##### Table of Contents



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 29, 2008
 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 0-16611
 
 GSI COMMERCE, INC.
  DELAWARE
    
    04-2958132(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. employer identification no.)
 935 FIRST AVENUE, KING OF PRUSSIA, PA
    
    19406(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code
 þ o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ




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##### 



GSI COMMERCE, INC.
 FORM 10-Q
FOR THE THREE MONTHS ENDED MARCH 29, 2008
 INDEX
 PagePART I  FINANCIAL INFORMATIONItem 1. Financial Statements (unaudited):Condensed Consolidated Balance Sheets as of December 29, 2007 and March 29, 2008
    
    
    3Condensed Consolidated Statements of Operations for the three-month periods
ended March 31, 2007 and March 29, 2008
    
    
    4Condensed Consolidated Statements of Cash Flows for the three-month periods
ended March 31, 2007 and March 29, 2008
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    23Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    28Item 4. Controls and Procedures
    
    
    28PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    29Item 1A. Risk Factors
    
    
    29Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    29Item 3. Defaults Upon Senior Securities
    
    
    29Item 4. Submission of Matters to a Vote of Security Holders
    
    
    29Item 5. Other Information
    
    
    29Item 6. Exhibits
    
    
    29SIGNATURES
    
    
    30Exhibit 10.2Exhibit 31.1Exhibit 31.2Exhibit 32.1
     2




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##### Table of Contents



PART I
 
 ITEM 1: FINANCIAL STATEMENTS
 GSI COMMERCE, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
 December 29,
    
    
    March 29,2007
    
    
    2008ASSETSCurrent assets:Cash and cash equivalents
    
    $
    231,511
    
    
    $
    42,750Accounts receivable, net of allowance of $1,833 and $1,795
    
    
    64,285
    
    
    
    53,484Inventory
    
    
    47,293
    
    
    
    46,054Deferred tax assets
    
    
    14,114
    
    
    
    14,114Prepaid expenses and other current assets
    
    
    12,459
    
    
    
    11,959Total current assets
    
    
    369,662
    
    
    
    168,361Property and equipment, net
    
    
    156,774
    
    
    
    167,012Goodwill
    
    
    82,757
    
    
    
    221,425Intangible assets, net of accumulated amortization of $4,972 and $6,857
    
    
    16,476
    
    
    
    14,456Equity investments
    
    
    6,202
    
    
    
    6,508Long-term deferred tax assets
    
    
    45,234
    
    
    
    54,879Other assets, net of accumulated amortization of $14,545 and $15,302
    
    
    16,535
    
    
    
    15,017Total assets
    
    $
    693,640
    
    
    $
    647,658LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    85,667
    
    
    $
    49,385Accrued expenses
    
    
    98,179
    
    
    
    75,095Deferred revenue
    
    
    17,588
    
    
    
    22,109Current portion of long-term debt
    
    
    2,406
    
    
    
    2,823Total current liabilities
    
    
    203,840
    
    
    
    149,412Convertible notes
    
    
    207,500
    
    
    
    207,500Long-term debt
    
    
    27,245
    
    
    
    41,966Deferred revenue and other long-term liabilities
    
    
    5,634
    
    
    
    5,350Total liabilities
    
    
    444,219
    
    
    
    404,228Commitments and contingencies (Note 8)Stockholders equity:Preferred stock, $0.01 par value, 5,000,000 shares authorized; 0 shares issued and
outstanding as of December 29, 2007 and March 29, 2008
    
    
    
    
    
    
    Common stock, $0.01 par value, 90,000,000 shares authorized; 46,847,919 and
47,328,556 shares issued as of December 29, 2007 and March 29, 2008
respectively; 46,847,716 and 47,328,353 shares outstanding as of December 29,
2007 and March 29, 2008, respectively
    
    
    468
    
    
    
    473Additional paid in capital
    
    
    366,400
    
    
    
    369,923Accumulated other comprehensive loss
    
    
    (156
    )
    
    
    (110
    )Accumulated deficit
    
    
    (117,291
    )
    
    
    (126,856
    )Total stockholders equity
    
    
    249,421
    
    
    
    243,430Total liabilities and stockholders equity
    
    $
    693,640
    
    
    $
    647,658
   3




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##### Table of Contents



GSI COMMERCE, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
 Three Months EndedMarch 31,
    
    
    March 29,2007
    
    
    2008Revenues:Net revenues from product sales
    
    $
    108,750
    
    
    $
    123,120Service fee revenues
    
    
    37,533
    
    
    
    72,423Net revenues
    
    
    146,283
    
    
    
    195,543Costs and expenses:Cost of revenues from product sales
    
    
    76,802
    
    
    
    85,417Sales and marketing, inclusive of $557 and $1,134 of
stock-based compensation
    
    
    44,174
    
    
    
    75,986Product development, inclusive of $288 and $426 of
stock-based compensation
    
    
    13,738
    
    
    
    22,436General and administrative, inclusive of $752 and $2,061
of stock-based compensation
    
    
    9,411
    
    
    
    15,724Depreciation and amortization
    
    
    6,924
    
    
    
    13,809Total costs and expenses
    
    
    151,049
    
    
    
    213,372Loss from operations
    
    
    (4,766
    )
    
    
    (17,829
    )Other (income) expense:Interest expense
    
    
    842
    
    
    
    2,177Interest income
    
    
    (1,944
    )
    
    
    (1,039
    )Other expense, net
    
    
    15
    
    
    
    145Total other (income) expense
    
    
    (1,087
    )
    
    
    1,283Net loss before income taxes
    
    
    (3,679
    )
    
    
    (19,112
    )Benefit for income taxes
    
    
    (1,334
    )
    
    
    (9,547
    )Net loss
    
    $
    (2,345
    )
    
    $
    (9,565
    )Basic and diluted loss per share
    
    $
    (0.05
    )
    
    $
    (0.20
    )Weighted average shares outstanding  basic and diluted
    
    
    45,999
    
    
    
    46,924
   4




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GSI COMMERCE, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 Three Months EndedMarch 31,
    
    
    March 29,2007
    
    
    2008Cash Flows from Operating Activities:Net loss
    
    $
    (2,345
    )
    
    $
    (9,565
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation
    
    
    6,522
    
    
    
    11,910Amortization
    
    
    402
    
    
    
    1,899Stock-based compensation
    
    
    1,597
    
    
    
    3,621Loss on disposal of equipment
    
    
    46
    
    
    
    Deferred income taxes
    
    
    (1,402
    )
    
    
    (9,547
    )Changes in operating assets and liabilities:Accounts receivable, net
    
    
    12,393
    
    
    
    18,750Inventory
    
    
    4,855
    
    
    
    1,239Prepaid expenses and other current assets
    
    
    815
    
    
    
    1,121Other assets, net
    
    
    303
    
    
    
    1,777Accounts payable and accrued expenses
    
    
    (68,826
    )
    
    
    (65,295
    )Deferred revenue
    
    
    1,567
    
    
    
    3,640Net cash used in operating activities
    
    
    (44,073
    )
    
    
    (40,450
    )Cash Flows from Investing Activities:Payments for acquisitions of businesses, net of cash acquired
    
    
    
    
    
    
    (145,001
    )Cash paid for property and equipment, including internal use software
    
    
    (9,556
    )
    
    
    (17,482
    )Purchases of marketable securities
    
    
    (56,279
    )
    
    
    Sales of marketable securities
    
    
    60,950
    
    
    
    Net cash used in investing activities
    
    
    (4,885
    )
    
    
    (162,483
    )Cash Flows from Financing Activities:Borrowings on revolving credit loan
    
    
    
    
    
    
    15,000Debt issuance costs paid
    
    
    
    
    
    
    (454
    )Repayments of capital lease obligations
    
    
    (123
    )
    
    
    (468
    )Repayments of mortgage note
    
    
    (47
    )
    
    
    (68
    )Proceeds from exercise of common stock options
    
    
    3,402
    
    
    
    158Net cash provided by financing activities
    
    
    3,232
    
    
    
    14,168Effect of exchange rate changes on cash and cash equivalents
    
    
    15
    
    
    
    4Net decrease in cash and cash equivalents
    
    
    (45,711
    )
    
    
    (188,761
    )Cash and cash equivalents, beginning of period
    
    
    71,382
    
    
    
    231,511Cash and cash equivalents, end of period
    
    $
    25,671
    
    
    $
    42,750Supplemental Cash Flow InformationCash paid during the period for interest
    
    $
    295
    
    
    $
    782Cash paid during the period for income taxes
    
    
    564
    
    
    
    357Noncash Investing and Financing Activities:Accrual for purchases of property and equipment
    
    
    1,077
    
    
    
    3,401Equipment financed under capital lease
    
    
    7,964
    
    
    
    
   5




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GSI COMMERCE, INC. AND SUBSIDIARIES
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)
 NOTE 1BASIS OF PRESENTATION
   inter-company
  NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Use of Estimates:
 Reclassifications:
 Other Assets, Net:
     6




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GSI COMMERCE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)
 Sales and Marketing:
 Shipping and Handling Costs:
 Fulfillment Costs:
 Advertising:
 Catalog Costs:
 Income Taxes:
  7




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GSI COMMERCE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)
  New Accounting Pronouncements:
      8




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GSI COMMERCE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)
 Proposed Accounting Pronouncement:
 NOTE 3FAIR VALUE OF FINANCIAL INSTRUMENTS
       Fair Value Measurements on March 29, 2008Quoted Prices inActive Markets for
    
    
    Significant Other
    
    
    SignificantIdentical Assets
    
    
    Observable Inputs
    
    
    Unobservable Inputs(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Cash surrender value of life insurance policies(1)
    
    $
    
    
    
    $
    848
    
    
    $
    
 (1)
    
    Amounts relate to the
Companys deferred compensation plan and are included in other assets, net on the Companys Condensed Consolidated Balance
Sheet.  9




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GSI COMMERCE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)
 NOTE 4PROPERTY AND EQUIPMENT
  December 29,
    
    
    March 29,2007
    
    
    2008Computer hardware and software
    
    $
    148,091
    
    
    $
    159,572Building and building improvements
    
    
    44,213
    
    
    
    44,644Furniture, warehouse and office equipment, and other
    
    
    38,916
    
    
    
    40,075Land
    
    
    7,889
    
    
    
    7,889Leasehold improvements
    
    
    4,200
    
    
    
    4,442Capitalized lease
    
    
    17,403
    
    
    
    17,985Construction in progress
    
    
    1,528
    
    
    
    9,692262,240
    
    
    
    284,299Less: Accumulated depreciation
    
    
    (105,466
    )
    
    
    (117,287
    )Property and equipment, net
    
    $
    156,774
    
    
    $
    167,012
  NOTE 5GOODWILL AND OTHER INTANGIBLE ASSETS
  InteractiveE-Commerce
    
    
    MarketingServices
    
    
    Services
    
    
    ConsolidatedDecember 29, 2007
    
    $
    82,757
    
    
    $
    
    
    
    $
    82,757Purchase price adjustments
    
    
    1,127
    
    
    
    
    
    
    
    1,127e-Dialog acquisition
    
    
    
    
    
    
    137,541
    
    
    
    137,541March 29, 2008
    
    $
    83,884
    
    
    $
    137,541
    
    
    $
    221,425
  10




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GSI COMMERCE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)
  Weighted-December 29,
    
    
    March 29,
    
    
    Average2007
    
    
    2008
    
    
    LifeGross carrying value of intangible assets
subject to amortization:Customer contracts
    
    $
    17,282
    
    
    $
    17,147
    
    
    
    1.9Non-compete agreements
    
    
    3,838
    
    
    
    3,838
    
    
    
    3.0Other
    
    
    328
    
    
    
    328
    
    
    
    1.521,448
    
    
    
    21,313
    
    
    
    2.1Accumulated amortization:Customer contracts
    
    
    (4,570
    )
    
    
    (6,135
    )Non-compete agreements
    
    
    (320
    )
    
    
    (640
    )Other
    
    
    (82
    )
    
    
    (82
    )(4,972
    )
    
    
    (6,857
    )Net carrying value:Customer contracts
    
    
    12,712
    
    
    
    11,012Non-compete agreements
    
    
    3,518
    
    
    
    3,198Other
    
    
    246
    
    
    
    246$
    16,476
    
    
    $
    14,456
  Fiscal 2008
    
    $
    4,952Fiscal 2009
    
    
    4,174Fiscal 2010
    
    
    3,123Fiscal 2011
    
    
    1,578Fiscal 2012
    
    
    383$
    14,210
 NOTE 6ACQUISITIONS
   11




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GSI COMMERCE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)
 e-Dialog, Inc.
    Total current assets
    
    $
    13,731Property, plant and equipment
    
    
    4,050Goodwill
    
    
    137,541Total assets acquired
    
    
    155,322Total current liabilities
    
    
    (5,883
    )Total non-current liabilities
    
    
    (75
    )Total liabilities assumed
    
    
    (5,958
    )Net assets acquired
    
    $
    149,364
 Pro Forma Financial Information
   12




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GSI COMMERCE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)
 Three Months EndedMarch 31,
    
    
    March 29,2007
    
    
    2008Net revenues
    
    $
    154,103
    
    
    $
    200,514Net loss
    
    $
    (2,694
    )
    
    $
    (9,607
    )Basic and diluted loss per share:
    
    $
    (0.06
    )
    
    $
    (0.20
    )
 Zendor.com Ltd.
   Total current assets
    
    $
    9,830Property, plant and equipment
    
    
    3,089Goodwill
    
    
    4,005Total assets acquired
    
    
    16,924Total liabilities assumed
    
    
    (6,827
    )Net assets acquired
    
    $
    10,097
 Accretive Commerce, Inc.
   13




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GSI COMMERCE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)
  Total current assets
    
    $
    17,034Property, plant and equipment
    
    
    9,165Identifiable intangible assets:Customer contracts
    
    
    15,008Employee non-compete agreements
    
    
    3,838Goodwill
    
    
    62,092Other assets
    
    
    8,424Total assets acquired
    
    
    115,561Total current liabilities
    
    
    (15,124
    )Total non-current liabilities
    
    
    (1,837
    )Total liabilities assumed
    
    
    (16,961
    )Net assets acquired
    
    $
    98,600
   December 29,
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    March 29,2007
    
    
    Additions
    
    
    Payments
    
    
    Adjustments
    
    
    2008Severance payments
    
    $
    2,667
    
    
    $
    
    
    
    $
    (306
    )
    
    $
    
    
    
    $
    2,361Lease payments
    
    
    2,824
    
    
    
    49
    
    
    
    (74
    )
    
    
    (2,263
    )
    
    
    536$
    5,491
    
    
    $
    49
    
    
    $
    (380
    )
    
    $
    (2,263
    )
    
    $
    2,897
  14




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GSI COMMERCE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)
 NOTE 7LONG-TERM DEBT AND CREDIT FACILITY
  December 29,
    
    
    March 29,2007
    
    
    2008Convertible notes
    
    $
    207,500
    
    
    $
    207,500Notes payable
    
    
    12,858
    
    
    
    12,791Capital lease obligations
    
    
    16,793
    
    
    
    16,998Credit facilities
    
    
    
    
    
    
    15,000237,151
    
    
    
    252,289Less: Current portion of notes payable
    
    
    (193
    )
    
    
    (175
    )Less: Current portion of capital lease obligations
    
    
    (2,213
    )
    
    
    (2,648
    )$
    234,745
    
    
    $
    249,466
 3% Convertible Notes due 2025
    2.5% Convertible Notes due 2027
   15




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GSI COMMERCE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)
  th
  Note Payable
   16




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GSI COMMERCE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)
 Capital Lease Obligations
  March 29,2008Gross capital lease obligations
    
    $
    20,521Less: imputed interest
    
    
    (3,523
    )Total present value of future minimum lease payments
    
    
    16,998Less: current portion
    
    
    (2,648
    )Long-term portion
    
    $
    14,350
 Credit Facilities
   NOTE 8COMMITMENTS AND CONTINGENCIES
 Legal Proceedings
   17




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GSI COMMERCE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)
 Operating and Capital Commitments
  Payments due by fiscal year2008
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    2012
    
    
    Thereafter
    
    
    TotalOperating lease
obligations(1)
    
    $
    11,113
    
    
    $
    12,319
    
    
    $
    10,022
    
    
    $
    7,460
    
    
    $
    6,922
    
    
    $
    18,512
    
    
    $
    66,348Purchase
obligations(1)
    
    
    73,126
    
    
    
    5,953
    
    
    
    5,953
    
    
    
    992
    
    
    
    
    
    
    
    
    
    
    
    86,024Advertising and media
agreements(1)
    
    
    194
    
    
    
    17
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    211Partner revenue share
payments(1)
    
    
    13,522
    
    
    
    26,630
    
    
    
    27,190
    
    
    
    27,683
    
    
    
    20,818
    
    
    
    62,557
    
    
    
    178,400Debt interest(1)
    
    
    7,013
    
    
    
    6,774
    
    
    
    5,755
    
    
    
    5,024
    
    
    
    5,012
    
    
    
    15,897
    
    
    
    45,475Debt obligations
    
    
    127
    
    
    
    399
    
    
    
    57,696
    
    
    
    209
    
    
    
    220
    
    
    
    176,640
    
    
    
    235,291Capital lease obligations,
including
interest(2)
    
    
    2,661
    
    
    
    3,443
    
    
    
    3,304
    
    
    
    3,231
    
    
    
    3,231
    
    
    
    4,651
    
    
    
    20,521Total
    
    $
    107,756
    
    
    $
    55,535
    
    
    $
    109,920
    
    
    $
    44,599
    
    
    $
    36,203
    
    
    $
    278,257
    
    
    $
    632,270
 (1)
    
    Not required to be recorded in the Condensed Consolidated Balance Sheet as of March 29,
2008 in accordance with accounting principles generally accepted in the United States of
America.(2)
    
    Capital lease obligations, excluding interest, are recorded in the Condensed
Consolidated Balance Sheets.  NOTE 9SHARE-BASED AWARDS
   18




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GSI COMMERCE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)
 Stock Options and Warrants
  WeightedWeighted
    
    
    AverageNumber of
    
    
    Average
    
    
    Remaining
    
    
    AggregateShares
    
    
    Exercise
    
    
    Contractual
    
    
    Intrinsic(in thousands)
    
    
    Price
    
    
    Life (in years)
    
    
    ValueOutstanding at December 29, 2007
    
    
    4,163
    
    
    $
    9.94Granted
    
    
    
    
    
    
    Exercised
    
    
    (18
    )
    
    $
    8.59Forfeited/Cancelled
    
    
    (3
    )
    
    $
    9.35Outstanding at March 29, 2008
    
    
    4,142
    
    
    $
    9.95
    
    
    
    4.47
    
    
    $
    16,029Vested and expected to vest at March 29, 2008
    
    
    4,133
    
    
    $
    9.95
    
    
    
    4.46
    
    
    $
    16,004Exercisable at March 29, 2008
    
    
    4,090
    
    
    $
    9.94
    
    
    
    4.44
    
    
    $
    15,884
   Restricted Stock Units
   WeightedNumber of
    
    
    AverageShares
    
    
    Grant Date(in thousands)
    
    
    Fair ValueNonvested shares at December 29, 2007
    
    
    1,870
    
    
    $
    23.40Granted
    
    
    2,153
    
    
    $
    14.10Vested
    
    
    (475
    )
    
    $
    12.59Forfeited/Cancelled
    
    
    (63
    )
    
    $
    19.44Nonvested shares at March 29, 2008
    
    
    3,485
    
    
    $
    23.63
   19




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##### Table of Contents



GSI COMMERCE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)
 Restricted Stock Awards
   NOTE 10INCOME TAXES
    NOTE 11LOSS PER SHARE
   Three Months EndedMarch 31,
    
    
    March 29,2007
    
    
    2008Net loss for basic and diluted earnings per share
    
    $
    (2,345
    )
    
    $
    (9,565
    )Weighted average shares outstanding  basic and diluted
    
    
    45,999
    
    
    
    46,924Net loss per common share  basic and diluted
    
    $
    (0.05
    )
    
    $
    (0.20
    )
  20




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##### Table of Contents



GSI COMMERCE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)
  Three Months EndedMarch 31,
    
    
    March 29,2007
    
    
    2008Stock units and awards
    
    
    1,724
    
    
    
    3,791Stock options and warrants
    
    
    4,922
    
    
    
    4,372Convertible notes
    
    
    3,229
    
    
    
    8,2299,875
    
    
    
    16,392
  NOTE 12COMPREHENSIVE LOSS
 Three Months EndedMarch 31,
    
    
    March 29,2007
    
    
    2008Net loss
    
    $
    (2,345
    )
    
    $
    (9,565
    )Other comprehensive income:Net unrealized gain on available-for-sale securities, net of tax
    
    
    67
    
    
    
    Cumulative translation adjustment, net of tax
    
    
    2
    
    
    
    46Other comprehensive income
    
    
    69
    
    
    
    46Comprehensive loss
    
    $
    (2,276
    )
    
    $
    (9,519
    )
 NOTE 13MAJOR SUPPLIERS/ECONOMIC DEPENDENCY
    NOTE 14SEGMENT INFORMATION
    21




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##### Table of Contents



GSI COMMERCE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)
    Three-Months Ended March 31, 2007E-Commerce
    
    
    Interactive
    
    
    IntersegmentServices
    
    
    Marketing Services
    
    
    Eliminations
    
    
    ConsolidatedNet revenues
    
    $
    144,497
    
    
    $
    4,815
    
    
    $
    (3,029
    )
    
    $
    146,283Operating expenses
before depreciation,
amortization
and stock-based compensation expense
    
    
    140,846
    
    
    
    4,711
    
    
    
    (3,029
    )
    
    
    142,528Operating income before depreciation, amortization
and stock-based compensation expense
    
    
    3,651
    
    
    
    104
    
    
    
    
    
    
    
    3,755Depreciation and amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,924Stock-based compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,597Loss from operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,766
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    842Interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,944
    )Other expense, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15Loss before income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (3,679
    )
 Three-Months Ended March 29, 2008E-Commerce
    
    
    Interactive
    
    
    IntersegmentServices
    
    
    Marketing Services
    
    
    Eliminations
    
    
    ConsolidatedNet revenues
    
    $
    187,599
    
    
    $
    12,085
    
    
    $
    (4,141
    )
    
    $
    195,543Operating expenses
before
depreciation,
amortization
and stock-based compensation expense
    
    
    188,891
    
    
    
    11,192
    
    
    
    (4,141
    )
    
    
    195,942Operating income (loss) before depreciation, amortization
and stock-based compensation expense
    
    
    (1,292
    )
    
    
    893
    
    
    
    
    
    
    
    (399
    )Depreciation and amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,809Stock-based compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,621Loss from operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17,829
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,177Interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,039
    )Other expense, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    145Loss before income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (19,112
    )
 Included in the Intersegment
Eliminations column are transactions that our segments enter with one another.
The most common types of these transactions are the following:  •
  
  our E-Commerce Services segment generates
revenues by selling information technology services to our Interactive
Marketing Services segment  •
  
  our Interactive Marketing Services segment
generates revenue by selling online marketing, advertising, email and design
services to our E-Commerce Services segment  22




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##### Table of Contents



ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION.
 All statements made in this Quarterly Report on Form 10-Q , other than statements of historical
fact, are forward-looking statements, as defined under federal securities law. The words look
forward to, anticipate, believe, estimate, expect, intend, may, plan, will,
would, should, could, guidance, potential, opportunity, continue, project,
forecast, confident, prospects, schedule, designed, future discussions, if and
similar expressions typically are used to identify forward-looking statements. Forward-looking
statements are based on the then-current expectations, beliefs, assumptions, estimates and
forecasts about our business. These statements are not guarantees of future performance and involve
risks, uncertainties and assumptions which are difficult to predict. Therefore, actual outcomes and
results may differ materially from what is expressed or implied by these forward-looking
statements. Factors which may affect our business, financial condition and operating results
include the effects of changes in the economy, consumer spending, the financial markets and the
industries in which we and our partners operate, changes affecting the Internet and e-commerce, our
ability to develop and maintain relationships with strategic partners and suppliers and the timing
of our establishment, extension or termination of our relationships with strategic partners, our
ability to timely and successfully develop, maintain and protect our technology, confidential and
proprietary information, and product and service offerings and execute operationally, our ability
to attract and retain qualified personnel, our ability to successfully integrate our acquisitions
of other businesses, and the performance of acquired businesses. More information about potential
factors that could affect us are described in Part I, Item 1A under the heading Risk Factors in
our Form 10-K for the fiscal year ended December 29, 2007, filed with the SEC on March 13, 2008. We
expressly disclaim any intent or obligation to update these forward-looking statements.
 Executive Overview
  
    
    We are a leading provider of services for e-commerce, multichannel retailing and
interactive marketing to large business-to-consumer enterprises, which we call partners.
Beginning in the first quarter of fiscal 2008, we operate in two reportable business
segments: e-commerce services and interactive marketing services. For e-commerce services,
we deliver customized solutions to partners through an integrated e-commerce platform,
which is comprised of three components: technology, fulfillment and customer care. We offer
each of the platforms components on a modular basis, or as part of an integrated,
end-to-end solution. For interactive marketing services, we offer a full suite of online
interactive marketing, advertising, e-mail and design services.
 
    
    We derive our revenues from sales of products by us through our partners e-commerce
businesses, service fees earned by us in connection with the development and operation of
our partners e-commerce businesses, and service fees earned by us through our provision of
interactive marketing services.
 
    
    We generate the majority of our cash from operating activities in our fourth fiscal
quarter due to the seasonality of our business. In our first fiscal quarter, we typically
use cash from operating activities to satisfy accounts payable and accrued expenses
incurred in the fourth fiscal quarter of our prior fiscal year. We typically have not
generated significant cash from operating activities in our second and third fiscal
quarters.
  
    
    In January 2008, we entered into a $75 million revolving secured bank line of credit.
The five-year, revolving secured line of credit is available to us for working capital and
general corporate purposes, including possible acquisitions, and contains certain financial
and negative covenants with which we must comply. As of March 29, 2008, $15.0 million was
outstanding under the line of credit.
 
    
    In February 2008, we acquired e-Dialog, Inc., a Lexington, Mass.-based market-leading
provider of advanced e-mail marketing services and solutions to more than 100 companies in
the U.S. and Europe for $149.4 million, including estimated acquisition costs. We expect
the acquisition to expand the breadth and depth of our interactive
marketing services capabilities, our reach into existing and new vertical markets, and our
growing European presence.
  23




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##### Table of Contents




    
    While we expect the opportunity for partnered e-commerce to continue to grow, we also
anticipate continuing intense competition. We compete with in-house solutions and a variety
of third-party vendors that provide one of more components of an e-commerce solution. To
satisfy our existing partners and to continue to attract new partners, we offer a complete
integrated solution designed to increase efficiencies and improve integration. This
includes a high level of direct-to-consumer expertise and infrastructure. Through our
solution, we help our partners grow their e-commerce businesses and use their e-commerce
businesses as a channel to complement and enhance their offline businesses. Our solution is
provided to partners on a platform that includes shared technology, logistics and customer
care, supporting infrastructure and interactive marketing services. To differentiate our
solution in the marketplace, we continually add new services and functions to our platform.
As part of our continuing efforts to add value to our platform, we evaluate opportunities
to acquire complementary or new businesses or assets.
 
    
    Our objective is to grow our business by expanding the e-commerce businesses of our
existing partners, by adding new partners, by expanding internationally, by generating
incremental revenue from interactive marketing and other services, and selectively through
acquisitions.
 Results of Operations
 Three-month period ended March 31, 2007 and March 29, 2008 (amounts in tables in millions):
 Net Revenues
  Net Revenues from Product Sales
 Service Fee Revenues.
 First Qtr Fiscal 2008vs.First Qtr Fiscal 2007First Qtr Fiscal 2007
    
    
    First Qtr Fiscal 2008
    
    
    Change
    
    
    ChangeNet Revenues by Type:Net revenues from product sales
    
    $
    108.8
    
    
    
    74
    %
    
    $
    123.1
    
    
    
    63
    %
    
    $
    14.3
    
    
    
    13
    %Service fee revenues
    
    
    37.5
    
    
    
    26
    %
    
    
    72.4
    
    
    
    37
    %
    
    
    34.9
    
    
    
    93
    %Total net revenues
    
    $
    146.3
    
    
    
    100
    %
    
    $
    195.5
    
    
    
    100
    %
    
    $
    49.2
    
    
    
    34
    %Net Revenues by Segment:E-Commerce services:Net revenues from
product sales
    
    $
    110.5
    
    
    
    76
    %
    
    $
    125.2
    
    
    
    64
    %
    
    $
    14.7
    
    
    
    13
    %Service fee revenues
    
    
    34.0
    
    
    
    23
    %
    
    
    62.3
    
    
    
    32
    %
    
    
    28.3
    
    
    
    83
    %Interactive marketing services:Service fee revenues
    
    
    4.8
    
    
    
    3
    %
    
    
    12.1
    
    
    
    6
    %
    
    
    7.3
    
    
    
    152
    %Intersegment Eliminations
    
    
    (3.0
    )
    
    
    (2
    %)
    
    
    (4.1
    )
    
    
    (2
    %)
    
    
    (1.1
    )
    
    
    37
    %Total net revenues
    
    $
    146.3
    
    
    
    100
    %
    
    $
    195.5
    
    
    
    100
    %
    
    $
    49.2
    
    
    
    34
    %
  24




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##### Table of Contents



E-Commerce Services Segment Revenues
   Interactive Marketing Services Segment Revenues
  Costs and Expenses
  Costs of Revenues from Product Sales.
 Sales and Marketing Expenses.
 Product Development Expenses
 General and Administrative Expense.
 Depreciation and Amortization Expenses.
 First Qtr Fiscal 2008vs.First Qtr Fiscal 2007
    
    
    First Qtr Fiscal 2008
    
    
    First Qtr Fiscal 2007% of
    
    
    
    
    
    
    % ofNet
    
    
    
    
    
    
    Net$
    
    
    Revenues
    
    
    $
    
    
    Revenues
    
    
    $ Change
    
    
    % ChangeCost of revenues from product sales
    
    $
    76.8
    
    
    
    52.5
    %
    
    $
    85.4
    
    
    
    43.7
    %
    
    $
    8.6
    
    
    
    11.2
    %Sales and marketing expenses
    
    
    44.2
    
    
    
    30.2
    %
    
    
    76.0
    
    
    
    38.9
    %
    
    
    31.8
    
    
    
    71.9
    %Product development expenses
    
    
    13.7
    
    
    
    9.4
    %
    
    
    22.4
    
    
    
    11.4
    %
    
    
    8.7
    
    
    
    63.5
    %General and administrative expenses
    
    
    9.4
    
    
    
    6.4
    %
    
    
    15.7
    
    
    
    8.0
    %
    
    
    6.3
    
    
    
    67.0
    %Depreciation and amortization
expenses
    
    
    6.9
    
    
    
    4.7
    %
    
    
    13.8
    
    
    
    7.1
    %
    
    
    6.9
    
    
    
    100.0
    %Total costs and expenses
    
    $
    151.0
    
    
    
    103.2
    %
    
    $
    213.3
    
    
    
    109.1
    %
    
    $
    62.3
    
    
    
    41.3
    %
  25




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##### Table of Contents



First Qtr
    
    
    First QtrFiscal 2007
    
    
    Fiscal 2008Cost of revenues from product sales
    
    $
    76.8
    
    
    $
    85.4As a percentage of net revenues from product sales
    
    
    70.6
    %
    
    
    69.4
    %
        26




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##### Table of Contents



Income Taxes
   Liquidity and Capital Resources
 As ofDecember 29,
    
    
    March 29,2007
    
    
    2008(in millions)Cash and cash equivalents
    
    $
    231.5
    
    
    $
    42.8Percentage of total assets
    
    
    56.8
    %
    
    
    6.7
    %
    Cash Flow Changes
   27




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##### Table of Contents



Critical Accounting Policies
  Recent Accounting Pronouncements
  Seasonality
  
 ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
  
 ITEM 4: CONTROLS AND PROCEDURES.
 Evaluation of disclosure controls and procedures.
  Changes in internal control over financial reporting.
  28




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##### Table of Contents



PART II  OTHER INFORMATION
 
 ITEM 1: LEGAL PROCEEDINGS .
  
 ITEM 1A: RISK FACTORS.
  
 ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 3: DEFAULTS UPON SENIOR SECURITIES.
  
 ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS WHO ARE NOT ALSO DIRECTORS .
  
 ITEM 5: OTHER INFORMATION.
  
 ITEM 6: EXHIBITS.
 2.1
    
    
    Agreement and Plan of Merger, dated as of January 23, 2008, by and among GSI Commerce, Inc., Dolphin
Acquisition Corporation, E-Dialog, Inc. and OneLiberty Ventures 2000, L.P. (as Stockholders Representative)
(filed with the Companys current Report on Form 8-K filed on January 29, 2008 and incorporated herein by
reference)2.2
    
    
    Voting and Support Agreement, dated as of January 23, 2008, by and among GSI Commerce, Inc. and each of the
individuals and entities listed on a signature page thereto (filed with the Companys current Report on Form
8-K filed on January 29, 2008 and incorporated herein by reference)10.1
    
    
    Credit Agreement, dated as of January 11, 2008, by and among GSI Commerce Solutions, Inc., the Guarantors
named therein, the Lenders named therein, PNC Bank, National Association, as administrative agent, and Bank
of America, N.A., as syndication agent (filed with the Companys current Report on Form 8-K filed on January
17, 2008 and incorporated herein by reference)10.2
    
    
    Offer
Letter, dated March 26, 2007, between GSI Commerce, Inc. and Scott Hardy31.1
    
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 193431.2
    
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 193432.1
    
    
    Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
    
    Confidential treatment has been requested for certain portions of this exhibit. Omitted
portions have been filed separately with the Securities and Exchange Commission.  29




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##### Table of Contents



SIGNATURES
   GSI COMMERCE, INC.By:
    /s/ MICHAEL G. RUBINMichael G. RubinChairman, President and Chief Executive OfficerBy:
    /s/ MICHAEL R. CONNMichael R. ConnExecutive Vice President, Finance
and Chief Financial Officer
(principal financial officer &
principal accounting officer)  30




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##### Table of Contents



EXHIBIT INDEX
 ExibitNo.
    
    Description2.1
    
    
    Agreement and Plan of Merger, dated as of January 23, 2008, by and among GSI Commerce, Inc., Dolphin
Acquisition Corporation, E-Dialog, Inc. and OneLiberty Ventures 2000, L.P. (as Stockholders Representative)
(filed with the Companys current Report on Form 8-K filed on January 29, 2008 and incorporated herein by
reference)2.2
    
    
    Voting and Support Agreement, dated as of January 23, 2008, by and among GSI Commerce, Inc. and each of the
individuals and entities listed on a signature page thereto (filed with the Companys current Report on Form
8-K filed on January 29, 2008 and incorporated herein by reference)10.1
    
    
    Credit Agreement, dated as of January 11, 2008, by and among GSI Commerce Solutions, Inc., the Guarantors
named therein, the Lenders named therein, PNC Bank, National Association, as administrative agent, and Bank
of America, N.A., as syndication agent (filed with the Companys current Report on Form 8-K filed on January
17, 2008 and incorporated herein by reference)10.2
    
    

Offer
Letter, dated March 26, 2007, between GSI Commerce, Inc. and
Scott Hardy31.1
    
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 193431.2
    
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 193432.1
    
    
    Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
    
    Confidential treatment has been requested for certain portions of this exhibit. Omitted
portions have been filed separately with the Securities and Exchange Commission.
  31