Form 10-Q

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 2, 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.

(Exact name of registrant as specified in its charter)


DELAWARE		04-2958132
(State or other jurisdiction of		(I.R.S. employer identification no.)
incorporation or organization)


935 FIRST AVENUE, KING OF PRUSSIA, PA		19406
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code (610) 491-7000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

There were 66,492,417 shares of the registrant’s Common Stock outstanding as of the close of business on October 27, 2010.

PART I


ITEM 1:		FINANCIAL STATEMENTS

GSI COMMERCE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
(unaudited)


	January 2,			October 2,
	2010			2010

ASSETS
Current assets:
Cash and cash equivalents	$	228,430		$	66,709
Accounts receivable, net		70,582			76,958
Inventory		55,678			68,943
Deferred tax assets		12,347			22,580
Prepaid expenses and other current assets		13,187			16,919

Total current assets		380,224			252,109

Property and equipment, net		163,329			180,363
Goodwill		373,003			396,041
Intangible assets, net		132,875			148,959
Long-term deferred tax assets		—			10,886
Other assets, net		12,417			31,253

Total assets	$	1,061,848		$	1,019,611


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	126,914		$	77,991
Accrued expenses and other		150,173			123,155
Deferred revenue		20,645			20,724
Convertible notes		55,443			—
Current portion — long-term debt		5,260			8,054

Total current liabilities		358,435			229,924

Convertible notes		116,948			121,747
Long-term debt		28,142			53,378
Deferred acquisition payments		63,763			68,935
Deferred tax liabilities		8,534			—
Deferred revenue and other long-term liabilities		9,686			9,892

Total liabilities		585,508			483,876

Commitments and contingencies

Stockholders’ equity:
Preferred stock, $0.01 par value:
Authorized shares — 5,000
Issued and outstanding shares — none		—			—
Common stock, $0.01 par value:
Authorized shares — 90,000 and 180,000
Issued and outstanding shares — 60,033 and 66,486		600			665
Additional paid in capital		642,852			753,771
Accumulated other comprehensive loss		(1,498	)		(653	)
Accumulated deficit		(165,614	)		(218,048	)

Total stockholders’ equity		476,340			535,735


Total liabilities and stockholders’ equity	$	1,061,848		$	1,019,611

The accompanying notes are an integral part of these condensed consolidated financial statements.

GSI COMMERCE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)


	Three Months Ended						Nine Months Ended
	October 3,			October 2,			October 3,			October 2,
	2009			2010			2009			2010

Revenues:
Net revenues from product sales	$	90,767		$	153,238		$	288,150		$	458,667
Service fee revenues		99,544			130,900			285,817			362,291


Net revenues		190,311			284,138			573,967			820,958

Costs and expenses:
Cost of revenues from product sales		67,548			113,701			217,345			338,627
Marketing		9,087			11,394			27,002			29,903
Account management and operations		60,173			83,500			176,969			240,489
Product development		28,396			42,410			84,871			118,789
General and administrative		19,365			29,309			58,169			81,396
Depreciation and amortization		15,655			21,971			46,335			61,306
Changes in fair value of deferred acquisition payments		—			2,074			—			6,222


Total costs and expenses		200,224			304,359			610,691			876,732


Loss from operations		(9,913	)		(20,221	)		(36,724	)		(55,774	)

Other (income) expense:
Interest expense		4,897			3,648			14,452			13,595
Interest income		(99	)		(10	)		(304	)		(316	)
Other (income) expense		(32	)		(506	)		(197	)		906
Loss on investments		—			736			—			736


Total other expense		4,766			3,868			13,951			14,921

Loss before income taxes and equity-method investment earnings		(14,679	)		(24,089	)		(50,675	)		(70,695	)

Benefit for income taxes		(5,273	)		(5,435	)		(16,046	)		(18,185	)
Equity-method investment earnings		—			(76	)		—			(76	)


Net loss	$	(9,406	)	$	(18,578	)	$	(34,629	)	$	(52,434	)


Basic and diluted loss per share	$	(0.18	)	$	(0.28	)	$	(0.70	)	$	(0.83	)


Weighted average shares outstanding — basic and diluted		51,910			66,419			49,506			63,384

The accompanying notes are an integral part of these condensed consolidated financial statements.

GSI COMMERCE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)


	Nine Months Ended
	October 3,			October 2,
	2009			2010

Cash Flows from Operating Activities:
Net loss	$	(34,629	)	$	(52,434	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		38,856			46,538
Amortization		7,479			14,768
Amortization of discount on convertible notes		7,765			6,824
Changes in fair value of deferred acquisition payments		—			6,222
Stock-based compensation		18,722			21,128
Foreign currency transaction losses		(184	)		(909	)
Loss on investments		—			736
Gain on disposal of equipment		(10	)		—
Equity-method investment earnings		—			(76	)
Deferred income taxes		(16,046	)		(19,578	)
Changes in operating assets and liabilities:
Accounts receivable, net		14,602			(3,022	)
Inventory		(1,087	)		(13,265	)
Prepaid expenses and other current assets		(1,900	)		(2,955	)
Other assets, net		1,938			744
Accounts payable, accrued expenses and other		(81,434	)		(78,572	)
Deferred revenue		(2,224	)		(2,668	)


Net cash used in operating activities		(48,152	)		(76,519	)

Cash Flows from Investing Activities:
Payments for acquisitions of businesses, net of cash acquired		(5,601	)		(47,850	)
Cash paid for property and equipment, including internal use software		(29,585	)		(54,648	)
Purchase of investments		—			(18,611	)
Release from restricted cash escrow funds		1,052			—


Net cash used in investing activities		(34,134	)		(121,109	)

Cash Flows from Financing Activities:
Borrowings on revolving credit loan		—			25,000
Proceeds from the sale of common stock		92,596			—
Equity issuance costs paid		(4,179	)		—
Debt issuance costs paid		(83	)		(887	)
Repayments of capital lease obligations		(3,359	)		(4,446	)
Repayments of mortgage note		(136	)		(145	)
Excess tax benefit in connection with exercise of stock options and awards		—			978
Proceeds from exercise of common stock options		2,065			14,693


Net cash provided by financing activities		86,904			35,193

Effect of exchange rate changes on cash and cash equivalents		340			714


Net increase (decrease) in cash and cash equivalents		4,958			(161,721	)
Cash and cash equivalents, beginning of period		130,315			228,430


Cash and cash equivalents, end of period	$	135,273		$	66,709


Supplemental Cash Flow Information:
Cash paid during the period for interest	$	4,672		$	5,316
Cash paid during the period for income taxes		2,620			739
Noncash Investing and Financing Activities:
Accrual for purchases of property and equipment		3,196			2,636
Equipment financed under capital lease		257			7,482

The accompanying notes are an integral part of these condensed consolidated financial statements.

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)

NOTE 1—BASIS OF PRESENTATION

The accompanying condensed consolidated financial statements of GSI Commerce, Inc. and Subsidiaries (“the Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the instructions for Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all information and note disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements.

The accompanying financial information is unaudited; however, in the opinion of the Company’s management, all adjustments (consisting of normal recurring adjustments and accruals) necessary to present fairly the financial position, results of operations and cash flows for the periods reported have been included. The results of operations for the periods reported are not necessarily indicative of those that may be expected for a full year.

The financial statements presented include the accounts of the Company and all wholly-owned subsidiaries. All inter-company balances and transactions among consolidated entities have been eliminated.

This quarterly report should be read in conjunction with the financial statements and notes thereto included in the Company’s audited financial statements presented in the Company’s Annual Report on Form 10-K for the fiscal year ended January 2, 2010, filed with the Securities and Exchange Commission (“SEC”) on March 5, 2010.

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and assumptions.

Accrued Expenses and Other: Accrued expenses and other include $43,038 of amounts payable to the Company’s clients and accrued payroll of $17,495 as of October 2, 2010. No other item included in accrued expenses was greater than 5% of total current liabilities as of October 2, 2010.

Accrued expenses include $62,705 of amounts payable to the Company’s clients and accrued payroll of $25,617 as of January 2, 2010. No other item included in accrued expenses was greater than 5% of total current liabilities as of January 2, 2010.

Client Revenue Share: Client revenue share charges are payments made to the Company’s clients in exchange for the use of their brand names, logos, the promotion of its clients’ URLs, Web stores and toll-free telephone numbers in clients’ marketing and communications materials, the implementation of programs to provide incentives to consumers to shop through the e-commerce businesses that the Company operates for its clients and other programs and services provided to the consumers of the e-commerce businesses that the Company operates for its clients, net of amounts reimbursed to the Company by its clients. Client revenue share is calculated as either a percentage of product sales, a guaranteed annual amount, or both. Client revenue share charges were $5,964 and $16,430 for the three- and nine-month periods ended October 2, 2010 and $5,613 and $17,900 for the three- and nine-month periods ended October 3, 2009, and are included in marketing expenses in the Condensed Consolidated Statements of Operations.

Fulfillment Costs: The Company defines fulfillment costs as personnel, occupancy and other costs associated with its fulfillment centers, personnel and other costs associated with its logistical support and vendor operations departments and third-party warehouse and fulfillment services costs. Fulfillment costs were $25,775 and $75,190 for the three- and nine- month periods ended October 2, 2010 and $19,541 and $59,351 for the three- and nine-month periods ended October 3, 2009, and are included in account management and operations expenses in the Condensed Consolidated Statements of Operations.

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)

Recent Accounting Pronouncements:

The following is a summary of recent accounting standards issued by the Financial Accounting Standards Board (“FASB”):


				Effective Date for
Subject	Date Issued	Summary	Effect of Adoption	The Company
Multiple 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

The Company’s financial assets and liabilities subject to fair value measurements on a recurring basis are as follows:


	Fair Value Measurements on January 2, 2010
	Quoted Prices in
	Active Markets for		Significant Other		Significant
	Identical Assets		Observable Inputs		Unobservable Inputs
	(Level 1)		(Level 2)		(Level 3)
Assets
Cash and cash equivalents:⁽¹⁾
Money market mutual funds	$	13,606	$	—	$	—
Liabilities
Deferred acquisition payments⁽²⁾	$	—	$	—	$	60,963


	Fair Value Measurements on October 2, 2010
	Quoted Prices in
	Active Markets for		Significant Other		Significant
	Identical Assets		Observable Inputs		Unobservable Inputs
	(Level 1)		(Level 2)		(Level 3)
Assets
Cash and cash equivalents:⁽¹⁾
Money market mutual funds	$	—	$	—	$	—
Liabilities
Deferred acquisition payments⁽²⁾	$	—	$	—	$	67,185


(1)		Cash and cash equivalents totaled $66,709 as of October 2, 2010, and were entirely comprised 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 RueLaLa, Inc., formerly known as Retail Convergence, Inc. (“Rue La La”) achieving specified minimum earnings thresholds over one or more years. The Company utilized a discounted cash flow model and a discount rate of 13.6% to determine fair value. The Company accreted $2,074 and $6,222 of its deferred acquisition payments from the acquisition date of Rue La La during the three- and nine-month periods ended October 2, 2010 and $0 during the three- and nine-month periods ended October 3, 2009, and the corresponding charge was recorded to changes in fair value of deferred acquisition payments in the Condensed Consolidated Statements of Operations.

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)

The following table provides a reconciliation between the beginning and ending balances of items measured at fair value on a recurring basis in the table above that used significant unobservable inputs (Level 3):


	Three Months Ended		Nine Months Ended
	October 2, 2010		October 2, 2010

Balance, beginning of period	$	65,111	$	60,963
Changes in fair value of deferred acquisition payments included in the Company’s Condensed Consolidated Statements of Operations		2,074		6,222


Balance, end of period	$	67,185	$	67,185

NOTE 4—PROPERTY AND EQUIPMENT

The major classes of property and equipment, at cost, as of January 2, 2010 and October 2, 2010 are as follows:


	January 2,			October 2,
	2010			2010
Computer hardware and software	$	231,954		$	282,365
Building and building improvements		44,822			44,977
Furniture, warehouse and office equipment, and other		45,722			47,570
Land		7,889			7,889
Leasehold improvements		8,847			11,406
Capitalized leases		29,132			36,955


		368,366			431,162
Less: Accumulated depreciation		(205,037	)		(250,799	)


Property and equipment, net	$	163,329		$	180,363

The Company’s net book value in capital leases was $21,568 as of October 2, 2010 and $18,500 as of January 2, 2010. The Company’s capital leases primarily relate to warehouse equipment, computer hardware, and computer software. The depreciation of capital leases is included within depreciation and amortization expense in the Condensed Consolidated Statements of Operations. Interest expense recorded on capital leases was $379 and $1,022 for the three- and nine-month periods ended October 2, 2010 and $357 and $1,126 for the three- and nine-month periods ended October 3, 2009.

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

The following table summarizes the changes in the carrying amount of goodwill for each of the Company’s reportable segments:


	E-Commerce			Marketing		Consumer
	Services			Services		Engagement		Consolidated
January 2, 2010	$	83,090		$	117,025	$	172,888	$	373,003
Acquisitions		2,556			20,708		—		23,264
Foreign currency translation		(226	)		—		—		(226	)

October 2, 2010	$	85,420		$	137,733	$	172,888	$	396,041

The Company’s intangible assets are as follows:


							Weighted-
	January 2,			October 2,			Average
	2010			2010			Life
							(in years)
Gross carrying value of intangible assets subject to amortization:
Customer contracts	$	41,190		$	56,148			2.5
Member relationships		22,200			22,200			2.6
Supplier relationships		11,186			11,186			3.4
Non-compete agreements		4,079			4,481			3.0
Purchased technology		4,805			13,723			3.6
Trade names		840			840			1.5
Foreign currency translation		(482	)		(528	)

		83,818			108,050			2.7
Accumulated amortization:
Customer contracts		(22,907	)		(29,387	)
Member relationships		(489	)		(5,109	)
Supplier relationships		—			(708	)
Non-compete agreements		(2,888	)		(3,963	)
Purchased technology		(2,428	)		(4,147	)
Trade names		(532	)		(670	)
Foreign currency translation		72			89

		(29,172	)		(43,895	)

Net carrying value:
Customer contracts		18,283			26,761
Member relationships		21,711			17,091
Supplier relationships		11,186			10,478
Non-compete agreements		1,191			518
Purchased technology		2,377			9,576
Trade names		308			170
Foreign currency translation		(410	)		(439	)

Total intangible assets subject to amortization, net		54,646			64,155

Indefinite life intangible assets:
Trade names		78,229			84,804

Total intangible assets	$	132,875		$	148,959

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)

Amortization expense of intangible assets was $5,677 and $14,741 for the three- and nine-month periods ended October 2, 2010 and $2,582 and $7,544 for the three- and nine-month periods ended October 3, 2009. Estimated future amortization expense related to intangible assets as of October 2, 2010, is as follows:


Fiscal 2010	$	5,358
Fiscal 2011		20,937
Fiscal 2012		16,122
Fiscal 2013		12,452
Fiscal 2014		8,044
Thereafter		1,242

	$	64,155

NOTE 6—ACQUISITIONS AND INVESTMENTS

The Company accounts for acquisitions using the acquisition method of accounting. Under the acquisition method, assets acquired and liabilities assumed from acquisitions are recorded at their fair values as of the acquisition date. Any excess of the purchase price over the fair values of the net assets acquired is recorded as goodwill. The Company’s purchased intangible assets and goodwill are not deductible for tax purposes. However, acquisition method accounting allows for the establishment of deferred tax liabilities on purchased intangible assets, other than goodwill.

MBS

On April 30, 2010, the Company acquired 100% of the issued and outstanding capital stock of MBS Insight, Inc. (“MBS”), a wholly owned subsidiary of World Marketing, Inc. for $22,200. MBS is a database marketing solutions provider that offers a knowledge-based marketing services and solutions that help marketers innovate, advance, and automate their marketing efforts for greater return on their investment. The acquisition strengthens e-Dialog’s suite of products providing marketers with an operational, multichannel view of customers in order to understand customer behavior and preferences in real time.

The table below summarizes the fair values of the MBS’s assets and acquired liabilities assumed, including cash acquired, as of acquisition date:


Total current assets	$	2,472
Property, plant, and equipment		949
Goodwill		11,563
Indentifiable intangible assets:
Customer relationships		8,611
Technology		2,551
Trade name		1,710

Total assets acquired		27,856

Total current liabilities		(1,476	)
Long-term deferred tax liabilities		(4,180	)

Total liabilities assumed		(5,656	)


Net assets acquired	$	22,200

MBS’ results of operations are included on the Company’s Consolidated Statements of Operations beginning on April 30, 2010. MBS' revenue and net loss for the period from April 30, 2010 to October 2, 2010 included in the Company's Consolidated Statements of Operations was $7,282 and $159, respectively.

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)

Rue La La

In November 2009, the Company completed the acquisition of substantially all of the outstanding common stock of Rue La La pursuant to the terms of an Agreement and Plan of Merger dated October 27, 2009. In December 2009, the Company acquired the remaining outstanding common stock of Rue La La.

Other Acquisitions

During the nine months ended October 2, 2010, the Company made three other acquisitions. Results of operations for each of the Company’s 2010 acquisitions are included in the Company’s Condensed Consolidated Statements of Operations beginning on each respective acquisition date.

Unaudited Pro Forma Financial Information

The financial information in the table below summarizes the combined results of operations of the Company, MBS, and Rue La La on a pro forma basis, as though the companies had been combined as of the beginning of each of the periods presented. The pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had actually taken place at the beginning of each of the periods presented and is not intended to be a projection of future results or trends.


	Three Months Ended						Nine Months Ended
	October 3,			October 2,			October 3,			October 2,
	2009			2010			2009			2010
Net revenues	$	226,341		$	284,138		$	675,934		$	826,621
Net loss	$	(14,826	)	$	(18,578	)	$	(48,089	)	$	(52,722	)

Equity Method Investment

As of October 2, 2010, the Company owned 27% of the common stock of Intershop Communications AG (“Intershop”), a provider of e-commerce software based in Germany and publicly traded on the Frankfurt Stock Exchange. The carrying amount of the investment as of October 2, 2010 is $20,120, which includes a cumulative translation adjustment of $1,433 due to the increase in the exchange rate between the Euro and the Unites States dollar. The Company recorded $76 during the three months ended October 2, 2010 for its share of Intershop’s earnings.

The Company accounts for this investment using the equity method of accounting, and monitors its investment periodically to evaluate whether any changes in fair value below its cost basis become other-than-temporary. The Company has elected to record its share of earnings/losses for Intershop on a three-month lag due to timeliness considerations. The Company’s investment in Intershop is included in other assets, net in the Company’s Condensed Consolidated Balance Sheets. As of October 2, 2010, the market value of the Company’s investment in Intershop, based on the quoted market price of its stock, is $18,820.

Other Investment

During the three months ended October 3, 2010, the Company recorded an other-than-temporary impairment loss of $736 related to one of its cost-method investments which reduced the carrying value of the investment to $0.

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

The following table summarizes the Company’s long-term debt as of:


	January 2,			October 2,
	2010			2010

Convertible notes	$	172,391		$	121,747
Notes payable ⁽¹⁾		12,479			12,334
Capital lease obligations		20,923			24,098
Line of credit		—			25,000


Total debt		205,793			183,179
Less: Current portion of convertible notes		(55,443	)		—
Less: Current portion of notes payable		(195	)		(206	)
Less: Current portion of capital lease obligations	(5,065		)		(7,848	)


Total long-term debt	$	145,090		$	175,125


(1)		The estimated fair market value of the notes payable approximated their carrying value as of October 2, 2010 and January 2, 2010.

3% Convertible Notes due 2025

In 2005, the Company completed a public offering of $57,500 aggregate principal amount of 3% subordinated convertible notes due June 1, 2025.

In April 2010, the Company called the notes for redemption and in June 2010, the Company issued 3,227 shares of common stock upon the conversion of $57,469 of the 3% convertible notes at the election of the holders of the notes, which was recorded as an increase to additional paid in capital in the Condensed Consolidated Balance Sheets. The Company paid $31 for the remaining 3% convertible notes that were not converted by the holders of the notes.

The following table provides additional information about the Company’s 3% convertible notes:


	As of		As of
	January 2, 2010		October 2, 2010
Carrying amount of the equity component	$	18,187	$	—
Principal amount of the liability component	$	57,500	$	—
Unamortized discount of liability component	$	2,057	$	—
Net carrying amount of liability component	$	55,443	$	—

The following table provides the components of interest expense for the Company’s 3% convertible notes:


	Three Months Ended				Nine Months Ended
	October 3,		October 2,		October 3,		October 2,
	2009		2010		2009		2010
Amortization of the discount on the liability component	$	1,161	$	—	$	3,354	$	2,053
Contract interest coupon		431		—		1,294		719
Amortization of the liability component of the issue costs		101		—		292		173

Interest expense	$	1,693	$	—	$	4,940	$	2,945

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)

2.5% Convertible Notes due 2027

In 2007, the Company completed a private placement of $150,000 of aggregate principal amount of 2.5% subordinated convertible notes due June 1, 2027, raising net proceeds of approximately $145,000, after deducting initial purchaser’s discount and issuance costs. The notes bear interest at 2.5%, payable semi-annually on June 1 and December 1.

Holders may convert the notes into shares of the Company’s common stock (or cash or a combination of the Company’s common stock and cash, if the Company so elects) at a conversion rate of 33.3333 shares per $1,000 principal amount of notes (representing a conversion price of approximately $30.00 per share) beginning on March 1, 2014. Holders can require the Company to repurchase the notes for 100% of principal amount of the notes on June 1, 2014. At any time on or after June 8, 2014, the Company may redeem any of the notes for cash at a redemption price of 100% of their principal amount, plus accrued and unpaid interest, if any, up to but excluding, the redemption date. Based on the Company’s closing stock price of $24.39 on October 2, 2010, the if-converted value of the notes does not exceed the aggregate principal amount of the notes.

The following table provides additional information about the Company’s 2.5% convertible notes:


	As of		As of
	January 2, 2010		October 2, 2010
Carrying amount of the equity component	$	26,783	$	26,783
Principal amount of the liability component	$	150,000	$	150,000
Unamortized discount of liability component	$	33,052	$	28,253
Net carrying amount of liability component	$	116,948	$	121,747
Remaining amortization period of discount			44 months
Effective interest rate on liability component				8.60	%

The following table provides the components of interest expense for the Company’s 2.5% convertible notes:


	Three Months Ended				Nine Months Ended
	October 3,		October 2,		October 3,		October 2,
	2009		2010		2009		2010
Amortization of the discount on the liability component	$	1,512	$	1,645	$	4,411	$	4,799
Contract interest coupon		937		937		2,812		2,812
Amortization of the liability component of the issue costs		116		122		342		360

Interest expense	$	2,565	$	2,704	$	7,565	$	7,971

The estimated fair market value of the 2.5% subordinated convertible notes was $159,600 as of October 2, 2010 and $157,125 as of January 2, 2010 based on quoted market prices.

Credit Facility

In March 2010, the Company amended and expanded its existing secured revolving credit facility expanding the credit facility to $150,000. The credit facility expires in March 2013 and is available for letters of credit, working capital, and general corporate purposes, including possible acquisitions. The $150,000 secured revolving credit facility provides for the issuance of up to $30,000 of letters of credit, which is included in the $150,000 available under the secured revolving credit facility. The secured revolving credit facility is collateralized by substantially all of the Company’s assets. The Company may elect to have amounts outstanding under the credit facilities bear interest at either a LIBOR rate plus an applicable margin of 2.0% to 3.25%, the prime rate plus an applicable margin of 2.0% to 3.25%, Daily LIBOR plus 1.0% plus an applicable margin of 2.0% to 3.25%, or at the Federal Funds Open Rate plus 0.5% plus an applicable margin of 2.0% to 3.25%. The applicable margin is determined by the leverage ratio of funded debt to EBITDA, as defined in the credit facility. The Company had $25,000 of outstanding borrowings and $3,929 of outstanding letters of credit under the secured revolving credit facility as of October 2, 2010.

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)

NOTE 8—COMMITMENTS AND CONTINGENCIES

Legal Proceedings

The Company is involved in various litigation incidental to its business, including alleged contractual claims, claims relating to infringement of intellectual property rights of third parties, claims relating to the manner in which goods are sold through its integrated-commerce platform and claims relating to the Company’s collection of sales taxes in certain states. The Company collects sales taxes for goods owned and sold by it and shipped into certain states. As a result, the Company is subject from time to time to claims from other states alleging that the Company failed to collect and remit sales taxes for sales and shipments of products to customers in such other states.

Based on the merits of the cases and/or the amounts claimed, the Company does not believe that any claims are likely to have a material adverse effect on its business, financial position or results of operations. The Company may, however incur substantial expenses and devote substantial time to defend these claims whether or not such claims are meritorious. In addition, litigation is inherently unpredictable. In the event of a determination adverse to the Company, the Company may incur substantial monetary liability and may be required to implement expensive changes in its business practices, enter into costly royalty or licensing agreements, or begin to collect sales taxes in states in which it previously did not. An adverse determination could have a material adverse effect on the Company’s business, financial position or results of operations. Expenditures for legal costs are expensed as incurred.

Operating and Capital Commitments

The following summarizes the Company’s principal contractual commitments, excluding open orders for inventory purchases that support normal operations, as of October 2, 2010:


	Payments due by fiscal year
	2010		2011		2012		2013		2014		Thereafter		Total

Operating lease obligations⁽¹⁾	$	5,976	$	21,175	$	20,701	$	16,740	$	13,257	$	21,356	$	99,205
Marketing commitments⁽¹⁾		344		1,702		2,570		2,570		2,570		—		9,756
Client revenue share payments⁽¹⁾		3,714		21,400		22,158		23,368		15,991		33,269		119,900
Debt interest⁽¹⁾		2,664		4,509		4,498		4,480		1,921		—		18,072
Debt obligations		50		209		563		25,237		161,275		—		187,334
Capital lease obligations, including interest⁽²⁾		2,145		9,412		8,171		4,883		1,800		—		26,411
Deferred acquisition payments⁽³⁾		—		1,500		750		1,000		—		—		3,250

Total	$	14,893	$	59,907	$	59,411	$	78,278	$	196,814	$	54,625	$	463,928


(1)		Not required to be recorded in the Condensed Consolidated Balance Sheet as of October 2, 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 $3,250 of deferred acquisition payments in the table above represent fixed contractual future payments. The Company is also obligated to pay up to an additional $208,400 from fiscal 2011 through fiscal 2016 based on the achievement of certain financial targets by some of our acquired companies, of which the Company has the ability to pay up to $45,800 with shares of the Company’s common stock. The Company is uncertain as to if or when such amounts may be settled; as a result, these obligations are not included in the table above.

Approximately $3,894 of unrecognized tax benefits have been recorded as liabilities as of October 2, 2010, and the Company is uncertain as to if or when such amounts may be settled; as a result, these obligations are not included in the table above. Changes to these tax contingencies that are reasonably possible in the next 12 months are not expected to be material.

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)

NOTE 9—STOCK AWARDS

In May 2010, the Company’s stockholders approved the 2010 Equity Incentive Plan (“2010 Plan”). The 2010 Plan authorizes the award of 3,500 shares of the Company’s common stock. In addition, any outstanding stock awards previously granted under the Company’s 2005 Equity Incentive Plan (the “2005 Plan”) or the Company’s Amended and Restated 1996 Equity Incentive Plan that expire, are terminated, cancelled or forfeited, or are withheld in satisfaction of payment of withholding taxes after May 28, 2010 will become available for grant under the 2010 Plan. The 2010 Plan will terminate on March 2, 2020, after which no further awards may be granted under the 2010 Plan.

In May 2010, the Company’s stockholders also approved an increase to the total number of authorized shares of common stock from 90,000 shares to 180,000 shares.

As of October 2, 2010, 3,584 shares of common stock were available for future grants under the 2010 Plan. The equity awards granted under the Plan generally vest at various times over periods ranging up to five years and have terms of up to ten years after the date of grant, unless the optionee’s service to the Company is interrupted or terminated.

Stock Options and Warrants

The following table summarizes the stock option and warrant activity for the nine-month period ended October 2, 2010:


						Weighted
				Weighted		Average
	Number of			Average		Remaining		Aggregate
	Shares			Exercise		Contractual		Intrinsic
	(in thousands)			Price		Life (in years)		Value
Outstanding at January 2, 2010		3,252		$	9.88
Granted		—		$	—
Exercised		(1,651	)	$	8.90
Forfeited/Cancelled		(2	)	$	12.16


Outstanding at October 2, 2010		1,599		$	10.89		2.81	$	21,588

Vested and expected to vest at October 2, 2010		1,599		$	10.89		2.81	$	21,588

Exercisable at October 2, 2010		1,599		$	10.89		2.81	$	21,588

Restricted Stock Units and Awards

The following table summarizes the restricted stock unit and restricted stock award activity for the nine-month period ended October 2, 2010:


				Weighted
	Number of			Average
	Shares			Grant Date
	(in thousands)			Fair Value
Nonvested shares at January 2, 2010		4,294		$	16.64
Granted		1,402		$	27.19
Vested		(1,690	)	$	14.25
Forfeited/Cancelled		(284	)	$	16.78


Nonvested shares at October 2, 2010		3,722		$	21.69

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)

Stock-based Compensation Expense

The following table summarizes stock-based compensation expense included in the Company’s Condensed Consolidated Statements of Operations:


	Three Months Ended				Nine Months Ended
	October 3,		October 2,		October 3,		October 2,
	2009		2010		2009		2010
Includes stock-based compensation as follows:
Account management and operations	$	2,033	$	2,162	$	6,684	$	8,030
Product development	$	1,207	$	1,603	$	3,843	$	5,231
General and administrative	$	2,436	$	2,693	$	8,195	$	7,867

NOTE 10—INCOME TAXES

In the first quarter of fiscal 2010, the Company’s tax provision was determined using an estimate of its annual effective rate of 65.3% plus any discrete items that occurred during the quarter. In the second and third quarters of fiscal 2010, due to the impact of the Company’s acquisitions made during the second quarter and other factors, small variations to the full-year projection would result in material variability in the Company’s estimated annual effective rate. Therefore, the Company has calculated the third quarter tax provision using a calculation of the actual tax rate on the actual results for the nine months ended October 2, 2010, which is the best estimate of the Company’s estimated annual effective tax rate. Using this approach, the Company’s effective tax rate is 23.1% for the nine months ended October 2, 2010, while the reported effective tax rate for the nine months ended October 2, 2010 is 25.7%. The difference between the year-to-date effective and the reported effective tax rate is due to discrete items. Both rates are lower than the 35% federal statutory tax rate primarily due to non-deductible permanent items and certain losses in foreign operations that generate no tax benefit. The Company does not provide for U.S. taxes on its undistributed earnings of foreign subsidiaries, if any, since it intends to invest such undistributed earnings indefinitely outside of the U.S.

The reported effective tax rate for the nine months ended October 3, 2009 was 31.7%. The estimated annual effective tax rate of 39.2% was different from the actual tax rate of 31.7% primarily due to the losses in foreign operations that generate no tax benefit and therefore they are not included in the pre-tax book income calculation for the annual effective tax rate partially offset by the benefit from certain discrete items.

The total amount of liabilities, interest and penalties related to uncertain tax positions and recognized in the Condensed Consolidated Balance Sheets were $3,894 as of October 2, 2010, and $2,052 as of January 2, 2010.

NOTE 11—LOSS PER SHARE

Basic and diluted net loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the fiscal year.

The following is a summary of the securities outstanding during the respective periods that have been excluded from the calculations because the effect on net loss per share would have been anti-dilutive for the three- and nine-month periods ended:


	October 3,		October 2,
	2009		2010
Stock units and awards		4,379		3,722
Stock options and warrants		3,565		1,599
Convertible notes		8,229		5,000

		16,173		10,321

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)

NOTE 12 — COMPREHENSIVE LOSS

Comprehensive loss is computed as net loss plus certain other items that are recorded directly to shareholders’ equity in accordance with standards of accounting for “Reporting Comprehensive Income.” Comprehensive loss is calculated as follows:


	Three Months Ended						Nine Months Ended
	October 3,			October 2,			October 3,			October 2,
	2009			2010			2009			2010

Net loss	$	(9,406	)	$	(18,578	)	$	(34,629	)	$	(52,434	)
Other comprehensive loss:
Cumulative translation adjustment		153			2,354			935			845


Comprehensive loss	$	(9,253	)	$	(16,224	)	$	(33,694	)	$	(51,589	)

NOTE 13—SEGMENT INFORMATION

The Company operates three reportable segments: e-commerce services, marketing services and consumer engagement. For e-commerce services, the Company delivers customized solutions through an integrated platform which is comprised of technology, fulfillment and customer care and is available on a modular basis or as part of an integrated, end-to-end solution. For marketing services, the Company offers a full suite of interactive marketing services. For consumer engagement, the Company provides brands and retailers a platform for online private sales through RueLaLa.com. In addition, the consumer engagement segment includes expenses for the start up of a new business, ShopRunner.

The Company manages its segments and makes financial decisions and allocates resources based on an internal management reporting process that provides segment revenue and segment profit (loss) before depreciation, amortization, changes in fair value of deferred acquisition payments and stock-based compensation expense. Beginning in the second quarter of fiscal 2010, the Company started excluding the following expenses from its segment profit (loss): acquisition related integration, transaction, due diligence expenses, non-cash inventory valuation adjustments, and the cash portion of deferred acquisition payments recorded as compensation expense. The Company has conformed its prior period segment results to reflect this change in Form 8-K filed on August 10, 2010 and in this footnote. The Company believes this metric is an appropriate measure of evaluating the operational performance of the Company’s segments. The Company also uses this metric for planning, forecasting and analyzing future periods. However, this measure should be considered in addition to, not as a substitute for, or superior to, income from operations or other measures of financial performance prepared in accordance with GAAP.

The Company manages its working capital on a consolidated basis and does not allocate long-lived assets to segments. Pursuant to accounting standards for “Disclosures about Segments of an Enterprise and Related Information,” total segment assets have not been disclosed.

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)

The following tables present summarized information by segment:


	Three Months Ended October 3, 2009
	E-Commerce		Marketing		Consumer		Intersegment
	Services		Services		Engagement		Eliminations			Consolidated
Net revenues	$	166,641	$	31,038	$	—	$	(7,368	)	$	190,311

Segment costs and expenses		161,003		24,535		—		(7,368	)		178,170


Segment profit		5,638		6,503		—		—			12,141
Acquisition related integration, transaction, due diligence expenses, non-cash inventory valuation adjustments, and the cash portion of deferred acquisition payments recorded as compensation expense											723
Depreciation and amortization											15,655
Changes in fair value of deferred acquisition payments											—
Stock-based compensation expense											5,676

Loss from operations											(9,913	)

Interest expense											4,897
Interest income											(99	)
Other expense, net											(32	)

Loss before income taxes										$	(14,679	)


	Three Months Ended October 2, 2010
	E-Commerce		Marketing		Consumer			Intersegment
	Services		Services		Engagement			Eliminations			Consolidated
Net revenues	$	203,067	$	50,838	$	51,524		$	(21,291	)	$	284,138

Segment costs and expenses		197,480		40,037		54,650			(21,291	)		270,876


Segment profit (loss)		5,587		10,801		(3,126	)		—			13,262
Acquisition related integration, transaction, due diligence expenses, non-cash inventory valuation adjustments, and the cash portion of deferred acquisition payments recorded as compensation expense												2,980
Depreciation and amortization												21,971
Changes in fair value of deferred acquisition payments												2,074
Stock-based compensation expense												6,458

Loss from operations												(20,221	)

Interest expense												3,648
Interest income												(10	)
Other expense, net												(506	)
Loss on investments												736

Loss before income taxes											$	(24,089	)

GSI COMMERCE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)


	Nine Months Ended October 3, 2009
	E-Commerce		Marketing		Consumer		Intersegment
	Services		Services		Engagement		Eliminations			Consolidated
Net revenues	$	508,921	$	84,646	$	—	$	(19,600	)	$	573,967

Segment costs and expenses		495,245		67,642		—		(19,600	)		543,287


Segment profit		13,676		17,004		—		—			30,680
Acquisition related integration, transaction, due diligence expenses, non-cash inventory valuation adjustments, and the cash portion of deferred acquisition payments recorded as compensation expense											2,347
Depreciation and amortization											46,335
Changes in fair value of deferred acquisition payments											—
Stock-based compensation expense											18,722

Loss from operations											(36,724	)

Interest expense											14,452
Interest income											(304	)
Other expense, net											(197	)

Loss before income taxes										$	(50,675	)


	Nine Months Ended October 2, 2010
	E-Commerce		Marketing		Consumer			Intersegment
	Services		Services		Engagement			Eliminations			Consolidated
Net revenues	$	592,311	$	133,249	$	147,663		$	(52,265	)	$	820,958

Segment costs and expenses		571,603		104,812		154,353			(52,265	)		778,503


Segment profit (loss)		20,708		28,437		(6,690	)		—			42,455
Acquisition related integration, transaction, due diligence expenses, non-cash inventory valuation adjustments, and the cash portion of deferred acquisition payments recorded as compensation expense												9,573
Depreciation and amortization												61,306
Changes in fair value of deferred acquisition payments												6,222
Stock-based compensation expense												21,128

Loss from operations												(55,774	)

Interest expense												13,595
Interest income												(316	)
Other expense, net												906
Loss on investments												736

Loss before income taxes											$	(70,695	)

The Company’s operations are substantially within the United States.

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 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 to timely and successfully enhance, develop and maintain its product and service offerings; our ability to execute operationally to attract and retain qualified personnel, to successfully integrate our recent acquisitions of other businesses; and the performance of acquired businesses. More information about potential factors that could affect us are described in Part I, Item 1A in our Form 10-K for the fiscal year ended January 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

Third Quarter of Fiscal 2010 Financial Results Compared to the Third Quarter of Fiscal 2009:

•

Net revenues increased by $93.8 million, or 49%, net revenues from product sales increased by $62.4 million, or 69%, and service fee revenues increased $31.4 million, or 32%.

•

Loss from operations was $20.2 million compared to a loss of $9.9 million.

•

Net loss was $18.6 million including a benefit for income taxes of $5.4 million, compared to a net loss of $9.4 million including a benefit for income taxes of $5.3 million.

Consolidated Results (amounts in tables in millions)

Total Net Revenues, Costs and Expenses and Loss from Operations:


	Third Quarter																		Nine Months Ended
				% of						% of												% of						% of
	Fiscal			Net			Fiscal			Net			Increase/						Fiscal			Net			Fiscal			Net			Increase/
	2009			Revenues			2010			Revenues			(Decrease)			% Change			2009			Revenues			2010			Revenues			(Decrease)			% Change
Revenues:
Net revenues from product sales	$	90.8			48	%	$	153.2			54	%	$	62.4			69	%	$	288.2			50	%	$	458.7			56	%	$	170.5			59	%
Service fee revenues		99.5			52	%		130.9			46	%		31.4			32	%		285.8			50	%		362.3			44	%		76.5			27	%

Total net revenues		190.3			100	%		284.1			100	%		93.8			49	%		574.0			100	%		821.0			100	%		247.0			43	%

Costs and expenses:
Cost of revenues from product sales		67.5			35	%		113.7			40	%		46.2			68	%		217.3			38	%		338.7			41	%		121.4			56	%
Marketing		9.1			5	%		11.4			4	%		2.3			25	%		27.0			4	%		29.9			4	%		2.9			11	%
Account management and operations		60.2			32	%		83.5			29	%		23.3			39	%		177.0			31	%		240.5			29	%		63.5			36	%
Product development		28.4			15	%		42.4			15	%		14.0			49	%		84.9			15	%		118.8			15	%		33.9			40	%
General and administrative		19.4			10	%		29.3			10	%		9.9			51	%		58.2			10	%		81.4			10	%		23.2			40	%
Depreciation and amortization		15.6			8	%		21.9			8	%		6.3			40	%		46.3			8	%		61.3			7	%		15.0			32	%
Changes in fair value of deferred acquisitoin payments		—			0	%		2.1			1	%		2.1						—			0	%		6.2			1	%		6.2

Total costs and expenses		200.2			105	%		304.3			107	%		104.1			52	%		610.7			106	%		876.8			107	%		266.1			44	%


Loss from operations	$	(9.9	)		-5	%	$	(20.2	)		-7	%	$	(10.3	)		104	%	$	(36.7	)		-6	%	$	(55.8	)		-7	%	$	(19.1	)		52	%

Net Revenues from Product Sales. The increase in product sales for the third quarter and nine-months ended October 2, 2010 was primarily driven by the acquisition of Rue La La, which we acquired in November 2009, as well as higher shipping revenue due to increased volume of unit shipments in the e-commerce segment.

Service Fee Revenues. The increase in service fee revenues for the third quarter and nine-months ended October 2, 2010 was primarily driven by growth in the e-commerce and marketing services segments. The revenue growth in both segments was driven by increased revenue from existing clients, the addition of new clients as well as from the impact of companies acquired in the last twelve months.

Cost and Expenses.

Cost of Revenues from Products Sales:


	Third Quarter						Nine Months Ended
	October 3, 2009			October 2, 2010			October 3, 2009			October 2, 2010
Cost of revenues from product sales	$	67.5		$	113.7		$	217.3		$	338.7
As a percentage of net revenues from product sales		74	%		74	%		75	%		74	%

The increase in cost of revenues from product sales for the third quarter and nine-months ended October 2, 2010 was driven by the addition of the consumer engagement segment as well as increased net revenues from products sales in the e-commerce segment. Cost of revenue from product sales as a percentage of net revenues from product sales was relatively flat in each time period.

Marketing: The absolute dollar increase in marketing expenses, which are substantially related to net revenues from product sales, was driven by the increase in net revenues from product sales in the e-commerce and consumer engagement segment. As a percentage of net revenues from product sales, marketing expenses decreased from 10% to 7% in the third quarter of fiscal 2010 and from 9% to 7% in the first nine months of fiscal 2010 due to the increase in product sales from the consumer engagement segment which have lower marketing expenses as a percentage of net revenues from product sales than the e-commerce segment.

Account Management and Operations: The absolute dollar increase in account management and operations expenses was driven primarily by increased payroll, professional fees and related personnel expenses in each of our segments as well as increased fulfillment, customer care and credit card fees in the e-commerce segment driven by increased order and shipment volume.

Product Development: The absolute dollar increase in product development expenses was primarily driven by payroll and professional fees in each of our segments for enhancements to our technology platforms, the expansion and upgrading of our technology operations infrastructure and costs associated with launching new clients on our platforms as well as from companies acquired in the past twelve months.

General and Administrative: The absolute dollar increase in general and administrative expenses was primarily driven by increased payroll and related expenses and professional fees in each of our segments including expenses from the companies acquired in the last year. Expenses for the third quarter and nine months ended October 2, 2010 included $3.0 million and $9.6 million of acquisition related integration, transaction, due diligence and earn-out expenses, respectively, compared to $0.7 million and $2.3 million in the third quarter and nine months ended October 3, 2009.

Depreciation and Amortization: Depreciation expenses increased by $3.2 million and $7.7 million for the third quarter and nine months ended October 2, 2010 primarily due to an increase in capital expenditures in fiscal 2010 compared to fiscal 2009 as well as depreciation on assets from companies acquired in the past twelve months. Amortization expenses increased by $3.1 million and $7.3 million for the third quarter and nine months ended October 2, 2010, respectively, due to the intangible asset amortization related to the companies acquired in the past twelve months.

Changes in Fair Value of Deferred Acquisition Payments: The increase was due to the acquisition of Rue La La. Assuming our estimate of the value of the Rue La La earnout does not change, we expect changes in fair value of deferred acquisition payments to continue to increase in fiscal 2010 as we accrete our deferred acquisition payments liability up to the estimated payment amount. Any change in our assumptions about the value of future earnout payments may result in a significant change to our change in fair value of deferred acquisition payments.

Other (Income) Expense:


	Third Quarter									Nine Months Ended
	October 3, 2009			October 2, 2010			Change			October 3, 2009			October 2, 2010			Change
Interest expense	$	4.9		$	3.7		$	(1.2	)	$	14.5		$	13.6		$	(0.9	)
Interest income		(0.1	)		—			0.1			(0.3	)		(0.3	)		—
Other (income) expense		—			(0.5	)		(0.5	)		(0.2	)		0.9			1.1
Loss on investments		—			0.7			0.7			—			0.7			0.7

Total other expense	$	4.8		$	3.9		$	(0.9	)	$	14.0		$	14.9		$	0.9

Interest expense decreased in the third quarter and nine-months ended October 2, 2010 primarily due to the conversion of our $57.5 million 3% convertible notes into shares of our common stock in June 2010. Other (income) expense is primarily comprised of foreign currency exchange gains and losses on transactions denominated in currencies other than the functional currency. The $0.7 million loss on investments in the third quarter of fiscal 2010 is a result of the write-off on an investment, which was accounted for under the cost method, due to the deterioration in the financial condition of the investee.

Income Taxes:

In the first quarter of 2010, our tax provision was determined using an estimate of our annual effective rate of 65.3% plus any discrete items that occurred during the quarter. In the second and third quarters of 2010, due to the impact of our acquisitions made during the second quarter and other factors, small variations to the full-year projection can result in material variability in our estimated annual effective rate. Therefore, we have calculated the third quarter tax provision using a calculation of the actual tax rate on the actual results for the nine months ended October 2, 2010, which is the best estimate of the our estimated annual effective tax rate. Using this approach, we recorded a benefit of $18.2 million in the first nine months of fiscal 2010. Our tax provision for this interim period resulted in a tax rate of 25.7% based on the actual result for the first nine months of fiscal 2010. The actual tax rate is lower than the 35% federal statutory tax rate primarily due to non- deductible permanent items and certain losses in foreign operations that generate no tax benefit. We do not provide for U.S. taxes on our undistributed earnings of foreign subsidiaries, if any, since we intend to invest such undistributed earnings indefinitely outside of the U.S.

As of January 2, 2010, we had available federal net operating loss carryforwards of approximately $507.3 million which expire in the years 2010 through 2029. Approximately $308.6 million, out of the total $507.3 million, will expire as a result of the Internal Revenue Code Section 382 limitation regardless of the amount of future taxable income, and thus has a full valuation allowance recorded against this deferred tax asset. As such, we expect a majority of our 2010 net tax provision to be non-cash. As of January 2, 2010, we had available state net operating loss carryforwards of approximately $268.6 million which expire in the years 2010 through 2029 and foreign net operating loss carryforwards of approximately $18.7 million that either begin expiring in 2023 or have no expiration date. A portion of these net operating loss carryforwards are offset by a valuation allowance. Management monitors all available positive and negative evidence related to our ability to utilize our deferred tax assets. Should management determine that it is more likely than not that these deferred tax assets will be utilized, we will release a portion of the remaining valuation allowance. Should management determine that it is more likely than not that these deferred tax assets will not be utilized, we will increase the valuation allowance.

Segment Results


	Third Quarter												Nine Months Ended
	Fiscal 2009			Fiscal 2010			$ Change			% Change			Fiscal 2009			Fiscal 2010			$ Change			% Change
E-Commerce services:
Net revenues	$	166.7		$	203.1		$	36.4			22	%	$	508.9		$	592.3		$	83.4			16	%
Segment profit	$	5.6		$	5.6		$	—			0	%	$	13.7		$	20.7		$	7.0			51	%

Marketing services:
Net revenues	$	31.0		$	50.8		$	19.8			64	%	$	84.7		$	133.2		$	48.5			57	%
Segment profit	$	6.5		$	10.8		$	4.3			66	%	$	17.0		$	28.4		$	11.4			67	%

Consumer engagement:
Net revenues	$	—		$	51.5		$	51.5			100	%	$	—		$	147.8		$	147.8			100	%
Segment loss	$	—		$	(3.1	)	$	(3.1	)		100	%	$	—		$	(6.7	)	$	(6.7	)		100	%

Intersegment eliminations:
Net revenues	$	(7.4	)	$	(21.3	)	$	(13.9	)		188	%	$	(19.6	)	$	(52.3	)	$	(32.7	)		167	%
Segment profit	$	—		$	—		$	—			0	%	$	—		$	—		$	—			0	%

Consolidated net revenues	$	190.3		$	284.1		$	93.8			49	%	$	574.0		$	821.0		$	247.0			43	%
Consolidated segment profit	$	12.1		$	13.3		$	1.2			10	%	$	30.7		$	42.4		$	11.7			38	%

Segment Margins:
E-Commerce services		3.4	%		2.8	%								2.7	%		3.5	%
Marketing services		21.0	%		21.3	%								20.1	%		21.3	%
Consumer engagement	NA				-6.0	%							NA				-4.5	%

E-Commerce Services Segment:

Net revenues increased 22% and 16% for the third quarter and first nine months of fiscal 2010, respectively. The growth in both periods is due to an increase in net revenues from product sales and services fees. The increase in net revenues from product sales was driven by an increase in shipping revenue due to increased unit shipments as well as an increase in product revenue from clients that operated for the entirely of both periods. The increase in service fees revenues for the third quarter and nine-months ended October 2, 2010 was primarily due to an increase in revenues from clients that operated during the entirety of both periods as well as from the addition of clients that began generating revenue for us after the third quarter of fiscal 2009.

Segment profit was unchanged for the third quarter fiscal 2010 compared to the same period in fiscal 2009 and segment operating margins decreased to 2.8% in the third quarter of fiscal 2010 versus 3.4% in the same period in fiscal 2009. The decrease in segment operating margins was primarily driven by expenses associated with the launches of international webstores. Segment operating margins for the nine months ended October 2, 2010 increased from 2.7% to 3.5% compared to the same period in 2009. The increase in segment operating margins was driven primarily by service fee revenues comprising a larger percentage of total net revenues as services fee revenue has no associated cost of revenue or marketing expenses.

Marketing Services Segment:

Net revenues increased by 64% and 57% for the third quarter and first nine months of fiscal 2010, respectively. The increases are due to growth of revenue from existing clients, revenue from new clients as well as revenue from the acquisitions of Silverlign and Pepperjam in 2009 and MBS Insight, FetchBack and M3 Mobile in 2010.

Segment profit increased $4.3 million or 66% in the third quarter of fiscal 2010 compared to the same period in fiscal 2009, and increased $11.4 million or 67% in the first nine months of fiscal 2010 compared to the same period in fiscal 2009. Segment operating margins remained constant at 21% in the third quarter of fiscal 2010 compared to same period in 2009 and increased slightly from 20% to 21% in the first nine months of fiscal 2010 compared to same period in 2009. The increase in segment profit was primarily driven by the revenue growth described above. The increase in the segment margins for the first nine months of fiscal 2010 compared to same period in 2009 was driven by a favorable mix of revenue from higher margin services partially offset by expenses associated with hiring an executive management team.

Consumer Engagement Segment:

The segment was established upon the acquisition of Rue La La and as such, did not have any revenues or expenses in the first nine months of fiscal 2009.

Seasonality

We have experienced and expect to continue to experience seasonal fluctuations in our revenues from e-commerce services. These seasonal patterns will cause quarterly fluctuations in our operating results. We also expect to experience seasonal fluctuations from our consumer engagement segment, but to a lesser degree than with our e-commerce services segment. We experience less seasonality in our revenues from marketing services. The fourth fiscal quarter has accounted for and is expected to continue to account for a disproportionate percentage of our total annual revenues. We believe that results of operations for any quarterly period may not be indicative of the results for any other quarter or for the full year.

Liquidity and Capital Resources


	As of
	January 2,			October 2,
	2010			2010
	(in millions)
Cash and cash equivalents	$	228.4		$	66.7
Percentage of total assets		21	%		7	%

As of October 2, 2010, our cash was comprised entirely of bank deposits. As of January 2, 2010, our cash and cash equivalents were comprised of $13.6 million of money market mutual funds and $214.8 million of bank deposits.

In June 2010, we called all of our $57.5 million 3% convertible notes for redemption and substantially all of the notes were converted into 3.2 million shares of our common stock.

We have experienced and expect to continue to experience seasonal fluctuations in our cash flows. We generate the substantial majority of cash from our operating activities in our fourth fiscal quarter. In our first fiscal quarter, we typically use cash generated from operating activities in the fourth quarter of the prior fiscal year to satisfy accounts payable and accrued expenses incurred in the fourth fiscal quarter of our prior fiscal year. During our second and third fiscal quarters, we generally fund our operating expenses and capital expenditures from either cash generated from operating activities, cash and cash equivalents, or financing activities.

Sources of Cash

Our principal sources of liquidity in the first nine months of fiscal 2010 were our cash and cash equivalents balances and a $25.0 million borrowing on our line of credit.

We generated $35.2 million of cash from financing activities in the first nine months of fiscal 2010 primarily from a $25.0 million borrowing on our line of credit and from the proceeds from exercise of common stock options partially offset by principal payments on our debt and lease obligations. During the first nine months of fiscal 2009, we generated $86.9 million of cash for financing activities primarily from the proceeds sale of 5.4 million shares of common stock in the first nine months of fiscal 2009.

As of October 2, 2010 we had $25 million of outstanding borrowings under our $150 million secured revolving bank credit facility and $3.9 million of letters of credit outstanding. As of January 2, 2010, we had no outstanding borrowings and $6.6 million of letters of credit outstanding. The credit facility contains financial and restrictive covenants that limit our ability to engage in activities that may be in our long term best interests. We do not believe the financial covenants will limit our ability to utilize the entire borrowing availability in fiscal 2010, if necessary.

Uses of Cash

We used $76.5 million and $48.2 million of cash to fund operating activities in the first nine months of fiscal 2010 and fiscal 2009, respectively. Our operating cash flows result primarily from cash received from our customers and clients offset by cash payments we make for products and services, employee compensation (less amounts capitalized related to internal use software that are reflected as cash used in investing activities), payment processing and related transaction costs, and operating leases. Changes to our operating cash flows have historically been driven primarily by changes in operating income (excluding changes in non-cash items such as depreciation, amortization and stock-based compensation) and changes to the components of working capital, including changes to accounts receivable, accounts payable, accrued expenses and deferred revenue.

We used $47.9 million in cash for acquisitions in the first nine months of fiscal 2010. We acquired MBS for $22.2 million, acquired three additional companies during fiscal 2010 for an aggregate purchase price of $24.1 million, net of cash acquired, and made $1.6 million of deferred acquisition payments. We are also obligated to pay up to an additional $208.4 million in earnout payments through 2016 based on the achievement of certain performance targets by some of our acquired companies, of which we have the ability to pay up to $45.8 million with shares of our common stock. In addition, we invested $18.6 million in fiscal 2010 for a 27% noncontrolling interest in Intershop Communications.

Our capital expenditures totaled $54.6 million and $29.6 million in the first nine months of fiscal 2010 and fiscal 2009, respectively. Our capital expenditures have generally comprised purchases of computer hardware and software, internally developed software, and furniture and fixtures.

See Item 1 of Part I, Financial Statements, Note 8, Commitments and Contingencies, for additional discussion of our principal contractual commitments. Purchase obligations and open purchase orders, consisting primarily of inventory commitments, were $96.4 million at October 2, 2010.

Outlook and Guidance

Outlook

We expect an increase in net revenues primarily driven by the inclusion of Rue La La in our full year results as well as increases in our e-commerce services and marketing services segments driven by increased revenue from existing clients as well as the addition of new clients who started generating revenue for us in fiscal 2010. The expected increase in net revenues from our existing clients is based on the Company’s recent revenue growth trends which are expected to continue as well as projected industry growth.

We expect a decrease in income from operations compared to 2009. The expected decrease is primarily driven by the expected percentage increase in amortization expense from companies acquired in 2009 and 2010 and the expected percentage increase in changes in fair value of deferred acquisition payments from the Rue La La acquisition being greater than the expected percentage increase in revenue. The expected percentage increase in other operating costs and expenses is expected to be less than the expected percentage increase in net revenues.

We expect to have a larger net loss in 2010 as compared to 2009 based on the expected decrease in income from operations noted above, partially offset by a decrease in interest expense resulting from the conversion of our $57.5 million convertible notes in the second quarter of fiscal 2010.

We expect an increase in our capital expenditures primarily from investments in our e-commerce technology platform and capital expenditures for companies acquired in 2009 and 2010.

We expect to generate positive cash flow from operations in fiscal 2010, all of which will be generated in our fourth fiscal quarter. We believe that our cash flow from operating activities, cash and cash equivalents balances, and borrowing availability under our secured revolving credit facility will be sufficient to meet our anticipated operating cash needs for at least the next 12 months, which includes any deferred acquisition payments. However, any projections of future cash needs and cash flows are subject to substantial uncertainty.

We continually evaluate opportunities to sell additional equity or debt securities, obtain credit facilities, or repurchase, refinance, or otherwise restructure our long-term debt for strategic reasons or to further strengthen our financial position. Our secured revolving bank credit facility contains negative covenants including prohibitions on our ability to incur additional indebtedness. The sale of additional equity or convertible debt securities would likely be dilutive to our stockholders. In addition, we will, from time to time, consider the acquisition of, or investment in, complementary businesses, products, services, and technologies, which might affect our liquidity requirements or cause us to issue additional equity or debt securities. There can be no assurance that additional lines-of-credit or financing instruments will be available in amounts or on terms acceptable to us, if at all.

Guidance

We provided the following guidance for fiscal 2010 on October 27, 2010, in our earnings released furnished on Form 8-K:

•

Net revenues are expected to be $1.35 billion.

•

Income/loss from operations is expected to be between a loss of $1.3 million and income of $0.7 million.

•

Capital expenditures are expected to be between $65 million and $70 million.

These projections are subject to substantial uncertainty. 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.

Critical Accounting Policies

The preparation of our consolidated financial statements requires us to make estimates, assumptions and judgments that affect our assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities. We base these estimates and assumptions on historical data and trends, current fact patterns, expectations and other sources of information we believe are reasonable. Actual results may differ from these estimates under different conditions. For a full description of our critical accounting policies, see Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations in the 2009 Annual Report on Form 10-K for the fiscal year ended January 2, 2010, filed with the SEC on March 5, 2010.

Recent Accounting Pronouncements

See Item 1 of Part I, “Financial Statements — Note 2, Summary of Significant Accounting Policies” for recent accounting pronouncements that could have an effect on us.

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

There have been no significant changes in market risks for the fiscal quarter ended October 2, 2010. See the information set forth in Part II, Item 7A of the Company’s Annual Report on Form 10-K for the fiscal year ended January 2, 2010 filed with the Securities and Exchange Commissions (“SEC”) on March 5, 2010.

ITEM 4: CONTROLS AND PROCEDURES.

Evaluation of disclosure controls and procedures. We maintain disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and accumulated and communicated to our management, including our chief executive officer and chief financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Our management, with the participation of our chief executive officer and our chief financial officer, conducted an evaluation, as of the end of the period covered by this report, of the effectiveness of our disclosure controls and procedures, as such term is defined in Exchange Act Rule 13a-15(e). Based on this evaluation, our chief executive officer and our chief financial officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures, as defined in Rule 13a-15(e), were effective at the reasonable assurance level.

Changes in internal control over financial reporting. We monitor and evaluate on an ongoing basis our internal control over financial reporting in order to improve its overall effectiveness. In the course of these evaluations, we modify and refine our internal processes and controls as conditions warrant. As required by Rule 13a-15(d), our management, including our chief executive officer and our chief financial officer, also conducted an evaluation of our internal control over financial reporting to determine whether any changes occurred during the fiscal quarter ended October 2, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, there has been no such change during the fiscal quarter ended October 2, 2010.

PART II — OTHER INFORMATION

ITEM 1: LEGAL PROCEEDINGS.

See Item 1 of Part I, “Financial Statements — Note 8, Commitments and Contingencies.”

ITEM 1A: RISK FACTORS.

Our Annual Report on Form 10-K for the fiscal year ended January 2, 2010, filed with the Securities and Exchange Commission on March 5, 2010, includes a detailed discussion of our risk factors. The information presented below updates and should be read in conjunction with the risk factors and information disclosed in our Form 10-K for the fiscal year ended January 2, 2010, and our Forms 10-Q for the fiscal quarters ended April 3, 2010 and July 3, 2010.

ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Pursuant to the terms of a Consulting Agreement dated April 22, 2009 between Arimor, LLC (“Arimor”) and GSI Commerce Solutions, Inc., the Company agreed to issue to Arimor shares of the Company’s common stock as a fee for consulting services provided by Arimor. In the fiscal quarter ended October 2, 2010, the Company issued an aggregate of 10,946 shares of common stock to Arimor (“Arimor Shares”) pursuant to such agreement.

The issuance of the Arimor Shares was completed in accordance with Section 4(2) of the Securities Act of 1933, as amended, in offerings without any public offering or distribution. The Arimor Shares are restricted securities and include appropriate restrictive legends.

ITEM 3: DEFAULTS UPON SENIOR SECURITIES.

None

ITEM 4: [Reserved]

None

ITEM 5: OTHER INFORMATION.

None

ITEM 6: EXHIBITS.


	3.1			Certificate of Amendment to Amended and Restated Certificate of Incorporation of GSI Commerce, Inc. (filed as Appendix B to GSI Commerce, Inc.’s Definitive Proxy Statement on Schedule 14A filed with the Securities and Exchange Commission on April 13, 2010 and incorporated herein by reference)
	10.1			Form of Performance Restricted Stock Unit Award Issued to Michael Rubin Under the GSI Commerce, Inc. 2010 Equity Incentive Plan.
	10.2			Amended and Restated 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.+
	10.3			Form of Indemnification Agreement
	31.1			Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934
	31.2			Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934
	32.1			Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


+		Confidential treatment has been requested for certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission.


	Page

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited):

Condensed Consolidated Balance Sheets		3

Condensed Consolidated Statements of Operations		4

Condensed Consolidated Statements of Cash Flows		5

Notes to Condensed Consolidated Financial Statements		6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		20

Item 3. Quantitative and Qualitative Disclosures About Market Risk		26

Item 4. Controls and Procedures		26

PART II — OTHER INFORMATION

Item 1. Legal Proceedings		27

Item 1A. Risk Factors		27

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		27

Item 3. Defaults Upon Senior Securities		27

Item 4. (Reserved)		27

Item 5. Other Information		27

Item 6. Exhibits		28

SIGNATURES		29

Exhibit 10.1
Exhibit 10.2
Exhibit 10.3
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1


	GSI COMMERCE, INC.
	By:	/s/ MICHAEL G. RUBIN
		Michael G. Rubin
		Chairman, President and Chief Executive Officer

	By:	/s/ MICHAEL R. CONN
		Michael R. Conn
		Executive Vice President, Finance and Chief Financial Officer (principal financial officer & principal accounting officer)

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References To		Refer to the Years Ended/Ending
Fiscal 2009		January 2, 2010
Fiscal 2010		January 1, 2011
Fiscal 2011		December 31, 2011
Fiscal 2012		December 29, 2012
Fiscal 2013		December 28, 2013
Fiscal 2014		January 3, 2015