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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 April 3, 2010
 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
(Do not check if a smaller reporting company)
    
    Smaller reporting company o
 Yes o No þ




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##### 



GSI COMMERCE, INC.
FORM 10-Q
FOR THE QUARTER ENDED APRIL 3, 2010
 INDEX
 PagePART I  FINANCIAL INFORMATIONItem 1. Financial Statements (unaudited):Condensed Consolidated Balance Sheets as of January 2, 2010 and April 3, 2010
    
    
    3Condensed Consolidated Statements of Operations for the three-month periods ended
April 4, 2009 and April 3, 2010
    
    
    4Condensed Consolidated Statements of Cash Flows for the three-month periods ended
April 4, 2009 and April 3, 2010
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    19Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    25Item 4. Controls and Procedures
    
    
    25PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    26Item 1A. Risk Factors
    
    
    26Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    27Item 3. Defaults Upon Senior Securities
    
    
    27Item 4. (Reserved)
    
    
    27Item 5. Other Information
    
    
    27Item 6. Exhibits
    
    
    28SIGNATURES
    
    
    29Exhibit 10.3Exhibit 31.1Exhibit 31.2Exhibit 32.1
   References To
    
    Refer to the Years Ended/EndingFiscal 2009
    
    January 2, 2010Fiscal 2010
    
    January 1, 2011Fiscal 2011
    
    December 31, 2011Fiscal 2012
    
    December 29, 2012Fiscal 2013
    
    December 28, 2013Fiscal 2014
    
    January 3, 2015
  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 2,
    
    
    April 3,2010
    
    
    2010ASSETSCurrent assets:Cash and cash equivalents
    
    $
    228,430
    
    
    $
    132,403Accounts receivable, net of allowance of $4,648 and $3,641
    
    
    70,582
    
    
    
    53,879Inventory
    
    
    55,678
    
    
    
    58,299Deferred tax assets
    
    
    12,347
    
    
    
    14,436Prepaid expenses and other current assets
    
    
    13,187
    
    
    
    13,678Total current assets
    
    
    380,224
    
    
    
    272,695Property and equipment, net
    
    
    163,329
    
    
    
    165,518Goodwill
    
    
    373,003
    
    
    
    372,611Intangible assets, net of accumulated amortization of $29,172 and $33,201
    
    
    132,875
    
    
    
    128,723Long-term deferred tax assets
    
    
    
    
    
    
    7,371Other assets, net of accumulated amortization of $17,264 and $17,875
    
    
    12,417
    
    
    
    12,949Total assets
    
    $
    1,061,848
    
    
    $
    959,867LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    126,914
    
    
    $
    71,094Accrued expenses
    
    
    150,173
    
    
    
    95,858Deferred revenue
    
    
    20,645
    
    
    
    21,553Convertible notes
    
    
    55,443
    
    
    
    56,675Current portion of long-term debt
    
    
    5,260
    
    
    
    5,246Total current liabilities
    
    
    358,435
    
    
    
    250,426Convertible notes
    
    
    116,948
    
    
    
    118,525Long-term debt
    
    
    28,142
    
    
    
    26,632Deferred acquisition payments
    
    
    63,763
    
    
    
    65,960Deferred tax liabilities
    
    
    8,534
    
    
    
    Deferred revenue and other long-term liabilities
    
    
    9,686
    
    
    
    9,596Total liabilities
    
    
    585,508
    
    
    
    471,139Commitments and contingencies (Note 8)Stockholders equity:Preferred stock, $0.01 par value, 5,000,000 shares authorized; 0 shares issued and
outstanding as of January 2, 2010 and April 3, 2010
    
    
    
    
    
    
    Common stock, $0.01 par value, 90,000,000 shares authorized; 60,033,393 and
61,480,819 shares issued as of January 2, 2010 and April 3, 2010
respectively; 60,033,190 and 61,480,616 shares outstanding
as of January 2, 2010 and April 3, 2010, respectively
    
    
    600
    
    
    
    615Additional paid in capital
    
    
    642,852
    
    
    
    664,053Accumulated other comprehensive loss
    
    
    (1,498
    )
    
    
    (2,201
    )Accumulated deficit
    
    
    (165,614
    )
    
    
    (173,739
    )Total stockholders equity
    
    
    476,340
    
    
    
    488,728Total liabilities and stockholders equity
    
    $
    1,061,848
    
    
    $
    959,867
   3




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GSI COMMERCE, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (in thousands, except per share data)
 (unaudited)
 Three Months EndedApril 4,
    
    
    April 3,2009
    
    
    2010Revenues:Net revenues from product sales
    
    $
    106,191
    
    
    $
    159,275Service fee revenues
    
    
    90,284
    
    
    
    113,317Net revenues
    
    
    196,475
    
    
    
    272,592Costs and expenses:Cost of revenues from product sales
    
    
    79,355
    
    
    
    117,474Marketing
    
    
    10,861
    
    
    
    10,807Account management and operations, inclusive of $2,256
and $2,446 of stock-based compensation
    
    
    57,741
    
    
    
    77,694Product development, inclusive of $1,451 and
$1,869 of stock-based compensation
    
    
    28,374
    
    
    
    34,317General and administrative, inclusive of $3,247 and
$2,616 of stock-based compensation
    
    
    19,277
    
    
    
    24,397Depreciation and amortization
    
    
    15,401
    
    
    
    18,761Changes in fair value of deferred acquisition payments
    
    
    
    
    
    
    2,074Total costs and expenses
    
    
    211,009
    
    
    
    285,524Loss from operations
    
    
    (14,534
    )
    
    
    (12,932
    )Other (income) expense:Interest expense
    
    
    4,796
    
    
    
    5,208Interest income
    
    
    (151
    )
    
    
    (234
    )Other (income) expense
    
    
    229
    
    
    
    474Total other expense
    
    
    4,874
    
    
    
    5,448Loss before income taxes
    
    
    (19,408
    )
    
    
    (18,380
    )Benefit for income taxes
    
    
    (7,298
    )
    
    
    (10,255
    )Net loss
    
    $
    (12,110
    )
    
    $
    (8,125
    )Basic and diluted loss per share
    
    $
    (0.25
    )
    
    $
    (0.13
    )Weighted average shares outstanding  basic and diluted
    
    
    47,926
    
    
    
    60,446
   4




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GSI COMMERCE, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 Three Months EndedApril 4,
    
    
    April 3,2009
    
    
    2010Cash Flows from Operating Activities:Net loss
    
    $
    (12,110
    )
    
    $
    (8,125
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation
    
    
    12,962
    
    
    
    14,646Amortization
    
    
    2,439
    
    
    
    4,115Amortization of discount on convertible notes
    
    
    2,546
    
    
    
    2,809Changes in fair value of deferred acquisition payments
    
    
    
    
    
    
    2,074Stock-based compensation
    
    
    6,954
    
    
    
    6,931Foreign currency transaction losses
    
    
    238
    
    
    
    475Deferred income taxes
    
    
    (7,250
    )
    
    
    (11,191
    )Changes in operating assets and liabilities:Accounts receivable, net
    
    
    16,802
    
    
    
    16,420Inventory
    
    
    3,483
    
    
    
    (2,621
    )Prepaid expenses and other current assets
    
    
    (549
    )
    
    
    (561
    )Other assets, net
    
    
    1,965
    
    
    
    149Accounts payable and accrued expenses
    
    
    (97,854
    )
    
    
    (110,530
    )Deferred revenue
    
    
    (2,236
    )
    
    
    238Net cash used in operating activities
    
    
    (72,610
    )
    
    
    (85,171
    )Cash Flows from Investing Activities:Payments for acquisitions of businesses, net of cash acquired
    
    
    (750
    )
    
    
    Cash paid for property and equipment, including internal use software
    
    
    (7,411
    )
    
    
    (15,868
    )Net cash used in investing activities
    
    
    (8,161
    )
    
    
    (15,868
    )Cash Flows from Financing Activities:Debt issuance costs paid
    
    
    (38
    )
    
    
    (856
    )Repayments of capital lease obligations
    
    
    (1,195
    )
    
    
    (1,473
    )Repayments of mortgage note
    
    
    (47
    )
    
    
    (50
    )Excess tax benefit in connection with exercise of stock options and awards
    
    
    
    
    
    
    978Proceeds from exercise of common stock options
    
    
    72
    
    
    
    6,933Net cash provided by (used in) financing activities
    
    
    (1,208
    )
    
    
    5,532Effect of exchange rate changes on cash and cash equivalents
    
    
    (231
    )
    
    
    (520
    )Net decrease in cash and cash equivalents
    
    
    (82,210
    )
    
    
    (96,027
    )Cash and cash equivalents, beginning of period
    
    
    130,315
    
    
    
    228,430Cash and cash equivalents, end of period
    
    $
    48,105
    
    
    $
    132,403Supplemental Cash Flow InformationCash paid during the period for interest
    
    $
    703
    
    
    $
    866Cash paid during the period for income taxes
    
    
    1,458
    
    
    
    602Noncash Investing and Financing Activities:Accrual for purchases of property and equipment
    
    
    3,581
    
    
    
    3,633
   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:
 Accrued Expenses:
  Client Revenue Share:
 Fulfillment Costs:
  6




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GSI COMMERCE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)
 Recent Accounting Pronouncements:
  Subject
    
    Date Issued
    
    Summary
    
    Effect of Adoption
    
    Effective Date for The CompanyMultiple Element 
Arrangements
    
    October 2009
    
    Removes the
objective-and-reliable-evidence-of-fair-value
criterion from the separation criteria used
to determine whether an arrangement involving
multiple deliverables contains more than one
unit of accounting. Replaces references to
fair value with selling price to
distinguish from the fair value measurements
required under accounting standards for Fair
Value Measurements. Provides a hierarchy
that entities must use to estimate the
selling price, eliminates the use of the
residual method for allocation, and expands
the ongoing disclosure requirements.
    
    No material impact.
    
    January 2, 2011, with early
adoption permitted. The
Company chose to
prospectively adopt this
standard on January 3, 2010
 NOTE 3 FAIR VALUE OF FINANCIAL AND NONFINANCIAL INSTRUMENTS
  Fair Value Measurements on January 2, 2010Quoted Prices in
    
    
    
    
    
    
    SignificantActive Markets for
    
    
    Significant Other
    
    
    UnobservableIdentical Assets
    
    
    Observable Inputs
    
    
    Inputs(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)AssetsCash and cash equivalents:(1)Money market mutual funds
    
    $
    13,606
    
    
    $
    
    
    
    $
    LiabilitiesDeferred acquisition payments(2)
    
    $
    
    
    
    $
    
    
    
    $
    60,963
 Fair Value Measurements on April 3, 2010Quoted Prices in
    
    
    
    
    
    
    SignificantActive Markets for
    
    
    Significant Other
    
    
    UnobservableIdentical Assets
    
    
    Observable Inputs
    
    
    Inputs(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)AssetsCash and cash equivalents:(1)Money market mutual funds
    
    $
    13,606
    
    
    $
    
    
    
    $
    LiabilitiesDeferred acquisition payments(2)
    
    $
    
    
    
    $
    
    
    
    $
    63,037
 (1)
    
    Cash and cash equivalents totaled $132,403 as of April 3, 2010, and were comprised of $13,606
of money market mutual funds and $118,797 of bank deposits. Cash and cash equivalents totaled
$228,430 as of January 2, 2010, and were comprised of $13,606 of money market mutual funds and
$214,824 of bank deposits.(2)
    
    Deferred acquisition payments represent the fair value of estimated acquisition payments that
are contingent upon Retail Convergence, Inc. (Rue La La) achieving specified minimum
earnings thresholds over one or more years. The Company utilized a discounted cash flow model
that incorporated several different assumptions of future performance and a discount rate of
13.6% to determine fair value. The Company accreted $3,025 of its deferred acquisition
payments from the acquisition date of Rue La La through April 3, 2010, and $951 through
January 2, 2010, and the corresponding charge was recorded to changes in fair value of
deferred acquisition payments on the Condensed Consolidated Statements of Operations.  7




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GSI COMMERCE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)
  Three Months EndedApril 3, 2010Balance, beginning of period
    
    $
    60,963Changes in fair value of deferred acquisition payments included
in the Companys Condensed Consolidated Statements of Operations
    
    
    2,074Balance, end of period
    
    $
    63,037
 NOTE 4PROPERTY AND EQUIPMENT
  January 2,
    
    
    April 3,2010
    
    
    2010Computer hardware and software
    
    $
    231,954
    
    
    $
    247,019Building and building improvements
    
    
    44,822
    
    
    
    44,886Furniture, warehouse and office equipment, and other
    
    
    45,722
    
    
    
    46,478Land
    
    
    7,889
    
    
    
    7,889Leasehold improvements
    
    
    8,847
    
    
    
    8,863Capitalized leases
    
    
    29,132
    
    
    
    29,132368,366
    
    
    
    384,267Less: Accumulated depreciation
    
    
    (205,037
    )
    
    
    (218,749
    )Property and equipment, net
    
    $
    163,329
    
    
    $
    165,518
   8




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GSI COMMERCE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)
 NOTE 5GOODWILL AND OTHER INTANGIBLE ASSETS
  E-Commerce
    
    
    Marketing
    
    
    ConsumerServices
    
    
    Services
    
    
    Engagement
    
    
    ConsolidatedJanuary 2, 2010
    
    $
    83,090
    
    
    $
    117,025
    
    
    $
    172,888
    
    
    $
    373,003Foreign currency translation
    
    
    (392
    )
    
    
    
    
    
    
    
    
    
    
    (392
    )April 3, 2010
    
    $
    82,698
    
    
    $
    117,025
    
    
    $
    172,888
    
    
    $
    372,611
  Weighted-January 2,
    
    
    April 3,
    
    
    Average2010
    
    
    2010
    
    
    Life(in years)Gross carrying value of intangible assets
subject to amortization:Customer contracts
    
    $
    41,190
    
    
    $
    41,190
    
    
    
    2.4Member relationships
    
    
    22,200
    
    
    
    22,200
    
    
    
    2.6Supplier relationships
    
    
    11,186
    
    
    
    11,186
    
    
    
    3.4Non-compete agreements
    
    
    4,079
    
    
    
    4,079
    
    
    
    3.0Purchased technology
    
    
    4,805
    
    
    
    4,805
    
    
    
    4.0Trade names
    
    
    840
    
    
    
    840
    
    
    
    1.5Foreign currency translation
    
    
    (482
    )
    
    
    (605
    )83,818
    
    
    
    83,695
    
    
    
    2.7Accumulated amortization:Customer contracts
    
    
    (22,907
    )
    
    
    (24,544
    )Member relationships
    
    
    (489
    )
    
    
    (2,029
    )Supplier relationships
    
    
    
    
    
    
    (236
    )Non-compete agreements
    
    
    (2,888
    )
    
    
    (3,227
    )Purchased technology
    
    
    (2,428
    )
    
    
    (2,735
    )Trade names
    
    
    (532
    )
    
    
    (578
    )Foreign currency translation
    
    
    72
    
    
    
    148(29,172
    )
    
    
    (33,201
    )Net carrying value:Customer contracts
    
    
    18,283
    
    
    
    16,646Member relationships
    
    
    21,711
    
    
    
    20,171Supplier relationships
    
    
    11,186
    
    
    
    10,950Non-compete agreements
    
    
    1,191
    
    
    
    852Purchased technology
    
    
    2,377
    
    
    
    2,070Trade names
    
    
    308
    
    
    
    262Foreign currency translation
    
    
    (410
    )
    
    
    (457
    )Total intangible assets subject to amortization, net
    
    
    54,646
    
    
    
    50,494Indefinite life intangible assets:Trade names
    
    
    78,229
    
    
    
    78,229Total intangible assets
    
    $
    132,875
    
    
    $
    128,723
  9




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GSI COMMERCE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)
  Fiscal 2010
    
    $
    11,989Fiscal 2011
    
    
    14,260Fiscal 2012
    
    
    10,105Fiscal 2013
    
    
    7,715Fiscal 2014
    
    
    6,425$
    50,494
 NOTE 6ACQUISITIONS
  Unaudited Pro Forma Financial Information
  Three Months EndedApril 4,
    
    
    April 3,2009
    
    
    2010Net revenues
    
    $
    224,658
    
    
    $
    272,592Net loss
    
    $
    (17,537
    )
    
    $
    (8,125
    )
  10




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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
  January 2,
    
    
    April 3,2010
    
    
    2010Convertible notes
    
    $
    172,391
    
    
    $
    175,200Notes payable (1)
    
    
    12,479
    
    
    
    12,428Capital lease obligations
    
    
    20,923
    
    
    
    19,450Line of credit
    
    
    
    
    
    
    Total debt
    
    
    205,793
    
    
    
    207,078Less: Current portion of convertible notes
    
    
    (55,443
    )
    
    
    (56,675
    )Less: Current portion of notes payable
    
    
    (195
    )
    
    
    (199
    )Less: Current portion of capital lease obligations
    
    
    (5,065
    )
    
    
    (5,047
    )Total long-term debt
    
    $
    145,090
    
    
    $
    145,157
 (1)
    
    The estimated fair market value of the notes payable approximated their carrying value
as of April 3, 2010 and January 2, 2010. 3% Convertible Notes due 2025
     As of
    
    
    As ofJanuary 2, 2010
    
    
    April 3, 2010Carrying amount of the equity component
    
    $
    18,187
    
    
    $
    18,187Principal amount of the liability component
    
    $
    57,500
    
    
    $
    57,500Unamortized discount of liability component
    
    $
    2,057
    
    
    $
    825Net carrying amount of liability component
    
    $
    55,443
    
    
    $
    56,675Remaining amortization period of discount
    
    
    
    
    
    2 monthsEffective interest rate on liability component
    
    
    
    
    
    
    12.00
    %
  11




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GSI COMMERCE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)
  Three Months EndedApril 4,
    
    
    April 3,2009
    
    
    2010Amortization of the discount on the liability component
    
    $
    1,096
    
    
    $
    1,232Contract interest coupon
    
    
    431
    
    
    
    431Amortization of the liability component of the issue costs
    
    
    97
    
    
    
    104Interest expense
    
    $
    1,624
    
    
    $
    1,767
  2.5% Convertible Notes due 2027
    As of
    
    
    As ofJanuary 2, 2010
    
    
    April 3, 2010Carrying amount of the equity component
    
    $
    26,783
    
    
    $
    26,783Principal amount of the liability component
    
    $
    150,000
    
    
    $
    150,000Unamortized discount of liability component
    
    $
    33,052
    
    
    $
    31,475Net carrying amount of liability component
    
    $
    116,948
    
    
    $
    118,525Remaining amortization period of discount
    
    
    
    
    
    50 monthsEffective interest rate on liability component
    
    
    
    
    
    
    8.60
    %
  Three Months EndedApril 4,
    
    
    April 3,2009
    
    
    2010Amortization of the discount on the liability component
    
    $
    1,450
    
    
    $
    1,577Contract interest coupon
    
    
    938
    
    
    
    938Amortization of the liability component of the issue costs
    
    
    112
    
    
    
    119Interest expense
    
    $
    2,500
    
    
    $
    2,634
   12




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GSI COMMERCE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)
 Credit Facility
  NOTE 8COMMITMENTS AND CONTINGENCIES
 Legal Proceedings
    13




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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 year2010
    
    
    2011
    
    
    2012
    
    
    2013
    
    
    2014
    
    
    Thereafter
    
    
    TotalOperating lease obligations(1)
    
    $
    15,539
    
    
    $
    18,738
    
    
    $
    18,476
    
    
    $
    14,375
    
    
    $
    10,876
    
    
    $
    17,662
    
    
    $
    95,666Purchase obligations and marketing
commitments(1)
    
    
    51,757
    
    
    
    13,403
    
    
    
    13,403
    
    
    
    4,876
    
    
    
    3,570
    
    
    
    45,000
    
    
    
    132,009Client revenue share payments(1)
    
    
    13,638
    
    
    
    21,400
    
    
    
    14,658
    
    
    
    4,368
    
    
    
    4,491
    
    
    
    24,269
    
    
    
    82,824Debt interest(1)
    
    
    5,632
    
    
    
    4,509
    
    
    
    4,497
    
    
    
    4,481
    
    
    
    2,278
    
    
    
    8,784
    
    
    
    30,181Debt obligations
    
    
    57,645
    
    
    
    209
    
    
    
    563
    
    
    
    237
    
    
    
    150,253
    
    
    
    11,022
    
    
    
    219,929Capital lease obligations, including interest(2)
    
    
    4,558
    
    
    
    6,119
    
    
    
    5,815
    
    
    
    3,671
    
    
    
    1,789
    
    
    
    
    
    
    
    21,952Deferred acquisition payments(3)
    
    
    1,250
    
    
    
    1,050
    
    
    
    750
    
    
    
    1,000
    
    
    
    
    
    
    
    
    
    
    
    4,050Total
    
    $
    150,019
    
    
    $
    65,428
    
    
    $
    58,162
    
    
    $
    33,008
    
    
    $
    173,257
    
    
    $
    106,737
    
    
    $
    586,611
 (1)
    
    Not required to be recorded in the Condensed Consolidated Balance Sheet as of April 3,
2010 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.(3)
    
    The Company will be obligated to pay up to an additional $170,000 over a three year
period beginning with fiscal 2010 contingent on Rue La Las achievement of certain
financial targets, of which the Company has the ability to pay up to $44,100 with shares of
the Companys common stock.  NOTE 9STOCK AWARDS
   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)
 Stock Options and Warrants
  WeightedWeighted
    
    
    AverageNumber of
    
    
    Average
    
    
    Remaining
    
    
    AggregateShares
    
    
    Exercise
    
    
    Contractual
    
    
    Intrinsic(in thousands)
    
    
    Price
    
    
    Life (in years)
    
    
    ValueOutstanding at January 2, 2010
    
    
    3,252
    
    
    $
    9.88Granted
    
    
    
    
    
    $
    Exercised
    
    
    (677
    )
    
    $
    10.25Forfeited/Cancelled
    
    
    (1
    )
    
    $
    14.21Outstanding at April 3, 2010
    
    
    2,574
    
    
    $
    9.78
    
    
    
    2.68
    
    
    $
    46,598Vested and expected to vest at April 3, 2010
    
    
    2,574
    
    
    $
    9.78
    
    
    
    2.68
    
    
    $
    46,598Exercisable at April 3, 2010
    
    
    2,574
    
    
    $
    9.78
    
    
    
    2.68
    
    
    $
    46,598
  Restricted Stock Units and Awards
  WeightedNumber of
    
    
    AverageShares
    
    
    Grant Date(in thousands)
    
    
    Fair ValueNonvested shares at January 2, 2010
    
    
    4,294
    
    
    $
    16.64Granted
    
    
    1,081
    
    
    $
    27.48Vested
    
    
    (1,089
    )
    
    $
    15.22Forfeited/Cancelled
    
    
    (21
    )
    
    $
    12.20Nonvested shares at April 3, 2010
    
    
    4,265
    
    
    $
    19.77
  NOTE 10INCOME TAXES
   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 11LOSS PER SHARE
   April 4,
    
    
    April 3,2009
    
    
    2010Stock units and awards
    
    
    4,752
    
    
    
    4,265Stock options and warrants
    
    
    4,138
    
    
    
    2,574Convertible notes
    
    
    8,229
    
    
    
    8,22917,119
    
    
    
    15,068
  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)
 NOTE 12  COMPREHENSIVE LOSS
  Three Months EndedApril 4,
    
    
    April 3,2009
    
    
    2010Net loss
    
    $
    (12,110
    )
    
    $
    (8,125
    )Other comprehensive loss:Cumulative translation adjustment
    
    
    (62
    )
    
    
    (703
    )Comprehensive loss
    
    $
    (12,172
    )
    
    $
    (8,828
    )
 NOTE 13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 April 4, 2009E-Commerce
    
    
    Marketing
    
    
    Consumer
    
    
    IntersegmentServices
    
    
    Services
    
    
    Engagement
    
    
    Eliminations
    
    
    ConsolidatedNet revenues
    
    $
    178,510
    
    
    $
    25,122
    
    
    $
    
    
    
    $
    (7,157
    )
    
    $
    196,475Costs and expenses before depreciation,
amortization, changes in fair value of deferred acquisition
payments and stock-based compensation expense
    
    
    174,841
    
    
    
    20,970
    
    
    
    
    
    
    
    (7,157
    )
    
    
    188,654Operating income before depreciation,
amortization, changes in fair value of deferred acquisition
payments and stock-based compensation expense
    
    
    3,669
    
    
    
    4,152
    
    
    
    
    
    
    
    
    
    
    
    7,821Depreciation and amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,401Changes in fair value of deferred acquisition payments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock-based compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,954Loss from operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14,534
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,796Interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (151
    )Other expense, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    229Loss before income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (19,408
    )
 Three Months Ended April 3, 2010E-Commerce
    
    
    Marketing
    
    
    Consumer
    
    
    IntersegmentServices
    
    
    Services
    
    
    Engagement
    
    
    Eliminations
    
    
    ConsolidatedNet revenues
    
    $
    201,372
    
    
    $
    38,371
    
    
    $
    44,454
    
    
    $
    (11,605
    )
    
    $
    272,592Costs and expenses before depreciation, amortization,
changes in fair value of deferred acquisition
payments and stock-based compensation expense
    
    
    193,383
    
    
    
    28,804
    
    
    
    47,176
    
    
    
    (11,605
    )
    
    
    257,758Operating income (loss) before depreciation, amortization,
changes in fair value of deferred acquisition
payments and stock-based compensation expense
    
    
    7,989
    
    
    
    9,567
    
    
    
    (2,722
    )
    
    
    
    
    
    
    14,834Depreciation and amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,761Changes in fair value of deferred acquisition payments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,074Stock-based compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,931Loss from operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12,932
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,208Interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (234
    )Other expense, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    474Loss before income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (18,380
    )
   NOTE 14SUBSEQUENT EVENTS
    18




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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 Annual 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 e-commerce and
marketing service, our ability to develop and maintain relationships with clients and suppliers
and the timing of our establishment, extension or termination of our relationships with clients,
our ability to timely and successfully develop, maintain and protect our technology, confidential
and proprietary information, and product and service offerings, our ability to execute
operationally to attract and retain qualified personnel, to successfully integrate our recent
acquisitions, 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 2, 2010, filed with the SEC on March 5, 2010, and in Part II, Item 1A of this Quarterly
Report. We expressly disclaim any intent or obligation to update these forward-looking statements.
 Executive Overview
  
    
    Net revenues increased by $76.1 million, or 39%, compared to the first quarter of fiscal
2009. Net revenues from product sales increased by $53.1 million and service fee revenues
increased $23.0 million. Net revenues for our consumer engagement segment were $44.4
million from Retail Convergence, Inc. (Rue La La), which we acquired in November 2009,
our e-commerce services segment increased $22.9 million, and our marketing services segment
increased $13.3 million.
 
    
    Net loss was $8.1 million in the first quarter of fiscal 2010, including a benefit for
income taxes of $10.3 million, compared to a net loss of $12.1 million in the first quarter
of fiscal 2009, including a tax benefit of $7.3 million. Loss from operations improved to
$12.9 million in the first quarter of fiscal 2010 compared to a loss of $14.5 million in
the first quarter of fiscal 2009.
 
    
    In March 2010, we amended and expanded our existing secured revolving credit facility by
$60 million to $150 million. The credit facility is available for letters of credit,
working capital and general corporate purposes, including possible acquisitions.
  
    
    We continue to expect an increase in net revenue in fiscal 2010, with the majority of
the increase to be generated by our consumer engagement segment. We also expect increased
revenues in fiscal 2010 from e-commerce services and marketing services. We expect our
income from operations in fiscal 2010 to increase. We expect our capital expenditures to
increase in fiscal 2010, and that they will be similar to our capital expenditures in
fiscal 2008 as we increase investments in our infrastructure and technology and as we
integrate Rue La La. We believe we will have a net loss in fiscal 2010.
 Results of Operations
 Three-month period ended April 3, 2010 and April 4, 2009 (amounts in tables in millions):
 Net Revenues
   19




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##### Table of Contents



Net Revenues from Product Sales.
 Service Fee Revenues.
 First Qtr Fiscal 2010vs.First Qtr Fiscal 2009First Qtr Fiscal 2009
    
    
    First Qtr Fiscal 2010
    
    
    Increase/(Decrease)
    
    
    % ChangeNet Revenues by Type:Net revenues from product sales
    
    $
    106.2
    
    
    
    54
    %
    
    $
    159.3
    
    
    
    58
    %
    
    $
    53.1
    
    
    
    50
    %Service fee revenues
    
    
    90.3
    
    
    
    46
    %
    
    
    113.3
    
    
    
    42
    %
    
    
    23.0
    
    
    
    25
    %Total net revenues
    
    $
    196.5
    
    
    
    100
    %
    
    $
    272.6
    
    
    
    100
    %
    
    $
    76.1
    
    
    
    39
    %Net Revenues by Segment:E-Commerce services
    
    $
    178.5
    
    
    
    91
    %
    
    $
    201.4
    
    
    
    74
    %
    
    $
    22.9
    
    
    
    13
    %Marketing services
    
    
    25.1
    
    
    
    13
    %
    
    
    38.4
    
    
    
    14
    %
    
    
    13.3
    
    
    
    53
    %Consumer engagement
    
    
    
    
    
    
    0
    %
    
    
    44.4
    
    
    
    16
    %
    
    
    44.4
    
    
    
    100
    %Intersegment eliminations
    
    
    (7.1
    )
    
    
    (4
    %)
    
    
    (11.6
    )
    
    
    (4
    %)
    
    
    (4.5
    )
    
    
    63
    %Total net revenues
    
    $
    196.5
    
    
    
    100
    %
    
    $
    272.6
    
    
    
    100
    %
    
    $
    76.1
    
    
    
    39
    %
 Net Revenues by Type
 Net Revenues from Product Sales.
 Service Fee Revenues.
  Net Revenues by Segment
 E-Commerce Services Segment Revenues.
   20




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##### Table of Contents



Marketing Services Segment Revenues.
 Consumer Engagement Segment Revenues.
 Costs and Expenses
 Cost of Revenues from Product Sales.
 Marketing.
 Account Management and Operations.
 Product Development
 General and Administrative.
 Depreciation and Amortization.
 Changes in Fair Value of Deferred Acquisition Payments.
 First Quarter
    
    
    First Quarter
    
    
    First Quarter of Fiscal 2010of Fiscal 2009
    
    
    of Fiscal 2010
    
    
    vs.% of
    
    
    
    
    
    
    % of
    
    
    First Quarter of Fiscal 2009Net
    
    
    
    
    
    
    Net
    
    
    Increase /$
    
    
    Revenues
    
    
    $
    
    
    Revenues
    
    
    (Decrease)
    
    
    % ChangeCost of revenues from product sales
    
    $
    79.4
    
    
    
    41
    %
    
    $
    117.5
    
    
    
    43
    %
    
    $
    38.1
    
    
    
    48
    %Marketing
    
    
    10.9
    
    
    
    6
    %
    
    
    10.8
    
    
    
    4
    %
    
    
    (0.1
    )
    
    
    (1
    %)Account management and operations
    
    
    57.7
    
    
    
    29
    %
    
    
    77.7
    
    
    
    28
    %
    
    
    20.0
    
    
    
    35
    %Product development
    
    
    28.3
    
    
    
    14
    %
    
    
    34.3
    
    
    
    13
    %
    
    
    6.0
    
    
    
    21
    %General and administrative
    
    
    19.3
    
    
    
    9
    %
    
    
    24.4
    
    
    
    9
    %
    
    
    5.1
    
    
    
    26
    %Depreciation and amortization
    
    
    15.4
    
    
    
    8
    %
    
    
    18.7
    
    
    
    7
    %
    
    
    3.3
    
    
    
    21
    %Changes in fair value of deferred
acquisition payments
    
    
    
    
    
    
    0
    %
    
    
    2.1
    
    
    
    1
    %
    
    
    2.1
    
    
    
    100
    %Total costs and expenses
    
    $
    211.0
    
    
    
    107
    %
    
    $
    285.5
    
    
    
    105
    %
    
    $
    74.5
    
    
    
    35
    %
  21




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##### Table of Contents



Cost of Revenues from Product Sales:
 First Qtr
    
    
    First QtrFiscal 2009
    
    
    Fiscal 2010Cost of revenues from product sales
    
    $
    79.4
    
    
    $
    117.5As a percentage of net revenues from product sales
    
    
    75
    %
    
    
    74
    %
   Marketing:
 First Qtr
    
    
    First QtrFiscal 2009
    
    
    Fiscal 2010Marketing
    
    $
    10.9
    
    
    $
    10.8As a percentage of net revenues from product sales
    
    
    10
    %
    
    
    7
    %
   Account Management and Operations.
 Product Development.
  22




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##### Table of Contents



General and Administrative.
 Depreciation and Amortization.
 Changes in Fair Value of Deferred Acquisition Payments.
 Other (Income) Expense
 First Quarter
    
    
    First Quarter
    
    
    First Quarter of Fiscal 2010of Fiscal 2009
    
    
    of Fiscal 2010
    
    
    vs.% of
    
    
    
    
    
    
    % of
    
    
    First Quarter of Fiscal 2009Net
    
    
    
    
    
    
    Net
    
    
    Increase /$
    
    
    Revenues
    
    
    $
    
    
    Revenues
    
    
    (Decrease)
    
    
    % ChangeInterest expense
    
    $
    4.8
    
    
    
    1
    %
    
    $
    5.2
    
    
    
    2
    %
    
    $
    0.4
    
    
    
    8
    %Interest income
    
    
    (0.1
    )
    
    
    0
    %
    
    
    (0.3
    )
    
    
    0
    %
    
    
    (0.2
    )
    
    
    200
    %Other (income) expense
    
    
    0.2
    
    
    
    0
    %
    
    
    0.5
    
    
    
    0
    %
    
    
    0.3
    
    
    
    150
    %Total other expenses
    
    $
    4.9
    
    
    
    1
    %
    
    $
    5.4
    
    
    
    2
    %
    
    $
    0.5
    
    
    
    10
    %
  Income Taxes
    23




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##### Table of Contents



Seasonality
  Liquidity and Capital Resources
 As ofJanuary 2,
    
    
    April 3,2010
    
    
    2010(in millions)Cash and cash equivalents
    
    $
    228.4
    
    
    $
    132.4Percentage of total assets
    
    
    21
    %
    
    
    14
    %
  Sources of Cash
     Uses of Cash
    24




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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.
  25




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##### Table of Contents



PART II  OTHER INFORMATION
 
 ITEM 1:
    
    LEGAL PROCEEDINGS.
 Commitments and Contingencies
 
 ITEM 1A:
    
    RISK FACTORS.
  Our substantial leverage and significant debt service obligations could adversely affect our
financial condition and our ability to fulfill our obligations and operate our business.
   
    
    our debt level increases our vulnerability to general adverse economic
and industry conditions;
    
    we may have difficulty obtaining financing in the future for working
capital, capital expenditures, acquisitions or other purposes;
    
    we may need to use a substantial portion of our cash flow from
operations to pay interest and principal on our debt, which would
reduce the amount of money available to finance our operations and
other business activities;
    
    our debt level could limit our flexibility in planning for, or
reacting to, changes in our business and in our industry in
general; and
    
    our substantial amount of debt and the amount we must pay to service
our debt obligations could place us at a competitive disadvantage
compared to our competitors that have less debt.
 The terms of our secured revolving bank credit facility impose financial and operating restrictions
on us.
  
    
    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.
  26




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##### Table of Contents



Our ability to use net operating loss carryforwards to reduce future tax payments may be limited.
    
 ITEM 2:
    
    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
   
 ITEM 3:
    
    DEFAULTS UPON SENIOR SECURITIES.
  
 ITEM 4:
    
    [Reserved]
  
 ITEM 5:
    
    OTHER INFORMATION.
   27




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##### Table of Contents



ITEM 6:
    
    EXHIBITS.
 10.1
    
    
    Credit Agreement, dated as of March 24, 2010, by and among GSI Commerce Solutions, Inc., the Guarantors
named therein, the Lenders named therein, PNC Bank, National Association, as administrative agent, and PNC
Capital Markets LLC and Bank of America, N.A., as joint lead arrangers and joint bookrunners (filed with GSI
Commerce, Inc.s Current Report on Form 8-K filed on March 26, 2009 and incorporated herein by reference)10.2
    
    
    Form of Executive Performance Restricted Stock Unit Award Grant Notice Under the GSI Commerce, Inc. 2005
Equity Incentive Plan (filed with GSI Commerce, Inc.s Current Report on Form 8-K filed on April 6, 2010 and
incorporated herein by reference)10.3
    
    
    Form of Change in Control Agreement31.1
    
    
    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
  28




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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)  29