##### 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 October 3, 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
(Address of principal executive offices)
    
    19406
(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 THREE AND NINE MONTHS ENDED OCTOBER 3, 2009
 INDEX
 PagePART I  FINANCIAL INFORMATIONItem 1. Financial Statements (unaudited):Condensed Consolidated Balance Sheets as of January 3, 2009 and October 3, 2009
    
    
    3Condensed Consolidated Statements of Operations for the three- and nine-month periods ended
September 27, 2008 (corrected) and October 3, 2009
    
    
    4Condensed Consolidated Statements of Cash Flows for the nine-month periods ended
September 27, 2008 (corrected) and October 3, 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
    
    
    32Item 4. Controls and Procedures
    
    
    32PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    32Item 1A. Risk Factors
    
    
    32Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    52Item 3. Defaults Upon Senior Securities
    
    
    52Item 4. Submission of Matters to a Vote of Security Holders
    
    
    52Item 5. Other Information
    
    
    52Item 6. Exhibits
    
    
    53SIGNATURES
    
    
    54Exhibit 31.1Exhibit 31.2Exhibit 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,
    
    
    October 3,2009
    
    
    2009ASSETSCurrent assets:Cash and cash equivalents
    
    $
    130,315
    
    
    $
    135,273Accounts receivable, less allowance for doubtful accounts of $2,747 and $2,981
    
    
    78,544
    
    
    
    66,065Inventory
    
    
    42,856
    
    
    
    43,943Deferred tax assets
    
    
    18,125
    
    
    
    18,184Prepaid expenses and other current assets
    
    
    11,229
    
    
    
    13,263Total current assets
    
    
    281,069
    
    
    
    276,728Property and equipment, net
    
    
    164,833
    
    
    
    155,870Goodwill
    
    
    194,996
    
    
    
    199,653Intangible assets, net of accumulated amortization of $18,340 and $25,884
    
    
    46,663
    
    
    
    42,939Long-term deferred tax assets
    
    
    11,296
    
    
    
    27,544Other assets, net of accumulated amortization of $16,384 and $18,197
    
    
    17,168
    
    
    
    13,017Total assets
    
    $
    716,025
    
    
    $
    715,751LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    98,100
    
    
    $
    58,237Accrued expenses
    
    
    116,747
    
    
    
    76,573Deferred revenue
    
    
    20,397
    
    
    
    19,089Convertible notes
    
    
    
    
    
    
    54,280Current portion of long-term debt
    
    
    4,887
    
    
    
    5,019Total current liabilities
    
    
    240,131
    
    
    
    213,198Convertible notes
    
    
    161,951
    
    
    
    115,436Long-term debt
    
    
    32,609
    
    
    
    29,239Deferred revenue and other long-term liabilities
    
    
    6,838
    
    
    
    9,116Total liabilities
    
    
    441,529
    
    
    
    366,989Commitments 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 October 3, 2009
    
    
    
    
    
    
    Common stock, $0.01 par value, 90,000,000 shares authorized; 47,630,824 and
55,077,864 shares issued as of January 3, 2009 and October 3, 2009,
respectively; 47,630,621 and 55,077,661 shares outstanding as of January 3,
2009 and October 3, 2009, respectively
    
    
    476
    
    
    
    551Additional paid in capital
    
    
    430,933
    
    
    
    538,818Accumulated other comprehensive loss
    
    
    (2,327
    )
    
    
    (1,392
    )Accumulated deficit
    
    
    (154,586
    )
    
    
    (189,215
    )Total stockholders equity
    
    
    274,496
    
    
    
    348,762Total liabilities and stockholders equity
    
    $
    716,025
    
    
    $
    715,751
   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
    
    
    Nine Months EndedSeptember 27,
    
    
    October 3,
    
    
    September 27,
    
    
    October 3,2008 (1)
    
    
    2009
    
    
    2008 (1)
    
    
    2009Revenues:Net revenues from product sales
    
    $
    102,139
    
    
    $
    90,767
    
    
    $
    332,314
    
    
    $
    288,150Service fee revenues
    
    
    84,655
    
    
    
    99,544
    
    
    
    243,232
    
    
    
    285,817Net revenues
    
    
    186,794
    
    
    
    190,311
    
    
    
    575,546
    
    
    
    573,967Costs and expenses:Cost of revenues from product sales
    
    
    73,089
    
    
    
    67,548
    
    
    
    236,950
    
    
    
    217,345Marketing
    
    
    11,412
    
    
    
    9,087
    
    
    
    40,141
    
    
    
    27,002Account management and operations, inclusive of $1,374,
$2,033, $4,205 and $6,684 of stock-based
compensation
    
    
    58,733
    
    
    
    60,173
    
    
    
    175,726
    
    
    
    176,969Product development, inclusive of $705, $1,207, $2,003
and $3,843 of stock-based compensation
    
    
    25,736
    
    
    
    28,396
    
    
    
    73,571
    
    
    
    84,871General and administrative, inclusive of $2,475, $2,436,
$7,338 and $8,195 of stock-based compensation
    
    
    17,489
    
    
    
    19,365
    
    
    
    52,437
    
    
    
    58,169Depreciation and amortization
    
    
    16,868
    
    
    
    15,655
    
    
    
    49,503
    
    
    
    46,335Total costs and expenses
    
    
    203,327
    
    
    
    200,224
    
    
    
    628,328
    
    
    
    610,691Loss from operations
    
    
    (16,533
    )
    
    
    (9,913
    )
    
    
    (52,782
    )
    
    
    (36,724
    )Other (income) expense:Interest expense
    
    
    4,909
    
    
    
    4,897
    
    
    
    13,818
    
    
    
    14,452Interest income
    
    
    (190
    )
    
    
    (99
    )
    
    
    (1,397
    )
    
    
    (304
    )Other (income) expense
    
    
    480
    
    
    
    (32
    )
    
    
    833
    
    
    
    (197
    )Total other expense
    
    
    5,199
    
    
    
    4,766
    
    
    
    13,254
    
    
    
    13,951Loss before income taxes
    
    
    (21,732
    )
    
    
    (14,679
    )
    
    
    (66,036
    )
    
    
    (50,675
    )Benefit for income taxes
    
    
    (7,537
    )
    
    
    (5,273
    )
    
    
    (19,996
    )
    
    
    (16,046
    )Net loss
    
    $
    (14,195
    )
    
    $
    (9,406
    )
    
    $
    (46,040
    )
    
    $
    (34,629
    )Basic and diluted loss per share
    
    $
    (0.30
    )
    
    $
    (0.18
    )
    
    $
    (0.97
    )
    
    $
    (0.70
    )Weighted average shares outstanding  basic and diluted
    
    
    47,488
    
    
    
    51,910
    
    
    
    47,259
    
    
    
    49,506(1)    As
retrospectively
adjusted and corrected,
see Note 14.
   4




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GSI COMMERCE, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (in thousands)  (unaudited)
 Nine Months EndedSeptember 27,
    
    
    October 3,2008 (1)

    
    
    2009Cash Flows from Operating Activities:Net loss
    
    $
    (46,040
    )
    
    $
    (34,629
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation
    
    
    39,805
    
    
    
    38,856Amortization
    
    
    9,698
    
    
    
    7,479Amortization of discount on convertible
notes
    
    
    7,041
    
    
    
    7,765Stock-based compensation
    
    
    13,546
    
    
    
    18,722Foreign currency transaction losses (gains)
    
    
    841
    
    
    
    (184
    )Gain on disposal of equipment
    
    
    (359
    )
    
    
    (10
    )Deferred income taxes
    
    
    (18,026
    )
    
    
    (16,046
    )Changes in operating assets and liabilities:Accounts receivable, net
    
    
    5,623
    
    
    
    14,602Inventory
    
    
    (6,614
    )
    
    
    (1,087
    )Prepaid expenses and other current assets
    
    
    510
    
    
    
    (1,900
    )Other assets, net
    
    
    583
    
    
    
    1,938Accounts payable and accrued expenses
    
    
    (54,937
    )
    
    
    (81,434
    )Deferred revenue
    
    
    6,064
    
    
    
    (2,224
    )Net cash used in operating activities
    
    
    (42,265
    )
    
    
    (48,152
    )Cash Flows from Investing Activities:Payments for acquisitions of businesses, net of cash acquired
    
    
    (145,001
    )
    
    
    (5,601
    )Cash paid for property and equipment, including internal use software
    
    
    (46,007
    )
    
    
    (29,585
    )Proceeds from disposition of assets
    
    
    1,500
    
    
    
    Release from restricted cash escrow
funds
    
    
    
    
    
    
    1,052Net cash used in investing activities
    
    
    (189,508
    )
    
    
    (34,134
    )Cash Flows from Financing Activities:Borrowings on revolving credit loan
    
    
    60,000
    
    
    
    Repayments on revolving credit loan
    
    
    (20,000
    )
    
    
    Proceeds from sale of common stock
    
    
    
    
    
    
    92,596Equity issuance costs paid
    
    
    
    
    
    
    (4,179
    )Proceeds from lease financing obligations
    
    
    7,901
    
    
    
    Debt issuance costs paid
    
    
    (561
    )
    
    
    (83
    )Repayments of capital lease obligations
    
    
    (2,142
    )
    
    
    (3,359
    )Repayments of mortgage note
    
    
    (152
    )
    
    
    (136
    )Proceeds from exercise of common stock options
    
    
    1,342
    
    
    
    2,065Net cash provided by financing activities
    
    
    46,388
    
    
    
    86,904Effect of exchange rate changes on cash and cash equivalents
    
    
    (1,073
    )
    
    
    340Net increase (decrease) in cash and cash equivalents
    
    
    (186,458
    )
    
    
    4,958Cash and cash equivalents, beginning of period
    
    
    231,511
    
    
    
    130,315Cash and cash equivalents, end of period
    
    $
    45,053
    
    
    $
    135,273Supplemental Cash Flow InformationCash paid during the period for interest
    
    $
    5,614
    
    
    $
    4,672Cash paid during the period for income taxes
    
    
    628
    
    
    
    2,620Noncash Investing and Financing Activities:Accrual for purchases of property and equipment
    
    
    2,047
    
    
    
    3,196Equipment financed under capital lease
    
    
    2,497
    
    
    
    257(1)    As retrospectively
adjusted and corrected, see Note 14.
   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: e-commerce
 Shipping and Handling Costs:
 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:
  Effective Date forSubject
    
    Date Issued
    
    Summary
    
    Effect of Adoption
    
    The CompanyEffective Date of
Fair Value
Measurements
    
    February 2008
    
    Delayed the
effective date of
previously issued
accounting
standards for Fair
Value Measurements
of nonfinancial
assets and
nonfinancial
liabilities, except
those that are
recognized or
disclosed at fair
value on a
recurring basis, at
least annually,
until fiscal years
beginning after
November 15, 2008,
and interim periods
within those fiscal
years.
    
    No material impact.
    
    January 4, 2009Business 
Combinations
    
    December 2007
    
    Establishes
principles and
requirements for an
acquirer in a
business
combination for
recognizing and
measuring the
identifiable assets
acquired, the
liabilities assumed
and any
noncontrolling
interest in the
entity acquired in
its financial
statements.
Provides guidance
on the recognition
and measurement of
goodwill acquired
in the business
combination or a
gain from a bargain
purchase as well as
what information to
disclose to enable
users of the
financial
statements to
evaluate the nature
and financial
impact of the
business
combination. Also,
requires
recognition of
assets and
liabilities of
noncontrolling
interests acquired,
fair value
measurement of
consideration and
contingent
consideration,
expense recognition
for transaction
costs and certain
integration costs,
recognition of the
fair value of
contingencies, and
adjustments to
income tax expense
for changes in an
acquirers existing
valuation
allowances or
uncertain tax
positions that
result from the
business
combination.
    
    No material impact.
    
    January 4, 2009Noncontrolling 
Interests in 
Consolidating 
Financial 
Statements
    
    December 2007
    
    Establishes
principles and
requirements of
treatment for the
portion of equity
in a subsidiary
that is not
attributable
directly or
indirectly to a
parent. This is
commonly known as a
minority interest.
The objective is to
improve relevance,
comparability, and
transparency
concerning
ownership interests
in subsidiaries
held by parties
other than the
parent by providing
disclosures that
clearly identify
between interests
of the parent and
interest of the
noncontrolling
owners and the
related impacts on
the consolidated
statement of income
and the
consolidated
statement of
financial position.
Also provides
guidance on
disclosures related
to changes in the
parents ownership
interest and
deconsolidation of
a subsidiary.
    
    No material impact.
    
    January 4, 2009Disclosures about
Derivative
Instruments and
Hedging Activities
    
    March 2008
    
    Requires companies
with derivative
instruments to
disclose how and
why a company uses
derivative
instruments, how
derivative
instruments and
related hedged
items are accounted
for under
accounting
standards for
Accounting for
Derivative
Instruments and
Hedging
Activities, and
how derivative
instruments and
related hedged
items affect a
companys financial
statements.
    
    No material impact.
    
    January 4, 2009
  7




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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)
 Effective Date forSubject
    
    Date Issued
    
    Summary
    
    Effect of Adoption
    
    The CompanyAccounting for 
Convertible Debt 
Instruments That 
May Be Settled in
Cash upon
Conversion
(Including Partial 
Cash Settlement)
    
    May 2008
    
    Changes the accounting treatment for
convertible debt instruments that allow for
either mandatory or optional cash
settlements. Requires the issuer of
convertible debt instruments with cash
settlement features to separately account for
the liability and equity components of the
instrument. The Companys $207,500 principal
amount of subordinated convertible notes are
subject to the provisions of these standards
because under the notes the Company has the
ability to elect cash settlement of the
conversion value of the notes. The provisions
require retrospective application.
    
    See Note 14,
Financial Statement
Correction of a
Misstatement and
Retrospective
Application of
Accounting
Standard,for the
impact of these
standards on the
Companys
previously reported
financial
statements.
    
    January 4, 2009Determining whether
an Instrument (or
Embedded Feature)
is indexed to an
Entitys Own Stock
    
    June 2008
    
    Provides a two-step model to be applied in
determining whether a financial instrument or
an embedded feature is indexed to an issuers
own stock and thus able to qualify for the
scope exception under accounting standards of
Accounting for Derivative Instruments and
Hedging Activities.
    
    No material impact.
    
    January 4, 2009Determining Whether
Instruments Granted
in Share-Based
Payment
Transactions are
Participating
Securities
    
    June 2008
    
    Requires that unvested stock-based
compensation awards that contain
non-forfeitable rights to dividends or
dividend equivalents (whether paid or unpaid)
should be classified as participating
securities and should be included in the
computation of earnings per share pursuant to
the two-class method as described in
accounting standards for Earnings Per
Share.
    
    No material impact.
    
    January 4, 2009Interim Disclosures
about Fair Value of
Financial
Instruments
    
    April 2009
    
    Requires companies to disclose in interim
financial statements the fair value of
financial instruments within the scope of
accounting standards for Disclosures About
Fair Value of Financial Instruments. Also
requires that companies disclose the method
or methods and significant assumptions used
to estimate the fair value of financial
instruments.
    
    No material impact.
    
    July 4, 2009Subsequent Events
    
    May 2009
    
    Sets forth the period after the balance sheet
date during which management of a reporting
entity should evaluate events or transactions
that may occur for potential recognition or
disclosure in the financial statements, the
circumstances under which an entity should
recognize events or transactions occurring
after the balance sheet date in its financial
statements, and the disclosures that an
entity should make about events or
transactions that occurred after the balance
sheet date.
    
    No material impact.
    
    July 4, 2009The FASB Accounting
Standards
Codification and
the Hierarchy of
Generally Accepted
Accounting
Principles
    
    June 2009
    
    Identifies the FASB Accounting Standards
Codification as the authoritative source of
generally accepted accounting principles in
the United States. Rules and interpretive
releases of the Securities and Exchange
Commission under federal securities laws are
also sources of authoritative GAAP for SEC
registrants.
    
    No material impact.
    
    July 5, 2009Multiple 
Deliverable 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.
    
    The Company is
currently
evaluating the
impact, if any,
that the adoption
of this statement
will have on its
consolidated
financial
statements.
    
    January 2, 2011,
with early adoption
permitted.
  8




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GSI COMMERCE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)
 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. Fair Value Measurements on October 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
    
    $
    11,759
    
    
    $
    
    
    
    $
    
 (1)
    
    Cash and cash equivalents total $135,273 as of October 3, 2009, and are comprised of $11,759
of money market mutual funds and $123,514 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
   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,
    
    
    October 3,2009
    
    
    2009Computer hardware and software
    
    $
    190,957
    
    
    $
    215,024Building and building improvements
    
    
    44,721
    
    
    
    44,791Furniture, warehouse and office equipment, and other
    
    
    40,423
    
    
    
    43,945Land
    
    
    7,889
    
    
    
    7,889Leasehold improvements
    
    
    4,592
    
    
    
    5,386Capitalized leases
    
    
    28,141
    
    
    
    28,398Construction in progress
    
    
    1,497
    
    
    
    1,931318,220
    
    
    
    347,364Less: Accumulated depreciation
    
    
    (153,387
    )
    
    
    (191,494
    )Property and equipment, net
    
    $
    164,833
    
    
    $
    155,870
  NOTE 5GOODWILL AND OTHER INTANGIBLE ASSETS
  InteractiveE-Commerce
    
    
    MarketingServices
    
    
    Services
    
    
    ConsolidatedJanuary 3, 2009
    
    $
    82,758
    
    
    $
    112,238
    
    
    $
    194,996Acquisitions(1)(2)
    
    
    
    
    
    
    4,263
    
    
    
    4,263Foreign currency translation
    
    
    394
    
    
    
    
    
    
    
    394October 3, 2009
    
    $
    83,152
    
    
    $
    116,501
    
    
    $
    199,653
 (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.(2)
    
    In September 2009, the Company completed an acquisition of an interactive marketing
services agency. The allocation of the purchase price over the fair value of the tangible and
intangible assets acquired resulted in $1,626 of goodwill.   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,
    
    
    October 3,
    
    
    Average2009
    
    
    2009
    
    
    Life(in years)Gross carrying value of intangible assets subject to amortization:Customer contracts
    
    $
    38,773
    
    
    $
    41,191
    
    
    
    2.5Non-compete agreements
    
    
    3,838
    
    
    
    3,838
    
    
    
    3.0Purchased technology
    
    
    4,493
    
    
    
    4,805
    
    
    
    4.0Trade names
    
    
    470
    
    
    
    840
    
    
    
    1.5Foreign currency translation
    
    
    (691
    )
    
    
    (511
    )46,883
    
    
    
    50,163
    
    
    
    2.6Accumulated amortization:Customer contracts
    
    
    (15,302
    )
    
    
    (20,850
    )Non-compete agreements
    
    
    (1,599
    )
    
    
    (2,559
    )Purchased technology
    
    
    (1,152
    )
    
    
    (2,092
    )Trade names
    
    
    (470
    )
    
    
    (470
    )Foreign currency translation
    
    
    183
    
    
    
    87(18,340
    )
    
    
    (25,884
    )Net carrying value:Customer contracts
    
    
    23,471
    
    
    
    20,341Non-compete agreements
    
    
    2,239
    
    
    
    1,279Purchased technology
    
    
    3,341
    
    
    
    2,713Trade names
    
    
    
    
    
    
    370Foreign currency translation
    
    
    (508
    )
    
    
    (424
    )Total intangible assets subject to
amortization, net
    
    
    28,543
    
    
    
    24,279Indefinite life
intangible assets:Trade names
    
    
    18,120
    
    
    
    18,660Total intangible assets
    
    $
    46,663
    
    
    $
    42,939
  Fiscal 2009
    
    $
    2,772Fiscal 2010
    
    
    8,930Fiscal 2011
    
    
    6,463Fiscal 2012
    
    
    2,845Fiscal 2013
    
    
    1,786Thereafter
    
    
    1,483$
    24,279
  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,
    
    
    October 3,2009
    
    
    2009Convertible notes
    
    $
    161,951
    
    
    $
    169,716Notes payable (1)
    
    
    12,663
    
    
    
    12,527Capital lease obligations
    
    
    24,833
    
    
    
    21,731Credit facility (2)
    
    
    
    
    
    
    Total debt
    
    
    199,447
    
    
    
    203,974Less: Current portion of convertible notes
    
    
    
    
    
    
    (54,280
    )Less: Current portion of notes payable
    
    
    (184
    )
    
    
    (193
    )Less: Current portion of capital lease obligations
    
    
    (4,703
    )
    
    
    (4,826
    )Total long-term debt
    
    $
    194,560
    
    
    $
    144,675
 (1)
    
    The estimated fair market value of the notes payable approximated their carrying value
as of October 3, 2009 and January 3, 2009.(2)
    
    The Company had no outstanding borrowings and $3,689 of outstanding letters of credit
under its $90,000 secured revolving credit facility as of October 3, 2009. Financial Statement Correction of Misstatement and Retrospective Application of Accounting
Standard,
 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
    
    
    October 3, 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
    
    
    $
    3,220Net carrying amount of liability component
    
    $
    50,926
    
    
    $
    54,280Remaining amortization period of discount
    
    
    
    
    
    8 monthsEffective interest rate on liability component
    
    
    
    
    
    
    12.00
    %
   2.5% Convertible Notes due 2027
    As of
    
    
    As ofJanuary 3, 2009
    
    
    October 3, 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
    
    
    $
    34,564Net carrying amount of liability component
    
    $
    111,025
    
    
    $
    115,436Remaining amortization period of discount
    
    
    
    
    
    56 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)
    
    $
    4,645
    
    
    $
    17,688
    
    
    $
    14,491
    
    
    $
    13,612
    
    
    $
    9,464
    
    
    $
    19,175
    
    
    $
    79,075Purchase obligations and marketing commitments(1)
    
    
    89,258
    
    
    
    11,589
    
    
    
    13,866
    
    
    
    13,866
    
    
    
    5,338
    
    
    
    49,960
    
    
    
    183,877Client revenue share payments(1)
    
    
    3,795
    
    
    
    20,768
    
    
    
    21,400
    
    
    
    14,658
    
    
    
    4,368
    
    
    
    28,760
    
    
    
    93,749Debt interest(1)
    
    
    3,499
    
    
    
    5,241
    
    
    
    4,509
    
    
    
    4,498
    
    
    
    4,481
    
    
    
    11,061
    
    
    
    33,289Debt obligations
    
    
    48
    
    
    
    57,695
    
    
    
    209
    
    
    
    563
    
    
    
    237
    
    
    
    161,275
    
    
    
    220,027Capital lease obligations, including interest(2)
    
    
    1,672
    
    
    
    6,040
    
    
    
    5,989
    
    
    
    5,768
    
    
    
    3,672
    
    
    
    1,789
    
    
    
    24,930Deferred acquisition payments
    
    
    
    
    
    
    1,250
    
    
    
    1,050
    
    
    
    750
    
    
    
    1,000
    
    
    
    
    
    
    
    4,050Total
    
    $
    102,917
    
    
    $
    120,271
    
    
    $
    61,514
    
    
    $
    53,715
    
    
    $
    28,560
    
    
    $
    272,020
    
    
    $
    638,997
 (1)
    
    Not required to be recorded in the Condensed Consolidated Balance Sheet as of October
3, 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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GSI COMMERCE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)
 NOTE 8STOCKHOLDERS EQUITY
 Common Stock
  NOTE 9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
    
    
    (500
    )
    
    $
    4.41Forfeited/Cancelled
    
    
    (179
    )
    
    $
    13.70Outstanding at October 3, 2009
    
    
    3,565
    
    
    $
    9.99
    
    
    
    3.11
    
    
    $
    32,079Vested and expected to vest at October
3, 2009
    
    
    3,565
    
    
    $
    9.99
    
    
    
    3.11
    
    
    $
    32,079Exercisable at October 3, 2009
    
    
    3,565
    
    
    $
    9.99
    
    
    
    3.11
    
    
    $
    32,079
  Restricted Stock Units and Awards
   15




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GSI COMMERCE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)
  WeightedNumber of
    
    
    AverageShares
    
    
    Grant Date(in thousands)
    
    
    Fair ValueNonvested shares at January 3, 2009
    
    
    3,793
    
    
    $
    18.86Granted
    
    
    1,776
    
    
    $
    10.96Vested
    
    
    (942
    )
    
    $
    15.77Forfeited/Cancelled
    
    
    (248
    )
    
    $
    13.90Nonvested shares at October 3, 2009
    
    
    4,379
    
    
    $
    16.60
  NOTE 10INCOME TAXES
       16




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GSI COMMERCE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)
  NOTE 11LOSS PER SHARE
   September 27,
    
    
    October 3,2008
    
    
    2009Stock units and awards
    
    
    3,881
    
    
    
    4,379Stock options and warrants
    
    
    4,256
    
    
    
    3,565Convertible notes
    
    
    8,229
    
    
    
    8,22916,366
    
    
    
    16,173
  NOTE 12  COMPREHENSIVE LOSS
  Three Months Ended
    
    
    Nine Months EndedSeptember 27,
    
    
    October 3,
    
    
    September 27,
    
    
    October 3,2008
    
    
    2009
    
    
    2008
    
    
    2009Net loss
    
    $
    (14,195
    )
    
    $
    (9,406
    )
    
    $
    (46,040
    )
    
    $
    (34,629
    )Other comprehensive
income (loss):Cumulative translation
adjustment
    
    
    (6
    )
    
    
    153
    
    
    
    50
    
    
    
    935Comprehensive loss
    
    $
    (14,201
    )
    
    $
    (9,253
    )
    
    $
    (45,990
    )
    
    $
    (33,694
    )
 NOTE 13SEGMENT INFORMATION
    17




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GSI COMMERCE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)
   Three Months Ended September 27, 2008E-Commerce
    
    
    Interactive
    
    
    IntersegmentServices
    
    
    Marketing Services
    
    
    Eliminations
    
    
    ConsolidatedNet revenues
    
    $
    168,097
    
    
    $
    23,132
    
    
    $
    (4,435
    )
    
    $
    186,794Costs and expenses
before depreciation,
amortization
and stock-based compensation expense
    
    
    166,082
    
    
    
    20,258
    
    
    
    (4,435
    )
    
    
    181,905Operating income before depreciation,
amortization and stock-based
compensation expense
    
    
    2,015
    
    
    
    2,874
    
    
    
    
    
    
    
    4,889Depreciation and amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,868Stock-based compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,554Loss from operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,533
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,909Interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (190
    )Other expense, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    480Loss before income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (21,732
    )
 Three Months Ended October 3, 2009E-Commerce
    
    
    Interactive
    
    
    IntersegmentServices
    
    
    Marketing Services
    
    
    Eliminations
    
    
    ConsolidatedNet revenues
    
    $
    166,641
    
    
    $
    31,038
    
    
    $
    (7,368
    )
    
    $
    190,311Costs and expenses
before depreciation,
amortization
and stock-based compensation expense
    
    
    161,708
    
    
    
    24,553
    
    
    
    (7,368
    )
    
    
    178,893Operating income before depreciation, amortization
and stock-based compensation expense
    
    
    4,933
    
    
    
    6,485
    
    
    
    
    
    
    
    11,418Depreciation and amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,655Stock-based compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,676Loss from operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,913
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,897Interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (99
    )Other income, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (32
    )Loss before income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (14,679
    )
  18




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GSI COMMERCE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)
 Nine Months Ended September 27, 2008E-Commerce
    
    
    Interactive
    
    
    IntersegmentServices
    
    
    Marketing Services
    
    
    Eliminations
    
    
    ConsolidatedNet revenues
    
    $
    531,632
    
    
    $
    56,746
    
    
    $
    (12,832
    )
    
    $
    575,546Costs and expenses
before depreciation,
amortization
and stock-based compensation expense
    
    
    528,834
    
    
    
    49,277
    
    
    
    (12,832
    )
    
    
    565,279Operating income before depreciation,
amortization and stock-based
compensation expense
    
    
    2,798
    
    
    
    7,469
    
    
    
    
    
    
    
    10,267Depreciation and amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    49,503Stock-based compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,546Loss from operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (52,782
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,818Interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,397
    )Other expense, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    833Loss before income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (66,036
    )
 Nine Months Ended October 3, 2009E-Commerce
    
    
    Interactive
    
    
    IntersegmentServices
    
    
    Marketing Services
    
    
    Eliminations
    
    
    ConsolidatedNet revenues
    
    $
    508,921
    
    
    $
    84,646
    
    
    $
    (19,600
    )
    
    $
    573,967Costs and expenses
before depreciation,
amortization
and stock-based compensation expense
    
    
    497,885
    
    
    
    67,349
    
    
    
    (19,600
    )
    
    
    545,634Operating income before depreciation, amortization
and stock-based compensation expense
    
    
    11,036
    
    
    
    17,297
    
    
    
    
    
    
    
    28,333Depreciation and amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    46,335Stock-based compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,722Loss from operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (36,724
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,452Interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (304
    )Other income, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (197
    )Loss before income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (50,675
    )
  NOTE 14FINANCIAL STATEMENT CORRECTION OF MISSTATEMENT AND RETROSPECTIVE APPLICATION OF ACCOUNTING
STANDARD
 Summary of Significant Accounting Policies Long-Term Debt
and Credit Facility
   19




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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 September 27, 2008Account management and operations
    
    $
    58,732
    
    
    $
    
    
    
    $
    1
    
    
    $
    58,733General and administrative
    
    
    17,487
    
    
    
    
    
    
    
    2
    
    
    
    17,489Total costs and expenses
    
    
    203,324
    
    
    
    
    
    
    
    3
    
    
    
    203,327Loss from operations
    
    
    (16,530
    )
    
    
    
    
    
    
    (3
    )
    
    
    (16,533
    )Interest expense
    
    
    2,594
    
    
    
    2,315
    
    
    
    
    
    
    
    4,909Total other expense
    
    
    2,884
    
    
    
    2,315
    
    
    
    
    
    
    
    5,199Loss before income taxes
    
    
    (19,414
    )
    
    
    (2,315
    )
    
    
    (3
    )
    
    
    (21,732
    )Benefit for income taxes
    
    
    (6,575
    )
    
    
    (961
    )
    
    
    (1
    )
    
    
    (7,537
    )Net loss
    
    
    (12,839
    )
    
    
    (1,354
    )
    
    
    (2
    )
    
    
    (14,195
    )Basic and diluted loss per share
    
    
    (0.27
    )
    
    
    (0.03
    )
    
    
    
    
    
    
    (0.30
    )Nine Months Ended September 27, 2008Account management and operations
    
    $
    175,339
    
    
    $
    
    
    
    $
    387
    
    
    $
    175,726Product development
    
    
    73,356
    
    
    
    
    
    
    
    215
    
    
    
    73,571General and administrative
    
    
    51,820
    
    
    
    
    
    
    
    617
    
    
    
    52,437Total costs and expenses
    
    
    627,109
    
    
    
    
    
    
    
    1,219
    
    
    
    628,328Loss from operations
    
    
    (51,563
    )
    
    
    
    
    
    
    (1,219
    )
    
    
    (52,782
    )Interest expense
    
    
    7,118
    
    
    
    6,700
    
    
    
    
    
    
    
    13,818Total other expense
    
    
    6,554
    
    
    
    6,700
    
    
    
    
    
    
    
    13,254Loss before income taxes
    
    
    (58,117
    )
    
    
    (6,700
    )
    
    
    (1,219
    )
    
    
    (66,036
    )Benefit for income taxes
    
    
    (16,753
    )
    
    
    (2,780
    )
    
    
    (463
    )
    
    
    (19,996
    )Net loss
    
    
    (41,364
    )
    
    
    (3,920
    )
    
    
    (756
    )
    
    
    (46,040
    )Basic and diluted loss per share
    
    
    (0.88
    )
    
    
    (0.08
    )
    
    
    (0.01
    )
    
    
    (0.97
    )
  20




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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 Cash Flows
    
    Reported
    
    
    Application
    
    
    Correction
    
    
    CorrectedNine Months Ended September 27, 2008Net loss
    
    $
    (41,364
    )
    
    $
    (3,920
    )
    
    $
    (756
    )
    
    $
    (46,040
    )Amortization of discount on convertible notes
    
    
    
    
    
    
    7,041
    
    
    
    
    
    
    
    7,041Stock-based compensation
    
    
    12,327
    
    
    
    
    
    
    
    1,219
    
    
    
    13,546Deferred income taxes
    
    
    (14,783
    )
    
    
    (2,780
    )
    
    
    (463
    )
    
    
    (18,026
    )Other assets, net
    
    
    924
    
    
    
    (341
    )
    
    
    
    
    
    
    583Net cash used in operating activities
    
    
    (42,265
    )
    
    
    
    
    
    
    
    
    
    
    (42,265
    )
 NOTE 15SUBSEQUENT EVENTS
      21




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##### Table of Contents



ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.
 All statements made in this Quarterly Report on Form 10-Q , other than statements of
historical fact, are forward-looking statements, as defined under federal securities law. The words
look forward to, anticipate, believe, estimate, expect, intend, may, plan, will,
would, should, could, guidance, potential, opportunity, continue, project,
forecast, confident, prospects, schedule, designed, future, discussions, if and
similar expressions typically are used to identify forward-looking statements. Forward-looking
statements are based on the then-current expectations, beliefs, assumptions, estimates and
forecasts about our business. These statements are not guarantees of future performance and involve
risks, uncertainties and assumptions which are difficult to predict. Therefore, actual outcomes and
results may differ materially from what is expressed or implied by these forward-looking
statements. Factors which may affect our business, financial condition and operating results
include the effects of changes in the economy, consumer spending, the financial markets and the
industries in which we and our clients operate, changes affecting the Internet and e-commerce, our
ability to develop and maintain relationships with strategic partners and suppliers and the timing
of our establishment, extension or termination of our relationships with 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 close the acquisition of Retail Convergence, Inc.
(RCI), to successfully integrate our acquisitions of other businesses, including Pepperjam and
RCI, and the performance of acquired businesses, including Pepperjam and RCI. More information
about potential factors that could affect us are described in Part II, Item 1A of this Quarterly
Report of Form 10-Q . We expressly disclaim any intent or obligation to update these forward-looking
statements.
 Executive Overview
  
    
    Net revenues increased 2% compared to the third quarter of fiscal 2008. Service fee
revenues grew 17% and net revenues from product sales decreased 11%. E-commerce services
segment net revenues decreased slightly and interactive marketing services segment net
revenues increased by 34%.
    
    Net loss was $9.4 million in the third quarter of fiscal 2009, inclusive of a benefit
for income taxes of $5.3 million, compared to a net loss of $14.2 million in the third
quarter of fiscal 2008, inclusive of a tax benefit of $7.5 million. Loss from operations
improved to $9.9 million in the third quarter of fiscal 2009 compared to a loss of $16.5
million in the third quarter of fiscal 2008.
    
    In August 2009, we received approximately $88 million of net proceeds through the sale
of 5.4 million shares of common stock. We plan to use the net proceeds for working capital
and general corporate purposes, including possible acquisitions.
    
    On October 27, 2009, we executed an Agreement and Plan of Merger (the Merger
Agreement) to acquire Retail Convergence, Inc. (RCI). RCI operates RueLaLa.com, an
operator of online private sales and SmartBargains.com, an off-price e-commerce
marketplace. We believe the acquisition will allow us to enter the private sale and
off-price e-commerce marketplace markets and broaden our e-commerce solution offerings. The
Merger Agreement provides that we will acquire RCI for $180 million at closing, consisting
of cash of $90 million and shares of our common stock valued at $90 million. In addition,
we will be obligated to pay additional earn-out payments of up to $170 million over a three
year period beginning with fiscal year 2010 contingent on RCIs achievement of certain
financial performance targets.
  
    
    For the remainder of fiscal 2009, compared to the same period in fiscal 2008 and
excluding the planned acquisition of RCI, we expect a modest decrease in net revenues due
primarily to the liquidation of a client that was one of our top ten contributors of service
fee revenues in fiscal 2008, 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 that this
transition will decrease our cost of revenues from product sales and our marketing
expenses. Including the planned RCI acquisition we expect a modest increase in net
revenues.
    
    We believe that 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.
  22




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##### Table of Contents




    
    We continue to expect that we will have a net loss in fiscal 2009, although we expect to
earn a profit in our fourth quarter of fiscal 2009.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations do
not take into account the impact of the planned acquisition of RCI on our financial
condition.
 Financial Statement Correction and Retrospective Application of Accounting Standard for Convertible
Debt Instruments That May be Settled in Cash Upon Conversion, Including Partial Cash Settlement
 Financial Statement Correction of Misstatement and
Retrospective Application of Accounting Standard,
 Results of Operations
 Three-month period ended October 3, 2009 and September 27, 2008 (amounts in tables in millions):
 Net Revenues
  Net Revenues from Product Sales
 Service Fee Revenues.
 Third Qtr Fiscal 2009vs.Third Qtr Fiscal 2008Third Qtr Fiscal 2008
    
    
    Third Qtr Fiscal 2009
    
    
    Increase/(Decrease)
    
    
    % ChangeNet Revenues by Type:Net revenues from product sales
    
    $
    102.1
    
    
    
    55
    %
    
    $
    90.8
    
    
    
    48
    %
    
    $
    (11.3
    )
    
    
    (11
    %)Service fee revenues
    
    
    84.7
    
    
    
    45
    %
    
    
    99.5
    
    
    
    52
    %
    
    
    14.8
    
    
    
    17
    %Total net revenues
    
    $
    186.8
    
    
    
    100
    %
    
    $
    190.3
    
    
    
    100
    %
    
    $
    3.5
    
    
    
    2
    %Net Revenues by Segment:E-Commerce services
    
    $
    168.1
    
    
    
    90
    %
    
    $
    166.6
    
    
    
    88
    %
    
    $
    (1.5
    )
    
    
    (1
    %)Interactive marketing services
    
    
    23.1
    
    
    
    12
    %
    
    
    31.0
    
    
    
    16
    %
    
    
    7.9
    
    
    
    34
    %Intersegment eliminations
    
    
    (4.4
    )
    
    
    (2
    %)
    
    
    (7.3
    )
    
    
    (4
    %)
    
    
    (2.9
    )
    
    
    66
    %Total net revenues
    
    $
    186.8
    
    
    
    100
    %
    
    $
    190.3
    
    
    
    100
    %
    
    $
    3.5
    
    
    
    2
    %
  23




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##### Table of Contents



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
  Costs of Revenues from Product Sales.
 Marketing.
 Account Management and Operations.
  24




---



##### Table of Contents



Product Development
 General and Administrative.
 Depreciation and Amortization.
 Third Quarter of Fiscal 2009Third Quarter
    
    
    Third Quarter
    
    
    vs.of Fiscal 2008
    
    
    of Fiscal 2009
    
    
    Third Quarter of Fiscal 2008% of
    
    
    
    
    
    
    % ofNet
    
    
    
    
    
    
    Net
    
    
    Increase /$
    
    
    Revenues
    
    
    $
    
    
    Revenues
    
    
    (Decrease)
    
    
    % ChangeCost of revenues from product sales
    
    $
    73.1
    
    
    
    39
    %
    
    $
    67.5
    
    
    
    35
    %
    
    $
    (5.6
    )
    
    
    (8
    %)Marketing
    
    
    11.4
    
    
    
    6
    %
    
    
    9.1
    
    
    
    5
    %
    
    
    (2.3
    )
    
    
    (20
    %)Account management and operations
    
    
    58.7
    
    
    
    32
    %
    
    
    60.2
    
    
    
    32
    %
    
    
    1.5
    
    
    
    3
    %Product development
    
    
    25.7
    
    
    
    14
    %
    
    
    28.4
    
    
    
    15
    %
    
    
    2.7
    
    
    
    11
    %General and administrative
    
    
    17.5
    
    
    
    9
    %
    
    
    19.4
    
    
    
    10
    %
    
    
    1.9
    
    
    
    11
    %Depreciation and amortization
    
    
    16.9
    
    
    
    9
    %
    
    
    15.6
    
    
    
    8
    %
    
    
    (1.3
    )
    
    
    (8
    %)Total costs and expenses
    
    $
    203.3
    
    
    
    109
    %
    
    $
    200.2
    
    
    
    105
    %
    
    $
    (3.1
    )
    
    
    (2
    %)
 Cost of Revenues from Product Sales:
 Third Qtr
    
    
    Third QtrFiscal 2008
    
    
    Fiscal 2009Cost of revenues from product sales
    
    $
    73.1
    
    
    $
    67.5As a percentage of net revenues from product sales
    
    
    72
    %
    
    
    74
    %
   Marketing:
 Third Qtr
    
    
    Third QtrFiscal 2008
    
    
    Fiscal 2009Marketing
    
    $
    11.4
    
    
    $
    9.1As a percentage of net revenues from product sales
    
    
    11
    %
    
    
    10
    %
   25




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##### Table of Contents



Account Management and Operations.
 Product Development.
 General and Administrative.
 Depreciation and Amortization.
 Other (Income) Expense
 Third Quarter of Fiscal 2009Third Quarter
    
    
    Third Quarter
    
    
    vs.of Fiscal 2008
    
    
    of Fiscal 2009
    
    
    Third Quarter of Fiscal 2008% of
    
    
    
    
    
    
    % ofNet
    
    
    
    
    
    
    Net
    
    
    Increase /$
    
    
    Revenues
    
    
    $
    
    
    Revenues
    
    
    (Decrease)
    
    
    % ChangeInterest expense
    
    $
    4.9
    
    
    
    3
    %
    
    $
    4.9
    
    
    
    3
    %
    
    $
    
    
    
    
    0
    %Interest income
    
    
    (0.2
    )
    
    
    0
    %
    
    
    (0.1
    )
    
    
    0
    %
    
    
    0.1
    
    
    
    (50
    %)Other (income) expense
    
    
    0.5
    
    
    
    0
    %
    
    
    
    
    
    
    0
    %
    
    
    (0.5
    )
    
    
    (100
    %)Total other expenses
    
    $
    5.2
    
    
    
    3
    %
    
    $
    4.8
    
    
    
    3
    %
    
    $
    (0.4
    )
    
    
    (8
    %)
   26




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##### Table of Contents



Results of Operations
 Nine-month period ended October 3, 2009 and September 27, 2008 (amounts in tables in millions):
 Net Revenues
 First Nine Months of Fiscal 2009vs.First Nine Months
    
    
    First Nine Months
    
    
    First Nine Months of Fiscal 2008of Fiscal 2008
    
    
    of Fiscal 2009
    
    
    Increase/(Decrease)
    
    
    % ChangeNet Revenues by Type:Net revenues from product sales
    
    $
    332.3
    
    
    
    58
    %
    
    $
    288.2
    
    
    
    50
    %
    
    $
    (44.1
    )
    
    
    (13
    %)Service fee revenues
    
    
    243.2
    
    
    
    42
    %
    
    
    285.8
    
    
    
    50
    %
    
    
    42.6
    
    
    
    18
    %Total net revenues
    
    $
    575.5
    
    
    
    100
    %
    
    $
    574.0
    
    
    
    100
    %
    
    $
    (1.5
    )
    
    
    (0
    %)Net Revenues by Segment:E-Commerce services
    
    $
    531.6
    
    
    
    92
    %
    
    $
    508.9
    
    
    
    89
    %
    
    $
    (22.7
    )
    
    
    (4
    %)Interactive marketing services
    
    
    56.7
    
    
    
    10
    %
    
    
    84.7
    
    
    
    15
    %
    
    
    28.0
    
    
    
    49
    %Intersegment eliminations
    
    
    (12.8
    )
    
    
    (2
    %)
    
    
    (19.6
    )
    
    
    (4
    %)
    
    
    (6.8
    )
    
    
    53
    %Total net revenues
    
    $
    575.5
    
    
    
    100
    %
    
    $
    574.0
    
    
    
    100
    %
    
    $
    (1.5
    )
    
    
    (0
    %)
 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
  27




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##### Table of Contents



Interactive Marketing Services Segment Revenues.
 Costs and Expenses
 First Nine Months of Fiscal 2009First Nine Months
    
    
    First Nine Months
    
    
    vs.of Fiscal 2008
    
    
    of Fiscal 2009
    
    
    First Nine Months of Fiscal 2008% of
    
    
    
    
    
    
    % ofNet
    
    
    
    
    
    
    Net
    
    
    Increase /$
    
    
    Revenues
    
    
    $
    
    
    Revenues
    
    
    (Decrease)
    
    
    % ChangeCost of revenues from product sales
    
    $
    237.0
    
    
    
    41
    %
    
    $
    217.3
    
    
    
    38
    %
    
    $
    (19.7
    )
    
    
    (8
    %)Marketing
    
    
    40.1
    
    
    
    7
    %
    
    
    27.0
    
    
    
    4
    %
    
    
    (13.1
    )
    
    
    (33
    %)Account management and operations
    
    
    175.7
    
    
    
    30
    %
    
    
    177.0
    
    
    
    31
    %
    
    
    1.3
    
    
    
    1
    %Product development
    
    
    73.6
    
    
    
    13
    %
    
    
    84.9
    
    
    
    15
    %
    
    
    11.3
    
    
    
    15
    %General and administrative
    
    
    52.4
    
    
    
    9
    %
    
    
    58.2
    
    
    
    10
    %
    
    
    5.8
    
    
    
    11
    %Depreciation and amortization
    
    
    49.5
    
    
    
    9
    %
    
    
    46.3
    
    
    
    8
    %
    
    
    (3.2
    )
    
    
    (6
    %)Total costs and expenses
    
    $
    628.3
    
    
    
    109
    %
    
    $
    610.7
    
    
    
    106
    %
    
    $
    (17.6
    )
    
    
    (3
    %)
 Cost of Revenues from Product Sales:
 First Nine Months
    
    
    First Nine Monthsof Fiscal 2008
    
    
    of Fiscal 2009Cost of revenues from product sales
    
    $
    237.0
    
    
    $
    217.3As a percentage of net revenues from product sales
    
    
    71
    %
    
    
    75
    %
   Marketing:
 First Nine Months
    
    
    First Nine Monthsof Fiscal 2008
    
    
    of Fiscal 2009Marketing
    
    $
    40.1
    
    
    $
    27.0As a percentage of net revenues from product sales
    
    
    12
    %
    
    
    9
    %
    28




---



##### Table of Contents



Account Management and Operations.
 Product Development.
 General and Administrative.
 Depreciation and Amortization.
 Other (Income) Expense
 First Nine Months of Fiscal 2009First Nine Months
    
    
    First Nine Months
    
    
    vs.of Fiscal 2008
    
    
    of Fiscal 2009
    
    
    First Nine Months of Fiscal 2008% of
    
    
    
    
    
    
    % ofNet
    
    
    
    
    
    
    Net
    
    
    Increase /$
    
    
    Revenues
    
    
    $
    
    
    Revenues
    
    
    (Decrease)
    
    
    % ChangeInterest expense
    
    $
    13.8
    
    
    
    2
    %
    
    $
    14.5
    
    
    
    2
    %
    
    $
    0.7
    
    
    
    5
    %Interest income
    
    
    (1.4
    )
    
    
    0
    %
    
    
    (0.3
    )
    
    
    0
    %
    
    
    1.1
    
    
    
    (79
    %)Other (income) expense
    
    
    0.9
    
    
    
    0
    %
    
    
    (0.2
    )
    
    
    0
    %
    
    
    (1.1
    )
    
    
    (122
    %)Total other expenses
    
    $
    13.3
    
    
    
    2
    %
    
    $
    14.0
    
    
    
    2
    %
    
    $
    0.7
    
    
    
    5
    %
   29




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##### Table of Contents



Income Taxes
    Seasonality
  Liquidity and Capital Resources
 As ofJanuary 3,
    
    
    October 3,2009
    
    
    2009(in millions)Cash and cash equivalents
    
    $
    130.3
    
    
    $
    135.3Percentage of total assets
    
    
    18
    %
    
    
    19
    %
     30




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##### Table of Contents



Sources of Cash
    Uses of Cash
   Planned acquisition of Retail Convergence, Inc
  Outlook
  Critical Accounting Policies
  Recent Accounting Pronouncements
 Summary of Significant Accounting
Policies
  31




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##### Table of Contents



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.
 
 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 in a rapidly changing industry.
   32




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##### Table of Contents



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;
 
    
    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.
  Our success is tied to the success of, and continued relationships with, the clients for which we
operate e-commerce businesses.
   33




---



##### Table of Contents



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.
   
    
    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.
  34




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##### Table of Contents



The
terms of our secured revolving bank 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.
  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 condition could be materially impacted.
   35




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##### Table of Contents



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.
  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.
   36




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##### Table of Contents



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.
  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.
   37




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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.
   
    
    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.
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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.
  
    
    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.
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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.
  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.
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We may be subject to product liability claims that could be costly and time-consuming.
  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.
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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
negatively impacted.
  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.
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Existing or future laws or regulations could harm our business or marketing efforts.
    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.
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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;
 
    
    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.
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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.
  In connection with our acquisition of Retail Convergence, Inc., we will enter two new lines of
business  the online private sale and off-price e-commerce marketplace businesses. The online
private sale business is a new and unproven business. We cannot assure you that our expansion into
this business line will succeed.
  SmartBargains.com and RueLaLa.com compete with retailers and other online marketplaces.
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In connection with our acquisition of the assets of Pepperjam, we have entered a line of business -
the affiliate marketing network business. We cannot assure you that our expansion into this
business line will succeed.
  Our revenue from Pepperjam may fail to grow or may decline if the reputation of the Pepperjam
affiliate marketing network is damaged by unscrupulous activities of network participants.
  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;
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
    
    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.
    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.
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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.
    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;
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
    
    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.
   
    
    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;
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
    
    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.
   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.
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It may be difficult for a third-party to acquire us and this could depress our stock price.
     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.
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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.
  
 ITEM
2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
    
 ITEM 3: DEFAULTS UPON SENIOR SECURITIES.
  
 ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS WHO ARE NOT ALSO DIRECTORS .
  
 ITEM 5: OTHER INFORMATION.
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ITEM 6: EXHIBITS.
 4.1
    
    
    Fifth Amendment to Second Amended and Restated Registration Rights Agreement, dated as of August 5, 2009,
among Global Sports, Inc. (n/k/a GSI Commerce, Inc.), SOFTBANK Capital Partners LP, SOFTBANK Capital
Advisors Fund LP, SOFTBANK Capital LP and QK Holdings, Inc. (filed with GSI Commerce, Inc.s Registration
Statement on Form S-3/A filed on August 7, 2009 and incorporated herein by reference)10.1
    
    
    Amendment to Offer Letter, dated July 31, 2009, between GSI Commerce, Inc. and Stephen J. Gold (filed with
GSI Commerce, Inc.s Current Report on Form 8-K filed on August, 6, 2009 and incorporated herein by
reference)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, Finance
and Chief Financial Officer

(principal financial officer &

principal accounting officer)  54