##### 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 July 4, 2009
 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
(State or other jurisdiction of 
incorporation or organization)
    
    04-2958132
(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
  o 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 AND SIX MONTHS ENDED JULY 4, 2009
 INDEX
 PagePART I  FINANCIAL INFORMATIONItem 1. Financial Statements (unaudited):Condensed Consolidated Balance Sheets as of January 3, 2009 and July 4, 2009
    
    
    3Condensed Consolidated Statements of Operations for the three- and six-month periods ended
June 28, 2008 (corrected) and July 4, 2009
    
    
    4Condensed Consolidated Statements of Cash Flows for the six-month periods ended
June 28, 2008 (corrected) and July 4, 2009
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    22Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    31Item 4. Controls and Procedures
    
    
    31PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    32Item 1A. Risk Factors
    
    
    32Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    51Item 3. Defaults Upon Senior Securities
    
    
    51Item 4. Submission of Matters to a Vote of Security Holders
    
    
    51Item 5. Other Information
    
    
    51Item 6. Exhibits
    
    
    52SIGNATURES
    
    
    53EX-31.1EX-31.2EX-32.1
   References To
    

Refer to the Years Ended/EndingFiscal 2005
    
    December 31, 2005Fiscal 2006
    
    December 30, 2006Fiscal 2007
    
    December 29, 2007Fiscal 2008
    
    January 3, 2009Fiscal 2009
    
    January 2, 2010Fiscal 2010
    
    January 1, 2011Fiscal 2011
    
    December 31, 2011Fiscal 2012
    
    December 29, 2012Fiscal 2013
    
    December 28, 2013
 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)
 January 3,
    
    
    July 4,2009
    
    
    2009ASSETSCurrent assets:Cash and cash equivalents
    
    $
    130,315
    
    
    $
    59,833Accounts receivable, less allowance for doubtful accounts of $2,747 and $2,622
    
    
    78,544
    
    
    
    51,247Inventory
    
    
    42,856
    
    
    
    37,135Deferred tax assets
    
    
    18,125
    
    
    
    18,697Prepaid expenses and other current assets
    
    
    11,229
    
    
    
    12,341Total current assets
    
    
    281,069
    
    
    
    179,253Property and equipment, net
    
    
    164,833
    
    
    
    158,159Goodwill
    
    
    194,996
    
    
    
    197,854Intangible assets, net of accumulated amortization of $18,340 and $23,302
    
    
    46,663
    
    
    
    43,586Long-term deferred tax assets
    
    
    11,296
    
    
    
    21,579Other assets, net of accumulated amortization of $16,384 and $17,569
    
    
    17,168
    
    
    
    13,520Total assets
    
    $
    716,025
    
    
    $
    613,951LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    98,100
    
    
    $
    49,248Accrued expenses
    
    
    116,747
    
    
    
    69,359Deferred revenue
    
    
    20,397
    
    
    
    20,853Convertible notes
    
    
    
    
    
    
    53,118Current portion of long-term debt
    
    
    4,887
    
    
    
    4,938Total current liabilities
    
    
    240,131
    
    
    
    197,516Convertible notes
    
    
    161,951
    
    
    
    113,924Long-term debt
    
    
    32,609
    
    
    
    30,114Deferred revenue and other long-term liabilities
    
    
    6,838
    
    
    
    9,297Total liabilities
    
    
    441,529
    
    
    
    350,851Commitments and contingencies (Note 7)Stockholders equity:Preferred stock, $0.01 par value, 5,000,000 shares authorized; 0 shares issued
and
outstanding as of January 3, 2009 and July 4, 2009
    
    
    
    
    
    
    Common stock, $0.01 par value, 90,000,000 shares authorized; 47,630,824 and
49,037,690 shares issued as of January 3, 2009 and July 4, 2009
respectively; 47,630,621 and 49,037,487 shares outstanding as of January 3,
2009 and July 4, 2009, respectively
    
    
    476
    
    
    
    490Additional paid in capital
    
    
    430,933
    
    
    
    443,964Accumulated other comprehensive loss
    
    
    (2,327
    )
    
    
    (1,545
    )Accumulated deficit
    
    
    (154,586
    )
    
    
    (179,809
    )Total stockholders equity
    
    
    274,496
    
    
    
    263,100Total liabilities and stockholders equity
    
    $
    716,025
    
    
    $
    613,951
  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 Ended
    
    
    Six Months EndedJune 28,
    
    
    July 4,
    
    
    June 28,
    
    
    July 4,2008 (1)
    
    
    2009
    
    
    2008 (1)
    
    
    2009Revenues:Net revenues from product sales
    
    $
    107,055
    
    
    $
    91,192
    
    
    $
    230,175
    
    
    $
    197,383Service fee revenues
    
    
    86,154
    
    
    
    95,989
    
    
    
    158,577
    
    
    
    186,273Net revenues
    
    
    193,209
    
    
    
    187,181
    
    
    
    388,752
    
    
    
    383,656Costs and expenses:Cost of revenues from product sales
    
    
    78,444
    
    
    
    70,442
    
    
    
    163,861
    
    
    
    149,797Marketing
    
    
    11,853
    
    
    
    7,054
    
    
    
    28,729
    
    
    
    17,915Account management and operations, inclusive of $1,364,
$2,394, $2,831 and $4,650 of stock-based compensation
    
    
    57,550
    
    
    
    59,055
    
    
    
    116,993
    
    
    
    116,796Product development, inclusive of $687, $1,185, $1,297
and $2,636 of stock-based compensation
    
    
    25,214
    
    
    
    28,101
    
    
    
    47,835
    
    
    
    56,475General and administrative, inclusive of $2,273, $2,513,
$4,864 and $5,760 of stock-based compensation
    
    
    18,694
    
    
    
    19,527
    
    
    
    34,948
    
    
    
    38,804Depreciation and amortization
    
    
    18,826
    
    
    
    15,279
    
    
    
    32,635
    
    
    
    30,680Total costs and expenses
    
    
    210,581
    
    
    
    199,458
    
    
    
    425,001
    
    
    
    410,467Loss from operations
    
    
    (17,372
    )
    
    
    (12,277
    )
    
    
    (36,249
    )
    
    
    (26,811
    )Other (income) expense:Interest expense
    
    
    4,539
    
    
    
    4,759
    
    
    
    8,909
    
    
    
    9,555Interest income
    
    
    (168
    )
    
    
    (54
    )
    
    
    (1,207
    )
    
    
    (205
    )Other (income) expense
    
    
    208
    
    
    
    (394
    )
    
    
    353
    
    
    
    (165
    )Total other expense
    
    
    4,579
    
    
    
    4,311
    
    
    
    8,055
    
    
    
    9,185Loss before income taxes
    
    
    (21,951
    )
    
    
    (16,588
    )
    
    
    (44,304
    )
    
    
    (35,996
    )Benefit for income taxes
    
    
    (1,604
    )
    
    
    (3,475
    )
    
    
    (12,459
    )
    
    
    (10,773
    )Net loss
    
    $
    (20,347
    )
    
    $
    (13,113
    )
    
    $
    (31,845
    )
    
    $
    (25,223
    )Basic and diluted loss per share
    
    $
    (0.43
    )
    
    $
    (0.27
    )
    
    $
    (0.68
    )
    
    $
    (0.52
    )Weighted average shares outstanding  basic and diluted
    
    
    47,364
    
    
    
    48,681
    
    
    
    47,144
    
    
    
    48,304
 
 (1)
    
    As retrospectively adjusted and corrected, see Note 13.  4




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GSI COMMERCE, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 Six Months EndedJune 28,
    
    
    July 4,2008 (1)
    
    
    2009Cash Flows from Operating Activities:Net loss
    
    $
    (31,845
    )
    
    $
    (25,223
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation
    
    
    26,827
    
    
    
    25,821Amortization
    
    
    5,808
    
    
    
    4,859Amortization of discount on convertible notes
    
    
    4,617
    
    
    
    5,092Stock-based compensation
    
    
    8,992
    
    
    
    13,046Foreign currency transaction gains
    
    
    
    
    
    
    (153
    )Gain on disposal of equipment
    
    
    (282
    )
    
    
    Deferred income taxes
    
    
    (10,834
    )
    
    
    (10,737
    )Changes in operating assets and liabilities:Accounts receivable, net
    
    
    15,248
    
    
    
    28,156Inventory
    
    
    6,336
    
    
    
    5,721Prepaid expenses and other current assets
    
    
    (2,081
    )
    
    
    (923
    )Other assets, net
    
    
    683
    
    
    
    1,824Accounts payable and accrued expenses
    
    
    (68,115
    )
    
    
    (97,290
    )Deferred revenue
    
    
    7,181
    
    
    
    155Net cash used in operating activities
    
    
    (37,465
    )
    
    
    (49,652
    )Cash Flows from Investing Activities:Payments for acquisitions of businesses, net of cash acquired
    
    
    (145,001
    )
    
    
    (2,273
    )Cash paid for property and equipment, including internal use software
    
    
    (29,866
    )
    
    
    (17,929
    )Proceeds from disposition of assets
    
    
    1,500
    
    
    
    Release from restricted cash escrow funds
    
    
    
    
    
    
    1,052Net cash used in investing activities
    
    
    (173,367
    )
    
    
    (19,150
    )Cash Flows from Financing Activities:Borrowings on revolving credit loan
    
    
    30,000
    
    
    
    Debt issuance costs paid
    
    
    (550
    )
    
    
    (42
    )Repayments of capital lease obligations
    
    
    (1,004
    )
    
    
    (2,353
    )Repayments of mortgage note
    
    
    (110
    )
    
    
    (91
    )Proceeds from exercise of common stock options
    
    
    572
    
    
    
    522Net cash provided by (used in) financing activities
    
    
    28,908
    
    
    
    (1,964
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    (29
    )
    
    
    284Net decrease in cash and cash equivalents
    
    
    (181,953
    )
    
    
    (70,482
    )Cash and cash equivalents, beginning of period
    
    
    231,511
    
    
    
    130,315Cash and cash equivalents, end of period
    
    $
    49,558
    
    
    $
    59,833Supplemental Cash Flow InformationCash paid during the period for interest
    
    $
    4,483
    
    
    $
    4,080Cash paid during the period for income taxes
    
    
    434
    
    
    
    2,352Noncash Investing and Financing Activities:Accrual for purchases of property and equipment
    
    
    5,522
    
    
    
    4,494
 
 (1)
    
    As retrospectively adjusted and corrected, see Note 13.  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
     NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Use of Estimates:
 Client Revenue Share:
 Shipping and Handling Costs:
 Fulfillment Costs:
 Recent Accounting Pronouncements:
 6




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GSI COMMERCE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)
     Long-Term Debt and Credit Facility Financial Statement
Correction of Misstatement and Retrospective
Application of FSP APB 14-1
   7




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GSI COMMERCE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)
   Subsequent Events
  NOTE 3 FAIR VALUE OF FINANCIAL INSTRUMENTS
  Fair Value Measurements on January 3, 2009Quoted Prices in
    
    
    
    
    
    SignificantActive Markets for
    
    Significant Other
    
    UnobservableIdentical Assets
    
    Observable Inputs
    
    InputsRecurring Fair Value Measures
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)AssetsCash and cash equivalents(1)Money market mutual funds
    
    $
    97,849
    
    
    $
    
    
    
    $
    
 
 (1)
    
    Cash and cash equivalents total $130,315 as of January 3, 2009, and are comprised of $97,849
of money market mutual funds and $32,466 of bank deposits. 8




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GSI COMMERCE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)
 Fair Value Measurements on July 4, 2009Quoted Prices in
    
    
    
    
    
    SignificantActive Markets for
    
    Significant Other
    
    UnobservableIdentical Assets
    
    Observable Inputs
    
    InputsRecurring Fair Value Measures
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)AssetsCash and cash equivalents(1)Money market mutual funds
    
    $
    42,263
    
    
    $
    
    
    
    $
    
 
 (1)
    
    Cash and cash equivalents total $59,833 as of July 4, 2009, and are comprised of $42,263 of
money market mutual funds and $17,570 of bank deposits.  Fair Value Measurements on January 3, 2009Quoted Prices in
    
    
    
    
    
    
    SignificantActive Markets for
    
    
    Significant Other
    
    
    UnobservableIdentical Assets
    
    
    Observable Inputs
    
    
    InputsNonrecurring Fair Value Measures
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)AssetsOther assetsEquity investments
    
    $
    
    
    
    $
    
    
    
    $
    1,418$
    
    
    
    $
    
    
    
    $
    1,418
   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
  January 3,
    
    
    July 4,2009
    
    
    2009Computer hardware and software
    
    $
    190,957
    
    
    $
    205,133Building and building improvements
    
    
    44,721
    
    
    
    44,797Furniture, warehouse and office equipment, and other
    
    
    40,423
    
    
    
    43,893Land
    
    
    7,889
    
    
    
    7,889Leasehold improvements
    
    
    4,592
    
    
    
    5,269Capitalized leases
    
    
    28,141
    
    
    
    28,141Construction in progress
    
    
    1,497
    
    
    
    1,497318,220
    
    
    
    336,619Less: Accumulated depreciation
    
    
    (153,387
    )
    
    
    (178,460
    )Property and equipment, net
    
    $
    164,833
    
    
    $
    158,159
  NOTE 5GOODWILL AND OTHER INTANGIBLE ASSETS
  InteractiveE-Commerce
    
    
    MarketingServices
    
    
    Services
    
    
    ConsolidatedJanuary 3, 2009
    
    $
    82,758
    
    
    $
    112,238
    
    
    $
    194,996Acquisition(1)
    
    
    
    
    
    
    2,637
    
    
    
    2,637Foreign currency translation
    
    
    221
    
    
    
    
    
    
    
    221July 4, 2009
    
    $
    82,979
    
    
    $
    114,875
    
    
    $
    197,854
 
 (1)
    
    In April 2009, the Company completed an acquisition of a digital marketing services
agency. The allocation of the purchase price over the fair value of the tangible and
intangible assets acquired resulted in $2,637 of goodwill. The acquisition did not have a
material impact on the Companys condensed consolidated financial statements. 10




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GSI COMMERCE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)
  Weighted-January 3,
    
    
    July 4,
    
    
    Average2009
    
    
    2009
    
    
    Life(in years)Gross carrying value of intangible assets
subject to amortization:Customer contracts
    
    $
    38,773
    
    
    $
    39,888
    
    
    
    2.5Non-compete agreements
    
    
    3,838
    
    
    
    3,838
    
    
    
    3.0Purchased technology
    
    
    4,493
    
    
    
    4,493
    
    
    
    4.0Trade names
    
    
    470
    
    
    
    470
    
    
    
    1.1Foreign currency translation
    
    
    (691
    )
    
    
    (461
    )46,883
    
    
    
    48,228
    
    
    
    2.6Accumulated amortization:Customer contracts
    
    
    (15,302
    )
    
    
    (18,879
    )Non-compete agreements
    
    
    (1,599
    )
    
    
    (2,239
    )Purchased technology
    
    
    (1,152
    )
    
    
    (1,773
    )Trade names
    
    
    (470
    )
    
    
    (470
    )Foreign currency translation
    
    
    183
    
    
    
    59(18,340
    )
    
    
    (23,302
    )Net carrying value:Customer contracts
    
    
    23,471
    
    
    
    21,009Non-compete agreements
    
    
    2,239
    
    
    
    1,599Purchased technology
    
    
    3,341
    
    
    
    2,720Trade names
    
    
    
    
    
    
    Foreign currency translation
    
    
    (508
    )
    
    
    (402
    )Total intangible assets subject to amortization, net
    
    
    28,543
    
    
    
    24,926Indefinite life intangible assets:Trade names
    
    
    18,120
    
    
    
    18,660Total intangible assets
    
    $
    46,663
    
    
    $
    43,586
  Fiscal 2009
    
    $
    5,163Fiscal 2010
    
    
    8,257Fiscal 2011
    
    
    5,929Fiscal 2012
    
    
    2,538Fiscal 2013
    
    
    1,786Thereafter
    
    
    1,482$
    25,155
 11




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GSI COMMERCE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)
 NOTE 6LONG-TERM DEBT AND CREDIT FACILITY
  January 3,
    
    
    July 4,2009
    
    
    2009Convertible notes
    
    $
    161,951
    
    
    $
    167,042Notes payable (1)
    
    
    12,663
    
    
    
    12,571Capital lease obligations
    
    
    24,833
    
    
    
    22,481Credit facility (2)
    
    
    
    
    
    
    199,447
    
    
    
    202,094Less:
Current portion of convertible notes
(3)
    
    
    
    
    
    
    (53,118
    )Less: Current portion of notes payable
    
    
    (184
    )
    
    
    (190
    )Less: Current portion of capital lease obligations
    
    
    (4,703
    )
    
    
    (4,748
    )$
    194,560
    
    
    $
    144,038
 
 (1)
    
    The estimated fair market value of the notes payable approximated their carrying
value as of July 4, 2009 and January 3, 2009.(2)
    
    The Company had no outstanding borrowings and $4,073 of outstanding letters of
credit under its $90,000 secured revolving credit facility as of July 4, 2009.(3)
    
    In the second quarter of fiscal 2009, the Company reclassified the $53,118 debt
carrying value of its 3% convertible notes from long-term liabilities
to short-term liabilities as holders are permitted to require the
Company to repurchase the notes for 100% of the $57,500 principal
amount outstanding on June 1, 2010.  3% Convertible Notes due 2025
   12




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GSI COMMERCE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)
  As of
    
    As ofJanuary 3, 2009
    
    July 4, 2009Carrying amount of the equity component
    
    
    18,187
    
    
    
    18,187Principal amount of the liability component
    
    
    57,500
    
    
    
    57,500Unamortized discount of liability component
    
    
    6,574
    
    
    
    4,382Net carrying amount of liability component
    
    
    50,926
    
    
    
    53,118Remaining amortization period of discount
    
    
    
    
    
    11 monthsEffective interest rate on liability component
    
    
    
    
    
    
    12.00
    %
   2.5% Convertible Notes due 2027
    As of
    
    As ofJanuary 3, 2009
    
    July 4, 2009Carrying amount of the equity component
    
    
    26,783
    
    
    
    26,783Principal amount of the liability component
    
    
    150,000
    
    
    
    150,000Unamortized discount of liability component
    
    
    38,975
    
    
    
    36,076Net carrying amount of liability component
    
    
    111,025
    
    
    
    113,924Remaining amortization period of discount
    
    
    
    
    
    59 monthsEffective interest rate on liability component
    
    
    
    
    
    
    8.60
    %
   13




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GSI COMMERCE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)
 NOTE 7COMMITMENTS AND CONTINGENCIES
 Legal Proceedings
   Operating and Capital Commitments
  Payments due by fiscal year2009
    
    
    2010
    
    
    2011
    
    
    2012
    
    
    2013
    
    
    Thereafter
    
    
    TotalOperating lease obligations(1)
    
    $
    8,768
    
    
    $
    16,847
    
    
    $
    13,869
    
    
    $
    10,506
    
    
    $
    8,488
    
    
    $
    19,289
    
    
    $
    77,767Purchase obligations and marketing commitments(1)
    
    
    91,721
    
    
    
    10,897
    
    
    
    6,970
    
    
    
    5,978
    
    
    
    3,978
    
    
    
    49,795
    
    
    
    169,339Client revenue share payments(1)
    
    
    10,100
    
    
    
    20,768
    
    
    
    21,400
    
    
    
    14,658
    
    
    
    4,368
    
    
    
    28,760
    
    
    
    100,054Debt interest(1)
    
    
    3,650
    
    
    
    5,241
    
    
    
    4,509
    
    
    
    4,497
    
    
    
    4,481
    
    
    
    11,061
    
    
    
    33,439Debt obligations
    
    
    92
    
    
    
    57,696
    
    
    
    209
    
    
    
    563
    
    
    
    237
    
    
    
    161,275
    
    
    
    220,072Capital lease obligations, including interest(2)
    
    
    2,969
    
    
    
    5,976
    
    
    
    5,925
    
    
    
    5,705
    
    
    
    3,608
    
    
    
    1,747
    
    
    
    25,930Total
    
    $
    117,300
    
    
    $
    117,425
    
    
    $
    52,882
    
    
    $
    41,907
    
    
    $
    25,160
    
    
    $
    271,927
    
    
    $
    626,601
 
 (1)
    
    Not required to be recorded in the Condensed Consolidated Balance Sheet as of July 4,
2009 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.  14




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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)
 NOTE 8STOCK AWARDS
  Stock Options and Warrants
  WeightedWeighted
    
    AverageNumber of
    
    Average
    
    Remaining
    
    AggregateShares
    
    Exercise
    
    Contractual
    
    Intrinsic(in thousands)
    
    Price
    
    Life (in years)
    
    ValueOutstanding at January 3, 2009
    
    
    4,244
    
    
    $
    9.50Granted
    
    
    
    
    
    
    Exercised
    
    
    (65
    )
    
    $
    7.99Forfeited/Cancelled
    
    
    (132
    )
    
    $
    12.53Outstanding at July 4, 2009
    
    
    4,047
    
    
    $
    9.44
    
    
    
    3.18
    
    
    $
    21,566Vested and expected to vest at July 4, 2009
    
    
    4,047
    
    
    $
    9.44
    
    
    
    3.18
    
    
    $
    21,566Exercisable at July 4, 2009
    
    
    4,047
    
    
    $
    9.44
    
    
    
    3.18
    
    
    $
    21,566
  Restricted Stock Units and Awards
   WeightedNumber of
    
    AverageShares
    
    Grant Date(in thousands)
    
    Fair ValueNonvested shares at January 3, 2009
    
    
    3,793
    
    
    $
    18.86Granted
    
    
    1,711
    
    
    $
    10.70Vested
    
    
    (852
    )
    
    $
    (15.70
    )Forfeited/Cancelled
    
    
    (187
    )
    
    $
    (14.31
    )Nonvested shares at July 4, 2009
    
    
    4,465
    
    
    $
    16.53
 15




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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)
  NOTE 9INCOME TAXES
       NOTE 10LOSS PER SHARE
  16




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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)
  June 28,
    
    July 4,2008
    
    2009Stock units and awards
    
    
    3,850
    
    
    
    4,465Stock options and warrants
    
    
    4,324
    
    
    
    4,047Convertible notes
    
    
    8,229
    
    
    
    8,22916,403
    
    
    
    16,741
  NOTE 11  COMPREHENSIVE LOSS
  Three Months Ended
    
    
    Six Months EndedJune 28,
    
    
    July 4,
    
    
    June 28,
    
    
    July 4,2008
    
    
    2009
    
    
    2008
    
    
    2009Net loss
    
    $
    (20,347
    )
    
    $
    (13,113
    )
    
    $
    (31,845
    )
    
    $
    (25,223
    )Other comprehensive income (loss):Cumulative translation adjustment
    
    
    10
    
    
    
    845
    
    
    
    56
    
    
    
    782Comprehensive loss
    
    $
    (20,337
    )
    
    $
    (12,268
    )
    
    $
    (31,789
    )
    
    $
    (24,441
    )
 NOTE 12SEGMENT INFORMATION
    17




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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 June 28, 2008E-Commerce
    
    
    Interactive
    
    
    IntersegmentServices
    
    
    Marketing Services
    
    
    Eliminations
    
    
    ConsolidatedNet revenues
    
    $
    175,936
    
    
    $
    21,529
    
    
    $
    (4,256
    )
    
    $
    193,209Costs and expenses before depreciation, amortization
and stock-based compensation expense
    
    
    173,860
    
    
    
    17,827
    
    
    
    (4,256
    )
    
    
    187,431Operating income before depreciation,
amortization and stock-based compensation expense
    
    
    2,076
    
    
    
    3,702
    
    
    
    
    
    
    
    5,778Depreciation and amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,826Stock-based compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,324Loss from operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17,372
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,539Interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (168
    )Other expense, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    208Loss before
income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (21,951
    )
 Three Months Ended July 4, 2009E-Commerce
    
    
    Interactive
    
    
    IntersegmentServices
    
    
    Marketing Services
    
    
    Eliminations
    
    
    ConsolidatedNet revenues
    
    $
    163,770
    
    
    $
    28,486
    
    
    $
    (5,075
    )
    
    $
    187,181Costs and expenses before depreciation, amortization
and stock-based compensation expense
    
    
    161,336
    
    
    
    21,826
    
    
    
    (5,075
    )
    
    
    178,087Operating income before depreciation, amortization
and stock-based compensation expense
    
    
    2,434
    
    
    
    6,660
    
    
    
    
    
    
    
    9,094Depreciation and amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,279Stock-based compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,092Loss from operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12,277
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,759Interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (54
    )Other income, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (394
    )Loss before
income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (16,588
    )
 18




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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)
 Six Months Ended June 28, 2008E-Commerce
    
    
    Interactive
    
    
    IntersegmentServices
    
    
    Marketing Services
    
    
    Eliminations
    
    
    ConsolidatedNet revenues
    
    $
    363,535
    
    
    $
    33,614
    
    
    $
    (8,397
    )
    
    $
    388,752Costs and expenses before depreciation, amortization
and stock-based compensation expense
    
    
    362,752
    
    
    
    29,019
    
    
    
    (8,397
    )
    
    
    383,374Operating income before depreciation,
amortization and stock-based compensation expense
    
    
    783
    
    
    
    4,595
    
    
    
    
    
    
    
    5,378Depreciation and amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32,635Stock-based compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,992Loss from operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (36,249
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,909Interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,207
    )Other expense, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    353Loss before
income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (44,304
    )
 Six Months Ended July 4, 2009E-Commerce
    
    
    Interactive
    
    
    IntersegmentServices
    
    
    Marketing Services
    
    
    Eliminations
    
    
    ConsolidatedNet revenues
    
    $
    342,280
    
    
    $
    53,608
    
    
    $
    (12,232
    )
    
    $
    383,656Costs and expenses before depreciation, amortization
and stock-based compensation expense
    
    
    336,177
    
    
    
    42,796
    
    
    
    (12,232
    )
    
    
    366,741Operating income before depreciation, amortization
and stock-based compensation expense
    
    
    6,103
    
    
    
    10,812
    
    
    
    
    
    
    
    16,915Depreciation and amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,680Stock-based compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,046Loss from operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26,811
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,555Interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (205
    )Other income, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (165
    )Loss before
income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (35,996
    )
  NOTE 13FINANCIAL STATEMENT CORRECTION OF MISSTATEMENT AND RETROSPECTIVE APPLICATION OF FSP APB
14-1
 Summary of Significant
Accounting Policies Long-Term Debt and Credit Facility
  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)
    Effect of
    
    
    
    
    
    As RetrospectivelyAs Originally
    
    Retrospective
    
    Effect of
    
    Adjusted andCondensed Consolidated Statement of Operations
    
    Reported
    
    Application
    
    Correction
    
    CorrectedThree Months Ended June 28, 2008Account management and operations
    
    $
    57,497
    
    
    $
    
    
    
    $
    53
    
    
    $
    57,550Product development
    
    
    25,184
    
    
    
    
    
    
    
    30
    
    
    
    25,214General and administrative
    
    
    18,609
    
    
    
    
    
    
    
    85
    
    
    
    18,694Total costs and expenses
    
    
    210,413
    
    
    
    
    
    
    
    168
    
    
    
    210,581Loss from operations
    
    
    (17,204
    )
    
    
    
    
    
    
    (168
    )
    
    
    (17,372
    )Interest expense
    
    
    2,347
    
    
    
    2,192
    
    
    
    
    
    
    
    4,539Total other expense
    
    
    2,387
    
    
    
    2,192
    
    
    
    
    
    
    
    4,579Loss before income taxes
    
    
    (19,591
    )
    
    
    (2,192
    )
    
    
    (168
    )
    
    
    (21,951
    )Benefit for income taxes
    
    
    (631
    )
    
    
    (909
    )
    
    
    (64
    )
    
    
    (1,604
    )Net loss
    
    
    (18,960
    )
    
    
    (1,283
    )
    
    
    (104
    )
    
    
    (20,347
    )Basic and diluted loss per share
    
    
    (0.40
    )
    
    
    (0.03
    )
    
    
    
    
    
    
    (0.43
    )Six Months Ended June 28, 2008Account management and operations
    
    $
    116,607
    
    
    $
    
    
    
    $
    386
    
    
    $
    116,993Product development
    
    
    47,620
    
    
    
    
    
    
    
    215
    
    
    
    47,835General and administrative
    
    
    34,333
    
    
    
    
    
    
    
    615
    
    
    
    34,948Total costs and expenses
    
    
    423,785
    
    
    
    
    
    
    
    1,216
    
    
    
    425,001Loss from operations
    
    
    (35,033
    )
    
    
    
    
    
    
    (1,216
    )
    
    
    (36,249
    )Interest expense
    
    
    4,524
    
    
    
    4,385
    
    
    
    
    
    
    
    8,909Total other expense
    
    
    3,670
    
    
    
    4,385
    
    
    
    
    
    
    
    8,055Loss before income taxes
    
    
    (38,703
    )
    
    
    (4,385
    )
    
    
    (1,216
    )
    
    
    (44,304
    )Benefit for income taxes
    
    
    (10,178
    )
    
    
    (1,819
    )
    
    
    (462
    )
    
    
    (12,459
    )Net loss
    
    
    (28,525
    )
    
    
    (2,566
    )
    
    
    (754
    )
    
    
    (31,845
    )Basic and diluted loss per share
    
    
    (0.61
    )
    
    
    (0.05
    )
    
    
    (0.02
    )
    
    
    (0.68
    )
 Effect of
    
    
    
    
    
    As RetrospectivelyAs Originally
    
    Retrospective
    
    Effect of
    
    Adjusted andCondensed Consolidated Statement of Cash Flows
    
    Reported
    
    Application
    
    Correction
    
    CorrectedSix Months Ended June 28, 2008Net loss
    
    $
    (28,525
    )
    
    $
    (2,566
    )
    
    $
    (754
    )
    
    $
    (31,845
    )Amortization of discount on
convertible notes
    
    
    
    
    
    
    4,617
    
    
    
    
    
    
    
    4,617Stock-based compensation
    
    
    7,776
    
    
    
    
    
    
    
    1,216
    
    
    
    8,992Deferred income taxes
    
    
    (8,553
    )
    
    
    (1,819
    )
    
    
    (462
    )
    
    
    (10,834
    )Other assets, net
    
    
    915
    
    
    
    (232
    )
    
    
    
    
    
    
    683Net cash used in operating activities
    
    
    (37,465
    )
    
    
    
    
    
    
    
    
    
    
    (37,465
    )
 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)
 NOTE 14SUBSEQUENT EVENTS
  21




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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 clients operate, changes affecting the Internet and e-commerce, our
ability to develop and maintain relationships with strategic clients and suppliers and the timing
of our establishment, extension or termination of our relationships with strategic clients, 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 in our Form 10-K for the fiscal year
ended January 3, 2009, filed with the SEC on March 16, 2009. We expressly disclaim any intent or
obligation to update these forward-looking statements.
 Executive Overview
  
    
    Net revenues decreased 3% compared to the second quarter of fiscal 2008. Service fee
revenues grew 11% and net revenues from product sales decreased 15%. E-commerce services
segment net revenues decreased by 7% and interactive marketing services segment net
revenues increased by 33%.
 
    
    Net loss was $13.1 million in the second quarter of fiscal 2009, inclusive of a benefit
for income taxes of $3.5 million, compared to a net loss of $20.3 million in the second
quarter of fiscal 2008, inclusive of a tax benefit of $1.6 million. Loss from operations
improved to $12.3 million in the second quarter of fiscal 2009 compared to a loss of $17.4
million in the second quarter of fiscal 2008.
  
    
    For the remainder of fiscal 2009, compared to the same period in fiscal 2008, we expect
a modest decrease in net revenues due primarily to the termination of a client relationship
of one our top ten contributors of service fee revenues in fiscal 2008 as a result of the
clients liquidation, and the transition during fiscal 2009 of one owned inventory client
to a non-owned inventory deal structure. We believe that the client transition will result
in a decrease in net revenues from product sales partially offset by an increase in service
fee revenues and will have no material effect on earnings. We also expect this transition
will decrease our cost of revenues from product sales and our marketing expenses. In
addition, we believe, due to the current economic environment, same store e-commerce
revenues for the remainder of fiscal 2009 will grow at a more moderate rate than in fiscal
2008 and that capital expenditures will modestly decrease in fiscal 2009 compared to fiscal
2008. We continue to expect that we will have a net loss in fiscal 2009.
 Financial Statement Correction and Retrospective Application of FSP APB 14-1
 Financial Statement Correction of Misstatement and
Retrospective Application of FSP APB 14-1,
 Results of Operations
 Three-month period ended July 4, 2009 and June 28, 2008 (amounts in tables in millions):
 22




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##### Table of Contents



Net Revenues
  Net Revenues from Product Sales
 Service Fee Revenues.
 Second Qtr Fiscal 2009vs.Second Qtr Fiscal 2008Second Qtr Fiscal 2008
    
    
    Second Qtr Fiscal 2009
    
    
    Increase/(Decrease)
    
    
    % ChangeNet Revenues by Type:Net revenues from product sales
    
    $
    107.1
    
    
    
    55
    %
    
    $
    91.2
    
    
    
    49
    %
    
    $
    (15.9
    )
    
    
    (15
    %)Service fee revenues
    
    
    86.1
    
    
    
    45
    %
    
    
    96.0
    
    
    
    51
    %
    
    
    9.9
    
    
    
    11
    %Total net revenues
    
    $
    193.2
    
    
    
    100
    %
    
    $
    187.2
    
    
    
    100
    %
    
    $
    (6.0
    )
    
    
    (3
    %)Net Revenues by Segment:E-Commerce services
    
    $
    176.0
    
    
    
    91
    %
    
    $
    163.8
    
    
    
    88
    %
    
    $
    (12.2
    )
    
    
    (7
    %)Interactive marketing services
    
    
    21.5
    
    
    
    11
    %
    
    
    28.5
    
    
    
    15
    %
    
    
    7.0
    
    
    
    33
    %Intersegment eliminations
    
    
    (4.3
    )
    
    
    (2
    %)
    
    
    (5.1
    )
    
    
    (3
    %)
    
    
    (0.8
    )
    
    
    19
    %Total net revenues
    
    $
    193.2
    
    
    
    100
    %
    
    $
    187.2
    
    
    
    100
    %
    
    $
    (6.0
    )
    
    
    (3
    %)
 Net Revenues by Type
 Net Revenues from Product Sales.
 Service Fee Revenues.
  Net Revenues by Segment
 23




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##### Table of Contents



E-Commerce Services Segment Revenues.
  Net
Revenues by Type  Net Revenues from Product Sales
 Interactive Marketing Services Segment Revenues.
 Costs and Expenses
  Costs of Revenues from Product Sales.
 Marketing.
 Account Management and Operations.
 Product Development
 General and Administrative.
 Depreciation and Amortization.
 24




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Second Quarter of Fiscal 2009Second Quarter
    
    
    Second Quarter
    
    
    vs.of Fiscal 2008
    
    
    of Fiscal 2009
    
    
    Second Quarter of Fiscal 2008% of
    
    
    
    
    
    
    % ofNet
    
    
    
    
    
    
    Net
    
    
    Increase /$
    
    
    Revenues
    
    
    $
    
    
    Revenues
    
    
    (Decrease)
    
    
    % ChangeCost of revenues from product sales
    
    $
    78.4
    
    
    
    40
    %
    
    $
    70.4
    
    
    
    38
    %
    
    $
    (8.0
    )
    
    
    (10
    %)Marketing
    
    
    11.9
    
    
    
    6
    %
    
    
    7.1
    
    
    
    4
    %
    
    
    (4.8
    )
    
    
    (40
    %)Account management and operations
    
    
    57.6
    
    
    
    30
    %
    
    
    59.1
    
    
    
    32
    %
    
    
    1.5
    
    
    
    3
    %Product development
    
    
    25.2
    
    
    
    13
    %
    
    
    28.1
    
    
    
    15
    %
    
    
    2.9
    
    
    
    12
    %General and administrative
    
    
    18.7
    
    
    
    10
    %
    
    
    19.5
    
    
    
    10
    %
    
    
    0.8
    
    
    
    4
    %Depreciation and amortization
    
    
    18.8
    
    
    
    10
    %
    
    
    15.3
    
    
    
    8
    %
    
    
    (3.5
    )
    
    
    (19
    %)Total costs and expenses
    
    $
    210.6
    
    
    
    109
    %
    
    $
    199.5
    
    
    
    107
    %
    
    $
    (11.1
    )
    
    
    (5
    %)
 Cost of Revenues from Product Sales:
 Second Qtr
    
    Second QtrFiscal 2008
    
    Fiscal 2009Cost of revenues from product sales
    
    $
    78.4
    
    
    $
    70.4As a percentage of net revenues from product sales
    
    
    73
    %
    
    
    77
    %
   Marketing:
 Second Qtr
    
    Second QtrFiscal 2008
    
    Fiscal 2009Marketing
    
    $
    11.9
    
    
    $
    7.1As a percentage of net revenues from product sales
    
    
    11
    %
    
    
    8
    %
   Account Management and Operations.
 25




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##### Table of Contents



Product Development.
 General and Administrative.
 Depreciation and Amortization.
 Other (Income) Expense
 Second Quarter of Fiscal 2009Second Quarter
    
    
    Second Quarter
    
    
    vs.of Fiscal 2008
    
    
    of Fiscal 2009
    
    
    Second Quarter of Fiscal 2008% of
    
    
    
    
    
    
    % ofNet
    
    
    
    
    
    
    Net
    
    
    Increase /$
    
    
    Revenues
    
    
    $
    
    
    Revenues
    
    
    (Decrease)
    
    
    % ChangeInterest expense
    
    $
    4.6
    
    
    
    2.4
    %
    
    $
    4.8
    
    
    
    2.6
    %
    
    $
    0.2
    
    
    
    4
    %Interest income
    
    
    (0.2
    )
    
    
    (0.1
    %)
    
    
    (0.1
    )
    
    
    (0.1
    %)
    
    
    0.1
    
    
    
    (50
    %)Other (income) expense
    
    
    0.2
    
    
    
    0.1
    %
    
    
    (0.4
    )
    
    
    (0.2
    %)
    
    
    (0.6
    )
    
    
    (300
    %)Total other expenses
    
    $
    4.6
    
    
    
    2.4
    %
    
    $
    4.3
    
    
    
    2.3
    %
    
    $
    (0.3
    )
    
    
    (7
    %)
  Results of Operations
 Six-month period ended July 4, 2009 and June 28, 2008
(amounts in tables in millions):
 26




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##### Table of Contents



Net Revenues
 First Six Months of Fiscal 2009vs.First Six Months
    
    
    First Six Months
    
    
    First Six Months of Fiscal 2008of Fiscal 2008
    
    
    of Fiscal 2009
    
    
    Increase/(Decrease)
    
    
    % ChangeNet Revenues by Type:Net revenues from product sales
    
    $
    230.2
    
    
    
    59
    %
    
    $
    197.4
    
    
    
    51
    %
    
    $
    (32.8
    )
    
    
    (14
    %)Service fee revenues
    
    
    158.6
    
    
    
    41
    %
    
    
    186.3
    
    
    
    49
    %
    
    
    27.7
    
    
    
    17
    %Total net revenues
    
    $
    388.8
    
    
    
    100
    %
    
    $
    383.7
    
    
    
    100
    %
    
    $
    (5.1
    )
    
    
    (1
    %)Net Revenues by Segment:E-Commerce services
    
    $
    363.6
    
    
    
    93
    %
    
    $
    342.3
    
    
    
    89
    %
    
    $
    (21.3
    )
    
    
    (6
    %)Interactive marketing services
    
    
    33.6
    
    
    
    9
    %
    
    
    53.6
    
    
    
    14
    %
    
    
    20.0
    
    
    
    60
    %Intersegment eliminations
    
    
    (8.4
    )
    
    
    (2
    %)
    
    
    (12.2
    )
    
    
    (3
    %)
    
    
    (3.8
    )
    
    
    45
    %Total net revenues
    
    $
    388.8
    
    
    
    100
    %
    
    $
    383.7
    
    
    
    100
    %
    
    $
    (5.1
    )
    
    
    (1
    %)
 Net Revenues by Type
 Net Revenues from Product Sales.
 Service Fee Revenues.
  Net Revenues by Segment
 E-Commerce Services Segment Revenues.
  Net
Revenues by Type  Net Revenues from Product Sales
 Interactive Marketing Services Segment Revenues.
 Costs and Expenses
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First Six Months of Fiscal 2009First Six Months
    
    
    First Six Months
    
    
    vs.of Fiscal 2008
    
    
    of Fiscal 2009
    
    
    First Six Months of Fiscal 2008% of
    
    
    
    
    
    
    % ofNet
    
    
    
    
    
    
    Net
    
    
    Increase /$
    
    
    Revenues
    
    
    $
    
    
    Revenues
    
    
    (Decrease)
    
    
    % ChangeCost of revenues from product sales
    
    $
    163.9
    
    
    
    42
    %
    
    $
    149.8
    
    
    
    39
    %
    
    $
    (14.1
    )
    
    
    (9
    %)Marketing
    
    
    28.8
    
    
    
    8
    %
    
    
    17.9
    
    
    
    5
    %
    
    
    (10.9
    )
    
    
    (38
    %)Account management and operations
    
    
    117.0
    
    
    
    30
    %
    
    
    116.8
    
    
    
    30
    %
    
    
    (0.2
    )
    
    
    (0
    %)Product development
    
    
    47.8
    
    
    
    12
    %
    
    
    56.5
    
    
    
    15
    %
    
    
    8.7
    
    
    
    18
    %General and administrative
    
    
    34.9
    
    
    
    9
    %
    
    
    38.8
    
    
    
    10
    %
    
    
    3.9
    
    
    
    11
    %Depreciation and amortization
    
    
    32.6
    
    
    
    8
    %
    
    
    30.7
    
    
    
    8
    %
    
    
    (1.9
    )
    
    
    (6
    %)Total costs and expenses
    
    $
    425.0
    
    
    
    109
    %
    
    $
    410.5
    
    
    
    107
    %
    
    $
    (14.5
    )
    
    
    (3
    %)
 Cost of Revenues from Product Sales:
 First Six Months
    
    First Six Monthsof Fiscal 2008
    
    of Fiscal 2009Cost of revenues from product sales
    
    $
    163.9
    
    
    $
    149.8As a percentage of net revenues from product sales
    
    
    71
    %
    
    
    76
    %
   Marketing:
 First Six Months
    
    First Six Monthsof Fiscal 2008
    
    of Fiscal 2009Marketing
    
    $
    28.8
    
    
    $
    17.9As a percentage of net revenues from product sales
    
    
    13
    %
    
    
    9
    %
   Account Management and Operations.
 28




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Product Development.
 General and Administrative.
 Depreciation and Amortization.
 Other (Income) Expense
 First Six Months of Fiscal 2009First Six Months
    
    
    First Six Months
    
    
    vs.of Fiscal 2008
    
    
    of Fiscal 2009
    
    
    First Six Months of Fiscal 2008% of
    
    
    
    
    
    
    % ofNet
    
    
    
    
    
    
    Net
    
    
    Increase /$
    
    
    Revenues
    
    
    $
    
    
    Revenues
    
    
    (Decrease)
    
    
    % ChangeInterest expense
    
    $
    8.9
    
    
    
    2.3
    %
    
    $
    9.6
    
    
    
    2.5
    %
    
    $
    0.7
    
    
    
    8
    %Interest income
    
    
    (1.2
    )
    
    
    (0.3
    %)
    
    
    (0.2
    )
    
    
    (0.1
    %)
    
    
    1.0
    
    
    
    (83
    %)Other (income) expense
    
    
    0.4
    
    
    
    0.1
    %
    
    
    (0.2
    )
    
    
    (0.1
    %)
    
    
    (0.6
    )
    
    
    (150
    %)Total other expenses
    
    $
    8.1
    
    
    
    2.1
    %
    
    $
    9.2
    
    
    
    2.3
    %
    
    $
    1.1
    
    
    
    14
    %
  Income Taxes
   29




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##### Table of Contents



Seasonality
  Liquidity and Capital Resources
 As ofJanuary 3,
    
    July 4,2009
    
    2009(in millions)Cash and cash equivalents
    
    $
    130.3
    
    
    $
    59.8Percentage of total assets
    
    
    18
    %
    
    
    10
    %
  Sources of Cash
    Uses of Cash
   30




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##### Table of Contents



Outlook
  Critical Accounting Policies
  Recent Accounting Pronouncements
 Summary of Significant Accounting
Policies
 
 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.
 31




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##### Table of Contents



PART II  OTHER INFORMATION
 
 ITEM 1: LEGAL PROCEEDINGS .
 Commitments and Contingencies
 
 ITEM 1A: RISK FACTORS.
 Any investment in our securities involves a high degree of risk. You should carefully consider
the following information about these risks, together with the other information contained in this
prospectus. If any of the following risks occur, our business, financial position and operating
results could be materially harmed. In these circumstances, the market price of our common stock
could decline, and you may lose all or part of the money you paid to buy our common stock.
Additional risks not necessarily known to us or that we currently deem immaterial may also impair
our business operations.
 Risks Related to Our Business
 Our future success cannot be predicted based upon our limited operating history.
  Our failure to manage growth and diversification of our business could harm us.
  We have an accumulated deficit and may incur additional losses.
   
    
    launch new clients;
    
    expand internationally;
    
    enhance our fulfillment capabilities and increase fulfillment capacity;
    
    develop new technologies and features to improve our clients e-commerce
businesses;
    
    enhance our customer care center capabilities to better serve customers
needs and increase customer care capacity;
    
    expand our marketing services business;
    
    increase our general and administrative functions to support our growing
operations;
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##### Table of Contents




    
    continue our business development, sales and marketing activities; and
    
    make strategic or opportunistic acquisitions of complementary or new
businesses or assets or internally develop new business initiatives.If we incur expenses at a greater pace than we generate revenues, we could incur additional
losses.
 Our success is tied to the success of, and continued relationships with, the clients for which
we operate e-commerce businesses.
  The uncertainty regarding the general economy may reduce our revenues.
  We rely on access to the credit and capital markets to finance a portion of our working
capital requirements and support our liquidity needs. Access to these markets may be adversely
affected by factors beyond our control, including turmoil in the financial services industry,
volatility in securities trading markets and general economic downturns.
  Our substantial indebtedness could adversely affect our financial condition.
  33




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##### Table of Contents



Our indebtedness could have important consequences to you. For example, it could:
 
    
    increase our vulnerability to general adverse economic and industry
conditions;
 
    
    limit our ability to obtain additional financing;
 
    
    require the dedication of a substantial portion of our cash flow from
operations to the payment of interest and principal on our indebtedness, thereby
reducing the availability of such cash flow to fund our growth strategy, working
capital, capital expenditures and other general corporate purposes;
 
    
    limit our flexibility in planning for, or reacting to, changes in our
business and the industry;
 
    
    place us at a competitive disadvantage relative to competitors with less
debt; and
 
    
    make it difficult or impossible for us to pay the principal amount of the
convertible notes at maturity, thereby causing an event of default under the
convertible notes.
  The terms of our secured revolving credit facility impose financial and operating restrictions.
  
    
    incur additional indebtedness or pre-pay existing indebtedness;
 
    
    pay dividends or make other distributions in respect of our equity
securities;
 
    
    sell assets, including the capital stock of us and our subsidiaries;
 
    
    enter into certain transactions with our affiliates;
 
    
    transfer any capital stock of any subsidiary or permit any subsidiary to
issue capital stock;
 
    
    create liens;
 
    
    make certain loans or investments; and
 
    
    effect a consolidation or merger or transfer of all or substantially all
of our assets.
  34




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##### Table of Contents



We may in the future need additional debt or equity financing to continue our growth. Such
additional financing may not be available on satisfactory terms or it may not be available when
needed, or at all.
  If we fail to manage our exposure to global financial and securities market risk successfully,
our operating results and financial statements could be materially impacted.
  Seasonal fluctuations in sales cause wide fluctuations in our quarterly results.
    Consumers are constantly changing their buying preferences. If we and our clients fail to
anticipate these changes and adjust inventory accordingly, we could experience lower sales, higher
inventory markdowns and lower margins for the inventory that we own.
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##### Table of Contents



High merchandise returns or shrinkage rates could adversely affect our business, financial
condition and results of operations.
  Our growth depends, in part, on our ability to add and launch new clients on a timely basis
and on favorable terms and to extend the length of existing client agreements on favorable terms.
  We enter into contracts with our clients. In fiscal 2008, we derived 38.0% of our revenue from
five clients e-commerce businesses. If we do not maintain good working relationships with our
clients, or perform as required under these agreements, it could adversely affect our business.
  We and our clients must develop and maintain relationships with key manufacturers to obtain a
sufficient assortment and quantity of quality merchandise on acceptable commercial terms. If we or
our clients are unable to do so, it could adversely affect our business, results of operations and
financial condition.
  36




---



##### Table of Contents



We rely on our ability to enter into marketing and promotional agreements with online
services, search engines, comparison shopping sites, affiliate marketers and other web sites to
drive traffic to the e-commerce businesses we operate. If we are unable to enter into or properly
develop these marketing and promotional agreements, our ability to generate revenue could be
adversely affected. In addition, new technologies could block our ads and manipulate web search
results, which could harm our business.
   If we experience problems in our fulfillment operations, our business could be adversely
affected.
    A disruption in our operations could materially and adversely affect our business, results of
operations and financial condition.
 37




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##### Table of Contents




    
    fire, flood, hurricane, tornado, earthquake or other natural disasters;
 
    
    power losses and interruptions;
 
    
    Internet, telecommunications or data network failures;
 
    
    physical and electronic break-ins or security breaches;
 
    
    computer viruses;
 
    
    acts of terrorism; and
 
    
    other similar events.
    If we do not respond to rapid technological changes, our services and proprietary technology
and systems may become obsolete.
   Our success is tied to the continued growth in the use of the Internet and the adequacy of the
Internet infrastructure.
  38




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##### Table of Contents




    
    actual or perceived lack of security of information or privacy protection;
 
    
    lack of access and ease of use;
 
    
    congestion of traffic on the Internet;
 
    
    inconsistent quality of service and lack of availability of
cost-effective, high-speed service;
 
    
    possible disruptions, computer viruses or other damage to Internet servers
or to users computers;
 
    
    governmental regulation;
 
    
    uncertainty regarding intellectual property ownership;
 
    
    lack of access to high-speed communications equipment; and
 
    
    increases in the cost of accessing the Internet.
  Consumers may be unwilling to use the Internet to purchase goods.
   We and/or our clients may be unable to protect our and their proprietary technology and
intellectual property rights.
  39




---



##### Table of Contents



We may be subject to intellectual property claims or competition or trade practices claims
that could be costly and could disrupt our business.
  We may not be able to compete successfully against current and future competitors, which could
harm our margins and our business.
    We may be subject to product liability claims that could be costly and time-consuming.
  40




---



##### Table of Contents



We may be liable if third parties misappropriate our customers personal information.
Additionally, we are limited in our ability to use and disclose customer information.
  Changes to credit card association fees, rules, or practices could harm our business.
  Credit card fraud could adversely affect our business.
  If one or more states successfully assert that we should collect or should have collected
sales or other taxes on the sale of our merchandise, our business could be harmed.
  We may have exposure to greater than anticipated tax liabilities.
  We rely on insurance to mitigate some risks and, to the extent the cost of insurance
increases, or we are unable or choose not to maintain sufficient insurance to mitigate the risks
facing our business, or our insurers are unable to meet their obligations, our operating results
may be diminished.
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##### Table of Contents



Variability in self-insurance liability estimates could significantly impact our financial
results.
  
    
    historical claims experience;
 
    
    medical inflation;
 
    
    legislative changes to benefit levels;
 
    
    jury verdicts; and
 
    
    claim settlement patterns.
  Existing or future laws or regulations could harm our business or marketing efforts.
    42




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##### Table of Contents



Our e-Dialog e-mail marketing solutions business is dependent on the market for e-mail
marketing solutions and there may be changes in the market that may harm our business.
   
    
    growth in the number of e-mails sent or received on a daily or regular
basis;
 
    
    the ability of filters to effectively screen for unwanted e-mails;
 
    
    the ability of smart phones or similar communications to adequately
display e-mail;
 
    
    continued security concerns regarding Internet usage in general from
viruses, worms or similar problems affecting Internet and e-mail utilization; and
 
    
    increased governmental regulation or restrictive policies adopted by
Internet service providers, or ISPs, that make it more difficult or costly to
utilize e-mail for marketing communications.
   Existing federal, state and international laws regulating e-mail marketing practices impose
certain obligations on the senders of commercial e-mails and could expose us to liability for
violations, decrease the effectiveness of our e-mail marketing solutions, and expose us to
financial, criminal and other penalties for non-compliance, which could increase our operating
costs.
  
    
    payment of statutory, actual or other damages;
 43




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##### Table of Contents




    
    criminal penalties;
 
    
    actions by state attorneys general;
 
    
    actions by private citizens or class actions; and
 
    
    penalties imposed by regulatory authorities of the U.S. government, state
governments and foreign governments.
  Private spam blacklists may interfere with our ability to communicate with our e-commerce customers
and the ability of the clients of e-Dialog to effectively deploy our e-mail marketing products or
services which could harm our business.
   From time to time, we may acquire or invest in other companies. There are risks associated
with potential acquisitions and investments and we may not achieve the expected benefits of future
acquisitions and investments.
  44




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##### Table of Contents



We plan to continue to expand our business internationally which may cause our business to
become increasingly susceptible to numerous international business risks and challenges. We have
limited experience in international operations.
   
    
    the need to develop new supplier and manufacturer relationships,
particularly because major manufacturers may require that our international operations
deal with local distributors;
 
    
    compliance with international legal and regulatory requirements and
tariffs;
 
    
    managing fluctuations in currency exchange rates;
 
    
    difficulties in staffing and managing foreign operations;
 
    
    greater difficulty in accounts receivable collection;
 
    
    potential adverse tax consequences;
 
    
    uncertain political and economic climates;
 
    
    potentially higher incidence of fraud;
 
    
    price controls or other restrictions on foreign currency; and
 
    
    difficulties in obtaining export and import licenses and compliance with
applicable export controls.
    45




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##### Table of Contents



Our success is dependent upon our executive officers and other key personnel.
  We may be unable to hire and retain skilled personnel which could limit our growth.
  There are limitations on the liabilities of our directors and executive officers. Under
certain circumstances, we are obligated to indemnify our directors and executive officers against
liability and expenses incurred by them in their service to us.
  If we fail to maintain an effective system of internal controls, we may not be able to
accurately report our financial results or prevent fraud. As a result, current and potential
stockholders and clients could lose confidence in our financial reporting, which could harm our
business, the trading price of our common stock and our ability to retain our current clients and
obtain new clients.
  Future changes in financial accounting standards or practices or existing taxation rules or
practices may cause adverse unexpected revenue and/or expense fluctuations and affect our reported
results of operations.
  Our ability to use net operating loss carryforwards to reduce future tax payments may be limited if
we experience a change in ownership, or if taxable income does not reach sufficient levels.
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Risks Related to Our Common Stock
 We may enter into future acquisitions and take certain actions in connection with such
acquisitions that could affect the price of our common stock.
  
    
    use a significant portion of our available cash;
 
    
    issue equity securities, which would dilute current stockholders
percentage ownership;
 
    
    incur substantial debt;
 
    
    incur or assume contingent liabilities, known or unknown;
 
    
    incur amortization expenses related to intangibles; and
 
    
    incur large, immediate accounting write-offs.
  Our operating results have fluctuated and may continue to fluctuate significantly, which may cause
the market price of our common stock to be volatile.
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
    
    our ability to obtain new clients or to retain existing clients in our
e-commerce and marketing services businesses;
 
    
    the performance of one or more of our clients e-commerce businesses;
 
    
    our and our clients ability to obtain new customers at a reasonable cost
or encourage repeat purchases;
 
    
    the number of visitors to the e-commerce businesses operated by us or our
ability to convert these visitors into customers;
 
    
    our and our clients ability to offer an appealing mix of products or to
sell products that we purchase;
 
    
    our ability to achieve effective results for our marketing services
clients;
 
    
    our ability to adequately develop, maintain and upgrade our clients
e-commerce businesses or the technology and systems we use to process customers
orders and payments;
 
    
    the timing and costs of upgrades and developments of our systems and
infrastructure;
 
    
    the ability of our competitors to offer new or superior e-commerce
businesses, services or products or new or superior marketing services;
 
    
    price competition that results in lower profit margins or losses;
 
    
    the seasonality of our business, especially the importance of our fiscal
fourth quarter to our business;
 
    
    our inability to obtain or develop specific products or brands or
unwillingness of vendors to sell their products to us;
 
    
    unanticipated fluctuations in the amount of consumer spending on various
products that we sell, which tend to be discretionary spending items;
 
    
    the cost of advertising and the amount of free shipping and other
promotions we offer;
 
    
    increases in the amount and timing of operating costs and capital
expenditures relating to expansion of our operations;
 
    
    our inability to manage our shipping costs on a profitable basis or
unexpected increases in shipping costs or delivery times, particularly during the
holiday season;
 
    
    inflation of prices of fuel and gasoline and other raw materials that
impact our costs;
 
    
    technical difficulties, system security breaches, system downtime or
Internet slowdowns;
 
    
    our inability to manage inventory levels or control inventory shrinkage;
 
    
    our inability to manage fulfillment operations or provide adequate levels
of customer care or our inability to forecast the proper staffing levels in
fulfillment and customer care;
 
    
    an increase in the level of our product returns or our inability to
effectively process returns;
 
    
    government regulations related to the Internet or e-commerce which could
increase the costs associated with operating our businesses, including requiring the
collection of sales tax on all purchases through the e-commerce businesses we operate;
and
 
    
    unfavorable economic conditions in general or specific to the Internet or
e-commerce, which could reduce demand for the products sold through our clients
e-commerce businesses.
 Future sales of our common stock in the public market or the issuance of securities senior to our
common stock could adversely affect the trading price of our common stock and our ability to raise
funds in new securities offerings.
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We have never paid dividends on our common stock and do not anticipate paying dividends in the
foreseeable future.
  We are controlled by certain principal stockholders.
  It may be difficult for a third-party to acquire us and this could depress our stock price.
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The price of our common stock may fluctuate significantly.
   
    
    our performance and prospects;
 
    
    the performance and prospects of our clients;
 
    
    the depth and liquidity of the market for our common stock;
 
    
    the vesting of our equity awards resulting in the sale of large amounts of
our common stock during concentrated trading windows;
 
    
    investor perception of us and the industry in which we operate;
 
    
    changes in earnings estimates or buy/sell recommendations by analysts;
 
    
    general financial and other market conditions; and
 
    
    general economic conditions.In addition, the stock market in general has experienced extreme volatility that has often
been unrelated to the operating performance of a particular company. These broad market
fluctuations may adversely affect the market price of our common stock.
 Holders of our common stock will be subordinated to our secured revolving credit facility,
convertible notes and other indebtedness.
  Conversion of our convertible notes would dilute the ownership interest of existing
stockholders.
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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.
   No. of VotesName
    
    For
    
    WithholdMichael G. Rubin
    
    
    43,995,454
    
    
    
    436,681M. Jeffrey Branman
    
    
    44,284,411
    
    
    
    147,724Michael J. Donahue
    
    
    44,213,820
    
    
    
    218,315Ronald D. Fisher
    
    
    44,292,234
    
    
    
    139,901John A. Hunter
    
    
    43,122,724
    
    
    
    1,309,411Mark S. Menell
    
    
    44,291,900
    
    
    
    140,235Jeffrey F. Rayport
    
    
    43,281,826
    
    
    
    1,150,309Lawrence S. Smith
    
    
    44,212,098
    
    
    
    220,037Andrea M. Weiss
    
    
    43,281,745
    
    
    
    1,150,390
  No. of VotesFor
    
    Against
    
    Abstain44,256,170
    
    
    154,023
    
    
    
    22,014
 
 ITEM 5:
    
    OTHER INFORMATION.
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ITEM 6:
    
    EXHIBITS.
 31.1
    
    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
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SIGNATURES
   GSI COMMERCE, INC.By:
    /s/ MICHAEL G. RUBINMichael G. RubinChairman, President and Chief Executive OfficerBy:
    /s/ MICHAEL R. CONNMichael R. ConnExecutive Vice President, Financeand Chief Financial Officer(principal financial officer &principal accounting officer) 53