As filed with the Securities and Exchange Commission on April 21, 2011

No. 333-

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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 registrant’s 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


(1)		Includes shares of common stock that the underwriters may purchase from us.

(2)		Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended

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 April 21, 2011

Bluestem Brands, Inc.

Shares

Common Stock

This is the initial public offering of shares of common stock by Bluestem Brands, Inc. We are offering shares of our common stock. 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	$	$

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.

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
Management’s Discussion and Analysis of Financial Condition and Results of Operations			52
Business			88
Management			107
Executive Compensation			116
Principal Stockholders			135
Certain Relationships and Related Party Transactions			139
Description of Capital Stock			147
Shares Eligible for Future Sale			153
Material U.S. Federal Income and Estate Tax Considerations to Non-U.S. Holders			156
Underwriting			160
Market and Industry Data			164
Legal Matters			164
Experts			164
Where You Can Find More Information			164
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. We have not authorized anyone to give you any other information, and we take no responsibility for any other information that others may give you. We 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.

ABOUT THIS PROSPECTUS

Except where the context otherwise requires or where otherwise indicated, as used in this prospectus the terms “Bluestem,” “we,” “us,” “our,” “our company” and “our business” refer to Bluestem Brands, Inc. and its consolidated subsidiaries as a combined entity. 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 FreshStart^sm, 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 or^tm 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 or^tm symbols.

PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus. This summary 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 “Management’s 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. We sell a range of life’s 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 typically rely on the credit products we offer to pay for their purchases from us 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 utilize a combination of sophisticated multi-channel marketing and credit decision-making tools to reach our customers efficiently and offer relevant credit products to meet their needs. We have developed proprietary systems and analytics to continuously monitor customer purchases and payment histories, allowing us to offer merchandise and credit products to prospective and existing customers in a manner designed to optimize sales and profitability. Our ability to integrate and seamlessly manage targeted marketing and customer credit is a significant driver of our business.

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 own brands, including Chef’s Mark, LifeMax, Master Craft, McLeland Designs, Outdoor Spirit and Super Chef. We continuously tailor our merchandise across three key product categories:


	•	Home—including housewares, bed and bath, lawn and garden, home furnishings and hardware;

	•	Entertainment—including electronics, video games, toys and sporting goods; and

	•	Fashion—including 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%. Our Adjusted EBITDA grew 23% over the same period, from $64 million to $78 million, and net income before loss from derivatives in our own equity grew 34%, from $16 million to $21 million. Additionally, new customer 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.

Starting in 2002, we undertook a series of strategic initiatives designed to build our business and position us for future growth, including:


	•	establishing a new management team, including Brian Smith, our Chairman and Chief Executive Officer, which moved quickly to build essential infrastructure, acquire a new customer base, and migrate the company towards a multi-channel, web-enabled model;

	•	introducing a new marketing strategy of extending pre-approved credit offers to new prospects, accelerating growth in customers and revenue;

	•	launching the Gettington.com brand as an alternative e-commerce platform targeting a slightly younger, more e-commerce focused customer;

	•	introducing Fingerhut FreshStart, an installment credit product designed for customers unable to qualify for the revolving credit products that we offer; and

	•	launching the “360 Degree” Spanish language initiative including catalogs, credit documentation, and website fully translated in Spanish in an effort to improve our marketing to this customer demographic.

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—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 14% of total U.S. retail sales and a 2.9% compounded annual growth rate from $527.9 billion of sales in 2005.

Catalog—The catalog retailing industry consists of retail goods purchased via mail order, catalog and other media channels. Catalog retailing has distinct advantages over other marketing tools, such as allowing retailers to reach consumers who do not have access to the Internet. This sector generated $132.7 billion of U.S. sales in 2010 according to IBISWorld.

E-commerce—The online channel provides retailers the ability to efficiently target and reach a large and geographically dispersed group of customers. According 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 the low to middle income, credit constrained consumer. 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 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 been a leading general merchandise retailer 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 targeted 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 transparent credit offers instills trust and helps build positive customer relationships.

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. In addition, our customer service representatives have extensive experience addressing the unique issues and concerns of this customer segment.

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. 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 merchandising,

marketing or credit 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.

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 proprietary prospect database contains purchase and payment histories on over 90 million consumers. Our technology enables us to make credit decisions utilizing the latest customer behavior information, and allows us to make real time underwriting decisions, on behalf of third party financial institutions, at the point of sale. By creating proprietary marketing and credit decision-making 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

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. 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

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 Kohl’s, T-Mobile, US Bancorp, Capital One, General Electric, Metris Companies, Compaq/HP, PayPal, Target and American Express.

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 in order 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.

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. We now offer catalogs, credit offers, servicing and other support documentation, and a website that is fully translated in Spanish. We will continue to explore other demographics within our target market and intend to leverage our platform to market 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 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. In addition, our Gettington.com brand offers several payment options providing customers with payment flexibility. 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.

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;


	•	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; and

	•	competition from other retailers and lenders.

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.

The Offering


Common stock offered by us		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.”

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.”

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 .

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 balance sheet data as of January 30, 2009 has been derived from our previously audited consolidated financial statements that are not included in this prospectus. 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 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,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements and the related notes included elsewhere in this prospectus.


	Fiscal Year Ended (a)
	January 30,			January 29,			January 28,
	2009			2010 (b)			2011
	(in thousands, except per share data)

Consolidated Statement of Operations Data:
Net sales	$	423,338		$	438,189		$	521,307
Cost of sales		220,294			226,140			275,521

Gross profit		203,044			212,049			245,786
Sales and marketing expenses		110,404			109,384			130,091
Net credit expense (income) (c)		1,105			(22,316	)		(36,896	)
General and administrative expenses		59,533			69,087			84,031
Loss from derivatives in our own equity (d)		—			6,500			32,607
Loss on early extinguishment of debt (e)		—			—			5,109
Interest expense, net (f)		29,839			31,216			30,750

Income before income taxes		2,163			18,178			94
Income tax expense		828			8,956			11,618

Net income (loss)	$	1,335		$	9,222		$	(11,524	)
Series B Preferred Stock accretion		(2,399	)		(3,491	)		(3,710	)
Series A Preferred Stock accretion		(8,890	)		(9,111	)		(9,824	)

Net loss available to common shareholders	$	(9,954	)	$	(3,380	)	$	(25,058	)

Impact of pro forma adjustments (g):
Loss from derivatives in our own equity							$	31,317
Series B Preferred Stock accretion								3,710
Series A Preferred Stock accretion								9,824

Net income available to common shareholders, pro forma (g)							$	19,793

Pro forma income per share (g)
Basic							$
Diluted							$


	As of January 28, 2011 (a)(h)
						Pro Forma,
	Actual			Pro Forma		As Adjusted
	(in thousands)

Consolidated Balance Sheet Data:
Cash and cash equivalents	$	1,055		$	1,055	$
Customer accounts receivable (net of allowance for doubtful accounts)		492,836			492,836
Merchandise inventories		44,396			44,396
Total assets		614,002			614,002
Derivative liabilities in our own equity (d)		43,281			6,769
Total debt		329,983			329,983
Series B and Series A Preferred Stock		197,939			—
Shareholders’ (deficit) equity		(52,207	)		182,244


	Fiscal Year Ended (a)
	January 30,			January 29,			January 28,
	2009			2010 (b)			2011
	(in thousands, except average order size)

Selected Operating Data:
New customer credit accounts (i)		430			439			599
Average order size (j)	$	161.61		$	166.30		$	179.51
Number of orders (k)		2,708			2,728			2,985
Contribution Margin (l)	$	91,535		$	124,981		$	152,591
Net income before loss from derivatives in our own equity (l)	$	1,335		$	15,722		$	21,083
Adjusted EBITDA (l)	$	41,009		$	63,784		$	78,416
As a percentage of net sales		9.7	%		14.6	%		15.0	%

Selected Credit Data:
Finance charge and fee income as a percentage of average customer accounts receivable		32.1	%		32.7	%		32.9	%
Net charge-offs as a percentage of average customer accounts receivable		22.0	%		19.5	%		16.1	%
Period-end balances 30+ days delinquent as a percentage of customer accounts receivable		16.5	%		14.5	%		13.2	%


(a)	Our fiscal year ends on the Friday closest to January 31^st 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.

(b)	Includes the effects of the restatement of our 2009 financial statements discussed in Note 15 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)


(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, and zero for the fiscal years ended January 30, 2009, January 29, 2010, and January 28, 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:


	•	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.


(h)	The consolidated balance sheet data as of January 28, 2011 is presented:


	•	on an actual basis;

	•	on a pro forma basis to reflect the following events as if they had occurred on January 28, 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 January 28, 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 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 January 28, 2011, we had availability under our A/R Credit Facility of $24.5 million and under our Inventory Line of Credit of $11.3 million. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity 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.

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

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 Issuer’s 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 “Business—Government Regulation—Recent 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 Issuer’s 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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Accounts 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


		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 $290 million 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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Quantitative and Qualitative Disclosure about Market Risk—Interest 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

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.

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 Act’s 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,

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 be subject to penalties for noncompliance. Some states have enacted, and other states 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 department’s position is incorrect, but we could be liable for substantial sales taxes, penalties, and interest if the department’s position were 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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Customer Accounts Receivable Asset Quality and Management—Delinquencies.” 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.

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 model’s 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 “Management’s 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 Fingerhut’s 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.

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

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.

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,

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

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 company’s 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;


	•	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.

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, electronics products represented in the aggregate approximately 28% of our merchandise sales.

The recent 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. At this time, we have limited information on these supply chain resources and the degree to which our ability to acquire merchandise containing parts sourced from Japan will be affected. 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.

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 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.

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 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 management’s 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.

An aggregate of 338,731,641 shares of our Series A convertible preferred stock (our “Series A Preferred Stock”) and 55,009,035 shares of our 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, is 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. Because of Mr. Petters’ relationship to our company and because the trustee and receiver has not waived any rights it may have and, in any event, may discover in the future claims now unknown to it, there can be no assurance that the trustee and receiver will not seek to recover from us material amounts of property it may believe were unlawfully conveyed to us. Any such recovery could have a material adverse effect on our financial results, results of operation and the price of our common stock.

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

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 trustee’s 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 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 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 Transactions—Thomas J. Petters and Affiliates” for additional information concerning our relationship with Mr. Petters.

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 public’s 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

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 public’s 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;


	•	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 and certain of our other stockholders, 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 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 stockholder’s 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.

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.

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 15 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.

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

	•	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;

	•	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 “Management’s 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.

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.

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 21, 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.

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.

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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity 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.

CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of January 28, 2011:


	•	on an actual basis; and

	•	on a pro forma basis to reflect the following events as if they had occurred on January 28, 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 January 28, 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 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,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes included elsewhere in this prospectus.


	As of January 28, 2011
							Pro Forma,
	Actual			Pro Forma			As Adjusted
	(in thousands, except share and per share data)

Cash and cash equivalents	$	1,055		$	1,055

Derivative liabilities in our own equity(a)	$	43,281		$	6,769
Debt:
A/R Credit Facility—Revolving Credit Tranche (b)(c)	$	215,000		$	215,000
A/R Credit Facility—Term Loan Tranche (b)(c)		75,000			75,000
Inventory Line of Credit (c)(d)		10,100			10,100
Senior Subordinated Secured Notes (b)(e)		28,719			28,719
Other		1,164			1,164

Total debt		329,983			329,983

Mezzanine equity(f):
Series B Preferred Stock, $.00001 par value; 753,523,962 shares authorized, 752,181,500 shares issued and outstanding, actual; no shares issued and outstanding, pro forma and pro forma, as adjusted		65,199			—
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		132,740			—
Shareholders’ (deficit) equity(f):
Common stock, $0.00001 par value; 2,592,550,586 shares authorized, 333,670,246 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		—			234,451
Accumulated deficit		(52,210	)		(52,210	)

Total shareholders’ (deficit) equity		(52,207	)		182,244

Total capitalization	$	518,996		$	518,996


(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 revolver and a $75 million term loan, of which $215 million and $75 million, respectively, was outstanding as of January 28, 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 first allowed on August 21, 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 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 January 28, 2011, we had availability under our A/R Credit Facility of $24.5 million and under our Inventory Line of Credit of $11.3 million. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” for details on these facilities, including borrowing base limitations thereunder.

(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.

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.

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 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.

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, 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.”

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 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 pro forma data included in our consolidated financial statements included elsewhere in this prospectus.

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,” “Management’s 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. The consolidated pro forma financial data 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.


	Fiscal Year Ended (a)
	February 2,			February 1,			January 30,			January 29,			January 28,
	2007			2008			2009			2010 (b)			2011
	(in thousands, except average order size)

Consolidated Statement of Operations Data:
Net sales	$	310,251		$	448,518		$	423,338		$	438,189		$	521,307
Cost of sales		162,622			231,851			220,294			226,140			275,521

Gross profit		147,629			216,667			203,044			212,049			245,786
Sales and marketing expenses		72,624			101,630			110,404			109,384			130,091
Net credit expense (income) (c)		496			17,766			1,105			(22,316	)		(36,896	)
General and administrative expenses		44,150			51,838			59,533			69,087			84,031
Loss from derivatives in our own equity (d)		—			—			—			6,500			32,607
Loss on early extinguishment of debt (e)		—			—			—			—			5,109
Interest expense, net (f)		14,957			19,037			29,839			31,216			30,750

Income before income taxes		15,402			26,396			2,163			18,178			94
Income tax expense (benefit)		1,134			(2,081	)		828			8,956			11,618

Net income (loss)		14,268			28,477			1,335			9,222			(11,524	)
Series B Preferred Stock accretion		—			—			(2,399	)		(3,491	)		(3,710	)
Series A Preferred Stock accretion		(7,708	)		(8,301	)		(8,890	)		(9,111	)		(9,824	)
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	)

Net income (loss) per share available to common stockholders:
Basic	$	0.0077		$	0.0230		$	(0.0691	)	$	(0.0188	)	$	(0.1138	)
Diluted		0.0049			0.0127			(0.0691	)		(0.0188	)		(0.1138	)
Pro forma income per share (g):
Basic													$
Diluted													$
Weighted average common stock outstanding:
Basic		102,459			124,468			144,114			179,757			220,181
Diluted		162,661			226,130			144,114			179,757			220,181


	Fiscal Year Ended (a)
	February 2,			February 1,			January 30,			January 29,			January 28,
	2007			2008			2009			2010 (b)			2011
	(in thousands, except average order size)

Margins and Expenses as a Percentage of Net Sales:
Gross profit rate		47.6	%		48.3	%		48.0	%		48.4	%		47.1	%
Contribution Margin (h)	$	74,509		$	97,271		$	91,535		$	124,981		$	152,591
As a % of net sales		24.0	%		21.7	%		21.6	%		28.5	%		29.3	%
General and administrative expenses		14.2	%		11.6	%		14.1	%		15.8	%		16.1	%
Interest expense, net		4.8	%		4.2	%		7.0	%		7.1	%		5.9	%
Net income before loss from derivatives in our own equity (i)	$	14,268		$	28,477		$	1,335		$	15,722		$	21,083
As a % of net sales		4.6	%		6.3	%		0.3	%		3.6	%		4.0	%
Adjusted EBITDA (j)	$	35,386		$	52,533		$	41,009		$	63,784		$	78,416
As a % of net sales		11.4	%		11.7	%		9.7	%		14.6	%		15.0	%
Consolidated Balance Sheet Data (at end of period):
Cash and cash equivalents	$	1,658		$	9,547		$	558		$	2,614		$	1,055
Customer accounts receivable (net of allowance for doubtful accounts)		213,801			311,389			342,413			390,842			492,836
Merchandise inventories		38,149			45,622			45,390			41,534			44,396
Total assets		299,554			442,113			497,129			524,329			614,002
Derivative liabilities in our own equity (d)		4,174			4,174			4,174			10,674			43,281
Total debt (k)		168,766			286,073			289,878			275,743			329,983
Series B Preferred Stock and Series A Preferred Stock (l)		96,514			104,915			171,703			184,305			197,939
Shareholders’ deficit		(32,526	)		(11,845	)		(24,521	)		(27,503	)		(52,207	)
Selected Operating Data:
New customer credit accounts (m)		558			700			430			439			599
Average order size (n)	$	150.51		$	157.32		$	161.61		$	166.30		$	179.51
Number of orders (o)		2,155			2,958			2,708			2,728			2,985
Customer repurchase rate (p)		63	%		63	%		58	%		58	%		57	%
Percentage of orders placed online (q)		26	%		31	%		35	%		38	%		44	%
Selected Credit Data:
Period-end balances 30+ days delinquent (r)	$	32,135		$	64,274		$	72,670		$	71,019		$	79,630
As a % of customer accounts receivable (s)		12.6	%		16.1	%		16.5	%		14.5	%		13.2	%
Finance charge and fee income as a % of average customer accounts receivable		33.0	%		33.9	%		32.1	%		32.7	%		32.9	%
Provision for doubtful accounts as a % of average customer accounts receivable		22.4	%		30.5	%		24.4	%		19.9	%		18.3	%
Net charge-offs as a % of average customer accounts receivable		12.6	%		15.3	%		22.0	%		19.5	%		16.1	%
Cash Flow Data:
Net cash (used in) provided by:
Operating activities	$	(50,757	)	$	(84,275	)	$	(24,878	)	$	11,943		$	(59,095	)
Investing activities		(9,380	)		(22,370	)		(33,431	)		4,766			14,784
Financing activities		59,932			114,534			49,320			(14,653	)		42,752


(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.

(b)		Includes the effects of the restatement of our 2009 financial statements as discussed in Note 15 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, and zero for the fiscal years ended February 2, 2007, February 1, 2008, January 30, 2009, January 29, 2010, and January 28, 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:


	•	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.


(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 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
	February 2,		February 1,			January 30,		January 29,		January 28,
	2007		2008			2009		2010		2011
	(in thousands)

Contribution Margin:
Net income (loss)	$	14,268	$	28,477		$	1,335	$	9,222	$	(11,524	)
Income tax expense (benefit)		1,134		(2,081	)		828		8,956		11,618
Interest expense—net		14,957		19,037			29,839		31,216		30,750
Loss on early extinguishment of debt		—		—			—		—		5,109
Loss from derivatives in our own equity		—		—			—		6,500		32,607
General and administrative expenses		44,150		51,838			59,533		69,087		84,031

Contribution Margin	$	74,509	$	97,271		$	91,535	$	124,981	$	152,591


(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.

		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
	February 2,		February 1,		January 30,		January 29,		January 28,
	2007		2008		2009		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	)
Loss from derivatives in our own equity		—		—		—		6,500		32,607

Net income before loss from derivatives in our own equity	$	14,268	$	28,477	$	1,335	$	15,722	$	21,083


(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 company’s 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.

The following table reconciles our Adjusted EBITDA to the nearest U.S. GAAP performance measure, which is net income:


	Fiscal Year Ended
	February 2,		February 1,			January 30,			January 29,		January 28,
	2007		2008			2009			2010		2011
	(In thousands)

Adjusted EBITDA:
Net income (loss)	$	14,268	$	28,477		$	1,335		$	9,222	$	(11,524	)
Interest expense		15,053		19,507			30,461			31,310		30,752
Income tax expense (benefit)		1,134		(2,081	)		828			8,956		11,618
Depreciation and amortization expense		4,096		5,076			6,285			7,246		8,746
Stock-based compensation expense		389		313			110			321		282
Loss from derivatives in our own equity		—		—			—			6,500		32,607
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
Other		34		24			(82	)		—		—

Adjusted EBITDA	$	35,386	$	52,533		$	41,009		$	63,784	$	78,416


(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 cycle dates prior to or on fiscal period end.

MANAGEMENT’S 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 15 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 income before loss from derivatives in our own equity of $21.1 million. 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 customer’s 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 consumer’s 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 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). 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.

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:


	•	Home—including housewares, bed and bath, lawn and garden, home furnishings and hardware;

	•	Entertainment—including electronics, video games, toys and sporting goods; and

	•	Fashion—including 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.

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.

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.”

Other Factors Affecting Our 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.

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 January 28, 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 $4.4 million as of January 28, 2011. See “—Critical Accounting Policies and Use of Estimates—Income 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 Resources—Preferred Stock.”

Upon completion of this offering, we anticipate 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. See “—Liquidity and Capital Resources.”

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, were as follows:


	Fiscal Year Ended
	January 30,		% of			January 29,			% of			January 28,			% of
	2009		Net Sales			2010			Net Sales			2011			Net Sales
	(in thousands)

Net sales	$	423,338		100.0	%	$	438,189			100.0	%	$	521,307			100.0	%
Cost of sales		220,294		52.0	%		226,140			51.6	%		275,521			52.9	%

Gross profit		203,044		48.0	%		212,049			48.4	%		245,786			47.1	%
Sales and marketing expenses		110,404		26.1	%		109,384			25.0	%		130,091			25.0	%
Net credit expense (income)		1,105		0.3	%		(22,316	)		(5.1	)%		(36,896	)		(7.1	)%
General and administrative expenses		59,533		14.1	%		69,087			15.8	%		84,031			16.1	%
Loss from derivatives in our own equity		—		0.0	%		6,500			1.5	%		32,607			6.3	%
Loss on early extinguishment of debt		—		0.0	%		—			0.0	%		5,109			1.0	%
Interest expense, net		29,839		7.0	%		31,216			7.1	%		30,750			5.9	%

Income before income taxes		2,163		0.5	%		18,178			4.1	%		94			0.0	%
Income tax expense		828		0.2	%		8,956			2.0	%		11,618			2.2	%

Net income (loss)	$	1,335		0.3	%	$	9,222			2.1	%	$	(11,524	)		(2.2	)%


	Fiscal Year Ended
	January 30,		% of			January 29,		% of			January 28,			% of
	2009		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	)%
Loss from derivatives in our own equity		—		0.0	%		6,500		1.5	%		32,607			6.3	%

Net income before loss from derivatives in our own equity	$	1,335		0.3	%	$	15,722		3.6	%	$	21,083			4.0	%
Income tax expense		828		0.2	%		8,956		2.0	%		11,618			2.2	%
Interest expense, net		29,839		7.0	%		31,216		7.1	%		30,750			5.9	%
Loss on early extinguishment of debt		—		0.0	%		—		0.0	%		5,109			1.0	%
General and administrative expenses		59,533		14.1	%		69,087		15.8	%		84,031			16.1	%

Contribution Margin	$	91,535		21.6	%	$	124,981		28.5	%	$	152,591			29.3	%


(a)		See, “Selected Consolidated Financial and Other Data” for a discussion of Contribution Margin.

Comparison of Fiscal Year 2010 to Fiscal Year 2009

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. 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.

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	%

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		32.71	%					32.91	%

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, 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		1.5	%		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 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 related 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

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 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.


	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.

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 customer’s 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.

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		32.12	%					32.71	%

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.

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.

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. 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 “Business—Seasonality.”


	Fiscal Year Ended January 29, 2010												Fiscal Year Ended January 28, 2011
	First			Second			Third			Fourth			First			Second			Third			Fourth
	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
Cost of sales		39,015			47,618			48,282			91,225			44,944			54,899			56,364			119,314

Gross profit		37,084			46,313			45,062			83,590			42,162			51,477			50,850			101,297
Sales and marketing expenses		21,603			24,881			24,711			38,189			23,706			27,848			29,870			48,667
Net credit expense (income)		(12,619	)		(8,021	)		(6,881	)		5,205			(11,156	)		(6,087	)		(19,362	)		(291	)
General and administrative expenses		15,164			16,508			17,101			20,314			18,225			18,543			19,788			27,475
Loss from derivatives in our own equity		—			—			—			6,500			—			—			2,445			30,162
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

Income (loss) before income taxes		4,742			5,593			2,752			5,091			3,214			3,204			5,744			(12,068	)
Income tax expense		1,697			2,000			1,000			4,259			1,175			1,175			2,935			6,333

Net income (loss)	$	3,045		$	3,593		$	1,752		$	832		$	2,039		$	2,029		$	2,809		$	(18,401	)

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
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 are as follows:


	As of
	January 30,			January 29,			January 28,
	2009			2010			2011
	(in thousands)

Customer accounts receivable	$	439,507		$	489,236		$	602,047
Less allowance for doubtful accounts		(97,094	)		(98,394	)		(109,211	)

Customer accounts receivable, net	$	342,413		$	390,842		$	492,836

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
	January 30, 2009				January 29, 2010				January 28, 2011
	(in thousands)

Delinquent (a):
30 to 59 days	$	21,435	4.9	%	$	21,798	4.5	%	$	26,238	4.3	%
60 to 89 days		14,176	3.2	%		13,917	2.8	%		16,117	2.7	%
90 or more days		37,059	8.4	%		35,304	7.2	%		37,275	6.2	%

30 or more days	$	72,670	16.5	%	$	71,019	14.5	%	$	79,630	13.2	%

Re-aged balances	$	8,002	1.8	%	$	12,468	2.5	%	$	16,152	2.7	%


(a)		Delinquent and total customer accounts receivable balance 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 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.

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 customer’s 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 are summarized below:


	Fiscal Year Ended
	January 30,			January 29,			January 28,
	2009			2010			2011
	(in thousands)

Principal charge-offs	$	90,180		$	89,094		$	86,813
Recoveries		(5,961	)		(7,292	)		(8,106	)

Net charge-offs	$	84,219		$	81,802		$	78,707

Average customer accounts receivable	$	382,595		$	418,640		$	488,562
Net charge-offs as a percentage of average customer accounts receivable		22.0	%		19.5	%		16.1	%

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 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.

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 are as follows:


	Fiscal Year Ended
	January 30,			January 29,			January 28,
	2009			2010			2011
	(in thousands)

Allowance for doubtful accounts at beginning of period	$	87,981		$	97,094		$	98,394
Provision for doubtful accounts		93,332			83,102			89,524
Principal charge-offs (a)		(90,180	)		(89,094	)		(86,813	)
Recoveries		5,961			7,292			8,106

Allowance for doubtful accounts at end of period	$	97,094		$	98,394		$	109,211

As a percentage of period end receivables		22.1	%		20.1	%		18.1	%
As a percentage of balances 30+ days delinquent		133.6	%		138.5	%		137.1	%


(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 since 2008. The decrease is the result of the overall improvement in our customer accounts receivable portfolio, including lower delinquency rates.

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.

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 were as follows:


	As of
	January 30, 2009						January 29, 2010						January 28, 2011
	% of			% of			% of			% of			% of			% of
Time Since Origination	Accounts			Receivables			Accounts			Receivables			Accounts			Receivables

0 - 6 months		11.4	%		9.2	%		11.6	%		10.0	%		15.7	%		12.0	%
7 - 12 months		8.0	%		7.8	%		7.2	%		7.7	%		7.8	%		8.6	%
13 - 24 months		24.2	%		28.4	%		14.2	%		16.5	%		13.0	%		17.6	%
25+ months		51.6	%		53.8	%		60.6	%		64.8	%		56.7	%		61.0	%
Closed (a)		4.8	%		0.8	%		6.4	%		1.0	%		6.8	%		0.8	%

		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 customer’s account, as well as (ii) our response to our customer’s 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 individual’s 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 customer’s 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 loans outstanding as of the end of 2008, 2009 and 2010:


	As of
	January 30,			January 29,			January 28,
Account Balance Range	2009			2010			2011

$1 - $500		53.9	%		45.9	%		38.8	%
$501 - $1,000		36.7	%		38.8	%		34.9	%
$1,001 - $1,500		7.7	%		11.7	%		16.5	%
Over $1,501		0.9	%		2.6	%		8.9	%
Closed		0.8	%		1.0	%		0.9	%

		100.0	%		100.0	%		100.0	%

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 customer’s FICO score at least twice each year. The weighted-average FICO score of our customer accounts receivable was 615, 617, and 620 as of the end of 2008, 2009, and 2010, 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.

The following table summarizes our funding and liquidity as of 2008, 2009 and 2010:


				As of
	Maturity or	Maximum		January 30, 2009				January 29, 2010				January 28, 2011
	Extinguishment	Capacity				Additional				Additional				Additional
Funding Source	Date	(as amended)		Outstanding		Availability		Outstanding		Availability		Outstanding		Availability
	(in thousands)

A/R Credit Facility (a):
Revolving Credit Tranche	Matures	$	290,000									$	215,000	$	24,474
Term Loan Tranche	August 2013		75,000										75,000		—

		$	365,000
Senior Secured
Revolving Credit	Extinguished
Facility	August 2010	$	280,000	$	253,000	$	27,000	$	241,000	$	39,000
Inventory Line of Credit	Matures August 2013	$	50,000		8,156		13,803		5,339		14,369		10,100		11,334
Senior Subordinated	Matures
Secured Notes	November 2013	$	30,000		27,530				28,124				28,719
Other	Various		Various		1,192				1,280				1,164

Total				$	289,878			$	275,743			$	329,983


(a)		Replaced the Senior Secured Revolving Credit Facility.

Weighted-average borrowings outstanding and interest rates for 2008, 2009 and 2010, are as follows:


		Fiscal Year Ended
		January 30, 2009				January 29, 2010				January 28, 2011
		Weighted-		Weighted-		Weighted-		Weighted-		Weighted-		Weighted-
	Maturity or	Average		Average		Average		Average		Average		Average
Funding Source	Extinguishment Date	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%
Term Loan Tranche	Matures August 2013										33,288		15.8%
Senior Secured Revolving Credit Facility	Extinguished August 2010	$	136,090		13.1%	$	201,459		12.8%		116,847		12.7%
Inventory Line of Credit	Matures August 2013		12,219		7.4%		10,516		6.1%		16,514		7.4%
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%
Other	Various		810		0% - 9%		1,079		0% - 9%		1,099		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 $365 million 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 21, 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 acceptable terms. We currently expect all participating banks to provide funding as needed pursuant to the terms of our credit agreements.

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 $290 million Revolving Credit Tranche is a 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 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 4—Financing” to the consolidated financial statements included elsewhere in this prospectus:


	•	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 Eligible Underlying Receivables portfolio covenant levels to actual as of January 28, 2011:


Covenant	Covenant Level			Actual

Principal Payment Rate (three-month average)		> 5.00	%		5.60	%
Principal Default Ratio (three-month average)		< 28.00	%		19.37	%
Principal Delinquency Ratio (three-month average)		< 14.50	%		8.74	%
Excess Spread Ratio (three-month average)		> 8.00	%		22.12	%
Adjusted Excess Spread Ratio (three-month average)		> (4.00	)%		8.45	%
Principal Delinquency Ratio (one month)		< 16.00	%		8.41	%
Total Payment Rate (one month)		> 6.50	%		8.14	%

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 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:


	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 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 Liquidity—The 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 Worth—Must 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 Margin—LTM 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 Ratio—Must 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 EBITDA—Adjusted EBITDA must be at least $52.3 million for 2011 and $57 million for 2012 and any fiscal year thereafter.

As of January 28, 2011 and January 29, 2010, 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 management’s 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.

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
	January 30,			January 29,			January 28,
	2009			2010			2011
	(in thousands)

Net cash (used in) provided by:
Operating activities	$	(24,878	)	$	11,943		$	(59,095	)
Investing activities		(33,431	)		4,766			14,784
Financing activities		49,320			(14,653	)		42,752

Net (decrease) increase in cash and cash equivalents	$	(8,989	)	$	2,056		$	(1,559	)

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 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
	January 30,			January 29,			January 28,
	2009			2010			2011
	(in thousands)

Net income (loss)	$	1,335		$	9,222		$	(11,524	)
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
Depreciation and amortization		6,285			7,246			8,746
Amortization of deferred charges and original issue discount		4,076			4,168			4,328
Loss from derivates in our own equity		—			6,500			32,607
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
Provision for merchandise returns		11,355			13,061			12,984
Deferred income taxes		(851	)		6,303			(1,969	)
Stock-based compensation		110			321			282
Other non-cash items affecting income		12,645			10,788			13,423
Changes in operating assets and liabilities:
Customer accounts receivable		(150,937	)		(157,650	)		(218,350	)
Merchandise inventories		1,947			6,987			(1,649	)
Promotional material inventories		4,142			(576	)		(1,976	)
Prepaid expenses and other current assets		(1,080	)		(881	)		(910	)
Current income taxes payable		(6,346	)		3,117			3,001
Accounts payable and other liabilities		(1,610	)		20,466			9,582
Other		308			(268	)		—

Net cash (used in) provided by operating activities	$	(24,878	)	$	11,943		$	(59,095	)

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.


	Fiscal Year Ended
	January 30,			January 29,			January 28,
	2009			2010			2011
	(in thousands)

Purchases of fixed assets, internal-use software and website development	$	(6,635	)	$	(9,177	)	$	(12,570	)
Net (increase) decrease in restricted cash		(26,796	)		13,943			27,354

Net cash (used in) provided by investing activities	$	(33,431	)	$	4,766		$	14,784

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
	January 30,			January 29,			January 28,
	2009			2010			2011
	(in thousands)

Net (repayments) borrowings on revolving credit facilities	$	(6,197	)	$	(14,730	)	$	42,580
Issuance of Series B Preferred Stock		55,499			—			100
Issuance of common stock		18			77			72

Net cash provided by (used in) financing activities	$	49,320		$	(14,653	)	$	42,752

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 $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 payments—long-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.


(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 Transactions—May 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 holder’s 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.

Quantitative and Qualitative Disclosure about Market Risk

We are exposed to interest r

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

Bluestem Brands, Inc. S-1