10-Q 1 vprt3311310q.htm 10-Q VPRT 3.31.13 10Q

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________
Form 10-Q
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended March 31, 2013
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from               to               
Commission file number 000-51539
___________________
Vistaprint N.V.
(Exact Name of Registrant as Specified in Its Charter)
____________________
The Netherlands
 
98-0417483
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.) 
Hudsonweg 8
5928 LW Venlo
The Netherlands
(Address of Principal Executive Offices) (Zip Code)
Registrant’s telephone number, including area code: 31-77-850-7700
____________________
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ     No 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 (as defined in Exchange Act Rule 12b-2). See definitions of "large accelerated filer," "accelerated filer," "non-accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (check one):
Large accelerated filer  þ
 
Accelerated filer  o
 
Non-accelerated filer  o
 
 
Smaller reporting company  o
 
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).  Yes o     No þ
As of April 19, 2013, there were outstanding 32,644,049 ordinary shares, par value 0.01 per share, of Vistaprint N.V.
 



VISTAPRINT N.V.
QUARTERLY REPORT ON FORM 10-Q
For the Three and Nine Months Ended March 31, 2013

TABLE OF CONTENTS
 
 
Page
 
 
 
 48
 
 
 
 

2


PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS
VISTAPRINT N.V.
CONSOLIDATED BALANCE SHEETS
(Unaudited in thousands, except share and per share data)

March 31,
2013

June 30,
2012
Assets
 


 

Current assets:
 


 

Cash and cash equivalents
$
51,306


$
62,203

Accounts receivable, net of allowances of $358 and $189, respectively
21,501


20,125

Inventory
8,378


7,168

Prepaid expenses and other current assets
23,227


26,102

Total current assets
104,412


115,598

Property, plant and equipment, net
286,797


261,228

Software and web site development costs, net
8,459


5,186

Deferred tax assets
225


327

Goodwill
140,613


140,429

Intangible assets, net
33,698


40,271

Other assets
29,768


29,390

Investment in equity interests
12,392



Total assets
$
616,364


$
592,429

Liabilities and shareholders’ equity
 


 

Current liabilities:
 


 

Accounts payable
$
18,589


$
25,931

Accrued expenses
105,448


98,402

Deferred revenue
19,134


15,978

Deferred tax liabilities
1,191


1,668

Current portion of long-term debt
9,500



Other current liabilities
158

 

Total current liabilities
154,020


141,979

Deferred tax liabilities
16,133


18,359

Other liabilities
15,527


13,804

Long-term debt
229,000


229,000

Total liabilities
414,680


403,142

Commitments and contingencies (Note 12)





Shareholders’ equity:
 


 

Preferred shares, par value €0.01 per share, 100,000,000 and 120,000,000 shares authorized, respectively; none issued and outstanding



Ordinary shares, par value €0.01 per share, 100,000,000 and 120,000,000 shares authorized, respectively; 44,080,627 and 49,950,289 shares issued, respectively; and 33,187,958 and 34,119,637 shares outstanding, respectively
615


699

Treasury shares, at cost, 10,892,669 and 15,830,652 shares, respectively
(382,366
)

(378,941
)
Additional paid-in capital
293,657


285,633

Retained earnings
296,839


292,628

Accumulated other comprehensive loss
(7,061
)

(10,732
)
Total shareholders’ equity
201,684


189,287

Total liabilities and shareholders’ equity
$
616,364


$
592,429


See accompanying notes.

3


VISTAPRINT N.V.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited in thousands, except share and per share data)
 
Three Months Ended
March 31,

Nine Months Ended
March 31,
 
2013

2012

2013

2012
Revenue
$
287,684


$
257,634


$
887,412


$
769,856

Cost of revenue (1)
99,107


88,808


301,284


266,533

Technology and development expense (1)
43,004


35,696


120,706


92,162

Marketing and selling expense (1)
109,966


97,622


344,327


284,610

General and administrative expense (1)
25,874


27,724


78,087


76,479

Income from operations
9,733


7,784


43,008


50,072

Other income (expense), net
260


(1,457
)

(559
)

1,441

Interest expense, net
(1,283
)

(582
)

(3,709
)

(921
)
Income before income taxes and loss in equity interests
8,710


5,745


38,740


50,592

Income tax provision
2,264


5,471


10,587


10,449

Loss in equity interests
580




1,023



Net income
$
5,866


$
274


$
27,130


$
40,143

Basic net income per share
$
0.18


$
0.01


$
0.81


$
1.04

Diluted net income per share
$
0.17


$
0.01


$
0.78


$
1.01

Weighted average shares outstanding — basic
33,267,073


36,422,690


33,441,581


38,448,111

Weighted average shares outstanding — diluted
34,394,467


37,677,447


34,636,650


39,556,257

____________________________________________
(1) Share-based compensation is allocated as follows:
 
Three Months Ended March 31,
 
Nine Months Ended
 March 31,
 
2013

2012
 
2013
 
2012
Cost of revenue
$
104

 
$
74

 
$
309

 
$
245

Technology and development expense
2,297

 
1,394

 
6,903

 
3,087

Marketing and selling expense
1,594

 
474

 
4,733

 
1,527

General and administrative expense
4,175

 
5,474

 
12,842

 
12,143


See accompanying notes.



4


VISTAPRINT N.V.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited in thousands)


 
Three Months Ended March 31,
 
Nine Months Ended
March 31,
 
2013
 
2012
 
2013
 
2012
Net income
$
5,866

 
$
274

 
$
27,130

 
$
40,143

Other comprehensive income:

 

 

 

Foreign currency translation
(4,657
)
 
6,172

 
3,569

 
(13,980
)
Net unrealized gain on derivative instruments designated and qualifying as cash flow hedges
617

 

 
102

 

Total comprehensive income
$
1,826

 
$
6,446

 
$
30,801

 
$
26,163


See accompanying notes.








5


VISTAPRINT N.V.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited in thousands)
 
Nine Months Ended
March 31,
 
2013

2012
Operating activities
 


 

Net income
$
27,130


$
40,143

Adjustments to reconcile net income to net cash provided by operating activities:
 


 

Depreciation and amortization
46,993


43,365

Share-based compensation expense
24,787


17,002

Excess tax benefits derived from share-based compensation awards
1,808


(71
)
Deferred taxes
(4,130
)

(2,181
)
Loss in equity interests
1,023



Non-cash gain on equipment
(1,414
)


Abandonment of long-lived assets
977



Other non-cash items
125


189

Changes in operating assets and liabilities excluding the effect of business acquisitions:
 


 

Accounts receivable
(1,153
)

(2,428
)
Inventory
(1,143
)

688

Prepaid expenses and other assets
7,270


(6,031
)
Accounts payable
(3,280
)

1,966

Accrued expenses and other liabilities
4,325


28,658

Net cash provided by operating activities
103,318


121,300

Investing activities
 


 

Purchases of property, plant and equipment
(66,523
)

(32,938
)
Business acquisitions, net of cash acquired

 
(180,675
)
Proceeds from sale of intangible assets
1,750



Purchases of intangible assets
(452
)

(172
)
Capitalization of software and website development costs
(5,579
)

(4,302
)
Maturities and redemptions of marketable securities


529

Investment in equity interests
(12,753
)


Issuance of note receivable
(512
)


Net cash used in investing activities
(84,069
)

(217,558
)
Financing activities
 


 

Proceeds from borrowings of long-term debt
79,712


219,500

Payments of long-term debt and debt issuance costs
(71,714
)

(94,222
)
Payments of withholding taxes in connection with vesting of restricted share units
(2,460
)

(2,728
)
Purchases of ordinary shares
(36,290
)

(209,645
)
Excess tax benefits derived from share-based compensation awards
(1,808
)

71

Proceeds from issuance of ordinary shares
2,024


958

Net cash used in financing activities
(30,536
)

(86,066
)
Effect of exchange rate changes on cash
390


(2,091
)
Net decrease in cash and cash equivalents
(10,897
)

(184,415
)
Cash and cash equivalents at beginning of period
62,203


236,552

Cash and cash equivalents at end of period
$
51,306


$
52,137

See accompanying notes.


6


VISTAPRINT N.V.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited in thousands, except share and per share data)

1. Description of the Business
The Vistaprint group of companies offers micro businesses the ability to market their businesses with a broad range of brand identity and promotional products, marketing services and digital solutions. Through the use of proprietary Internet-based graphic design software, localized websites, proprietary order receiving and processing technologies and advanced computer integrated production facilities, we offer a broad spectrum of products, such as business cards, website hosting, apparel, signage, promotional gifts, brochures, online marketing and creative services. We focus on serving the marketing, graphic design and printing needs of the micro business market, generally businesses or organizations with fewer than 10 employees and usually 2 or fewer. We also provide personalized products for home and family use.
2. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of Vistaprint N.V., its wholly owned subsidiaries, and those entities in which we have a variable interest and are the primary beneficiary. Intercompany balances and transactions have been eliminated. Investments in entities in which we can exercise significant influence, but do not own a majority equity interest or otherwise control, are accounted for using the equity method and are included as investments in equity interests on the consolidated balance sheets.
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and, accordingly, do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting primarily of normal recurring accruals, considered necessary for a fair presentation of the results of operations for the interim periods reported and of our financial condition as of the date of the interim balance sheet have been included. Operating results for the three and nine months ended March 31, 2013 are not necessarily indicative of the results that may be expected for the year ending June 30, 2013 or for any other period. The consolidated balance sheet at June 30, 2012 has been derived from our audited consolidated financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended June 30, 2012 included in the our Annual Report on Form 10-K filed with the United States Securities and Exchange Commission (the “SEC”). Certain reclassifications have been made in the prior period consolidated financial statements to conform to the current presentation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We believe our most significant estimates are associated with the ongoing evaluation of our long-lived assets and goodwill, advertising expense and related accruals, share-based compensation, accounting for business combinations, income taxes, and litigation and contingencies, among others. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results could differ from those estimates.
Interim Period Changes in Estimate
As of July 1, 2012, we revised the estimated useful life of our capitalized software and website developments costs from 2 to 3 years based on an evaluation of historical trends, the period of benefit of past projects, and our current project portfolio. This change in estimated useful life increased our pre-tax income for three and nine months ended March 31, 2013, by approximately $699 and $2,056, respectively, when compared to the historical estimated useful life and could have a material impact in the future.
During the second fiscal quarter, we revised our interim accrual practice for cash incentive compensation that is paid based on achievement of annual performance targets. Historically, the related costs were accrued each

7


interim period based upon the weight of year-to-date results relative to the forecasted annual target; however, due to fluctuations in the pattern of quarterly results relative to historical trends and interim periods of net loss, we believe a straight-line attribution method better matches the pattern of how the employee earns the award. This change in practice does not affect full year net income, but does affect the trend of quarterly earnings relative to past interim periods. This change lowered our pre-tax income by $1,568 for the three months ended March 31, 2013, while the year-to-date impact is a benefit to our pre-tax income of $320 as compared to our historical practice. Our fourth fiscal quarter earnings will be negatively impacted by these changes subject to any changes in the expected payout based on actual attainment.
Net Income Per Share
Basic net income per share is computed by dividing net income by the weighted-average number of ordinary shares outstanding for the respective period. Diluted net income per share gives effect to all potentially dilutive securities, including share options, restricted share units (“RSUs”) and restricted share awards ("RSAs"), if the effect of the securities is dilutive using the treasury stock method. Awards with performance or market conditions are included using the treasury stock method only if the conditions would have been met as of the end of the reporting period and their effect is dilutive.
The following table sets forth the reconciliation of the weighted-average number of ordinary shares:
 
Three Months Ended March 31,
 
Nine Months Ended March 31,
 
2013
 
2012
 
2013
 
2012
Weighted average shares outstanding, basic
33,267,073

 
36,422,690

 
33,441,581

 
38,448,111

Weighted average shares issuable upon exercise/vesting of outstanding share options/RSUs/RSAs
1,127,394

 
1,254,757

 
1,195,069

 
1,108,146

Shares used in computing diluted net income per share
34,394,467

 
37,677,447

 
34,636,650

 
39,556,257

Weighted average anti-dilutive shares excluded from diluted net income per share
1,512,722

 
1,137,103

 
1,918,796

 
1,447,398

Share-Based Compensation
During the three and nine months ended March 31, 2013, we recorded share-based compensation expense of $8,170 and $24,787, respectively, and $7,416 and $17,002 during the three and nine months ended March 31, 2012, respectively. Share-based compensation expense has increased in the nine months ended March 31, 2013 as compared to the prior year period primarily due to restricted shares granted in conjunction with the December 2011 acquisition of Webs, Inc., as well as premium-priced share options that were granted in May and August of 2012 to certain executives as part of our re-designed long-term incentive program.
As of March 31, 2013, there was $61,724 of total unrecognized compensation cost related to non-vested share-based compensation arrangements, net of estimated forfeitures. This cost is expected to be recognized over a weighted average period of 3.16 years.
Investments in Equity Interests
We record our share of the results of investments in equity interests within loss in equity interests on the consolidated statements of operations. We review our investments for other-than-temporary impairment whenever events or changes in business circumstances indicate that the carrying value of the investment may not be fully recoverable. Investments identified as having an indication of impairment are subject to further analysis to determine if the impairment is other-than-temporary and this analysis requires estimating the fair value of the investment, which involves considering factors such as comparable valuations of public companies similar to the entity in which we have an equity investment, current economic and market conditions, the operating performance of the entities including current earnings trends and forecasted cash flows, and other entity and industry specific information.

8


Derivative Financial Instruments

We record all derivatives on the consolidated balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether we have elected to designate a derivative as being a hedging relationship and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability or firm commitment attributable to a particular risk are considered fair value hedges. Derivatives designated and qualifying as hedges of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transaction in a cash flow hedge. We execute these instruments with financial institutions that we judge to be credit-worthy, defined as institutions that hold an investment grade credit rating. We may enter into derivative contracts that are intended to economically hedge certain of our risks, even though we may elect not to apply hedge accounting. We do not currently hold or issue derivative financial instruments for trading or speculative purposes and do not have any derivatives that are not designated as hedges for accounting purposes. In accordance with the fair value measurement guidance, our accounting policy is to measure the credit risk of our derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.
Treasury Shares
Treasury shares are accounted for using the cost method and are included as a component of shareholders' equity. Effective January 28, 2013, 5,869,662 of our ordinary shares issued and held in our treasury account were canceled and have become authorized but unissued ordinary shares, as authorized by our shareholders on November 8, 2012. These canceled shares represent the remaining balance as of November 8, 2012 of the ordinary shares that were held in treasury at the date of the redomiciliation of our publicly traded parent company from Bermuda to the Netherlands in August 2009. The cancellation of the treasury shares resulted in a reduction of additional paid in capital and retained earnings.
Recently Issued or Adopted Accounting Pronouncements
Effective January 1, 2013 we adopted ASU 2013-02, "Reporting Amounts Reclassified Out of Accumulated Other Comprehensive Income." ASU 2013-02 requires an entity to disclose amounts reclassified out of other comprehensive income by component. In addition, an entity is required to present, either on the face of financial statements or in a single note, significant amounts reclassified out of accumulated other comprehensive income and the income statement line item affected by the reclassification. The adoption of this ASU did not have a material effect on our financial position or results of operations. See footnote 5 for further details.
In January 2013, the FASB issued ASU 2013-01, "Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities", which clarifies the scope of the offsetting disclosures of ASU 2011-11. This amendment requires disclosing and reconciling gross and net amounts for financial instruments that are offset in the balance sheet, and amounts for financial instruments that are subject to master netting arrangements and other similar clearing and repurchase arrangements. We adopted ASU 2013-01 effective January 1, 2013, which did not have a material impact on our disclosures.

9


3. Fair Value Measurements
The following tables summarize our assets and liabilities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy:
 
March 31, 2013
 
Total
 
Quoted Prices in
Active
Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets
 
 
 
 
 
 
 
Currency forward contracts
$
498

 
$

 
$
498

 
$

Total assets recorded at fair value
$
498

 
$

 
$
498

 
$

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Interest rate swap contracts
$
309

 
$

 
$
309

 
$

Currency forward contracts
149

 

 
149

 

Total liabilities recorded at fair value
$
458

 
$

 
$
458

 
$

 
June 30, 2012
 
Total
 
Quoted Prices in
Active
Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Liabilities
 
 
 
 
 
 
 
Albumprinter contingent earn-out
$
570

 
$

 
$

 
$
570

Total liabilities recorded at fair value
$
570

 
$

 
$

 
$
570

During the three and nine months ended March 31, 2013 and March 31, 2012 there were no significant transfers in or out of Level 1, Level 2 and Level 3 classifications.     
The valuations of the derivatives intended to mitigate our interest rate and currency risk are determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each instrument. This analysis utilizes observable market-based inputs, including interest rate curves, interest rate volatility, or spot and forward exchange rates, and reflects the contractual terms of these instruments, including the period to maturity. We incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty's nonperformance risk in the fair value measurements. In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements.     
Although we have determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads, to appropriately reflect both our own nonperformance risk and the respective counterparties' nonperformance risk in the fair value measurement. However, as of March 31, 2013, we have assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions and have determined that the credit valuation adjustments are not significant to the overall valuation of our derivatives. As a result, we have determined that our derivative valuations in their entirety are classified in Level 2 in the fair value hierarchy.
The following table represents the changes in fair value of Level 3 contingent consideration:
 
Albumprinter contingent earn-out
Balance at June 30, 2012
$
570

Fair value adjustment
(580
)
Effect of currency translation adjustments
10

Balance at March 31, 2013
$


10


    
The share purchase agreement for our acquisition of Albumprinter Holding B.V. in fiscal 2012 provided for an earn-out payment that was payable based on achieving certain operational results for calendar year 2012. This earn-out was measured at fair value and was based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy. Any changes in the fair value of contingent consideration related to updated assumptions and estimates have been recognized within the unaudited consolidated statements of operations in the period of change. As of March 31, 2013, the fair value of the liability was zero as the earn-out targets were not achieved and therefore, no payment was made.
As of March 31, 2013 and June 30, 2012, the carrying amounts of cash and cash equivalents, receivables, accounts payable, other current liabilities, and debt approximated their estimated fair values.
4. Derivative Financial Instruments
Hedges of Interest Rate Risk
We have entered into interest rate swap contracts to manage differences in the amount, timing, and duration of our known or expected cash payments related to our long-term debt. Our objective in using interest rate derivatives is to add stability to interest expense and to manage our exposure to interest rate movements. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for us making fixed-rate payments over the life of the derivative agreements without exchange of the underlying notional amount.
The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive loss and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the three and nine months ended March 31, 2013, such derivatives were used to hedge the variable cash flows associated with our long-term debt. If a derivative is deemed to be ineffective, the ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During the three and nine months ended March 31, 2013, we did not hold any derivative instruments that were determined to be ineffective.
Amounts reported in accumulated other comprehensive loss related to interest rate swap contracts will be reclassified to interest expense as interest payments are accrued or made on our variable-rate debt. Assuming these derivative instruments continue to qualify for hedge accounting, as of March 31, 2013, we estimate that $202 will be reclassified from accumulated other comprehensive loss to interest expense during the twelve months ending March 31, 2014. As of March 31, 2013, we had 7 outstanding interest rate swap contracts indexed to one-month LIBOR. These instruments were designated as cash flow hedges of interest rate risk and have varying start dates and maturity dates from 2013 - 2017. As the start date of certain contracts has not yet commenced, the notional amount of our outstanding contracts is in excess of the variable-rate debt being hedged as of the balance sheet date.
Interest rate swap contracts outstanding:
 
Notional Amounts
Contracts accruing interest as of March 31, 2013
 
$
100,000

Contracts with a future start date
 
95,000

Total
 
$
195,000

Hedges of Currency Risk
We have executed currency forward contracts in order to mitigate our exposure to fluctuations in various currencies against our reporting currency, the U.S. dollar. We use currency derivatives, specifically currency forward contracts, to manage this exposure. We currently have outstanding currency forward contracts that qualify as cash flow hedges intended to offset the effect of exchange rate fluctuations on our net income. Currency forward agreements involve fixing the exchange rate for delivery of a specified amount of currency on a specified date.
The effective portion of changes in the fair value of derivatives designated and qualifying as cash flow hedges is recorded in accumulated other comprehensive loss and is subsequently reclassified into earnings in the period in which the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. Assuming our currency forward contracts continue to qualify for hedge accounting, as of March 31, 2013, we estimate that $350 will be reclassified from accumulated other comprehensive loss to earnings during the twelve months ending March 31, 2014.

11


As of March 31, 2013, we had the following outstanding currency forward contracts that were used to hedge fluctuations in the US Dollar value of forecasted transactions denominated in Canadian Dollar, Danish Krone, Great British Pound, Swedish Krona, and Swiss Franc:
Notional Amount
 
Effective Date
 
Maturity Date
 
Number of Instruments
 
Index
$22,450
 
November 8, 2012
 
Various 2013
 
15
 
Various
Financial Instrument Presentation
The table below presents the fair value of our derivative financial instruments as well as their classification on the balance sheet as of March 31, 2013 and June 30, 2012:
 
 
Asset Derivatives
 
Liability Derivatives
 
 
March 31, 2013
 
June 30, 2012
 
March 31, 2013
 
June 30, 2012
Derivative designated as hedging instrument
 
Balance Sheet Line Item
 
Fair Value
 
Balance Sheet Line Item
 
Fair Value
 
Balance Sheet Line Item
 
Fair Value
 
Balance Sheet Line Item
 
Fair Value
Interest rate swaps
 
Other current assets
 
$

 

 
$

 
Other current liabilities/other liabilities
 
$
309

 

 
$

Currency forward contracts
 
Other current assets
 
498

 

 

 
Other current liabilities
 
149

 

 

Total derivatives designated as hedging instruments
 

 
$
498

 

 
$

 

 
$
458

 

 
$

As of March 31, 2013 there is no material impact on our balance sheet presentation for the netting of derivative financial instruments.
The following table presents the effect of our derivative financial instruments designated as hedging instruments and their classification within comprehensive income for the three and nine months ended March 31, 2013:
Derivatives in Hedging Relationships
 
Amount of Gain (Loss) Recognized in Comprehensive Income on Derivatives (Effective Portion)
In thousands
 
Three months ended March 31, 2013
 
Nine months ended
March 31, 2013
Interest Rate Swaps
 
$
(90
)
 
$
(367
)
Currency contracts that hedge revenue
 
1,058

 
407

Currency contracts that hedge cost of revenue
 
(137
)
 
(55
)
Currency contracts that hedge technology and development expense
 
(214
)
 
(4
)
Currency contracts that hedge general and administrative expense
 
(39
)
 
(24
)
 
 
$
578

 
$
(43
)
The following table presents the effect of our de-designated derivative financial instruments that no longer qualify as hedging instruments and the mark to market impact recorded within the statement of operations:
Derivatives not classified as hedging instruments under ASC 815
 
Amount of Gain (Loss) Recognized in Income
 
Location of Gain (Loss) Recognized in Income (Ineffective Portion)
In thousands
 
Three months ended March 31, 2013
 
Nine months ended March 31, 2013
 
 
Currency contracts
 
$
(164
)
 
$
(112
)
 
Other income (expense)

No comparative information is presented as we did not have any derivative financial instruments during the three and nine months ended March 31, 2012.

12


5. Accumulated Other Comprehensive Loss
The following table presents a roll forward of amounts recognized in accumulated other comprehensive loss by component, net of tax of $62, for the nine months ended March 31, 2013:

In thousands
Gains and Losses on Cash Flow Hedges
 
Currency translation adjustments
 
Total
Balance at June 30, 2012
$

 
$
(10,732
)
 
$
(10,732
)
Other comprehensive income before reclassifications
(43
)
 
3,569

 
3,526

Amounts reclassified from accumulated other comprehensive income to net income
145

 

 
145

Net current period other comprehensive income
102

 
3,569

 
3,671

Balance as of March 31, 2013
$
102

 
$
(7,163
)
 
$
(7,061
)

The following table presents reclassifications out of accumulated other comprehensive loss for the three and nine months ended March 31, 2013:
Details about Accumulated Other
Comprehensive Loss Components
 
Amount Reclassified from Accumulated Other Comprehensive Loss to Net Income
Gain/(Loss)
 
Affected line item in the
Statement of Operations
In thousands
 
Three months ended March 31, 2013
 
Nine months ended March 31, 2013
 
 
Currency contracts that hedge revenue
 
$
11

 
$
8

 
Revenue
Currency contracts that hedge cost of revenue
 
22

 
11

 
Cost of revenue
Currency contracts that hedge technology and development expense
 
(30
)
 
(39
)
 
Technology and development expense
Currency contracts that hedge general and administrative expense
 
(4
)
 
(6
)
 
General and administrative expense
Interest Rate Swaps
 
(48
)
 
(129
)
 
Interest expense
Total before income tax
 
(49
)
 
(155
)
 
Total before Income Tax
Income tax benefit
 
10

 
10

 
Income tax provision
Total
 
$
(39
)
 
$
(145
)
 
 
6. Goodwill and Acquired Intangible Assets
Goodwill
We perform our annual goodwill impairment test on January 1 of each fiscal year unless interim indicators of impairment exist. Goodwill is considered to be impaired when the net book value of a reporting unit exceeds its estimated fair value. We elected to perform the traditional two-step goodwill impairment test for our January 1, 2013 analysis in order to establish an updated baseline fair value for each of our reporting units as the majority of our goodwill was established in the second quarter of fiscal 2012 immediately preceding our prior year annual goodwill impairment test.
Fair values are estimated using a discounted cash flow methodology. The discounted cash flows are based on our strategic plans and best estimates of revenue growth and operating profit by each reporting unit. Our analysis requires the exercise of significant judgment, including assumptions about appropriate discount rates, perpetual growth rates, and the amount and timing of expected future cash flows. Our annual goodwill impairment test by reporting unit as of January 1, 2013 determined that the estimated fair value of each reporting unit sufficiently exceeds its carrying value and thus no further evaluation of impairment was necessary. While we believe our assumptions are reasonable, actual results could differ from our projections.

13


    The carrying amount of goodwill by segment as of June 30, 2012 and March 31, 2013 is as follows:
 
North America
 
Europe
 
Most of World
 
Total
Balance as of June 30, 2012
$
96,469

 
$
43,752

 
$
208

 
$
140,429

Effect of currency translation adjustments (1)

 
521

 

 
521

Adjustments
(337
)
 

 

 
(337
)
Balance as of March 31, 2013
$
96,132

 
$
44,273

 
$
208

 
$
140,613

_________________
(1) Relates to goodwill attributable to the Albumprinter acquisition as amounts are denominated in Euro.
Acquired Intangible Assets    
Acquired intangible assets amortization expense was $2,379 and $7,009 for three and nine months ended March 31, 2013, respectively, and $2,485 and $3,843 for the three and nine months ended March 31, 2012, respectively.
7. Accrued Expenses
Accrued expenses included the following:
 
March 31,
2013
 
June 30,
2012
Compensation costs (1)
$
30,822

 
$
32,513

Advertising costs (2)
25,902

 
21,355

Income and indirect taxes (3)
16,697

 
12,402

Shipping costs
5,363

 
4,614

Purchases of property, plant and equipment
4,122

 
6,952

Professional costs
2,537

 
2,277

Other
20,005

 
18,289

Total accrued expenses
$
105,448

 
$
98,402

_____________________
(1) The decrease in accrued compensation costs is principally a result of the payment of our fiscal 2012 annual incentive compensation plans in the three months ended September 30, 2012 offset by higher compensation costs during fiscal 2013 driven by investments in increased headcount.
(2) The increase in accrued advertising costs is principally a result of our increased customer acquisition efforts.
(3) The increase in accrued income taxes and indirect taxes is principally a result of the timing of payment of indirect taxes.
8. Debt
On February 8, 2013, we entered into an amended and restated agreement, which we refer to as the restated credit agreement, with a syndicate of lenders led by JPMorgan Chase Bank, N.A., as administrative agent, which modifies the senior credit agreement dated as of October 21, 2011. By adding new lenders and increasing the commitments of several existing lenders, the restated credit agreement consists of a secured credit facility to lend us an aggregate of $500,000 as follows:
Revolving loans of $35,000 with a maturity date of October 21, 2016;
Revolving loans of $365,000 with a maturity date of February 8, 2018;
Term loans of $100,000 made on February 8, 2013, amortizing over the loan period, with a final maturity date of February 8, 2018.
Up to $50,000 in borrowings may be made in Euro, Swiss Francs and such other non-United States Dollar currencies as permitted by our lenders. The restated credit agreement also contains letter of credit and swingline loan sublimits of $25,000 each. We may from time to time, so long as no default or event of default has occurred and is continuing, increase the loan commitments under the restated credit agreement by up to $200,000 by adding

14


new commitments or increasing the commitment of willing lenders. As of March 31, 2013 and June 30, 2012, our debt outstanding was $238,500 and $229,000, respectively.
Under the terms of the Restated Credit Agreement, borrowings bear interest at a variable rate of interest based on LIBOR plus 1.25% to 2.00% depending on our leverage ratio, which is the ratio of our consolidated total indebtedness to our consolidated earnings before interest, taxes, depreciation and amortization (EBITDA). As of March 31, 2013, the weighted-average interest rate on outstanding borrowings was 1.98%. We must also pay a commitment fee on unused balances of 0.175% to 0.350% depending on our leverage ratio.
The restated credit agreement contains financial and other covenants, including but not limited to (1) limitations on our incurrence of additional indebtedness and liens, the consummation of certain fundamental organizational changes or intercompany activities, investments and restricted payments including the purchases of our ordinary shares or payments of dividends, and the amount of consolidated capital expenditures that we may make in each of our fiscal years ending June 30, 2013 through 2018, and (2) financial covenants calculated on a trailing twelve month, or TTM, basis that:
our consolidated leverage ratio, which is the ratio of our consolidated indebtedness (*) to our TTM consolidated EBITDA (*), will not exceed (i) 3.5 during the period from December 31, 2012 through December 31, 2013; (ii) 3.25 during the period from March 31, 2014 through December 31, 2014; and 3.0 after March 31, 2015;
our interest coverage ratio, which is the ratio of our consolidated EBITDA to our consolidated interest expense, will be at least 3.0.
As of March 31, 2013, we were in compliance with all financial covenants under the credit agreement. The restated agreement also contains customary representations, warranties and events of default.
(*) The definitions of EBITDA and consolidated indebtedness are maintained in the restated credit agreement included as an exhibit to Form 8-K filed on February 13, 2013.
9. Income Taxes
Income tax expense was $2,264 and $10,587 for the three and nine months ended March 31, 2013, as compared to $5,471 and $10,449 for the same prior year period. On an annual basis, our income tax expense is mainly a function of our operating expenses and cost-based transfer pricing methodologies and not a function of consolidated pre-tax income. Accordingly, our effective tax rate will typically vary inversely to changes in our consolidated pre-tax income. Annual operating expenses are higher in 2013 as compared to 2012 thus resulting in a higher annual effective tax rate in 2013. Despite the higher effective tax rate in 2013, income tax expense is lower for the three months ended March 31, 2013 as compared to the same prior period in 2012 primarily attributable to the tax impact associated with the operational alignment of the Webs business and related intellectual property which was recognized in tax expense during the three months ended March 31, 2012. For the nine months ended March 31, 2013, tax expense is higher than the same prior year period, but partially offset by the currency exchange related tax benefit recognized during the three months ended December 31, 2012.
     As of March 31, 2013, we had a liability for unrecognized tax benefits included in the balance sheet of approximately $6,018, including accrued interest of $376. There have been no significant changes to these amounts for the three and nine months ended March 31, 2013. Of the total amount of unrecognized tax benefits, approximately $2,837 will reduce the effective tax rate if recognized. We recognize interest and, if applicable, penalties related to unrecognized tax benefits in the provision for income taxes.
We conduct business in a number of tax jurisdictions and, as such, are required to file income tax returns in multiple jurisdictions globally. The years 2007 through 2012 remain open for examination by the Internal Revenue Service and the years 2005 through 2012 remain open for examination in the U.S. states and the various non-US tax jurisdictions in which we file tax returns.
Vistaprint Limited (domiciled in Bermuda) is currently under income tax audit by the United States Internal Revenue Service (“IRS”). On August 16, 2012, we received a Revenue Agent's Report (“RAR”) from the IRS proposing tax assessments for the 2007 to 2009 tax years. The issue in dispute is the imposition of U.S. federal income tax on effectively connected income associated with the IRS' assertion that Vistaprint Limited has a U.S. Trade or Business. On September 17, 2012, we submitted to the IRS Examination team a written protest stating our

15


formal disagreement with the facts and technical conclusions presented in the RAR and requesting the case to be heard by the IRS Office of Appeals. As of the filing date of these financial statements, the case has not been officially transferred to the Appeals office, but we anticipate this will happen within the next three to six months. Based on the technical merits of this matter, we believe that our tax positions will be sustained. We plan to pursue all administrative and, if necessary, judicial remedies with respect to this matter.
In March 2013, Vistaprint USA, Incorporated and the IRS signed an RAR which effectively concluded the audit for tax years 2007 to 2010. We have included the impact of all RAR adjustments in our financial statements, accordingly, which did not have a material impact to our net income. The audit of the income tax return for the tax year 2011 continues to progress in the field examination stage.
One of our Canadian subsidiaries, Vistaprint North American Services Corp., is currently under federal income tax examination in Canada for tax years 2005 and 2006. During the quarter ended December 31, 2012, we received Notices of Re-assessment for the tax year 2006, adjusting the transfer price for the contract printing services provided to Vistaprint Limited. In February 2013, we filed Notices of Objection to formally request a hearing before Canadian Appeals. Based on the technical merits of this matter, we believe that our tax position will be sustained.
Vistaprint USA, Incorporated and Vistaprint Limited are both currently under income tax audit by the Massachusetts Department of Revenue. The tax years under examination are 2006 to 2008 and 2005 to 2011, respectively. These audits are still at the level of the field examination phase.
We believe that our income tax reserves associated with these matters are adequate as the positions reported on our tax returns will be sustained on their technical merits. However, final resolution is uncertain and there is a possibility that the final resolution could have a material impact on our financial condition, results of operations or cash flows.
10. Investment in Equity Interests
On July 10, 2012, we acquired an equity interest in Namex Limited and its related companies ("Namex") for $12,653 in cash and $500 to be paid on an installment basis through December 31, 2016. Namex includes an established Chinese printing business, and the investment provides us with access to this new market and an opportunity to participate in longer-term growth in China. Our proportionate ownership share as of March 31, 2013 is 34.5%, with additional call options to increase ownership incrementally over the coming eight years, and we are contractually committed to invest approximately $5,000 on or before October 1, 2013 which will result in an ownership share of approximately 42%.
This investment is accounted for using the equity method. We record in net income a proportionate share of the earnings or losses of Namex with a corresponding increase or decrease in the carrying value of the investment. For the three and nine months ended March 31, 2013, we recorded a loss of $580 and $1,023, respectively, attributable to Namex in our consolidated statement of operations. As of March 31, 2013, the carrying value of our Namex investment in our consolidated balance sheet was $12,392. As of March 31, 2013, we have a contractual loan arrangement with the majority shareholder of Namex, resulting in a loan receivable of $512 that is due with 6.5% per annum interest on or before December 31, 2016.
We have determined that the level of equity investment at risk is not sufficient for the entity to finance its activities without additional financial support and as a result, Namex represents a variable interest entity. However, through consideration of the most significant activities of the entity in conjunction with the collective shareholders' rights of Namex, we have concluded that we do not have the power to direct the activities that most significantly impact the entity's economic performance, and therefore we do not qualify as the primary beneficiary. We have a future contractual funding commitment to Namex of $5,000, but our exposure to loss is limited to our contributed capital, the additional funding obligation, and the standard risks of proportionate equity ownership associated with the entity's operating performance.
    We do not have any other material commercial arrangements with Namex as of March 31, 2013.

16


11. Segment Information
Effective July 1, 2012, we changed our internal reporting structure to re-organize primarily on a functional basis in order to best support our long-term growth strategy. This re-organization has resulted in revised allocations of costs within our reportable segments. The information is reported internally to our Chief Executive Officer, who constitutes our Chief Operating Decision Maker (“CODM”) for purposes of making decisions about how to allocate resources and assess performance. Beginning the quarter ended September 30, 2012, the CODM reviews revenue and the revised income or loss from operations based on three geographic operating segments: North America, Europe, and Most of World, which includes our historical Asia Pacific business and global emerging markets. Historic results included in this quarterly report have been reclassified where applicable to conform to this new operating segment structure.
Consistent with our historical reporting, the costs associated with shared central functions are not allocated to the reporting segments and instead are reported and disclosed under the caption “Corporate and global functions,” which includes expenses related to corporate support functions, software and manufacturing engineering, and the global component of our IT operations and customer service, sales and design support. As a result of our July 1, 2012 re-organization, the cost of our North America and Europe legal, human resource, and facilities management functions were re-classified to "Corporate and global functions," whereas, the cost of these same functions remains in our Most of World segment. We do not allocate non-operating income to our segment results. There are no internal revenue transactions between our reporting segments and all intersegment transfers are recorded at cost for presentation to the CODM, for example, products manufactured by our Venlo, the Netherlands facility for the Most of World segment; therefore, there is no intercompany profit or loss recognized on these transactions. At this time, we do not fully allocate support costs across operating segments or corporate and global functions, which may limit the comparability of income from operations by segment. Our balance sheet information is not presented to the CODM on an allocated basis and therefore we do not present asset information by segment.
Revenue by segment and geography is based on the country-specific website through which the customer’s order was transacted. The following tables set forth revenue and income from operations by operating segment.
 
Three Months Ended March 31,
 
Nine Months Ended March 31,
 
2013
 
2012
 
2013

2012
Revenue:
 
 
 
 
 

 
 

North America
$
163,029

 
$
141,968

 
$
474,778

 
$
400,466

Europe
108,255

 
100,228

 
357,307

 
323,255

Most of World
16,400

 
15,438

 
55,327

 
46,135

Total revenue
$
287,684

 
$
257,634

 
$
887,412

 
$
769,856


 
Three Months Ended March 31,
 
Nine Months Ended March 31,
 
2013

2012
 
2013

2012
Income (loss) from operations:
 
 
 
 
 

 
 

North America
$
50,234

 
$
40,309

 
$
147,335

 
$
119,120

Europe
25,772

 
22,615

 
82,201

 
83,511

Most of World
(2,847
)
 
(370
)
 
(4,725
)
 
3,051

Corporate and global functions
(63,426
)
 
(54,770
)
 
(181,803
)
 
(155,610
)
Total income from operations
$
9,733

 
$
7,784

 
$
43,008

 
$
50,072



17


The following tables set forth long-lived assets by geographic area:
 
March 31,
2013
 
June 30,
2012
Long-lived assets (1):
 

 
 

Netherlands
$
125,840

 
$
109,498

Canada
94,141

 
98,071

Australia
41,838

 
42,928

United States
36,405

 
34,673

Jamaica
26,598

 
22,614

Bermuda
19,208

 
17,933

Switzerland
4,585

 
5,112

India
4,778

 
1,206

Other
5,329

 
4,040

Total
$
358,722

 
$
336,075

___________________
(1) Excludes goodwill of $140,613 and $140,429 and deferred tax assets of $225 and $327 as of March 31, 2013 and June 30, 2012, respectively, and the investment in equity interests of $12,392 as of March 31, 2013.
12. Commitments and Contingencies
Purchase Obligations
At March 31, 2013, we had unrecorded commitments under contract of $18,565, which were principally composed of inventory purchase commitments of approximately $6,107, production and computer equipment purchases of approximately $3,354, various facility expansion and improvement projects of $2,072, and other unrecorded purchase commitments of $7,032.
Other Obligations
We have an outstanding installment obligation of $20,539 related to the fiscal 2012 intra-entity transfer of Webs' Intellectual Property, which results in tax being paid over a 7.5 year term and has been classified as a deferred tax liability in our consolidated balance sheet as of March 31, 2013. In addition, we have a $5,000 funding obligation associated with our investment in Namex payable on or before October 1, 2013.
Legal Proceedings
We are not currently party to any material legal proceedings. Although we cannot predict with certainty the results of litigation and claims to which we may be subject from time to time, we do not expect the resolution of any of our current matters to have a material adverse impact on our consolidated results of operations, cash flows or financial position. In all cases, at each reporting period, we evaluate whether or not a potential loss amount or a potential range of loss is probable and reasonably estimable under the provisions of the authoritative guidance that addresses accounting for contingencies. We expense the costs relating to our legal proceedings as those costs are incurred.

18



Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Report contains forward-looking statements that involve risks and uncertainties. The statements contained in this Report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including but not limited to our statements about anticipated income and revenue growth rates, future profitability and market share, new and expanded products and services, geographic expansion and planned capital expenditures. Without limiting the foregoing, the words “may,” “should,” “could,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “designed,” “potential,” “continue,” “target,” “seek” and similar expressions are intended to identify forward-looking statements. All forward-looking statements included in this Report are based on information available to us up to, and including the date of this document, and we disclaim any obligation to update any such forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain important factors, including those set forth in this “Management's Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” and elsewhere in this Report. You should carefully review those factors and also carefully review the risks outlined in other documents that we file from time to time with the United States Securities and Exchange Commission.
Executive Overview
For the three and nine months ended March 31, 2013, we reported revenue of $287.7 million and $887.4 million, respectively, representing 12% and 15% revenue growth over the same periods in the prior year. Constant-currency revenue growth was 12% and 17% for the three and nine months ended March 31, 2013. Constant-currency organic revenue growth, which excludes the impact of acquisitions, was 11% and 13% for the three and nine months ended March 31, 2013. Our organic constant-currency revenue growth in the first nine months of fiscal 2013 continues to be lower than our historical growth, and reflects a contrast of regional executional performance. Revenue from acquisitions contributed approximately 4% to our overall revenue growth during the nine month period.
Our diluted earnings per share ("EPS") for the three months ended March 31, 2013 increased to $0.17, as compared to $0.01 for the prior comparable period, primarily as a result of increased revenue, decreased general and administrative expenses, favorable changes in both income tax expense and other income (expense), and decreased share count amounts due to our repurchase activity. Despite the positive growth of EPS for the three month period, as well as the growth in our consolidated revenue and continued share repurchases, EPS for the nine months ended March 31, 2013 declined 23% from the same prior year period to $0.78. This decline was primarily due to planned investments we made in support of our long-term growth strategy including increased investment levels in our organic business such as advertising and other marketing expenditures in support of new and repeat customer growth, technology and development resources in support of our customer value proposition, and manufacturing and supply chain efficiency efforts. In addition, we have invested in our employee base and expanded in key departments, including additional resources in our MOW business unit to develop and implement our long-term strategy for emerging markets. The combined effect of our fiscal 2012 acquisitions and fiscal 2013 indirect equity investment in Namex continued to be dilutive to our earnings with share-based compensation, amortization expense and loss from equity interests totaling $5.0 million and $14.3 million in the three and nine months ended March 31, 2013, respectively.
On July 28, 2011, we introduced five-year organic revenue and EPS targets, along with an evolved financial and investment strategy to achieve our goals. We are in the midst of executing this strategy and have made significant progress in many of our strategic initiatives. However, the continuing weakness of our revenue performance in Europe in recent quarters has put significant pressure on our ability to achieve our 2016 revenue target. We continue to target our 2016 net income goal, as we believe we have many levers to help us minimize the impact of our weaker revenue outlook on net income. We believe we can achieve profit growth through a mix of the expected benefits of our strategy execution combined with a series of investment tradeoffs, improvements to our organizational effectiveness, advertising optimization and careful expense management. We believe that achieving our net income objectives will help position us to deliver longer-term value to our shareholders. 
Over the last 16 years, we have grown to become a leader in the large and fragmented market for small business marketing solutions. We have built significant competitive advantages via our marketing approach, proprietary technology, and manufacturing expertise. We have driven strong growth and developed substantial

19


scale advantage by executing on our core strengths in mass customization technologies and by introducing an unmatched breadth of small business marketing products. We believe we are well positioned to capitalize on our past success in order to capture more of the large market opportunity we see ahead of us. To do so, we have adopted an investment approach designed to support our ability to scale faster and drive significant long-term shareholder returns.
Our long-term goal is to be the leading online provider of micro business marketing solutions for businesses or organizations with fewer than 10 employees. Additionally, we plan to continue to focus on key market adjacencies where we believe we can drive additional long-term growth by employing our unique business model and customer value proposition. These adjacencies include digital marketing services, new geographic markets, personalized products for home and family usage, and up-market customers.
The strategy for growth in our core micro business marketing opportunity is to make investments and drive success in the following areas:
Customer Value Proposition.  We believe our average customers currently spend only a small portion of their annual budget for marketing products and services with us. By shifting our success metrics from transactionally focused profit measures to longer-term customer satisfaction and economic measures, we believe we can deliver improvements to our customer experience and value proposition that will significantly increase customer loyalty and lifetime value. Examples of these programs include improving the customer experience on our site, such as ease of use, less cross selling before customers reach the checkout, and expanded customer service.
Lifetime Value Based Marketing.  We have traditionally acquired customers by targeting micro businesses who are already shopping online through marketing channels such as search marketing, email marketing, and other online advertising. We believe a significant portion of micro businesses in our core markets do not currently use online providers of marketing services. By investing more deeply into existing marketing channels, as well as opening up new channels such as television broadcast and direct mail, we believe we can drive continued new customer growth and reach offline audiences that are not currently looking to online partners for marketing needs.
World Class Manufacturing.  We believe our manufacturing processes are best-in-class when it comes to the printing industry. But when compared to the best manufacturing companies in the world, we believe there is significant opportunity to drive further efficiencies and competitive advantages. By focusing additional top engineering talent on key process approaches, we believe we can make a step-function improvement in product quality and reliability, and significantly lower unit manufacturing costs.
Our strategy to drive longer-term growth by addressing market adjacencies is to develop our business in the following areas:
Digital Marketing Services.  We estimate that less than 50% of micro businesses have a website today, but digital marketing services, including websites, email marketing, online search marketing and social media marketing, are a fast-growing part of the small business marketing space. We believe there is great value in helping customers understand the powerful ways in which physical and digital marketing can be combined. Our current digital offering includes websites, email marketing, local search visibility, blogs, search engine optimization, and personalized email domain names. Since we launched digital marketing services in April 2008, our number of unique paying organic digital subscribers has grown to approximately 356,000. In fiscal 2012, we acquired Webs to significantly expand our ability to develop and deliver innovative, customer-focused online marketing solutions. At acquisition, Webs had a base of approximately 100,000 paying customers, as well as millions of non-paying users of its products that has continued to grow.
Geographies outside North America and Europe. For the three and nine months ended March 31, 2013, revenue generated outside of North America and Europe accounted for approximately 6% of our total revenue. We believe that we have significant opportunities to expand our revenue both in the countries we currently serve and in new markets. We intend to further extend our geographic reach by continuing to introduce localized websites in additional countries and languages, expanding our marketing efforts and customer service capabilities, and offering graphic design content, products, payment methodologies and languages specific to local markets. To support our expansion into global emerging markets, during fiscal 2012 we opened offices in Singapore and Mumbai, India and acquired assets of Printbell, an India based

20


printing business. More recently we made an indirect minority investment in a Chinese printing business in July 2012 and completed the launch of our new website and manufacturing facility in India in September 2012.
Home and Family. Although we expect to maintain our primary focus on micro business marketing products and services, we also participate in the market for customized home and family products such as invitations, announcements, calendars, holiday cards, embroidered products, and apparel. We continue to add new products and services targeted at the home and family market. We believe that the economies of scale provided by cross sales of these products to our extensive micro business customer base, our large production order volumes and our integrated design and production software and facilities support and will continue to support our effort to profitably grow our home and family business. During fiscal 2012, we acquired Albumprinter, a leading provider of photo books and other photo products to the home and family market in Europe, and launched a strategic partnership with Nickelodeon to offer licensed character content to Vistaprint customers.
Up-market Customers. We serve customers across the spectrum of micro businesses with fewer than 10 employees, but our strength has traditionally been in the smallest and most price sensitive of these customers. In comparison to our customer base, which is concentrated in businesses with 2 or fewer employees, the micro businesses in the “up-market” portion of this spectrum tend to have more sophisticated marketing needs and typically spend more per year on their marketing activities. We believe that as we continue to research customer needs and make customer value proposition improvements for our traditional core customer base, we will develop a stronger ability to focus on “up-market” small business customers. We expect this adjacency can serve as a driver of growth in future years.
Results of Operations
The following table presents our operating results for the periods indicated as a percentage of revenue:
 
Three Months Ended
March 31,
 
Nine Months Ended
March 31,
 
2013
 
2012
 
2013
 
2012
As a percentage of revenue:
 
 
 
 
 

 
 

Revenue
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
 %
Cost of revenue
34.5
 %
 
34.5
 %
 
34.0
 %
 
34.6
 %
Technology and development expense
14.9
 %
 
13.8
 %
 
13.6
 %
 
12.0
 %
Marketing and selling expense
38.2
 %
 
37.9
 %
 
38.8
 %
 
37.0
 %
General and administrative expense 
9.0
 %
 
10.8
 %
 
8.8
 %
 
9.9
 %
Income from operations
3.4
 %
 
3.0
 %
 
4.8
 %
 
6.5
 %
Other income (expense), net
 %
 
(0.6
)%
 
 %
 
0.2
 %
Interest expense, net
(0.4
)%
 
(0.2
)%
 
(0.4
)%
 
(0.1
)%
Income before income taxes and loss in equity interests
3.0
 %
 
2.2
 %
 
4.4
 %
 
6.6
 %
Income tax provision
0.8
 %

2.1
 %

1.2
 %

1.4
 %
Loss in equity interests
0.2
 %
 
 %
 
0.1
 %

 %
Net income
2.0
 %
 
0.1
 %
 
3.1
 %

5.2
 %


21


In thousands
 
Three Months Ended
March 31,
 
Nine Months Ended
March 31,
 
2013
 
2012
 
2013 vs. 2012
 
2013

2012
 
2013 vs. 2012
Revenue
$
287,684


$
257,634

 
12%
 
$
887,412

 
$
769,856

 
15%
Revenue
We generate revenue primarily from the sale and shipping of customized manufactured products, and the provision of digital services, website design and hosting, email marketing services, as well as a small percentage from order referral fees and other third-party offerings.
We seek to increase our revenue by increasing the number of customers who purchase from us (“unique active customers”), as well as the amount our customers spend on our offerings (“average bookings per unique active customer”). We use the combination of unique active customers and average bookings per unique active customer to describe our revenue performance as this approach is aligned with the way we manage our business and our efforts to increase our revenue. We believe that metrics relating to our unique active customers and average bookings per unique active customer offer shareholders a useful means of assessing our execution against our strategy. Because changes in one of these metrics may be offset by changes in the other metric, no single factor is determinative of our revenue and profitability trends, and we assess them together to understand their overall impact on revenue and profitability. A number of factors influence our ability to drive increases in these metrics:
Unique active customers.  The unique active customer count is the number of individual customers who purchased from us in a given period, with no regard to the frequency of purchase. For example, if a single customer makes two distinct purchases within a twelve-month period, that customer is tallied only once in the unique active customer count. We determine the uniqueness of a customer by looking at certain customer data. Unique active customers are driven by both the number of new customers we acquire, as well as our ability to retain customers after their first purchase. During our early growth phase, we focused more resources on the acquisition of new customers through the value of our offering and our broad-based marketing efforts targeted at the mass market for micro business customers. As we have grown larger, our acquisition focus has been supplemented with expanded retention efforts, such as email offers, customer service, and expanding our product offering. Our unique active customer count has grown significantly over the years, and we expect it will continue to grow as we see additional opportunity to drive both new customer acquisitions as well as increased retention rates. A retained customer is any unique customer in a specific period who has also purchased in any prior period.
Average bookings per unique active customer.  Average bookings per unique active customer is total bookings, which represents the value of total customer orders received on our websites, for a given period of time divided by the total number of unique active customers who purchased during that same period of time. We seek to increase average bookings per unique active customer as a means of increasing revenue. Average bookings per unique active customer are influenced by the frequency that a customer purchases from us, the number of products and feature upgrades a customer purchases in a given period, as well as the mix of tenured customers versus new customers within the unique active customer count, as tenured customers tend to purchase more than new customers. Average bookings per unique active customer have grown over a multi-year period, though they do sometimes fluctuate from one quarter to the next depending upon the type of products we promote during a period and promotional discounts we offer. For example, among other things, seasonal product offerings, such as holiday cards, can cause changes in bookings per customer in our second fiscal quarter ended December 31.
Revenue for the three months ended March 31, 2013 increased 12% to $287.7 million compared to the three months ended March 31, 2012 due to increases in sales across our product and service offerings in all of of our organic geographies, as well as revenue from the Albumprinter and Webs businesses which we acquired in the second quarter of fiscal 2012. The overall growth during this period was due to increases in the number of unique active customers, both new customer additions and repeat customers. Our MOW and organic European businesses contributed 10% and 5% constant-currency revenue growth during the three months ended March 31, 2013, which were below historical trends. The stronger U.S. dollar did not materially impact our revenue growth in the three months ended March 31, 2013, as compared to the prior year period.

22


Revenue for the nine months ended March 31, 2013 increased 15% to $887.4 million compared to the nine months ended March 31, 2012 due to increases in sales across our product and service offerings in our organic business, as well as revenue from the Albumprinter and Webs businesses which were included for only a portion of the prior period results. Our organic European business delivered 6% constant-currency revenue growth in the nine months ended March 31, 2013 as compared to the prior comparative period. We expect our revenue growth rate to remain below historical trends for at least the remainder of fiscal 2013 as we work to improve our performance. The stronger U.S. dollar negatively impacted our revenue growth by an estimated 150 basis points in the nine months ended March 31, 2013, as compared to the prior year period.     
In addition to the drivers of our quarterly revenue performance, we monitor unique active customers and average bookings per unique active customer on a trailing twelve-month, or TTM, basis. The overall growth during this period was driven by increases in the number of unique active customers, which grew by 14% to approximately 15.7 million. New customer additions and repeat customers both contributed to the increased order volume, which out-weighed the decrease in our average order booking per unique active customer. The following table summarizes our operational revenue metrics, excluding acquisitions, for the twelve months ended March 31, 2013 and 2012:
 
 
TTM Ended March 31,
 
 
2013
 
2012
 
% Increase/(Decrease)
Unique active customers
 
15.7 million
 
13.8 million
 
14
 %
       New customers
 
10.1 million
 
9.0 million
 
12
 %
       Retained customers
 
5.6 million
 
4.8 million
 
17
 %
 
 
 
 
 
 
 
Average bookings per unique active customer
 
$
68

 
$
69

 
(1
)%
       New customers
 
$
50

 
$
52

 
(4
)%
       Retained customers
 
$
98

 
$
100

 
(2
)%
Total revenue by geographic segment for the three and nine months ended March 31, 2013 and 2012 is shown in the following table:
In thousands
 
Three Months Ended
March 31,



Currency
Impact:

Constant-
Currency

Impact of Acquisitions:

Constant-
Currency Organic
 
2013

2012

%
 Change

(Favorable)/Unfavorable

Revenue Growth (1)

(Favorable)/Unfavorable

 Revenue Growth (1)
North America 
$
163,029


$
141,968


15%

—%

15%

—%

15%
Europe
108,255


100,228


8%

—%

8%

(3)%

5%
Most of World
16,400


15,438


6%

4%

10%

—%

10%
Total revenue
$
287,684


$
257,634


12%

—%

12%

(1)%

11%

 
Nine Months Ended
 March 31,
 
 
 
Currency
Impact:
 
Constant-
Currency
 
Impact of Acquisitions:
 
Constant-
Currency Organic
 
2013
 
2012
 
%
Change
 
(Favorable)/Unfavorable
 
Revenue Growth (1)
 
(Favorable)/Unfavorable
 
 Revenue Growth (1)
North America 
$
474,778

 
$
400,466

 
19%
 
—%
 
19%
 
(2)%
 
17%
Europe
357,307

 
323,255

 
11%
 
3%
 
14%
 
(8)%
 
6%
Most of World
55,327

 
46,135

 
20%
 
1%
 
21%
 
—%
 
21%
Total revenue
$
887,412

 
$
769,856

 
15%
 
2%
 
17%
 
(4)%
 
13%
___________________
(1) Constant-currency revenue growth, a non-GAAP financial measure, represents the change in total revenue between current and prior year periods at constant-currency exchange rates by translating all non-U.S. dollar denominated revenue generated in the current period using the prior year period’s average exchange rate for each currency to the U.S. dollar and excludes the impact of gains or losses on effective currency hedges recognized in revenue. Constant-currency organic revenue growth also excludes the impact of revenue from acquisitions. We have provided these non-GAAP financial measures because we believe they provide meaningful information regarding our results on a consistent and comparable basis for the periods presented. Management uses these non-GAAP financial measures, in addition to GAAP financial measures, to evaluate our operating results. These non-GAAP financial measures should be considered supplemental to and not a substitute for our reported financial results prepared in accordance with GAAP.

23


The following table summarizes our comparative operating expenses for the period:
In thousands
 
Three Months Ended
March 31,
 
Nine Months Ended
March 31,
 
2013
 
2012
 
2013 vs. 2012
 
2013
 
2012
 
2013 vs. 2012
Cost of revenue
$
99,107

 
$
88,808

 
12%
 
$
301,284

 
$
266,533

 
13%
% of revenue
34.5
%
 
34.5
%
 
 
 
34.0
%
 
34.6
%
 
 
Technology and development expense
$
43,004

 
$
35,696

 
20%
 
$
120,706

 
$
92,162

 
31%
% of revenue
14.9
%
 
13.8
%
 
 
 
13.6
%
 
12.0
%
 
 
Marketing and selling expense
$
109,966

 
$
97,622

 
13%
 
$
344,327

 
$
284,610

 
21%
% of revenue
38.2
%
 
37.9
%
 
 
 
38.8
%
 
37.0
%
 
 
General and administrative expense
$
25,874

 
$
27,724

 
(7)%
 
$
78,087

 
$
76,479

 
2%
% of revenue
9.0
%
 
10.8
%
 
 
 
8.8
%
 
9.9
%
 
 
Cost of revenue
Cost of revenue includes materials used to manufacture our products, payroll and related expenses for production personnel, depreciation of assets used in the production process and in support of digital marketing service offerings, shipping, handling and processing costs, third-party production costs, production of costs of free products and other related costs of products sold by us.
The increase in cost of revenue from the comparative period in 2012 to the three and nine months ended March 31, 2013 was primarily attributable to the increased volume of product shipments during the current year period, including those from Albumprinter. Cost of revenue as a percent of revenue remained consistent with the fiscal 2012 three month comparable period. The decrease in cost of revenue, as a percentage of total revenue from the nine months ended March 31, 2012 to 2013 is due to improved overhead absorption as a result of higher product sales, increased labor and production efficiency, and improvements in our materials sourcing. In addition, the decrease in cost of revenue, as a percentage of total revenue for the nine months ended March 31, 2013, includes a benefit from a non-cash gain substantially recognized in the first quarter related to a free piece of equipment.
Technology and development expense
Technology and development expense consists primarily of payroll and related expenses for our employees engaged in software and manufacturing engineering, information technology operations, content development, amortization of capitalized software, website development costs and certain acquired intangible assets, including developed technology, hosting of our websites, asset depreciation, patent amortization, legal settlements in connection with patent-related claims, and other technology infrastructure-related costs. Depreciation expense for information technology equipment that directly supports the delivery of our digital marketing services products is included in cost of revenue.
The growth in our technology and development expenses of $7.3 million and $28.5 million for the three and nine months ended March 31, 2013, respectively, as compared to the prior comparative periods was primarily due to increased payroll and facility-related costs of $6.8 million and $22.1 million, respectively, as a result of increased headcount in our technology development and information technology support organizations. At March 31, 2013, we employed 765 employees in these organizations compared to 586 employees at March 31, 2012. Share-based compensation increased by $1.0 million and $4.0 million, respectively, as compared to the prior comparative period. In addition, other technology and development expenses increased $1.4 million and $6.5 million for the three and nine months ended March 31, 2013, respectively, as compared to the prior comparative periods due to increased employee travel and training costs, recruitment costs, and increased depreciation, hosting services, and other costs related to continued investment in our website infrastructure. These expense increases in both periods were offset by decreased amortization expense of capitalized software costs due to our change in accounting estimate related to capitalized software costs of $1.9 million and $4.1 million as discussed in Note 2 of the accompanying consolidated financial statements. The nine months ended March 31, 2013 includes $1.3 million of additional

24


amortization of acquired developed technology assets from the acquisitions of Albumprinter and Webs as compared to fiscal 2012.
Marketing and selling expense
Marketing and selling expense consists primarily of advertising and promotional costs; payroll and related expenses for our employees engaged in marketing, sales, customer support and public relations activities; amortization of certain acquired intangible assets, including customer relationships and trade names; and third-party payment processing fees.
The increase in our marketing and selling expenses of $12.3 million and $59.7 million for the three and nine months ended March 31, 2013, respectively, as compared to the prior comparative periods was driven primarily by increases of $4.5 million and $33.0 million, respectively, in advertising costs and commissions related to new customer acquisition and promotions targeted at our existing customer base, an integral component of our long-term growth strategy. We continued to expand our marketing organization and our customer service, sales and design support centers and at March 31, 2013, we employed 1,675 employees in these organizations compared to 1,440 employees at March 31, 2012, resulting in increased payroll and facility-related costs when compared to prior periods of $5.2 million and $17.9 million, respectively. For the three and nine months ended March 31, 2013, share-based compensation costs increased $1.1 million and $3.2 million, respectively, as compared to the prior comparative periods while other marketing and selling expenses also increased by $1.1 million and $3.7 million, respectively, due to increased depreciation costs, payment processing fees, and professional fees. Furthermore, the first three and nine months of fiscal 2013 include additional amortization expense from acquired customer and brand name intangible assets of $0.4 million and $1.9 million, respectively, related to the acquisitions of Albumprinter and Webs as compared to the same periods in fiscal 2012.
General and administrative expense
General and administrative expense consists primarily of general corporate costs, including third-party professional fees, insurance and payroll and related expenses of employees involved in executive management, finance, legal, and human resources.
During the three months ended March 31, 2013, our general and administrative expenses decreased as compared to the prior period by $1.9 million, primarily due to a decrease in third party professional fees of $1.4 million in part due to fees in the prior year related to our acquisitions, as well as a decrease in share-based compensation expense of $1.3 million due primarily to the reclassification of a portion of the share-based compensation expense to selling and marketing expense in fiscal 2013 associated with restricted shares granted as part of the Webs acquisition in line with our July 1, 2013 re-organization. This decrease was partially offset by an increased trend of shared-based compensation expense relative to the prior year period as a result of new share awards that are expensed using an accelerated attribution method These decreased costs were partially offset by our continued investment in our executive management, finance, legal and human resource organizations, resulting in increased payroll and facility related costs of $1.0 million. At March 31, 2013, we employed 391 employees in these organizations compared to 356 employees at March 31, 2012.
The increase in our general and administrative expenses of $1.6 million for the nine months ended March 31, 2013, as compared to the same prior year period, was primarily due to increased payroll and facility-related costs of $4.2 million, which is inclusive of $0.7 million of increased share-based compensation expense, as a result of our continued investment in our executive management, finance, legal and human resource organizations including share awards that are expensed using an accelerated attribution method as compared to historical awards. These payroll related increases were offset by a $2.8 million decrease in professional fees, as the fiscal 2012 comparable period included transaction costs associated with our Albumprinter and Webs acquisitions, as well as expenses associated with a patent infringement trial, which did not recur in fiscal 2013.
Other income (expense), net
Other income (expense), net, primarily consists of gains and losses from currency exchange rate fluctuations on transactions or balances denominated in currencies other than the functional currency of our subsidiaries. Currency transaction activity for the three months ended March 31, 2013 was $0.3 million of income as compared to $1.5 million of expense for the same prior year period. Other income (expense), net decreased to $0.6 million of expense for the nine months ended March 31, 2013, from $1.4 million of income for the same prior

25


year period. The decrease is primarily related to a gain in the prior year period from Euro currency transactions relating to the funding of the Albumprinter acquisition.
Interest expense, net
Interest expense, net, which consists of interest paid to financial institutions on outstanding balances on our credit facilities and amortization of debt issuance costs, partially offset by interest income, increased to $1.3 million and $3.7 million for the three and nine months ended March 31, 2013 as compared to $0.6 million and $0.9 million for the three and nine months ended March 31, 2012, respectively. The increase in interest expense, net in the current period as compared to the prior year periods is a result of increased borrowings under our credit facility.
Income tax provision
 
Three Months Ended March 31,
 
Nine Months Ended March 31,
 
2013
 
2012
 
2013

2012
Income tax provision
$
2,264

 
$
5,471

 
$
10,587

 
$
10,449

Effective tax rate
26.0
%
 
95.2
%
 
27.3
%
 
20.7
%
Income tax expense was $2.3 million and $10.6 million for the three and nine months ended March 31, 2013 as compared to $5.5 million and $10.4 million for the same prior year period. On an annual basis, our income tax expense is mainly a function of our operating expenses and cost-based transfer pricing methodologies and not a function of consolidated pre-tax income. Accordingly, our effective tax rate will typically vary inversely to changes in our consolidated pre-tax income. Annual operating expenses are higher in 2013 as compared to 2012 thus resulting in a higher annual effective tax rate in 2013. Despite the higher effective tax rate in 2013, income tax expense is lower for the three months ended March 31, 2013 as compared to the same prior period in 2012 primarily attributable to the tax impact associated with the operational alignment of the Webs business and related intellectual property which was recognized in tax expense during the three months ended March 31, 2012. For the nine months ended March 31, 2013, tax expense is higher than the same prior year period, but partially offset by the currency exchange related tax benefit recognized during the three months ended December 31, 2012.
We are currently under income tax audits in various jurisdictions. We believe that our income tax reserves associated with these matters are adequate as the positions reported on our tax returns will be sustained on their technical merits. However, final resolution is uncertain and there is a possibility that it could have a material impact on our financial condition, results of operations or cash flows. See Note 9 in our accompanying financial statements for additional discussion.
Loss in Equity Interest    
In July 2012, we made an indirect investment in a Chinese printing business for a 34.5% proportionate ownership. Our share of the loss for the three and nine months ended March 31, 2013 was $0.6 million and $1.0 million, respectively. See Note 10 in our accompanying consolidated financial statements for additional discussion.
Liquidity and Capital Resources
Consolidated Statements of Cash Flows Data:
In thousands
 
Nine Months Ended March 31,
 
2013

2012
Net cash provided by operating activities
$
103,318

 
$
121,300

Net cash used in investing activities
(84,069
)
 
(217,558
)
Net cash used in financing activities
(30,536
)
 
(86,066
)
At March 31, 2013, we had $51.3 million of cash and cash equivalents and $238.5 million of outstanding debt. Cash and cash equivalents decreased $10.9 million during the nine months ended March 31, 2013. The cash flows during nine months ended March 31, 2013 related primarily to the following items:

26


Cash inflows:
Net income of $27.1 million;
Positive adjustments to accrual based net income for non-cash items of $70.2 million primarily related to depreciation and amortization of $47.0 million and share-based compensation costs of $24.8 million;
Proceeds from borrowing of long-term debt of $79.7 million; and
Changes in working capital balances of $6.0 million.
Cash outflows:
Capital expenditures of $66.5 million of which $34.3 million were related to the construction of facilities, $18.1 million were related to the purchase of manufacturing and automation equipment for our production facilities, and $14.1 million were related to purchases of other assets, including information technology infrastructure and office equipment;
Repayments of long-term debt and debt issuance costs of $71.7 million;
Purchases of our ordinary shares of $36.3 million;
Our indirect investment in Namex of $12.8 million; and
Internal costs for software and website development that we have capitalized of $5.6 million.
Additional Liquidity and Capital Resources Information. During the nine months ended March 31, 2013, we financed our operations, strategic investments in capital expenditures, ordinary share purchases and equity investments primarily through internally generated cash flows from operations. Due to our recent investments, our current liabilities continue to exceed our current assets; however, we believe that our available cash, cash flows generated from operations, and our debt financing capacity will be sufficient to satisfy our working capital and planned investments to support our long-term growth strategy, including capital expenditure requirements, for the foreseeable future. We currently plan to invest approximately $85 million to $95 million on total capital expenditures in fiscal 2013, of which we have currently invested $66.5 million to date, which represents a substantial increase from fiscal 2012 primarily due to the expansion of our manufacturing capacity in Europe and India and the purchase of other IT and manufacturing equipment required to support our long-term growth strategy.
Debt. On February 8, 2013, we entered into an amended and restated agreement, which we refer to as the restated credit agreement, with a syndicate of lenders led by JPMorgan Chase Bank, N.A., as administrative agent, which modifies the senior credit agreement dated as of October 21, 2011. By adding new lenders and increasing the commitments of several existing lenders, the restated credit agreement consists of a secured credit facility to lend us an aggregate of $500 million as follows:
Revolving loans of $35 million with a maturity date of October 21, 2016;
Revolving loans of $365 million with a maturity date of February 8, 2018;
Term loans of $100 million made on February 8, 2013, amortizing over the loan period, with a final maturity date of February 8, 2018.
Up to $50 million in borrowings may be made in Euro, Swiss Francs and such other non-United States Dollar currencies as permitted by our lenders. The restated credit agreement also contains letter of credit and swingline loan sublimits of $25 million each. We may from time to time, so long as no default or event of default has occurred and is continuing, increase the loan commitments under the restated credit agreement by up to $200 million by adding new commitments or increasing the commitment of willing lenders. In order to mitigate our exposure to interest rate variability, we execute interest rate swap contracts to fix our interest payments on our outstanding debt with varying maturities. See Note 4 in our accompanying consolidated financial statements for additional discussion.

27


In the next twelve months we may use, as needed, our revolving credit facility or additional sources of borrowings in order to fund our ongoing operations, repurchase our ordinary shares, or support our long-term growth. We have other financial obligations that constitute additional indebtedness based on the definitions within the credit facility. The amount available for borrowing under our credit facility as of March 31, 2013 is as follows:

In thousands

March 31, 2013
Maximum aggregate available borrowing amounts
$
500,000

Outstanding borrowings of credit facility
238,500

Remaining amount
261,500

Limitations to borrowing due to debt covenants and other obligations (1)
(24,182
)
Amount available for borrowing as of March 31, 2013
$
237,318

_________________

(1) Our borrowing ability can be limited by our debt covenants each quarter. These covenants may limit our borrowing capacity depending on our leverage, other indebtedness, such as installment obligations and letters of credit, and other factors that are outlined in the restated credit agreement filed as an exhibit in our Form 8-K filed on February 13, 2013.
Debt Covenants. Our restated credit agreement contains financial and other covenants, including but not limited to (1) limitations on our incurrence of additional indebtedness and liens, the consummation of certain fundamental organizational changes or intercompany activities, investments and restricted payments including the purchases of our ordinary shares or payments of dividends, and the amount of consolidated capital expenditures that we may make in each of our fiscal years ending June 30, 2013 through 2018, and (2) financial covenants calculated on a trailing twelve month, or TTM, basis that:
our consolidated leverage ratio, which is the ratio of our consolidated indebtedness (*) to our TTM consolidated EBITDA (*), will not exceed (i) 3.5 during the period from December 31, 2012 through December 31, 2013; (ii) 3.25 during the period from March 31, 2014 through December 31, 2014; and 3.0 after March 31, 2015;
our interest coverage ratio, which is the ratio of our consolidated EBITDA to our consolidated interest expense, will be at least 3.0.
    At March 31, 2013, we were in compliance with all financial and other covenants under the credit agreement in effect at that time.
(*) The definitions of EBITDA and consolidated indebtedness are maintained in the credit agreement included as an exhibit to Form 8-K filed on February 13, 2013.
Contractual Obligations
Contractual obligations at March 31, 2013 are as follows:
In thousands
 
Payments Due by Period
 
Total
 
Less
than 1
year
 
1-3
years
 
3-5
years
 
More
than 5
years
Operating leases
$
57,949

 
$
12,886

 
$
22,287

 
$
15,543

 
$
7,233

Purchase commitments
18,565

 
18,565

 

 

 

Debt
264,617

 
14,972

 
30,848

 
218,797

 

Other
25,539

 
8,184

 
6,482

 
6,637

 
4,236

Total (1)
$
366,670

 
$
54,607

 
$
59,617

 
$
240,977

 
$
11,469

___________________
(1) We may be required to make cash outlays related to our unrecognized tax benefits. However, due to the uncertainty of the timing of future cash flows associated with our unrecognized tax benefits, we are unable to make reasonably reliable estimates of the period of cash settlement, if any, with the respective taxing authorities. Accordingly, unrecognized tax benefits of $6.0 million as of March 31, 2013 have been excluded from the contractual obligations table above. For further information on unrecognized tax benefits, see Note 9 to the accompanying consolidated financial statements.

28


Operating Leases. We rent office space under operating leases expiring on various dates through 2018. Future rental payments required under our leases are an aggregate of approximately $57.9 million. The terms of certain lease agreements require security deposits in the form of bank guarantees and a letter of credit in the amount of $2.2 million and $1.7 million, respectively.
Purchase Obligations. At March 31, 2013, we had unrecorded commitments under contract of $18.6 million, which were principally composed of inventory purchase commitments of approximately $6.1 million, production and computer equipment purchases of approximately $3.4 million, various facility expansion and improvement projects of $2.1 million, and other unrecorded purchase commitments of $7.0 million.
Debt. The term loans outstanding under our amended and restated credit agreement mature at various dates through February 8, 2018, with the revolving loans due either on October 21, 2016 or February 8, 2018. Interest payable included in this table is based on the interest rate as of March 31, 2013 and assumes all revolving loan amounts outstanding will not be paid until maturity, but that the term loan amortization payments will be made according to our defined schedule.
Other Obligations. Includes an installment obligation of $20.5 million related to the fiscal 2012 intra-entity transfer of Webs' Intellectual Property, which results in tax being paid over a 7.5 year term and has been classified as a deferred tax liability in our consolidated balance sheet as of March 31, 2013. Also included is a $5.0 million additional funding obligation due to our investment in Namex which is payable on or before October 1, 2013.
Recently Issued or Adopted Accounting Pronouncements
Effective January 1, 2013 we adopted ASU 2013-02, "Reporting Amounts Reclassified Out of Accumulated Other Comprehensive Income." ASU 2013-02 requires an entity to disclose amounts reclassified out of other comprehensive income by component. In addition, an entity is required to present, either on the face of financial statements or in a single note, significant amounts reclassified out of accumulated other comprehensive income and the income statement line item affected by the reclassification. The adoption of this ASU did not have a material effect on our financial position or results of operations. See footnote 5 for further details.
In January 2013, the FASB issued ASU 2013-01, "Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities", which clarifies the scope of the offsetting disclosures of ASU 2011-11. This amendment requires disclosing and reconciling gross and net amounts for financial instruments that are offset in the balance sheet, and amounts for financial instruments that are subject to master netting arrangements and other similar clearing and repurchase arrangements. We adopted ASU 2013-01 effective January 1, 2013 which did not have a material impact on our disclosures.
Critical Accounting Policies and Estimates
Our financial statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). To apply these principles, we must make estimates and judgments that affect our reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. In some instances, we reasonably could have used different accounting estimates and, in other instances, changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ significantly from our estimates. We base our estimates and judgments on historical experience and other assumptions that we believe to be reasonable at the time under the circumstances, and we evaluate these estimates and judgments on an ongoing basis. We refer to accounting estimates and judgments of this type as critical accounting policies and estimates.
As of July 1, 2012, we revised the estimated useful life of our capitalized software and website developments costs from 2 to 3 years based on an evaluation of historical trends, the period of benefit of past projects, and our current project portfolio. This change in estimated useful life increased our pre-tax income for the three and nine months ended March 31, 2013, by approximately $0.7 million and $2.1 million, respectively, when compared to the historical estimated useful life and could have a material impact in the future.
During the three months ended December 31, 2012, we revised our interim accrual practice for cash incentive compensation that is paid based on achievement of annual performance targets. Historically, the related costs were accrued each interim period based upon the weight of year-to-date results relative to forecasted annual achievement; however, due to fluctuations in the pattern of quarterly results relative to historical trends and interim

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periods of net loss, we believe a straight-line attribution method better matches the pattern of how the employee earns the award. This change in practice does not affect full year net income, but does affect the trend of quarterly earnings relative to past interim periods. This change lowered our pre-tax income by $1.6 million for the three months ended March 31, 2013, while the year-to-date impact is a benefit to our pre-tax income of $0.3 million as compared to our historical practice. Our fourth fiscal quarter earnings will be negatively impacted by these changes subject to any changes in the expected payout based on actual attainment.
Other than these changes, management believes there have been no material changes during the nine months ended March 31, 2013 to the critical accounting policies and estimates reported in the Management's Discussion and Analysis of Financial Condition and Results of Operations section of our Annual Report on Form 10-K filed with the Securities and Exchange Commission on August 15, 2012.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk. Our exposure to interest rate risk relates primarily to our cash, cash equivalents and long-term debt. As of March 31, 2013, our cash and cash equivalents consisted of standard depository accounts which are held for working capital purposes. Due to the nature of our investments, we do not believe we have a material exposure to interest rate fluctuations.
As of March 31, 2013, we have $238.5 million of total U.S. dollar denominated variable rate debt and $20.5 million of variable rate installment obligation related to the fiscal 2012 intra-entity transfer of Webs' Intellectual Property. As a result, we have exposure to market risk for changes in interest rates related to these obligations. In order to mitigate our exposure to interest rate changes, we execute interest rate swap contracts to fix the interest rate on a portion of our outstanding long-term debt with varying maturities. As of March 31, 2013, a hypothetical 100 basis point increase in rates, inclusive of our outstanding interest rate swaps, would result in an increase of interest expense of approximately $1.3 million over the next 12 months.
Currency Exchange Rate Risk. We conduct business in multiple currencies through our worldwide operations but report our financial results in U.S. dollars. Therefore, we are affected by fluctuations in exchange rates of such currencies versus the U.S. dollar as follows:
Translation of our non-U.S. dollar revenues and expenses: Revenue and related expenses generated in currencies other than the U.S. dollar could result in higher or lower net income when, upon consolidation, those transactions are translated to U.S. dollars. When the value or timing of revenue and expenses in a given currency are materially different, we may be exposed to significant impacts on our net income.
In order to mitigate the exposure related to currency exchange rate volatility on our net income, we began to execute currency forward contracts in November 2012. Our current contracts mature by the end of the current fiscal year.
Translation of our non-U.S. dollar assets and liabilities: Each of our subsidiaries translates its assets and liabilities to U.S. dollars at current rates of exchange in effect at the balance sheet date. The resulting gains and losses from translation are included as a component of accumulated other comprehensive loss on the consolidated balance sheet. Fluctuations in exchange rates can materially impact the carrying value of our assets and liabilities.
Remeasurement of monetary assets and liabilities: Transaction gains and losses generated from remeasurement of monetary assets and liabilities denominated in currencies other than the functional currency of a subsidiary are included in other (expense) income, net on the consolidated statements of operations. Our subsidiaries have intercompany accounts that are eliminated in consolidation and cash and cash equivalents denominated in various currencies that expose us to fluctuations in currency exchange rates. A hypothetical 10% change in currency exchange rates was applied to total net monetary assets denominated in currencies other than the functional currencies at the balance sheet dates to compute the impact these changes would have had on our income before taxes in the near term. A hypothetical decrease in exchange rates of 10% against the functional currency of our subsidiaries would have resulted in an increase of $2.8 million and $4.1 million on our income before taxes for the three months ended March 31, 2013 and 2012, respectively. Additionally, some of our subsidiaries prepare tax returns in currencies other than their functional currency.

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Foreign currency transaction gains (losses) included in other income (expense), net for the three months ended March 31, 2013 and 2012, were $0.3 million of gains and $1.5 million of losses, respectively. Foreign currency transaction gains (losses) included in other income (expense), net for the nine months ended March 31, 2013 and 2012, were $0.6 million of losses and $1.4 million of gains, respectively.
 

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Item 4. Controls and Procedures
Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and our chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2013. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Securities Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of March 31, 2013, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
During the nine months ended March 31, 2013, we implemented a process and internal controls related to accounting for derivative instruments including hedge documentation, initial and ongoing hedge effectiveness testing, and the valuation of our outstanding derivative instruments. While the activity during the period was not material, values and the volumes or types of derivative instruments that we enter into may increase in the future.
There were no other changes in our internal control over financial reporting during the fiscal quarter ended March 31, 2013 that materially affect, or are reasonably likely to materially affect, our internal control over financial reporting.



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PART II. OTHER INFORMATION
Item 1A. Risk Factors
We caution that our future results may vary materially from those contained in forward-looking statements that we make in this Report and other filings with the SEC, press releases, communications with investors and oral statements due to the following important factors, among others. Our forward-looking statements in this Report and in any other public statements we make may turn out to be wrong. These statements can be affected by, among other things, inaccurate assumptions we might make or by known or unknown risks and uncertainties or risks we currently deem immaterial. Many factors mentioned in the discussion below will be important in determining future results. Consequently, no forward-looking statement can be guaranteed. We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.
Risks Related to Our Business
If our long-term growth strategy is not successful or if our financial projections relating to the effects of our strategy turn out to be incorrect, our business and financial results could be harmed.

We may not achieve the objectives of the long-term investment and financial strategy we originally announced in July 2011, our associated financial projections relating to the long-term growth of our business may turn out to be incorrect, and our investments in our business may fail to affect our revenue or EPS growth as anticipated. Some of the factors that could cause our investment strategy and our overall business strategy to fail to achieve our objectives include, among others:

our failure to adequately execute our operational strategy or anticipate and overcome obstacles to achieving our strategic goals;

our failure to make our intended investments because the investments are more costly than we expected or because we are unable to devote the necessary operational and financial resources;

our inability to purchase or develop technologies and production platforms to increase our efficiency, enhance our competitive advantage and scale our operations;

the failure of our current supply chain to provide the resources we need and our inability to develop new or enhanced supply chains;

our failure to acquire new customers and enter new markets, retain our current customers, and sell more products to current and new customers;

our failure to identify and address the causes of our revenue weakness in Europe;

our failure to promote, strengthen, and protect our brands;

the failure of our current and new marketing channels to attract customers;

our failure to manage the growth and complexity of our business and expand our operations;

our failure to realize our net income goals due to lower revenue or higher than expected costs or taxes;

our failure to acquire businesses that enhance the growth and development of our business or to effectively integrate the businesses we do acquire into our business;

unanticipated changes in our business, current and anticipated markets, industry, or competitive landscape; and

general economic conditions.


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In addition, projections are inherently uncertain and are based on assumptions and judgments by management that may be flawed or based on information about our business and markets that may change in the future in ways that may be beyond our control. Our actual results may differ materially from our projections due to various factors, including but not limited to the factors listed immediately above and in the risk factor below entitled "Our quarterly financial results will often fluctuate," which is also applicable to longer term results.
If our strategy is not successful, or if there is a market perception that our strategy is not successful, then our revenue and earnings may not grow as anticipated or may decline, we may not be profitable, our reputation and brand may be damaged, and the price of our shares may decline. In addition, we may change our financial strategy or other components of our overall business strategy if we believe our current strategy is not effective, if our business or markets change, or for other reasons, which may cause fluctuations in our financial results and volatility in our share price.
If we are unable to attract visitors to our websites and convert those visitors to customers, our business and results of operations could be harmed.
Our success depends on our ability to attract new and repeat customers in a cost-effective manner. We rely on a variety of methods to draw visitors to our websites and promote our products and services, such as purchased search results from online search engines, e-mail, direct mail, advertising banners and other online links, broadcast media, and word-of-mouth customer referrals. If we are not effective at reaching new and repeat customers, if the costs of attracting customers using our current methods significantly increase, or if we are unable to develop new cost-effective means to obtain customers, then traffic to our websites would be reduced, and our business and results of operations would be harmed.
In addition, our internal research shows that an increasing number of current and potential customers access our websites using smart phones or tablet computing devices and that our website visits using traditional non-mobile computers may be declining. Designing and purchasing custom designed products on a smart phone, tablet, or other mobile device is more difficult than doing so with a traditional computer due to limited screen sizes and bandwidth constraints. Beyond these generic difficulties with a mobile device, our technology is not currently optimized for mobile devices, and the development of mobile-oriented user interfaces and other technologies is complex. Although we are investing to update our technology to be more effective on mobile devices, we cannot predict the success of those investments. We also rely heavily on email to contact and market to our customers, and we believe we may be losing potential sales to customers who use mobile devices to skim and then delete emails without opening them. If we fail to make changes to our websites, technologies, and marketing methods to facilitate the design and purchase of our products with mobile devices, or if the market shift to mobile devices accelerates faster than we are able to make the necessary changes, then we could find it increasingly difficult to attract new and repeat visitors to our websites and convert these visitors to customers, and our revenue could decline.
Purchasers of micro business marketing products and services, including graphic design and customized printing, may not choose to shop online, which would prevent us from acquiring new customers that are necessary to the success of our business.

The online market for micro business marketing products and services is less developed than the online market for other business and home and family products, and our success depends in part on our ability to attract customers who have historically purchased products and services we offer through offline channels. Specific factors that could prevent prospective customers from purchasing from us as an online retailer include:

concerns about buying graphic design services and marketing products without face-to-face interaction with sales personnel;

the inability to physically handle and examine product samples;

delivery time associated with Internet orders;

concerns about the security of online transactions and the privacy of personal information;

delayed shipments or shipments of incorrect or damaged products; and


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the inconvenience associated with returning or exchanging purchased items.
We may not succeed in promoting and strengthening our brands, which could prevent us from acquiring new customers and increasing revenues.
A primary component of our business strategy is to promote and strengthen the Vistaprint brand and the brands of our acquired companies in order to attract new and repeat customers to our websites. In addition to the challenges of establishing and promoting our brands among the many businesses that promote products and services on the Internet, we face significant competition from other companies in the various markets we serve who also seek to establish strong brands. To promote our brands, we have incurred and will continue to incur substantial expenses related to advertising and other marketing efforts, but we cannot be sure that these investments will be profitable. If we are unable to successfully promote our brands, we may fail to attract new customers, maintain customer relationships, and increase our revenues.
A component of our brand promotion strategy is establishing a relationship of trust with our customers by providing a high-quality customer experience, which requires us to invest substantial amounts of resources in our website development, design and technology, graphic design operations, production operations, and customer service operations. Our ability to provide a high-quality customer experience is also dependent on external factors over which we may have little or no control, including the reliability and performance of our suppliers, third-party carriers and communication infrastructure providers. If we are unable to provide customers with a high-quality customer experience for any reason, our reputation and brands would be harmed.
Our quarterly financial results will often fluctuate, which may lead to volatility in our share price.

Our revenues and operating results often vary significantly from quarter to quarter due to a number of factors, some of which are inherent in our business strategies but many of which are outside of our control. We target annual, rather than quarterly, EPS objectives which can lead to fluctuations in our quarterly results. Other factors that could cause our quarterly revenue and operating results to fluctuate or result in earnings that are lower than our guidance, or both, include among others:
 
seasonality-driven or other variations in the demand for our products and services;

currency and interest rate fluctuations, which affect our revenues and costs;

our ability to attract visitors to our websites and convert those visitors into customers;

our ability to retain customers and generate repeat purchases;

business and home and family preferences for our products and services;

shifts in product mix toward less profitable products;

our ability to manage our production, fulfillment and support operations;

costs to produce and deliver our products and provide our services, including the effects of inflation;

our pricing and marketing strategies and those of our competitors;

investments in our business to generate or support revenues and operations in future periods, such as incurring marketing, engineering or consulting expenses in a current period for revenue growth or support in future periods;

expenses and charges related to our compensation agreements with our executives and employees;

costs and charges resulting from litigation;

significant increases in credits, beyond our estimated allowances, for customers who are not satisfied with our products;


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changes in our income tax rate;

costs to acquire businesses or integrate our acquired businesses; and

impairments of our tangible and intangible assets including goodwill.
 
We base our operating expense budgets in part on expected revenue trends. A portion of our expenses, such as office leases, depreciation, and personnel costs, are relatively fixed, and we may be unable to adjust spending quickly enough to offset any revenue shortfall. Accordingly, any shortfall in revenue may cause significant variation in operating results in any quarter. Based on the above factors, among others, we believe that quarter-to-quarter comparisons of our operating results may not be a good indication of our future performance. Our operating results may sometimes be below the expectations of public market analysts and investors, in which case the price of our ordinary shares will likely fall.
Seasonal fluctuations in our business place a strain on our operations and resources.
Our second fiscal quarter includes the majority of the holiday shopping season and in each of the last three fiscal years has accounted for more of our revenue and earnings than any other quarter, primarily due to higher sales of home and family products such as holiday cards, calendars, photo books, and personalized gifts. We believe our second fiscal quarter is likely to continue to account for a disproportionate amount of our revenue and earnings for the foreseeable future. In anticipation of increased sales activity during our second fiscal quarter holiday season, we typically incur significant additional capacity related expenses each year to meet our seasonal needs, including facility expansions, equipment purchases and increases in the number of temporary and permanent employees. Lower than expected sales during the second quarter would likely have a disproportionately large impact on our operating results and financial condition for the full fiscal year. If we are unable to accurately forecast and respond to seasonality in our business, our business and results of operations may be materially harmed.
A significant portion of our revenues and expenses are transacted in currencies other than the U.S. dollar, our reporting currency. We therefore have currency exchange risk, despite our efforts to mitigate such risk through our currency hedge program.
We are exposed to fluctuations in currency exchange rates that may impact items such as the translation of our revenues and expenses, remeasurement of our intercompany balances, and the value of our cash and cash equivalents denominated in currencies other than the U.S. dollar. For example, when currency exchange movements are unfavorable to our business, the U.S. dollar equivalent of our revenue and operating income recorded in other currencies is diminished, particularly in certain currencies where we have disproportionate revenues or expenses. Our revenue and results of operations may differ materially from expectations as a result of currency exchange rate fluctuations. As we expand our revenues and operations throughout the world and to additional currencies, our exposure to currency exchange rate fluctuations is increasing. Additionally, our income tax rate may be impacted by fluctuations in currency exchange rates in jurisdictions where our tax returns are prepared in a currency other than the functional currency.
Our global operations and expansion place a significant strain on our management, employees, facilities and other resources and subject us to additional risks.

We are growing rapidly. We currently operate production facilities or offices in 14 countries and have approximately 30 localized websites to serve various geographic markets. We expect to establish operations and sell our products and services in additional geographic regions, including emerging markets, where we may have limited or no experience. We are subject to a number of risks and challenges that relate to our global operations and expansion, including, among others:

difficulty managing operations in, and communications among, multiple locations and time zones;

difficulty complying with multiple tax laws, treaties, and regulations and limiting our exposure to onerous or unanticipated taxes, duties, and other costs;

local regulations that may restrict or impair our ability to conduct our business as planned;


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protectionist laws and business practices that favor local producers and service providers;

our inexperience in marketing and selling our products and services within unfamiliar countries and cultures;

our failure to properly understand and develop graphic design content and product formats appropriate for local tastes;

disruptions caused by political and social instability that may occur in some countries;

corrupt business practices, such as bribery, that may be common in some countries;

difficulty expatriating our earnings from some countries;

disruptions or cessation of important components of our international supply chain;

the challenge of complying with disparate laws in multiple countries;

restrictions imposed by local labor practices and laws on our business and operations; and

failure of local laws to provide a sufficient degree of protection against infringement of our intellectual property.

To manage our operations and anticipated growth, we must continue to refine our operational, financial, and management controls, human resource policies, reporting systems, and procedures in the locations in which we operate. If we are unable to implement improvements to our management information and control systems in an efficient or timely manner or if we discover deficiencies in our existing systems and controls, then our ability to provide a high-quality customer experience could be harmed, which would damage our reputation and brands and substantially harm our business and results of operations.

Acquisitions may be disruptive to our business.

A component of our strategy is to selectively pursue acquisitions of businesses, technologies, or services, but the time and expense associated with finding suitable businesses, technologies, or services to acquire could disrupt our ongoing business and divert our management's attention. In addition, we may need to seek financing for acquisitions, which may not be available on terms that are favorable to us, or at all, and can cause dilution to our shareholders, cause us to incur additional debt, or subject us to covenants restricting the activities we may undertake. For example, to finance the acquisitions we completed in fiscal 2012, we borrowed amounts under our credit facility.

In addition, integrating newly acquired businesses, technologies, and services is complex, expensive, time consuming and subject to many risks, including the following:

We may not be able to retain customers and key employees of the acquired businesses, and we and the acquired businesses may not be able to cross sell products and services to each other's customers.

In some cases, our acquisitions are dilutive for a period of time, leading to reduced earnings.

An acquisition may fail to achieve our goals and expectations for the acquired business because we fail to integrate the acquired business, technologies, or services effectively, the integration is more expensive or takes more time than we anticipated, or the acquired business does not perform as well as we expected.

Acquisitions can result in large write-offs including impairments of goodwill and intangible assets, assumptions of contingent or unanticipated liabilities, or increased tax costs.


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We face risks related to interruption of our operations and lack of redundancy.

Our production facilities, websites, infrastructure, supply chain, and operations may be vulnerable to interruptions, and we do not have redundancies in all cases to carry on these operations in the event of an interruption. Some of the events that could cause interruptions in our operations or systems are, among others:

fire, flood, earthquake, hurricane, or other natural disaster or extreme weather;

labor strike, work stoppage, or other issue with our workforce;

political instability or acts of terrorism or war;

power loss or telecommunication failure;

attacks on our external websites or internal network by hackers or other malicious parties;

undetected errors or design faults in our technology, infrastructure, and processes that may cause our websites to fail;

inadequate capacity in our systems and infrastructure to cope with periods of high volume and demand; and

human error, including but not limited to poor managerial judgment or oversight.

In particular, both Bermuda, where substantially all of the computer hardware necessary to operate our websites is located in a single facility, and Jamaica, our largest customer service, sales, and design support operation, are subject to a high degree of hurricane risk and extreme weather conditions.

We have not identified alternatives to all of our facilities, systems, supply chains and infrastructure, including production, to serve us in the event of an interruption, and if we were to find alternatives, they may not be able to meet our requirements on commercially acceptable terms or at all. In addition, we are dependent in part on third parties for the implementation and maintenance of certain aspects of our communications and production systems, and because many of the causes of system interruptions or interruptions of the production process may be outside of our control, we may not be able to remedy such interruptions in a timely manner, or at all.

Any interruptions that cause any of our websites to be unavailable, reduce our order fulfillment performance, or interfere with our manufacturing, technology, or customer service operations could result in lost revenue, increased costs, negative publicity, damage to our reputation and brand, and an adverse effect on our business and results of operations. Building redundancies into our infrastructure, systems and supply chain to mitigate these risks may require us to commit substantial financial, operational, and technical resources, in some cases before the volume of our business increases with no assurance that our revenues will increase.

We face intense competition.

The markets for small business marketing products and services and home and family custom products, including the printing and graphic design market, are intensely competitive, highly fragmented and geographically dispersed. We expect competition to increase in the future. The increased use of the Internet for commerce and other technological advances have allowed traditional providers of these products and services to improve the quality of their offerings, produce and deliver those products and services more efficiently and reach a broader purchasing public. Competition may result in price pressure, reduced profit margins and loss of market share and brand recognition, any of which could substantially harm our business and results of operations. Current and potential competitors include:

traditional storefront printing and graphic design companies;

office superstores and other retailers targeting small business and home and family markets;

companies offering small business or consumer websites and other digital products, including website design and hosting companies;

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wholesale printers;

online printing and graphic design companies, many of which provide printed products and services similar to ours;

self-service desktop design and publishing using personal computer software with a laser or inkjet printer and specialty paper;

email marketing services companies;

suppliers of custom apparel, promotional products and customized gifts;

online photo product companies;

Internet firms and retailers; and

other digital marketing such as social media, search directories, Google Places and other providers.
Many of our current and potential competitors have advantages over us, including longer operating histories, greater brand recognition, more focus on a given subset of our business, existing customer and supplier relationships, or significantly greater financial, marketing, and other resources. Many of our competitors currently work together, and additional competitors may do so in the future through strategic business agreements or acquisitions.

The competitive landscape for e-commerce companies continues to change as new e-commerce businesses are introduced and traditional “bricks and mortar” businesses establish an online presence. Competitors may also develop new or enhanced products, technologies or capabilities that could render many of the products, services and content we offer obsolete or less competitive, which could harm our business and results of operations.

In addition, we have in the past and may in the future choose to collaborate with some of our existing and potential competitors in strategic partnerships that we believe will improve our competitive position and results of operations, such as through a retail in-store or web-based collaborative offering. It is possible, however, that such ventures will be unsuccessful and that our competitive position and results of operations will be adversely affected as a result of such collaboration.

Failure to meet our customers' price expectations would adversely affect our business and results of operations.

Demand for our products and services is sensitive to price, and changes in our pricing strategies have a significant impact on our revenues and results of operations. Many factors can significantly impact our pricing strategies, including the costs of running our business, our competitors' pricing and marketing strategies, and the effects of inflation. We offer some free or discounted products and services as a means of attracting customers and encouraging repeat purchases, but these free offers and discounts reduce our profit margins and may not result in repeat business to increase our revenues. If we fail to meet our customers' price expectations, our business and results of operations will suffer.

Failure to protect our networks and the confidential information of our customers against security breaches could damage our reputation and brands and substantially harm our business and results of operations.

Online commerce and communications depend on the secure transmission of confidential information over public networks. Currently, a majority of our sales are billed to our customers' credit card accounts directly, and we retain our customers' credit card information for a period of time that varies depending on the services we provide to each customer.

We may need to expend significant resources to protect against security breaches or to address problems caused by breaches. Any compromise or breach of our network or the technology that we use to protect our

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network and our customer transaction data, including credit card information, could damage our reputation and brand; expose us to losses, litigation, and possible liability; lead to the misappropriation of our proprietary information; or cause interruptions in our operations. Although we maintain network security 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 reasonable terms, or at all. In addition, some of our partners also collect information from transactions with our customers, and we may be liable or our reputation may be harmed if our partners fail to protect our customers' information or use it in a manner that is inconsistent with our practices.

If we fail to address risks associated with credit card fraud, our reputation and brands could be damaged, and our business and results of operations could be harmed.

We may be liable for fraudulent transactions conducted on our websites, such as through the use of stolen credit card numbers. To date, quarterly losses from payment fraud have not exceeded 1% of total revenues in any quarter, but we continue to face the risk of significant losses from this type of fraud.

We depend on search engines to attract a substantial portion of the customers who visit our websites, and losing these customers would adversely affect our business and results of operations.

Many customers access our websites by clicking through on search results displayed by search engines such as Google, Bing, and Yahoo!. If the search engines on which we rely modify their algorithms, terminate their relationships with us, or increase the prices at which we may purchase listings, our costs could increase, and fewer customers may click through to our websites. If fewer customers click through to our websites, we could be required to resort to other more costly resources to replace this traffic, which could adversely affect our revenues and operating and net income and could harm our business.

In addition, some of our competitors purchase the term “Vistaprint” and other terms incorporating our proprietary trademarks from Google and other search engines as part of their search listing advertising. Courts do not always side with the trademark owners in cases involving search engines, and Google has refused to prevent companies from purchasing search results that use the trademark “Vistaprint.” As a result, we may not be able to prevent our competitors from advertising to, and directly competing for, customers who search for the term “Vistaprint” on search engines.

We rely heavily on email to market to and communicate with customers, and email communications are subject to regulatory and reputation risks.

Various private entities attempt to regulate the use of commercial email solicitation by blacklisting companies that the entities believe do not meet their standards, which results in those companies' emails being blocked from some Internet domains and addresses. Although we believe that our commercial email solicitations comply with all applicable laws, from time to time some of our Internet protocol addresses appear on some of these blacklists. The blacklisting sometimes interferes with our ability to send operational or advertising emails to our current and potential customers and to send and receive emails to and from our corporate email accounts, which can interfere with our ability to market our products and services, communicate with our customers, and operate and manage our websites and corporate email accounts. In addition, as a result of being blacklisted, we have had disputes with, or concerns raised by, various service providers who perform services for us, including co-location and hosting services, Internet service providers and electronic mail distribution services.

Further, we have contractual relationships with partners that market our products and services on our behalf, and some of our marketing partners engage third-party email marketers with which we do not have any contractual or other relationship. Although we comply with all applicable laws relating to email solicitations and our contracts with our partners require that they do the same, we do not always have control over the third-party email marketers that our partners engage. If such a third party were to send emails marketing our products and services in violation of applicable anti-spam or other laws, then our reputation could be harmed and we could potentially be liable for their actions.


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Our customers create products that incorporate images, illustrations and fonts that we license from third parties, and any loss of the right to use these licensed materials may substantially harm our business and results of operations.

Many of the images, illustrations, and fonts incorporated in the design products and services we offer are the copyrighted property of other parties that we use under license agreements. If one or more of our licenses covering a significant amount of content were terminated, the amount and variety of content available on our websites would be significantly reduced, and we may not be able to find, license, and introduce substitute content in a timely manner, on acceptable terms, or at all.

The loss of key personnel or an inability to attract and retain additional personnel could affect our ability to successfully grow our business.

We are highly dependent upon the continued service and performance of our senior management team and key technical, marketing, and production personnel, any of whom may cease their employment with us at any time with minimal advance notice. The loss of one or more of our key employees may significantly delay or prevent the achievement of our business objectives. We face intense competition for qualified individuals from numerous technology, marketing, financial services, manufacturing, and e-commerce companies. We may be unable to attract and retain suitably qualified individuals, and our failure to do so could have an adverse effect on our ability to implement our business plan.

Our credit facility contains financial and operating restrictions and covenants that may limit our access to additional credit and could negatively impact our liquidity.

Our credit facility imposes limitations on our ability to, among other things:

incur additional indebtedness and liens outside of the credit facility;

make certain investments, payments, or changes in our corporate structure; and

make capital expenditures or purchase our ordinary shares in excess of certain limits.

In addition, we are required to meet certain financial covenants that are customary with this type of credit facility, and our inability to comply with these covenants could result in a default under the credit facility, which could cause us to be unable to borrow under the credit facility and may result in the acceleration of the maturity of our outstanding indebtedness under the facility. If the maturities were accelerated, we may not have sufficient funds available for repayment, and if we were unable to borrow further under the facility, we may not be able to make investments in our business to support our strategy or we may end up in bankruptcy proceedings, or other processes, in which our business would be negatively impacted. In addition, our shareholders would be detrimentally impacted as shareholder value could decrease to a point of limited return. Each scenario would result in significant negative implications to our liquidity and results of operations.

Our hedging activity could negatively impact our results of operations and cash flows.

We have entered into interest rate swap and currency forward contracts to manage differences in the amount, timing, and duration of our known or expected cash payments related to our long-term debt and operating cash flows. Our objective in using these derivatives is to add stability to our net income and to manage our exposure to interest rate and currency movements. If we do not accurately forecast our future long-term debt or expenditure levels, execute contracts that do not effectively mitigate our economic exposure to variable interest and currency rates, or fail to comply with the complex accounting requirements for hedging, our results of operations and cash flows could be negatively impacted.

Our business and results of operations may be negatively impacted by general economic and financial market conditions, and these conditions may increase the other risks that affect our business.

Many of the markets in which we operate are still in an economic downturn that we believe may have a negative impact on our business. Additionally, a significant portion of our revenues and costs are in Europe where the volatility of the capital markets and the state of government finances has continued to result in uncertainty for the outlook of the region and potential for one or more countries to exit the Eurozone. Turmoil in the world's

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financial markets has materially and adversely impacted the availability of financing to a wide variety of businesses, including micro businesses, and the resulting uncertainty led to reductions in capital investments, marketing expenditures, overall spending levels, future product plans, and sales projections across industries and markets. These trends could have a material and adverse impact on the demand for our products and services, our financial results from operations, and our ability to attract and retain employees in jurisdictions where we have significant operations.

The United States government may further increase border controls and impose duties or restrictions on cross-border commerce that may substantially harm our business by impeding our shipments into the United States from our Canadian manufacturing facility.

For the fiscal years ended June 30, 2012 and June 30, 2011 we derived 51% and 53% of our revenue, respectively, from sales to customers made through Vistaprint.com, our United States-focused website. We produce substantially all physical products for our United States customers at our facility in Windsor, Ontario, and the United States imposes restrictions on shipping goods into the United States from Canada. The United States also imposes protectionist measures such as customs duties and tariffs that limit free trade, some of which may apply directly to product categories that comprise a material portion of our revenues. The customs laws, rules and regulations that we are required to comply with are complex and subject to unpredictable enforcement and modification. We have from time to time experienced delays in shipping our manufactured products into the United States as a result of these restrictions which have, in some instances, resulted in delayed delivery of orders.

In the future, the United States could impose further border controls, tariffs, and restrictions, interpret or apply regulations in a manner unfavorable to the importation of products from outside of the U.S., or take other actions that have the effect of restricting the flow of goods from Canada and other countries to the United States, up to and including shutting down the U.S.-Canadian border for an extended period of time . If we experienced greater difficulty or delays shipping products into the United States or were foreclosed from doing so, or if our costs and expenses materially increased, our business and results of operations could be harmed.

If we are unable to protect our intellectual property rights, our reputation and brands could be damaged, and others may be able to practice our technology, which could substantially harm our business and results of operations.

We rely on a combination of patent, trademark, trade secret and copyright law and contractual restrictions to protect our intellectual property, but these protective measures afford only limited protection. Despite our efforts to protect our proprietary rights, unauthorized parties may copy aspects of our trademarks, websites features and functionalities or obtain and use information that we consider proprietary, such as the technology used to operate our websites and our production operations.

We intend to continue to pursue patent coverage in the United States and other countries, but there can be no guarantee that any of our pending applications or continuation patent applications will be granted. In addition, we have in the past and may in the future face infringement, invalidity, intellectual property ownership or similar claims brought by third parties with respect to our current or future patents. Any such claims, whether or not successful, could be extremely costly, damage our reputation and brands, and substantially harm our business and results of operations.

Although we hold trademark registrations for the Vistaprint trademark and our other trademarks in jurisdictions throughout the world, our competitors or other entities may adopt names or marks similar to ours, thereby impeding our ability to build brand identity and possibly leading to customer confusion. Any claims or customer confusion related to our trademarks could damage our reputation and brands and substantially harm our business and results of operations.

Intellectual property disputes and litigation are costly and could cause us to lose our exclusive rights, subject us to liability, or require us to stop some of our business activities.

From time to time, we are involved in lawsuits or disputes in which third parties claim that we infringe their intellectual property rights or that we improperly obtained or used their confidential or proprietary information. In addition, from time to time we receive letters from third parties who claim to have patent rights that cover aspects of the technology that we use in our business and that the third parties believe we must license in order to continue to use such technology.

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The cost to us of any litigation or other proceeding relating to intellectual property rights, even if resolved in our favor, could be substantial, and litigation diverts our management's efforts from managing and growing our business. Potential adversaries may be able to sustain the costs of complex intellectual property litigation more effectively than we can because they have substantially greater resources. Uncertainties resulting from any litigation could limit our ability to continue our operations. If any parties successfully claim that our sale, use, manufacturing or importation of technologies infringes upon their intellectual property rights, we might be forced to pay significant damages and attorney's fees, and a court could enjoin us from performing the infringing activity, which could restrict our ability to use certain technologies important to the operation of our business.

Alternatively, we may be required to, or decide to, enter into a license with a third party that claims infringement by us. Any such license may not be made available on commercially acceptable terms, if at all. In addition, such licenses are likely to be non-exclusive, and therefore our competitors may have access to the same technology licensed to us. If we fail to obtain a required license and are unable to design around a third party's patent, we may be unable to effectively conduct some of our business activities, which could limit our ability to generate revenues, grow our business or maintain profitability.

In addition, from time to time, we initiate lawsuits, proceedings or claims to enforce our patents, copyrights, trademarks and other intellectual property rights or to determine the scope and validity of third-party proprietary rights. Our ability to enforce our intellectual property rights is subject to general litigation risks, as well as uncertainty as to the enforceability of our intellectual property rights in various countries. When we seek to enforce our rights, we may be subject to claims that our intellectual property rights are invalid or unenforceable or are licensed to the party against whom we are asserting a claim. There is also a risk that our assertion of intellectual property rights could result in the other party's seeking to assert alleged intellectual property rights of its own against us, which may adversely impact our business in the manner discussed above. Our inability to enforce our intellectual property rights may negatively impact our competitive position and business.

Our business is dependent on the Internet, and unfavorable changes in government regulation of the Internet, e-commerce, and email marketing could substantially harm our business and results of operations.

Due to our dependence on the Internet for our sales, laws specifically governing the Internet, e-commerce and email marketing may have a greater impact on our operations than other more traditional businesses. Existing and future laws, such as laws covering pricing, customs, privacy, consumer protection, or commercial email, may impede the growth of e-commerce and our ability to compete with traditional “bricks and mortar” retailers. It is not always clear how existing laws governing these and other issues apply to the Internet and e-commerce, as the vast majority of applicable laws were adopted before the advent of the Internet and do not contemplate or address the unique issues raised by the Internet or e-commerce. Those laws that do reference the Internet, such as the Bermuda Electronic Transactions Act 1999, the U.S. Digital Millennium Copyright Act, and the U.S. CAN SPAM Act of 2003, are only beginning to be interpreted by the courts, and their applicability and reach are therefore uncertain. Those current and future laws and regulations or unfavorable resolution of these issues may substantially harm our business and results of operations.

We face judicial and regulatory challenges to our practice of offering free products and services, which, if successful, could hinder our ability to attract customers and generate revenue.

We regularly offer free products and services as an inducement for customers to try our products and services. Although we believe that we conspicuously and clearly communicate all details and conditions of these offers, such as the shipping and processing charges associated with these offers, from time to time we face claims, complaints, and inquiries from our customers, competitors, governmental regulators, standards bodies, and others that our free offers are misleading or do not comply with applicable legislation or regulation, and we may receive similar complaints, claims and inquiries in the future. If we are compelled or determine to curtail or eliminate our use of free offers as the result of any such actions, our business prospects and results of operations could be materially harmed.


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If we were required to review the content that our customers incorporate into our products and interdict the shipment of products that violate copyright protections or other laws, our costs would significantly increase, which would harm our results of operations.

Because of our focus on automation and high volumes, the vast majority of our sales do not involve any human-based review of content. Although our websites' terms of use specifically require customers to represent that they have the right and authority to reproduce a given content and that the content is in full compliance with all relevant laws and regulations, we do not have the ability to determine the accuracy of these representations on a case-by-case basis. There is a risk that a customer may supply an image or other content for a product order that we produce that is the property of another party used without permission, that infringes the copyright or trademark of another party, or that would be considered to be defamatory, hateful, obscene, or otherwise objectionable or illegal under the laws of the jurisdiction(s) where that customer lives or where we operate. If we become legally obligated in the future to perform manual screening and review for all orders destined for a jurisdiction, we will encounter increased production costs or may cease accepting orders for shipment to that jurisdiction, which could substantially harm our business and results of operations. In addition, if we were held liable for actions of our customers, we could be required to pay substantial penalties, fines, or monetary damages.

We are subject to customer payment-related risks.

We accept payments for our products and services on our websites by a variety of methods, including credit or debit card, PayPal, check, wire transfer or other methods. In some geographic regions, we rely on one or two third party companies to provide payment processing services. If any of the payment processing or other companies with which we have contractual arrangements became unwilling or unable to provide these services to us or we are unable to comply with our contractual requirements under such arrangements, then we would need to find and engage replacement providers, which we may not be able to do on terms that are acceptable to us or at all, or to process the payments ourselves. Any of these scenarios could be disruptive to our business as they could be costly and time consuming and may unfavorably impact our customers.

As we offer new payment options to our customers, we may be subject to additional regulations, compliance requirements and fraud risk. For some payment methods, including credit and debit cards, we pay interchange and other fees, which may increase over time and raise our operating costs and lower our profit margins or require that we charge our customers more for our products. We are also subject to payment card association and similar operating rules and requirements, which could change or be reinterpreted to make it difficult or impossible for us to comply. If we fail to comply with these rules and requirements, we may be subject to fines and higher transaction fees and lose our ability to accept credit and debit card payments from our customers or facilitate other types of online payments, and our business and operating results could be materially adversely affected.

We may be subject to product liability claims if people or property are harmed by the products we sell.

Some of the products we sell may expose us to product liability claims relating to personal injury, death, or property damage, and may require product recalls or other actions. Although we maintain product 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 reasonable terms, or at all.

Our inability to acquire or maintain domain names in each country or region where we currently or intend to do business could negatively impact our ability to sell our products and services in that country or region.

We sell our products and services primarily through our websites and from time to time we have difficulty obtaining a domain name using Vistaprint or our other trademarks in a particular country or region. The requirements for obtaining domain names vary from region to region and are subject to change, and the relationship between the regulations governing domain names and the laws protecting trademarks and similar proprietary rights is unclear. We may not be able to prevent third parties from acquiring domain names that infringe or otherwise decrease the value of our trademarks and other proprietary rights. If we are unable to use a domain name in a particular country, then we could be forced to purchase the domain name from an entity that owns or controls it, which we may not be able to do on commercially acceptable terms or at all; incur significant additional expenses to develop a new brand to market our products within that country; or elect not to sell products in that country.


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Our results of operations may be negatively affected if we are required to charge sales, value added, or other taxes on Internet sales in additional jurisdictions.

In some of the jurisdictions where we sell products and services, we do not collect or have imposed upon us sales, value added or other consumption taxes, which we refer to as indirect taxes. The application of indirect taxes to e-commerce businesses such as Vistaprint is a complex and evolving issue. Many of the fundamental statutes and regulations that impose these taxes were established before the growth of the Internet and e-commerce, and in many cases, it is not clear how existing statutes apply to the Internet or e-commerce. For example, some state governments in the United States have imposed or are seeking to impose indirect taxes on Internet sales. The imposition by national, state or local governments, whether within or outside the United States, of additional taxes upon Internet commerce could create administrative burdens for us, discourage customers from purchasing products from us, decrease our ability to compete with traditional retailers, or otherwise negatively impact our results of operations. Additionally, a successful assertion by one or more governments in jurisdictions where we are not currently collecting sales or value added taxes that we should be, or should have been, collecting indirect taxes on the sale of our products could result in substantial tax liabilities for past sales.

If we are unable to retain security authentication certificates, which are supplied by third party providers over which we exercise little or no control, our business could be harmed.

We are dependent on a limited number of third party providers of website security authentication certificates that are necessary for conducting secure transactions over the Internet. Despite any contractual protections we may have, these third party providers can disable or revoke, and in the past have disabled or revoked, our security certificates without our consent, which would render our websites inaccessible to some of our customers and could discourage other customers from accessing our sites, unless we are able to procure a replacement certificate from one of a limited number of alternative third party providers. Any interruption in our customers' ability or willingness to access our websites if we do not have adequate security certificates could result in a material loss of revenue and profits and damage to our brands.

Risks Related to Our Corporate Structure

Challenges by various tax authorities to our international structure could, if successful, increase our effective tax rate and adversely affect our earnings.

We are a Dutch limited liability company that operates through various subsidiaries in a number of countries throughout the world. Consequently, we are subject to tax laws, treaties and regulations in the countries in which we operate, and these laws and treaties are subject to interpretation. From time to time, we are subject to tax audits and claims by the tax authorities in these countries that a greater portion of the income of the Vistaprint N.V. group should be subject to income or other tax in their respective jurisdictions, which could result in an increase to our effective tax rate and adversely affect our results of operations. For more information about audits to which we are currently subject refer to Note 9 “Income Taxes” in the accompanying notes to the consolidated financial statements included in Item 1 of Part I of this Report.

A change in tax laws, treaties or regulations, or their interpretation, of any country in which we operate could result in a higher tax rate on our earnings, which could result in a significant negative impact on our earnings and cash flow from operations. We continue to assess the impact of various international tax proposals and modifications to existing tax treaties between the Netherlands and other countries that could result in a material impact on our income taxes. We cannot predict whether any specific legislation will be enacted or the terms of any such legislation. However, if such proposals were enacted, or if modifications were to be made to certain existing treaties, the consequences could have a materially adverse impact on us, including increasing our tax burden, increasing costs of our tax compliance or otherwise adversely affecting our financial condition, results of operations and cash flows.

Our intercompany arrangements may be challenged, which could result in higher taxes or penalties and an adverse effect on our earnings.

We operate pursuant to written intercompany service and related agreements, which we also refer to as transfer pricing agreements, among Vistaprint N.V. and its subsidiaries. These agreements establish transfer prices for production, marketing, management, technology development and other services performed by these subsidiaries for other group companies. Transfer prices are prices that one company in a group of related

45


companies charges to another member of the group for goods, services or the use of property. If two or more affiliated companies are located in different countries, the tax laws or regulations of each country generally will require that transfer prices be consistent with those between unrelated companies dealing at arm's length. With the exception of the transfer pricing arrangements applicable to our Dutch, French and Australian operations, our transfer pricing arrangements are not binding on applicable tax authorities, and no official authority in any other country has made a determination as to whether or not we are operating in compliance with its transfer pricing laws. If tax authorities in any country were successful in challenging our transfer prices as not reflecting arm's length transactions, they could require us to adjust our transfer prices and thereby reallocate our income to reflect these revised transfer prices. A reallocation of taxable income from a lower tax jurisdiction to a higher tax jurisdiction would result in a higher tax liability to us. In addition, if the country from which the income is reallocated does not agree with the reallocation, both countries could tax the same income, resulting in double taxation.

Our Articles of Association, Dutch law and the independent foundation, Stichting Continuïteit Vistaprint, may make it difficult to replace or remove management, may inhibit or delay a change of control or may dilute your voting power.

Our Articles of Association, or Articles, as governed by Dutch law, limit our shareholders' ability to suspend or dismiss the members of our management board and supervisory board or to overrule our supervisory board's nominees to our management board and supervisory board by requiring a vote of two thirds of the votes cast representing more than 50% of the outstanding ordinary shares to do so under most circumstances. As a result, there may be circumstances in which shareholders may not be able to remove members of our management board or supervisory board even if holders of a majority of our ordinary shares favor doing so.

In addition, we have established an independent foundation, Stichting Continuïteit Vistaprint, or the Foundation, to safeguard the interests of Vistaprint N.V. and its stakeholders, which include but are not limited to our shareholders, and to assist in maintaining Vistaprint's continuity and independence. To this end, we have granted the Foundation a call option pursuant to which the Foundation may acquire a number of preferred shares equal to the same number of ordinary shares then outstanding, which is designed to provide a protective measure against unsolicited take-over bids for Vistaprint and other hostile threats. If the Foundation were to exercise the call option, it may prevent a change of control or delay or prevent a takeover attempt, including a takeover attempt that might result in a premium over the market price for our ordinary shares. Exercise of the preferred share option would also effectively dilute the voting power of our outstanding ordinary shares by one half.

We have limited flexibility with respect to certain aspects of capital management.

Dutch law requires shareholder approval for the issuance of shares and grants preemptive rights to existing shareholders to subscribe for new issuances of shares. In November 2011, our shareholders granted our supervisory board and management board the authority to issue ordinary shares as the boards determine appropriate, without obtaining specific shareholder approval for each issuance, and to limit or exclude shareholders' preemptive rights. However, this authorization expires in November 2016. Although we plan to seek re-approval from our shareholders from time to time in the future, we may not succeed in obtaining future re-approvals. In addition, subject to specified exceptions, Dutch law requires shareholder approval for many corporate actions, such as the approval of dividends and authorization to repurchase outstanding shares. Situations may arise where the flexibility to issue shares, pay dividends, repurchase shares or take other corporate actions without a shareholder vote would be beneficial to us, but is not available under Dutch law.

Because of our corporate structure, our shareholders may find it difficult to pursue legal remedies against the members of our supervisory board or management board.

Our Articles and our internal corporate affairs are governed by Dutch law, and the rights of our shareholders and the responsibilities of our supervisory board and management board are different from those established under United States laws. For example, under Dutch law derivative lawsuits are generally not available, and our supervisory board and management board are responsible for acting in the best interests of the company, its business and all of its stakeholders generally (including employees, customers and creditors), not just shareholders. Furthermore, we are obligated to indemnify the members of our supervisory board and management board against liabilities for their good faith actions in connection with their service on either board, subject to various exceptions. As a result, our shareholders may find it more difficult to protect their interests against actions by members of our supervisory board or management board than they would if we were a U.S. corporation.


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Because of our corporate structure, our shareholders may find it difficult to enforce claims based on United States federal or state laws, including securities liabilities, against us or our management team.

We are incorporated under the laws of the Netherlands, and the vast majority of our assets are located outside of the United States. In addition, some of our officers and management board members reside outside of the United States. In most cases, a final judgment for the payment of money rendered by a U.S. federal or state court would not be directly enforceable in the Netherlands. The party in whose favor such final judgment is rendered would need to bring a new suit in the Netherlands and petition the Dutch court to enforce the final judgment rendered in the United States, and there can be no assurance that a Dutch court would impose civil liability on us or our management team in such a suit or in any other lawsuit predicated solely upon U.S. securities laws. In addition, because most of our assets are located outside of the United States, it could be difficult for investors to place a lien on our assets in connection with a claim of liability under U.S. laws. As a result, it may be difficult for investors to effect service of process within the United States upon us or our management team, enforce U.S. court judgments obtained against us or our management team outside of the U.S., or enforce rights predicated upon the U.S. securities laws.

We may not be able to make distributions or repurchase shares without subjecting our shareholders to Dutch withholding tax.

A Dutch withholding tax may be levied on dividends and similar distributions made by Vistaprint N.V. to its shareholders at the statutory rate of 15% if we cannot structure such distributions as being made to shareholders in relation to a reduction of par value, which would be non-taxable for Dutch withholding tax purposes. We have repurchased our shares and may seek to repurchase additional shares in the future. Under our Dutch Advanced Tax Ruling, a repurchase of shares should not result in any Dutch withholding tax if we hold the repurchased shares in treasury for the purpose of issuing shares pursuant to some employee share awards or for the funding of acquisitions. However, if the shares cannot be used for these purposes, or the Dutch tax authorities challenge the use of the shares for these purposes, such a repurchase of shares for the purposes of capital reduction may be treated as a partial liquidation subject to the 15% Dutch withholding tax to be levied on the difference between our recognized paid in capital per share for Dutch tax purposes and the redemption price per share. Our recognized paid in capital per share for Dutch tax purposes is €28.99 per share translated as of the date of our reincorporation to the Netherlands on August 28, 2009.
 
We may be treated as a passive foreign investment company for United States tax purposes, which may subject United States shareholders to adverse tax consequences.

If our passive income, or our assets that produce passive income, exceed levels provided by law for any taxable year, we may be characterized as a passive foreign investment company, or a PFIC, for United States federal income tax purposes. If we are treated as a PFIC, U.S. holders of our ordinary shares would be subject to a disadvantageous United States federal income tax regime with respect to the distributions they receive and the gain, if any, they derive from the sale or other disposition of their ordinary shares.

We believe that we were not a PFIC for the tax year ended June 30, 2012 and we expect that we will not become a PFIC in the foreseeable future. However, whether we are treated as a PFIC depends on questions of fact as to our assets and revenues that can only be determined at the end of each tax year. Accordingly, we cannot be certain that we will not be treated as a PFIC for our current tax year or for any subsequent year.

If a United States shareholder acquires 10% or more of our ordinary shares, it may be subject to increased United States taxation under the “controlled foreign corporation” rules. Additionally, this may negatively impact the demand for our ordinary shares.

If a United States shareholder owns 10% or more of our ordinary shares, it may be subject to increased United States federal income taxation (and possibly state income taxation) under the “controlled foreign corporation” rules. In general, each U.S. person who owns (or is deemed to own) at least 10% of the voting power of a non-U.S. corporation, “10% U.S. Shareholder,” and if such non-U.S. corporation is a “controlled foreign corporation”, or “CFC,” for an uninterrupted period of 30 days or more during a taxable year, then a 10% U.S. shareholder who owns (or is deemed to own) shares in the CFC on the last day of the CFC's taxable year, must include in its gross income for United States federal income tax (and possibly state income tax) purposes its pro rata share of the CFC's “subpart F income”, even if the subpart F income is not distributed. In general, a non-U.S. corporation is considered a CFC if one or more 10% U.S. Shareholders together own more than 50% of the voting

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power or value of the corporation on any day during the taxable year of the corporation. “Subpart F income” consists of, among other things, certain types of dividends, interest, rents, royalties, gains, and certain types of income from services and personal property sales.
The rules for determining ownership for purposes of determining 10% U.S. Shareholder and CFC status are complicated, depend on the particular facts relating to each investor, and are not necessarily the same as the rules for determining beneficial ownership for SEC reporting purposes. For taxable years in which we are a CFC for an uninterrupted period of 30 days or more, each of our 10% U.S. Shareholders will be required to include in its gross income for United States federal income tax purposes its pro rata share of our subpart F income, even if the subpart F income is not distributed by us. We currently do not believe we are a CFC. However, whether we are treated as a CFC can be affected by, among other things, facts as to our share ownership that may change. Accordingly, we cannot be certain that we will not be treated as a CFC for our current tax year or any subsequent tax year.
The risk of being subject to increased taxation as a CFC may deter our current shareholders from acquiring additional ordinary shares or new shareholders from establishing a position in our ordinary shares. Either of these scenarios could impact the demand for, and value of, our ordinary shares.
Our tax rate may increase during periods when our profitability declines. Additionally, we will pay taxes even if we are not profitable on a consolidated basis, which would harm our results of operations.
 
The intercompany service and related agreements among Vistaprint N.V. and our direct and indirect subsidiaries ensure that most of the subsidiaries realize profits based on their operating expenses. As a result, if the Vistaprint group is less profitable, or even not profitable on a consolidated basis, the majority of our subsidiaries will be profitable and incur income taxes in their respective jurisdictions. In periods of declining operating profitability or losses on a consolidated basis this structure will increase our effective tax rate or our consolidated losses and further harm our results of operations.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table outlines the purchases of our ordinary shares during the three months ended March 31, 2013, which were made pursuant to our repurchase programs:

Total Number of Shares Purchased
 
Average Price Paid Per Share (1)
 
Total Number of Shares Purchased as Part of a Publicly Announced Program
 
Approximate Dollar Value of Shares that May Yet be Purchased Under the Program (4)
January 1, 2013 through January 31, 2013

 
$

 

 

February 1, 2013 through February 28, 2013

 

 

 

March 1, 2013 through March 31, 2013 (2) (3)
410,400

 
39.50

 
410,400

 
$
261,545,532

Total
410,400

 
$
39.50

 
410,400

 
$
261,545,532

(1) Average price paid per share includes commissions paid in connection with our publicly announced share purchase program.
(2) On May 14, 2012, we announced our Supervisory Board's approval of an earlier program to purchase up to 4,015,127 of our outstanding ordinary shares on the open market or in one or more self tender offerer. During the three months ended March 31, 2013 we purchased 375,675 shares under this program, which is now expired effective March 30, 2013.
(3)
On February 13, 2013, we announced that our Supervisory Board authorized the purchase of up to 6,800,000 of our outstanding ordinary shares on the open market (including block trades that satisfy the safe harbor provisions of Rule 10b-18 pursuant to the Securities Exchange Act of 1934), through privately negotiated transactions or in one or more self tender offers. This share purchase authorization expires on May 8, 2014, and we may suspend or discontinue the purchase program at any time. We purchased 34,725 shares during the three month ended March, 31, 2013 as part of this program.
(4) Value based on an aggregate of 6,765,275 shares authorized to be purchased pursuant to our current program announced on February 13, 2013 at an assumed purchase price of $38.66 per share, which was the closing price of our ordinary shares on March 31, 2013, as reported on the NASDAQ.

ITEM 6. EXHIBITS

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We are filing the exhibits listed on the Exhibit Index following the signature page to this Report.


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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
April 26, 2013                                                            Vistaprint N.V.
 
By: 
/s/ Ernst J. Teunissen
 
 
Ernst J. Teunissen
 
 
Chief Financial Officer