200,000
|
|
|
|
|
*
|
Employees and/or directors (option exercises)
|
|
common stock
|
|
April 2010
|
|
|
|
|
|
|
112,500
|
|
|
$
|
5,205
|
|
Employees and/or directors (option exercises)
|
|
common stock
|
|
May 2010
|
|
|
|
|
|
|
50,000
|
|
|
$
|
725
|
|
Employees and/or directors (option exercises)
|
|
common stock
|
|
June 2010
|
|
|
|
|
|
|
2,518,700
|
|
|
$
|
49,824
|
|
Employees and/or directors (option exercises)
|
|
common stock
|
|
July 2010
|
|
|
|
|
|
|
225,000
|
|
|
$
|
425
|
|
Employees and/or directors (option exercises)
|
|
common stock
|
|
August 2010
|
|
|
|
|
|
|
293,750
|
|
|
$
|
5,875
|
|
Employees and/or directors (option exercises)
|
|
common stock
|
|
September 2010
|
|
|
|
|
|
|
262,500
|
|
|
$
|
3,737
|
|
Various investors (warrant exercises) (2)
|
|
common stock
|
|
February 2011
|
|
|
|
|
|
|
2,616,306
|
|
|
$
|
275,000
|
|
Employees and/or directors (option exercises)
|
|
common stock
|
|
February 2011
|
|
|
|
|
|
|
25,000
|
|
|
$
|
25
|
|
Existing investors (exchange)
|
|
common stock
|
|
April 2011
|
|
|
|
|
|
|
16,503,658
|
|
|
|
#
|
|
Employees and/or directors (restricted stock awards)
|
|
common stock
|
|
April 2011
|
|
|
|
|
|
|
6,450,000
|
|
|
|
*
|
|
Employees and/or directors (option exercises)
|
|
common stock
|
|
May 2011
|
|
|
|
|
|
|
25,000
|
|
|
$
|
25
|
|
|
|
|
*
|
|
Grants of restricted stock under
our 2008 Equity Incentive Plan pursuant to which the recipients
did not pay cash consideration for their awards.
|
|
#
|
|
Common stock issued in exchanges
for same number of common stock shares pursuant to exchange
agreements.
|
|
(1)
|
|
Substantially all of these shares
were sold to related parties, as described in the prospectus
included in Part I of this registration statement under
Certain Relationships and Related Party
TransactionsMay 2008 FinancingsIssuance of
Series B Preferred Stock.
|
|
(2)
|
|
The parties that exercised this
warrant were transferees of a warrant that was originally issued
to Piper Jaffray & Co. in February 2004.
|
The above-described sales of Series B Preferred Stock and
warrant exercises were made in reliance upon the exemption from
registration requirements of the Securities Act available under
Section 4(2) of the Securities Act and Rule 506 of
Regulation D. These sales did not involve any underwriters,
underwriting discounts or commissions or any public offering.
The recipients of the securities in these transactions
represented that they were sophisticated persons and that they
intended to acquire the securities for investment only and not
with a view to, or for sale in connection with, any distribution
thereof, and appropriate legends were affixed to the share
certificates and instruments issued in such sales. We believe
that the purchasers either received adequate information about
us or had adequate access, through their relationships with us,
to such information.
II-3
The exchanges of common stock referred to above were made in
reliance upon the exemption from registration requirements of
the Securities Act available under Section 3(a)(9) of the
Securities Act.
All other issuances of common stock described above either
represent grants of restricted stock under, or were made
pursuant to the exercise of stock options granted under, our
2003 Plan, 2005 Plan or 2008 Plan to our officers, directors,
employees and consultants in reliance upon an available
exemption from the registration requirements of the Securities
Act, including those contained in Rule 701 promulgated
under Section 3(b) of the Securities Act. Among other
things, we relied on the fact that, under Rule 701,
companies that are not subject to the reporting requirements of
Section 13 or Section 15(d) of the Exchange Act are
exempt from registration under the Securities Act with respect
to certain offers and sales of securities pursuant to
compensatory benefit plans as defined under that
rule. We believe that our 2003 Plan, 2005 Plan, and 2008 Plan
all qualify as a compensatory benefit plan.
The following table sets forth information on the stock options
issued by us in the three years preceding the filing of this
registration statement.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grant Date
|
|
|
|
Number of
|
|
|
Exercise Price
|
|
Date of Issuance
|
|
Options Granted
|
|
|
($/Sh)
|
|
|
April 5, 2011
|
|
|
400,000
|
|
|
$
|
0.049
|
|
December 7, 2010
|
|
|
100,000
|
|
|
|
0.011
|
|
November 4, 2010
|
|
|
2,100,000
|
|
|
|
0.011
|
|
July 22, 2010
|
|
|
1,017,500
|
*
|
|
|
0.004
|
|
June 18, 2010
|
|
|
13,749,700
|
|
|
|
0.004
|
|
April 9, 2010
|
|
|
5,000,000
|
|
|
|
0.004
|
|
December 8, 2009
|
|
|
600,000
|
|
|
|
0.001
|
|
September 23, 2009
|
|
|
700,000
|
|
|
|
0.001
|
|
July 23, 2009
|
|
|
600,000
|
|
|
|
0.001
|
|
June 19, 2009
|
|
|
100,000
|
|
|
|
0.001
|
|
April 7, 2009
|
|
|
1,000,000
|
|
|
|
0.001
|
|
December 9, 2008
|
|
|
1,100,000
|
|
|
|
0.009
|
|
September 30, 2008
|
|
|
6,360,000
|
|
|
|
0.009
|
|
September 16, 2008
|
|
|
100,000
|
|
|
|
0.009
|
|
August 8, 2008
|
|
|
5,900,000
|
|
|
|
0.009
|
|
|
|
|
*
|
|
Includes 717,500 options issued in
exchange for options previously granted on April 9, 2003 at
an exercise price of $0.80.
|
No cash consideration was paid to us by any recipient of any of
the foregoing options for the grant of such options. All of the
stock options described above were granted under our 2008 Plan
to our officers, employees and consultants in reliance upon an
available exemption from the registration requirements of the
Securities Act, including those contained in Rule 701
promulgated under Section 3(b) of the Securities Act. Among
other things, we relied on the fact that, under Rule 701,
companies that are not subject to the reporting requirements of
Section 13 or Section 15(d) of the Exchange Act are
exempt from registration under the Securities Act with respect
to certain offers and sales of securities pursuant to
compensatory benefit plans as defined under that
rule. We believe that our 2008 Plan qualifies as a compensatory
benefit plan.
|
|
Item 16.
|
Exhibits and
Financial Statement Schedules.
|
See the Exhibit Index following the signature page.
II-4
The undersigned registrant hereby undertakes to provide to the
underwriters at the closing specified in the purchase agreement,
certificates in such denominations and registered in such names
as required by the underwriters to permit prompt delivery to
each purchaser.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors,
officers and controlling persons of the registrant pursuant to
the provisions referenced in Item 14 of this registration
statement or otherwise, the registrant has been advised that in
the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid
by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in
connection with the securities being registered hereunder, the
registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in the form of
prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities
Act shall be deemed to be part of this registration statement as
of the time it was declared effective; and
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of such securities at the time shall
be deemed to be the initial bona fide offering thereof.
(3) For the purpose of determining liability under the
Securities Act of 1933 to any purchaser, if the registrant is
subject to Rule 430C, each prospectus filed pursuant to
Rule 424(b) as part of a registration statement relating to
an offering, other than registration statements relying on
Rule 430B or other than prospectuses filed in reliance on
Rule 430A, shall be deemed to be part of and included in
the registration statement as of the date it is first used after
effectiveness. Provided, however, that no statement made in a
registration statement or prospectus that is part of the
registration statement or made in a document incorporated or
deemed incorporated by reference into the registration statement
or prospectus that is part of the registration statement will,
as to a purchaser with a time of contract of sale prior to such
first use, supersede or modify any statement that was made in
the registration statement or prospectus that was part of the
registration statement or made in any such document immediately
prior to such date of first use.
The undersigned registrant undertakes that in a primary offering
of securities of the undersigned registrant pursuant to this
registration statement, regardless of the underwriting method
used to sell the securities to the purchaser, if the securities
are offered or sold to such purchaser by means of any of the
following communications, the undersigned registrant will be a
seller to the purchaser and will be considered to offer or sell
such securities to such purchaser;
(1) Any preliminary prospectus or prospectus of the
undersigned registrant relating to the offering required to be
filed pursuant to Rule 424;
II-5
(2) Any free writing prospectus relating to the offering
prepared by or on behalf of the undersigned registrant or used
or referred to by the undersigned registrant;
(3) The portion of any other free writing prospectus
relating to the offering containing material information about
the undersigned registrant or its securities provided by or on
behalf of the undersigned registrant; and
(4) Any other communication that is an offer in the
offering made by the undersigned registrant to the purchaser.
II-6
SIGNATURES
Pursuant to the requirements of the Securities Act, the
registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Eden Prairie, State of Minnesota on
July 7, 2011.
BLUESTEM BRANDS, INC.
Mark P. Wagener
Executive Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons
in the capacities and on the dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
*
Brian
A. Smith
|
|
Chairman and Chief Executive Officer (principal executive
officer)
|
|
July 7, 2011
|
|
|
|
|
|
*
Mark
P. Wagener
|
|
Executive Vice President and Chief
Financial Officer (principal financial officer)
|
|
July 7, 2011
|
|
|
|
|
|
*
Brad
T. Atkinson
|
|
Vice President and Corporate Controller (principal
accounting officer)
|
|
July 7, 2011
|
|
|
|
|
|
*
Michael
M. Brown
|
|
Director
|
|
July 7, 2011
|
|
|
|
|
|
*
John
A. Giuliani
|
|
Director
|
|
July 7, 2011
|
|
|
|
|
|
*
Roy
A. Guthrie
|
|
Director
|
|
July 7, 2011
|
|
|
|
|
|
*
Michael
A. Krupka
|
|
Director
|
|
July 7, 2011
|
|
|
|
|
|
*
Alice
M. Richter
|
|
Director
|
|
July 7, 2011
|
|
|
|
|
|
*
Scott
L. Savitz
|
|
Director
|
|
July 7, 2011
|
/s/ Mark P. Wagener
Attorney-in-Fact
|
|
|
*
|
|
Signed on individuals behalf
by attorney-in-fact
|
II-7
EXHIBIT INDEX
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
1
|
.1
|
|
Form of Underwriting Agreement
|
|
3
|
.1#
|
|
Composite Certificate of Incorporation of the Registrant, as
currently in effect
|
|
3
|
.2*
|
|
Amended and Restated Certificate of Incorporation of the
Registrant, to be in effect upon the completion of this offering
|
|
3
|
.3#
|
|
Bylaws of the Registrant, as currently in effect
|
|
3
|
.4*
|
|
Amended and Restated Bylaws of the Registrant, to be in effect
upon completion of this offering
|
|
4
|
.1
|
|
Specimen Common Stock Certificate of the Registrant
|
|
4
|
.2#
|
|
Stock Purchase Agreement related to the Series A Preferred
Stock dated as of February 24, 2004, among the Registrant,
Bain Capital Venture Fund, L.P., Battery Ventures VI, L.P.,
Petters Company, Inc., Theodore Deikel, and the Other Purchasers
named on Schedule I thereto
|
|
4
|
.3#
|
|
Supplement No. 1 to Stock Purchase Agreement related to the
Series A Preferred Stock dated as of October 27, 2004,
among the Registrant, Bain Capital Venture Fund, L.P., Battery
Ventures VI, L.P., Petters Company, Inc., CIGPF I Corp., and the
Supplemental Purchasers named on Supplemental Schedule I
thereto
|
|
4
|
.4#
|
|
Supplement No. 2 to Stock Purchase Agreement related to the
Series A Preferred Stock dated as of November 1, 2004,
among the Registrant, Bain Capital Venture Fund, L.P., Battery
Ventures VI, L.P., Petters Company, Inc., CIGPF I Corp., and the
Supplemental Purchasers named on Supplemental Schedule I
thereto
|
|
4
|
.5#
|
|
Stock Purchase Agreement related to Series B Preferred
Stock dated as of May 15, 2008, among the Registrant, Bain
Capital Venture Fund 2007, L.P., Battery Ventures VI, L.P.,
Prudential Capital Partners II, L.P. and the Other Purchasers
named on Schedule I thereto
|
|
4
|
.6#
|
|
Amended and Restated Stockholders Agreement dated as of
May 15, 2008, among the Registrant, the Investors listed on
Exhibit A thereto and the Stockholders listed on
Exhibit B thereto
|
|
4
|
.7#
|
|
Amended and Restated Investor Rights Agreement dated as of
May 15, 2008, among the Registrant and the Investors listed
on Exhibit A thereto
|
|
4
|
.8#
|
|
Common Stock Purchase Warrant dated as of February 24,
2004, issued to CIGPF I Corp.
|
|
4
|
.9#
|
|
Common Stock Purchase Warrant dated as of November 1, 2004,
issued to CIGPF I Corp.
|
|
4
|
.10#
|
|
Series A Preferred Stock Purchase Warrant dated as of
March 24, 2006, issued to Prudential Capital Partners II,
L.P.
|
|
4
|
.11#
|
|
Series A Preferred Stock Purchase Warrant dated as of
March 24, 2006, issued to Prudential Capital Partners
(Parallel Fund) II, L.P.
|
|
4
|
.12#
|
|
Series A Preferred Stock Purchase Warrant dated as of
March 24, 2006, issued to Prudential Capital Partners
Management Fund II, L.P.
|
|
4
|
.13#
|
|
Common Stock Purchase Warrants dated as of May 15, 2008,
issued to Eton Park Fund, L.P., and Amendment dated
March 29, 2011
|
|
4
|
.14#
|
|
Common Stock Purchase Warrants dated as of May 15, 2008,
issued to CCP Credit Acquisition Holdings, L.L.C., and Amendment
dated March 29, 2011
|
|
4
|
.15#
|
|
Common Stock Purchase Warrant dated as of May 15, 2008,
issued to DB FHUT LLC, and Amendment dated March 29, 2011
|
|
4
|
.16#
|
|
Common Stock Purchase Warrant dated as of May 15, 2008,
issued to FCOF UB Investments LLC, and Amendment dated
March 29, 2011
|
|
4
|
.17#
|
|
Common Stock Purchase Warrant dated as of May 15, 2008,
issued to FPF FHUT LLC, and Amendment dated March 29, 2011
|
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
4
|
.18#
|
|
Common Stock Purchase Warrant dated as of May 15, 2008,
issued to Goldman, Sachs & Co. , and Amendment dated
March 29, 2011
|
|
4
|
.19
|
|
Amendment No. 1 to Amended and Restated Stockholders Agreement
dated May 20, 2011, among the Registrant and the Investors
and Common Stockholders party thereto
|
|
4
|
.20
|
|
Amendment No. 1 to Amended and Restated Investor Rights
Agreement dated May 20, 2011, among the Registrant and the
Investors party thereto
|
|
5
|
.1
|
|
Form of Opinion of Faegre & Benson LLP
|
|
10
|
.1#
|
|
2003 Equity Incentive Plan of the Registrant
|
|
10
|
.2(i)#
|
|
Form of Non-Qualified Stock Option Agreement (Executives) under
2003 Equity Incentive Plan
|
|
10
|
.2(ii)#
|
|
Form of Incentive Stock Option Agreement (Non-Executives) under
2003 Equity Incentive Plan
|
|
10
|
.2(iii)#
|
|
Form of Restricted Stock Agreement (CEO) under 2003 Equity
Incentive Plan
|
|
10
|
.2(iv)#
|
|
Form of Restricted Stock Agreement (Executives) under 2003
Equity Incentive Plan
|
|
10
|
.2(v)#
|
|
Form of Restricted Stock Agreement (Non-Executives) under 2003
Equity Incentive Plan
|
|
10
|
.3#
|
|
2005 Non-Employee Directors Equity Compensation Plan of the
Registrant
|
|
10
|
.4(i)#
|
|
Form of Non-Qualified Stock Option Agreement under 2005
Non-Employee Directors Equity Compensation Plan
|
|
10
|
.4(ii)#
|
|
Form of Restricted Stock Award Agreement under 2005 Non-Employee
Directors Equity Compensation Plan
|
|
10
|
.5#
|
|
2008 Equity and Incentive Plan of the Registrant
|
|
10
|
.6(i)#
|
|
Form of Non-Qualified Stock Option Agreement (CEO Direct
Reports) under 2008 Equity and Incentive Plan
|
|
10
|
.6(ii)#
|
|
Form of Non-Qualified Stock Option Agreement (Executive
Employees) under 2008 Equity and Incentive Plan
|
|
10
|
.6(iii)#
|
|
Form of Non-Qualified Stock Option Agreement (Non-Executive
Employees) under 2008 Equity and Incentive Plan
|
|
10
|
.6(iv)#
|
|
Form of Restricted Stock Agreement (CEO) under 2008 Equity and
Incentive Plan
|
|
10
|
.6(v)#
|
|
Form of Restricted Stock Agreement (CEO Direct Reports) under
2008 Equity and Incentive Plan
|
|
10
|
.6(vi)#
|
|
Form of Restricted Stock Agreement (Executive Employees) under
2008 Equity and Incentive Plan
|
|
10
|
.6(vii)#
|
|
Form of Restricted Stock Agreement (Non-Employee Independent
Directors) under 2008 Equity and Incentive Plan
|
|
10
|
.7*
|
|
2011 Long-Term Incentive Plan of the Registrant
|
|
10
|
.8(i)*
|
|
Form of Non-Qualified Stock Option Agreement (CEO) under 2011
Long-Term Incentive Plan
|
|
10
|
.8(ii)*
|
|
Form of Non-Qualified Stock Option Agreement (Non-CEO Employees)
under 2011 Long-Term Incentive Plan
|
|
10
|
.8(iii)*
|
|
Form of Restricted Stock Award Agreement (CEO) under 2011
Long-Term Incentive Plan
|
|
10
|
.8(iv)*
|
|
Form of Restricted Stock Award Agreement (Non-CEO Employees)
under 2011 Long-Term Incentive Plan
|
|
10
|
.8(v)*
|
|
Form of Restricted Stock Award Agreement (Directors) under 2011
Long-Term Incentive Plan
|
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.9#
|
|
Credit Agreement dated as of August 20, 2010, by and among
Fingerhut Receivables I, LLC, the Tranche A Lender
Parties, Tranche B Lender Parties, Goldman Sachs Bank USA,
as Administrative Agent, Collateral Agent, Joint Lead Arranger,
Joint Bookrunner and Syndication Agent and Documentation Agent,
and J.P. Morgan Securities Inc., as Joint Lead Arranger and
Joint Bookrunner
|
|
10
|
.10#
|
|
First Amendment and Waiver to Servicing Agreement dated as of
April 21, 2011 by and among the Registrant, Fingerhut
Receivables I, LLC and Goldman Sachs Bank USA
|
|
10
|
.11#
|
|
Guaranty dated as of August 20, 2010, by and among the
Registrant as Guarantor, Fingerhut Receivables I, LLC, the
Lenders party thereto from time to time, Goldman Sachs Bank USA,
as Administrative Agent, Collateral Agent, Joint Lead Arranger,
Joint Bookrunner, Syndication Agent and Documentation Agent, and
J.P. Morgan Securities Inc., as Joint Lead Arranger and
Joint Bookrunner
|
|
10
|
.12#
|
|
Letter agreement dated as of August 20, 2010, by and among
the Registrant and Goldman Sachs Bank USA
|
|
10
|
.13#
|
|
Servicing Agreement, dated August 20, 2010, between the
Registrant, Fingerhut Receivables I, LLC and Goldman Sachs
Bank USA
|
|
10
|
.14#
|
|
Second Amended and Restated Credit Agreement, dated as of
August 20, 2010 among the Registrant, the Lenders thereto,
JP Morgan Chase Bank, N.A., as Administrative Agent, and
J.P. Morgan Securities Inc., as Sole Bookrunner and Sole
Lead Arranger
|
|
10
|
.15#
|
|
Limited Waiver and Amendment No. 1 to Second Amended and
Restated Credit Agreement, dated as of April 21, 2011, by
and among the Registrant, the Lenders thereto, and JP Morgan
Chase Bank, N.A., as Administrative Agent
|
|
10
|
.16#
|
|
Second Amended and Restated Pledge and Security Agreement dated
as of August 20, 2010 among the Registrant and JPMorgan
Chase Bank, N.A.
|
|
10
|
.17#
|
|
Securities Purchase Agreement dated as of March 23, 2006,
as amended, between the Registrant, Prudential Capital Partners
II, L.P., Prudential Capital Partners Management Fund II,
L.P. and Prudential Capital Partners (Parallel Fund), II,
L.P. related to $30,000,000 in 13% Senior Subordinated
Secured Notes Due March 24, 2013 and Warrants
|
|
10
|
.18#
|
|
Letter Agreement dated as of June 21, 2007, to the
Securities Purchase Agreement dated as of March 23, 2006,
as amended, between the Registrant, Prudential Capital Partners
II, L.P., Prudential Capital Partners Management Fund II,
L.P. and Prudential Capital Partners (Parallel Fund), II,
L.P.
|
|
10
|
.19#
|
|
Letter Agreement dated as of May 15, 2008, to the
Securities Purchase Agreement dated as of March 23, 2006,
as amended, between the Registrant, Prudential Capital Partners
II, L.P., Prudential Capital Partners Management Fund II,
L.P. and Prudential Capital Partners (Parallel Fund), II,
L.P.
|
|
10
|
.20#
|
|
Letter Agreement dated as of July 31, 2009, to the
Securities Purchase Agreement dated as of March 23, 2006,
as amended, between the Registrant, Prudential Capital Partners
II, L.P., Prudential Capital Partners Management Fund II,
L.P. and Prudential Capital Partners (Parallel Fund), II,
L.P.
|
|
10
|
.21#
|
|
Letter Agreement dated as of August 20, 2010, to the
Securities Purchase Agreement dated as of March 23, 2006,
as amended, between the Registrant, Prudential Capital Partners
II, L.P., Prudential Capital Partners Management Fund II,
L.P. and Prudential Capital Partners (Parallel Fund), II,
L.P.
|
|
10
|
.22#
|
|
Letter Agreement dated as of April 21, 2011, to the
Securities Purchase Agreement dated as of March 23, 2006,
as amended, between the Registrant, Prudential Capital Partners
II, L.P., Prudential Capital Partners Management Fund II,
L.P. and Prudential Capital Partners (Parallel Fund), II,
L.P.
|
|
10
|
.23#
|
|
Third Amended and Restated Pledge and Security Agreement dated
as of August 20, 2010, between the Registrant and
Prudential Capital Partners II, L.P.,
|
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.24#
|
|
Amended and Restated Program Agreement dated as of
August 20, 2010, between MetaBank and the Registrant
|
|
10
|
.25#
|
|
Amended and Restated Receivables Sale Agreement dated as of
August 20, 2010, between MetaBank and the Registrant
|
|
10
|
.26#
|
|
Back-up Originator Agreement for Gettington Credit Program dated
as of August 20, 2010, between MetaBank and the Registrant
|
|
10
|
.27#
|
|
Amended and Restated Revolving Loan Product Program Agreement
dated as of August 20, 2010, between WebBank and the
Registrant
|
|
10
|
.28#
|
|
Amended and Restated Receivables Sale Agreement dated as of
August 20, 2010, between WebBank and the Registrant
|
|
10
|
.29#
|
|
Back-up Originator Revolving Loan Product Agreement dated as of
January 19, 2011, between WebBank and the Registrant
|
|
10
|
.30#
|
|
Back-up Originator Receivables Sale Agreement dated as of
January 19, 2011 between WebBank and the Registrant
|
|
10
|
.31#
|
|
Lease dated as of February 1, 2009, between Welsh Fingerhut
MN, LLC and the Registrant, related to distribution facilities
located at 6250 Ridgewood Rd, St. Cloud, MN
|
|
10
|
.32#
|
|
Collective Bargaining Agreement dated as of April 1, 2011,
between Bluestem Fulfillment, Inc. and Chicago and Midwest Joint
Board, an affiliate of Workers United/SEIU
|
|
21
|
.1#
|
|
Subsidiaries of the Registrant
|
|
23
|
.1
|
|
Consent of Independent Registered Public Accounting Firm
|
|
23
|
.2*
|
|
Consent of Faegre & Benson (included in
Exhibit 5.1)
|
|
24
|
.1#
|
|
Powers of Attorney
|
|
99
|
.1#
|
|
Schedule ICondensed Parent Company Only Financial
Statements
|
|
|
|
*
|
|
To be filed by amendment.
|
|
|
|
Confidential treatment has been
requested with respect to certain portions of this exhibit.
Omitted portions have been filed separately with the Securities
and Exchange Commission.
|
|
#
|
|
Previously filed as an Exhibit to
this Registration Statement.
|