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

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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

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 72,711,252 shares of the registrant’s common stock outstanding as of the close of business on April 27, 2011.

 

 

GSI COMMERCE, INC.
FORM 10-Q
FOR THE QUARTER ENDED APRIL 2, 2011

INDEX

		Page
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited):
Condensed Consolidated Balance Sheets as of January 1, 2011 and April 2, 2011			4
Condensed Consolidated Statements of Operations for the three-month periods ended April 3, 2010 and April 2, 2011			5
Condensed Consolidated Statements of Cash Flows for the three-month periods ended April 3, 2010 and April 2, 2011			6
Notes to Condensed Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			20
Item 3. Quantitative and Qualitative Disclosures About Market Risk			25
Item 4. Controls and Procedures			25
PART II — OTHER INFORMATION
Item 1. Legal Proceedings			26
Item 1A. Risk Factors			26
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			27
SIGNATURES			29
Exhibit 10.7
Exhibit 10.8
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

The Company’s fiscal year ends on the Saturday nearest the last day of December. The Company’s fiscal year ends are as follows:

References To		Refer to the Years Ended/Ending
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
Fiscal 2015		January 2, 2016

INTRODUCTORY NOTE

On March 27, 2011, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with eBay Inc. (“eBay”) and Gibraltar Acquisition Corp., a wholly owned subsidiary of eBay (“Merger Sub”). Unless stated otherwise, all forward-looking information contained in this Quarterly Report on Form 10-Q does not take into account or give effect to the impact of the proposed merger. For additional details regarding the proposed merger, see:

•

Note 12, Merger Agreement with eBay, to our condensed consolidated financial statements, contained in Part I, Item I of this Quarterly Report on Form 10-Q;

•

Management’s Discussion and Analysis of Financial Condition and Results of Operations, contained in Part I, Item 2 of this Quarterly Report on Form 10-Q; and

•

Risk Factors, contained in Part II, Item 1A of this Quarterly Report on Form 10-Q.

PART I

ITEM 1:		FINANCIAL STATEMENTS

GSI COMMERCE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)

		January 1,				April 2,
		2011				2011
ASSETS
Current assets:
Cash and cash equivalents		$	242,146			$	109,624
Accounts receivable, net			96,382				72,151
Inventory, net			62,412				92,099
Deferred tax assets			16,439				19,235
Prepaid expenses and other current assets			16,984				21,497
Total current assets			434,363				314,606
Property and equipment, net			188,829				212,282
Goodwill			318,179				494,822
Intangible assets, net			132,972				204,953
Long-term deferred tax assets			2,279				—
Other assets, net			30,540				39,283
Total assets		$	1,107,162			$	1,265,946
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	144,323			$	84,387
Accrued expenses and other			197,417				154,277
Deferred revenue			23,808				28,088
Current portion — long-term debt			11,136				17,985
Total current liabilities			376,684				284,737
Convertible notes			123,391				125,107
Long-term debt			32,287				183,793
Deferred acquisition payments			1,750				4,673
Deferred tax liabilities			—				6,450
Deferred revenue and other long-term liabilities			10,017				9,300
Total liabilities			544,129				614,060
Commitments and contingencies (Note 6)
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 — 180,000 and 180,000
Issued and outstanding shares — 66,984 and 72,246			670				722
Additional paid in capital			765,857				867,195
Accumulated other comprehensive loss			(1,378	)			(306	)
Accumulated deficit			(202,116	)			(215,725	)
Total stockholders’ equity			563,033				651,886
Total liabilities and stockholders’ equity		$	1,107,162			$	1,265,946

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
		April 3,				April 2,
		2010				2011
Revenues:
Net revenues from product sales		$	159,275			$	178,940
Service fee revenues			113,317				144,554
Net revenues			272,592				323,494
Costs and expenses:
Cost of revenues from product sales			117,474				129,100
Marketing			10,807				14,691
Account management and operations			77,694				91,284
Product development			34,317				46,587
General and administrative			24,397				46,519
Depreciation and amortization			18,761				23,165
Changes in fair value of deferred acquisition payments			2,074				—
Total costs and expenses			285,524				351,346
Loss from operations			(12,932	)			(27,852	)
Other (income) expense:
Interest expense			5,208				5,248
Interest income			(234	)			(65	)
Other (income) expense			474				(1,098	)
Total other expense			5,448				4,085
Loss before income taxes and equity-method investment earnings			(18,380	)			(31,937	)
Benefit for income taxes			(10,255	)			(17,874	)
Equity-method investment earnings			—				(454	)
Net loss		$	(8,125	)		$	(13,609	)
Loss per share- basic and diluted		$	(0.13	)		$	(0.20	)
Weighted average shares outstanding — basic and diluted			60,446				68,156

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)

		Three Months Ended
		April 3,				April 2,
		2010				2011
Cash Flows from Operating Activities:
Net loss		$	(8,125	)		$	(13,609	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation			14,646				18,024
Amortization			4,115				5,141
Amortization of discount on convertible notes			2,809				1,716
Changes in fair value of deferred acquisition payments			2,074				—
Stock-based compensation			6,931				5,012
Foreign currency transaction losses (gains)			475				(1,006	)
Equity-method investment earnings			—				(454	)
Deferred income taxes			(11,191	)			(18,598	)
Changes in operating assets and liabilities:
Accounts receivable, net			16,420				27,221
Inventory, net			(2,621	)			4,739
Prepaid expenses and other current assets			(561	)			(1,114	)
Other assets, net			149				(1,706	)
Accounts payable and accrued expenses			(110,530	)			(117,402	)
Deferred revenue			238				(465	)
Net cash used in operating activities			(85,171	)			(92,501	)
Cash Flows from Investing Activities:
Payments for acquisitions of businesses, net of cash acquired			—				(169,875	)
Cash paid for property and equipment, including internal use software			(15,868	)			(18,485	)
Net cash used in investing activities			(15,868	)			(188,360	)
Cash Flows from Financing Activities:
Proceeds from long term borrowings			—				115,000
Borrowings on revolving credit loan			—				40,000
Debt issuance costs paid			(856	)			(5,674	)
Repayments of capital lease obligations			(1,473	)			(2,832	)
Repayments of mortgage note			(50	)			(53	)
Excess tax benefit in connection with exercise of stock options and awards			978				856
Proceeds from exercise of common stock options			6,933				448
Net cash provided by financing activities			5,532				147,745
Effect of exchange rate changes on cash and cash equivalents			(520	)			594
Net decrease in cash and cash equivalents			(96,027	)			(132,522	)
Cash and cash equivalents, beginning of period			228,430				242,146
Cash and cash equivalents, end of period		$	132,403			$	109,624
Supplemental Cash Flow Information
Cash paid during the period for interest		$	866			$	2,483
Cash paid during the period for income taxes			602				1,555
Noncash Investing and Financing Activities:
Accrual for purchases of property and equipment			3,633				2,406
Property and equipment acquired under capital leases and financings			—				6,241

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.

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.

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 1, 2011, filed with the Securities and Exchange Commission (“SEC”) on March 1, 2011.

NOTE 2— 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 (in thousands):

		Fair Value Measurements on January 1, 2011
		Quoted Prices in								Significant
		Active Markets for				Significant Other				Unobservable
		Identical Assets				Observable Inputs				Inputs
		(Level 1)				(Level 2)				(Level 3)
Assets
Cash and cash equivalents(1)		$	242,146			$	—			$	—
Liabilities
Deferred acquisition payments(2)		$	—			$	—			$	—

		Fair Value Measurements on April 2, 2011
		Quoted Prices in								Significant
		Active Markets for				Significant Other				Unobservable
		Identical Assets				Observable Inputs				Inputs
		(Level 1)				(Level 2)				(Level 3)
Assets
Cash and cash equivalents(1)		$	109,624			$	—			$	—
Liabilities
Deferred acquisition payments(2)		$	—			$	—			$	—

(1)		Cash and cash equivalents consist entirely of bank deposits.
(2)		Deferred acquisition payments, a Level 3 category liability, represent the fair value of estimated acquisition payments that are contingent upon Rue La La achieving specified minimum earnings thresholds. The Company does not expect Rue La La to achieve the minimum earnings thresholds needed to trigger any of the deferred acquisition payments and has determined that the fair value of the deferred acquisition payment liability is $0.

GSI COMMERCE, INC. AND SUBSIDIARIES

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

NOTE 3—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:

		Global e-				Global
		Commerce				Marketing
		Services				Services				Consumer
		(“GeC”)				(“GMS”)				Engagement				Consolidated
January 1, 2011		$	78,865			$	137,733			$	101,581			$	318,179
Acquisitions			164,553				12,090				—				176,643
April 2, 2011		$	243,418			$	149,823			$	101,581			$	494,822

The Company’s intangible assets are as follows:

										Weighted-
		January 1,				April 2,				Average
		2011				2011				Life
Gross carrying value of intangible assets subject to amortization:
Contract based		$	60,636			$	72,106				2.6
Customer related			22,200				22,200				2.6
Technology			13,723				16,207				3.6
Trade name			840				1,574				1.5
			97,399				112,087				2.8
Accumulated amortization:
Contract based			(36,904	)			(39,509	)
Customer related			(6,649	)			(8,023	)
Technology			(4,962	)			(5,891	)
Trade name			(716	)			(931	)
			(49,231	)			(54,354	)
Net carrying value:
Contract based			23,732				32,597
Customer related			15,551				14,177
Technology			8,761				10,316
Trade name			124				643
Total intangible assets subject to amortization, net			48,168				57,733
Indefinite life intangible assets:
Trade names			84,804				147,220
Total intangible assets		$	132,972			$	204,953

GSI COMMERCE, INC. AND SUBSIDIARIES

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

Amortization expense of intangible assets was $5,123 for the three-month period ended April 2, 2011 and $4,105 for the three-month period ended April 3, 2010. Estimated future amortization expense related to intangible assets as of April 2, 2011, is as follows:

Fiscal 2011		$	15,967
Fiscal 2012			16,021
Fiscal 2013			12,806
Fiscal 2014			8,599
Fiscal 2015			2,887
Thereafter			1,453
		$	57,733

NOTE 4—ACQUISITIONS

Fanatics

On March 15, 2011, the Company acquired 100% of the issued and outstanding capital stock of Fanatics, Inc. (“Fanatics”), in exchange for cash and shares of the Company’s common stock, including the assumption of Fanatics unvested stock options, pursuant to the terms of an Agreement and Plan of Merger dated February 9, 2011. Fanatics operates over 250 e-commerce websites and over 60 e-commerce stores for collegiate and professional sports partners and media organizations. The Company believes the combination of Fanatics and the Company will create a leader in the online licensed sports merchandise industry.

The fair value of Fanatics’ stock options assumed was determined using the Black-Scholes model. The following table summarizes the consideration paid for Fanatics:

Cash consideration		$	167,974
4,768 shares of stock consideration			89,018
257 assumed stock options			1,219
Total consideration		$	258,211

GSI COMMERCE, INC. AND SUBSIDIARIES

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

The Company’s estimates and assumptions used for the allocation of the purchase price are preliminary as the process to assign fair value to the various tangible and intangible assets acquired, including goodwill, is not final and are subject to change. The excess purchase price over the book value of the net assets acquired has been recorded to goodwill. Final adjustments could result in a materially different allocation of the purchase price, which could affect the value assigned to the tangible and/or intangible assets and amount of depreciation and amortization expense recorded in the Company’s Condensed Consolidated Statements of Operations. The following table summarizes the preliminary allocation of the purchase price to the fair values of the Fanatics assets acquired and liabilities assumed, including cash acquired, as of the acquisition date:

Total current assets		$	55,512
Property, plant, and equipment			18,510
Goodwill			164,553
Identifiable intangible assets:
Contract based			4,066
Trade name			60,341
Other long-term assets			1,381
Total assets acquired			304,363
Total current liabilities			(19,288	)
Long-term deferred tax liabilities			(26,864	)
Total liabilities assumed			(46,152	)
Net assets acquired		$	258,211

Fanatics’ results of operations are included on the Company’s Consolidated Statements of Operations beginning on March 16, 2011. Fanatics’ revenue and net loss for the period from March 16, 2011 to April 2, 2011 included in the Company’s Consolidated Statements of Operations is $5,358 and $438, respectively. Fanatics’ results are included in the Company’s GeC segment.

MBS

In April 2010, the Company completed the acquisition of all of the capital stock of MBS Insight, Inc. (“MBS”).

Other Acquisitions

During the first quarter of fiscal 2011, the Company made one acquisition within its GMS segment.

Unaudited Pro Forma Financial Information

The financial information in the table below summarizes the combined results of operations of the Company, MBS and Fanatics on a pro forma basis, as though the companies had been combined as of the beginning 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 the periods presented and is not intended to be a projection of future results or trends.

		Three Months Ended
		April 3,				April 2,
		2010				2011
Net revenues		$	302,364			$	349,747
Net loss		$	(11,666	)		$	(15,056	)

GSI COMMERCE, INC. AND SUBSIDIARIES

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

NOTE 5—LONG-TERM DEBT AND CREDIT FACILITY

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

		January 1,				April 2,
		2011				2011
Convertible notes		$	123,391			$	125,107
Credit facility			—				155,000
Notes payable (1)			15,989				18,773
Capital lease obligations			27,434				28,005
Total debt			166,814				326,885
Less: Current portion			(11,136	)			(17,985	)
Total long-term debt		$	155,678			$	308,900

(1)		The estimated fair market value of the notes payable approximated their carrying value as of April 2, 2011 and January 1, 2011.

The estimated fair market value of the convertible notes was $168,330 as of April 2, 2011 and $162,570 as of January 1, 2011 based on quoted market prices.

Credit Facility

On February 9, 2011, the Company entered into a new $400,000 secured credit facility (the “New Credit Facility”) with a consortium of banks that became effective on March 15, 2011, simultaneous with the completion of acquisition of Fanatics, and expires on February 9, 2016. The New Credit Facility replaced the Company’s previous $150,000 secured revolving credit facility. The New Credit Facility is comprised of a 5-year $285,000 revolving credit facility (the “Revolving Credit Facility”) and a 5-year $115,000 term loan (the “Term Loan”) with the option to increase the commitments under these facilities by up to an additional $50,000 to a total of $450,000. The New Credit Facility is secured by substantially all of the Company’s personal property and assets and contains certain affirmative and negative covenants. The terms of the New Credit Facility limit the Company’s ability to declare or pay dividends on its common stock subject to certain exceptions.

The Revolving Credit Facility provides for the issuance of up to $30,000 of letters of credit and a $25,000 sublimit for swing loan borrowings, both of which are included in the $285,000 available for borrowing under the Revolving Credit Facility. Borrowings under the New Credit Facility bear interest at the Company’s option, at either (i) a “base rate” (“Base Rate”) equal to, for any day, a fluctuating rate per annum equal to the highest of (a) the federal funds rate plus 0.5%, (b) the “prime rate” of Bank of America, N.A., as administrative agent, and (c) the London Interbank Offered Rate (“LIBOR”) for a three-month Interest Period plus 1.00%, in each case plus an applicable margin, or (ii) a rate derived from LIBOR as adjusted for statutory reserve requirements for Eurocurrency liabilities, plus an applicable margin. In either case, the applicable margin is determined by the Company’s “Leverage Ratio” (as defined in the Credit Agreement), which is the ratio of consolidated “Indebtedness” of the Company and its subsidiaries to “Consolidated Adjusted EBITDA” (as such terms are defined in the Credit Agreement). The applicable margin in the case of Base Rate term loans ranges from 1.25% to 2.50%, in the case of LIBOR term loans ranges from 2.25% to 3.50%, in the case of Base Rate revolving loans ranges from 0.90% to 2.00% and in the case of LIBOR revolving loans ranges from 1.90% to 3.00%. The revolving credit commitment (whether used or unused) under the New Credit Facility at any time is subject to a facility fee ranging from 0.35% to 0.50% based on the Company’s Leverage Ratio. The initial commitment fee is 0.375%. The Company had $40,000 of outstanding borrowings and $1,823 of outstanding letters of credit under the Revolving Credit Facility as of April 2, 2011.

GSI COMMERCE, INC. AND SUBSIDIARIES

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

The principal amount of the Term Loan is payable in aggregate quarterly installments of (i) 1.25% of $115,000, the aggregate principal amount of the Term Loan outstanding as of March 15, 2011, commencing on July 5, 2011 and ending on April 5, 2013, (ii) 2.50% of $115,000 commencing on July 5, 2013 and ending on January 5, 2016 and (iii) a final payment due on February 9, 2016, the expiration date of the New Credit Facility, equal to the total outstanding principal amount of the Term Loan, all accrued, but unpaid, interest thereon and all fees and other amounts owing under the New Credit Facility with respect thereto.

NOTE 6—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 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 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.

See Note 12, Merger Agreement with eBay, for information on litigation related to the Company’s pending merger with eBay.

Operating and Capital Commitments

The following summarizes the Company’s principal operating and capital commitments, excluding open orders for inventory purchases that support normal operations, as of April 2, 2011:

		2011				2012				2013				2014				2015				Thereafter				Total
Operating lease obligations(1)		$	20,442			$	27,664			$	23,032			$	17,211			$	12,797			$	17,977			$	119,123
Purchase obligations and marketing commitments(1)			6,900				24,883				18,332				16,895				16,000				32,000				115,010
Client revenue share payments(1)			16,302				26,916				28,076				27,785				28,729				58,163				185,971
Debt interest(1)			8,815				8,848				8,572				6,055				3,729				308				36,327
Debt obligations			4,895				8,128				11,025				173,121				11,853				114,750				323,772
Capital lease obligations, including interest(2)			9,844				10,787				7,463				1,948				127				11				30,180
Deferred acquisition payments(3)			1,500				3,695				1,000				—				—				—				6,195
Total (4)		$	68,698			$	110,921			$	97,500			$	243,015			$	73,235			$	223,209			$	816,578

(1)		Not required to be recorded in the Condensed Consolidated Balance Sheet as of April 2, 2011 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 $6,195 of deferred acquisition payments in the table above represent fixed contractual future payments. The Company is also obligated to pay up to an additional $227,400 from fiscal 2011 through fiscal 2016 based on the achievement of certain financial targets by certain of its acquired companies, of which the Company has the ability to pay up to $55,800 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.
(4)		The Company has long-term incentive plan arrangements with certain of its employees, and consultants which may obligate the Company to pay up to $60,000 based on the performance of the business for which the employee is responsible. Amounts due under these incentive plans are payable in cash and/or stock from fiscal 2012 through fiscal 2015. As payment is not probable for any of these plans and the Company is uncertain as to if or when such amounts may be settled, these obligations are not reflected in the Consolidated Balance Sheet as of January 1, 2011 and not included in the table above.

GSI COMMERCE, INC. AND SUBSIDIARIES

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

Approximately $4,174 of unrecognized tax benefits have been recorded as liabilities as of April 2, 2011, 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.

NOTE 7—EQUITY AND STOCK AWARDS

The Company maintains the 2010 Equity Incentive Plan (“2010 Plan”) which provides for the grant of equity to certain employees, directors and other persons. As of April 2, 2011, 2,574 shares of common stock were available for future grants under the 2010 Plan. The equity awards granted under the 2010 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.

In March 2011, the Company assumed the Fanatics Equity Incentive Plan (“Fanatics Plan”) which provides for the grant of equity to certain employees of Fanatics. As of April 2, 2011, 384 shares of common stock were available for future grants under the Fanatics Plan. The equity awards granted under the Fanatics Plan generally vest at various times over periods ranging up to eight 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 Company calculated the fair value of each option award on the date of grant using the Black-Scholes option pricing model. The following weighted-average assumptions were used to value the stock options assumed from the acquisition of Fanatics:

		Three Months Ended
		April 3, 2010				April 2, 2011
Risk-free interest rates			N/A				1.64	%
Expected lives (in years)			N/A				4.0
Dividend yield			N/A				0.00
Expected volatility			N/A				34	%

The Company’s computation of implied volatility was based on the market-based implied volatility from traded options on its stock. The Company’s computation of expected life was determined based on historical experience of similar awards, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior. The interest rate for periods within the contractual life of the award was based on the U.S. Treasury yield curve in effect at the time of grant.

GSI COMMERCE, INC. AND SUBSIDIARIES

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

The following table summarizes the stock option and warrant activity for the three-month period ended April 2, 2011:

										Weighted
						Weighted				Average
		Number of				Average				Remaining				Aggregate
		Shares				Exercise				Contractual				Intrinsic
		(in thousands)				Price				Life (in years)				Value
Outstanding at January 1, 2011			1,222			$	12.50
Assumed from Acquisition			257			$	10.57
Exercised			(96	)		$	13.45
Forfeited/Cancelled			(6	)		$	6.70
Outstanding at April 2, 2011			1,377			$	12.09				4.07			$	23,746
Vested and expected to vest at April 2, 2011			1,377			$	12.09				4.07			$	23,746
Exercisable at April 2, 2011			1,120			$	12.44				3.22			$	18,920

Restricted Stock Units and Awards

The following table summarizes the restricted stock unit and restricted stock award activity for the three-month period ended April 2, 2011:

						Weighted
		Number of				Average
		Shares				Grant Date
		(in thousands)				Fair Value
Nonvested shares at January 1, 2011			3,505			$	22.22
Granted			1,265			$	19.50
Vested			(397	)		$	15.85
Forfeited/Cancelled			(134	)		$	18.94
Nonvested shares at April 2, 2011			4,239			$	22.11

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
		April 3,				April 2,
		2010				2011
Includes stock-based compensation as follows:
Account management and operations		$	2,446			$	1,789
Product development		$	1,869			$	1,377
General and administrative		$	2,616			$	1,846

In the first quarter of fiscal 2011, the Company’s Board of Directors authorized a stock repurchase program contingent upon the closing of the Fanatics acquisition which closed on March 15, 2011. Under the program, the Company is authorized to repurchase up to $50,000 of its outstanding shares of common stock from time to time through March 14, 2013. The Company did not repurchase any of its common stock during the three months ended April 2, 2011.

GSI COMMERCE, INC. AND SUBSIDIARIES

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

NOTE 8—INCOME TAXES

The reported effective tax rate for the three months ended April 2, 2011 was 56.0%. The estimated annual effective tax rate of 60.0% was different from the actual tax rate of 56.0% 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 reported effective tax rate for the three months ended April 3, 2010 was 55.8%. The annual effective tax rate of 65.3% was different from the actual tax rate of 55.8% primarily due to losses in certain foreign operations that generate no tax benefit and therefore are not included in the pre-tax book income calculation for the annual effective tax rate partially offset by the net benefit from certain discrete items.

NOTE 9—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 that are issuable pursuant to equity awards or the conversion of notes that have been excluded from the calculations because the effect on net loss per share would have been anti-dilutive:

		As Of
		April 3,				April 2,
		2010				2011
Stock units and awards			4,265				4,239
Stock options and warrants			2,574				1,377
Convertible notes			8,229				5,000
			15,068				10,616

NOTE 10 — 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
		April 3,				April 2,
		2010				2011
Net loss		$	(8,125	)		$	(13,609	)
Other comprehensive loss:
Cumulative translation adjustment			(703	)			1,072
Comprehensive loss		$	(8,828	)		$	(12,537	)

GSI COMMERCE, INC. AND SUBSIDIARIES

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

NOTE 11—SEGMENT INFORMATION

The Company operates three reportable segments: Global e-Commerce Services (“GeC”), Global Marketing Services (“GMS”) and Consumer Engagement. For GeC, the Company offers a comprehensive suite of e-commerce services that enable companies to operate e-commerce businesses and to integrate their e-commerce businesses with their multi-channel retail offerings. For GMS, the Company offers a broad suite of services to help clients exploit digital marketing channels. For Consumer Engagement, the Company operates consumer facing e-commerce businesses that are complimentary to the clients of the GeC and GMS segments.

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. The Company defines segment profit/loss as income/loss from operations excluding stock-based compensation, depreciation and amortization expenses, and the following expenses related to acquisitions: transaction expenses, due diligence expenses, integration expenses, non-cash inventory valuation adjustments, the cash portion of any deferred acquisition payments recorded as compensation expense, the changes in fair value of deferred acquisition payments and any impairment of goodwill and intangible assets. 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 April 3, 2010
										Consumer				Intersegment
		GeC				GMS				Engagement				Eliminations				Consolidated
Net revenues		$	201,372			$	38,371			$	44,454			$	(11,605	)		$	272,592
Segment costs and expenses			192,164				29,040				45,612				(11,605	)		$	255,211
Segment profit (loss)			9,208				9,331				(1,158	)			—				17,381
Acquisition related integration, transaction, due diligence expenses, non-cash inventory valuation adjustments, and the cash portion of deferred acquisition payments recorded as compensation expense																			2,547
Depreciation and amortization																			18,761
Changes in fair value of deferred acquisition payments																			2,074
Stock-based compensation expense																			6,931
Loss from operations																			(12,932	)
Interest expense																			5,208
Interest income																			(234	)
Other expense, net																			474
Loss before income taxes and equity-method investment earnings																		$	(18,380	)

		Three Months Ended April 2, 2011
										Consumer				Intersegment
		GeC				GMS				Engagement				Eliminations				Consolidated
Net revenues		$	231,768			$	50,322			$	57,587			$	(16,183	)		$	323,494
Segment costs and expenses			219,404				43,365				62,142				(16,183	)		$	308,728
Segment profit (loss)			12,364				6,957				(4,555	)			—				14,766
Acquisition related integration, transaction, due diligence expenses, non-cash inventory valuation adjustments, and the cash portion of deferred acquisition payments recorded as compensation expense																			14,441
Depreciation and amortization																			23,165
Changes in fair value of deferred acquisition payments																			—
Stock-based compensation expense																			5,012
Loss from operations																			(27,852	)
Interest expense																			5,248
Interest income																			(65	)
Other income, net																			(1,098	)
Loss before income taxes and equity-method investment earnings																		$	(31,937	)

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

NOTE 12—MERGER AGREEMENT WITH eBAY

On March 27, 2011, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with eBay Inc. (“eBay”) and Gibraltar Acquisition Corp., a wholly owned subsidiary of eBay (“Merger Sub”).

The Merger Agreement provides that, upon the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub will merge with and into the Company (the “Merger”), with the Company continuing as the surviving corporation and a wholly-owned subsidiary of eBay. As of the effective time of the Merger, the Merger Agreement provides that each issued and outstanding share of Company common stock (other than shares held by eBay, Merger Sub, the Company or any of their respective subsidiaries or shares held by stockholders who have properly exercised and perfected appraisal rights under Delaware law) will be canceled and converted into the right to receive $29.25 in cash, without interest (the “Merger Consideration”).

To the extent that any outstanding shares of Company common stock are unvested or subject to a repurchase option, risk of forfeiture or other contractual right as of the effective time of the Merger, such shares will be converted into Merger Consideration that will remain unvested and subject to such rights, as applicable, and need not be paid until such time as such repurchase option, risk of forfeiture or other contractual right lapses or otherwise terminates.

Each outstanding stock option of the Company, to the extent vested immediately prior to the effective time of the Merger will be converted into the right to receive cash based on the Merger Consideration and the formulas contained in the Merger Agreement. Each outstanding stock option of the Company, to the extent unvested immediately prior to the effective time of the Merger, will be converted into an option to purchase eBay common stock in an amount based on formulas contained in the Merger Agreement. Each Company restricted stock unit that is outstanding and unvested immediately prior to the effective time of the Merger will be converted into a restricted stock unit representing the right to receive the number of shares of eBay common stock based on formulas contained in the Merger Agreement.

NRG, a Delaware limited liability company wholly-owned by Michael Rubin, the Company’s Chairman, President and Chief Executive Officer, is a party to a stock purchase agreement, dated as of March 27, 2011, with eBay (the “Purchase Agreement”), pursuant to which eBay has agreed to sell all or a portion of the equity interests of certain subsidiaries of the Company to NRG immediately after the completion of the Merger on the terms and subject to the conditions set forth in the Purchase Agreement (including the condition that the Merger has been completed). In addition, NRG will enter into a secured loan agreement with the Company pursuant to which the Company, which will be an affiliate of eBay at the time the agreement is entered into, will lend NRG funds to finance a substantial portion of the purchase price for such divestiture transaction on the terms and subject to the conditions set forth in the loan agreement. The closing of the Merger is not subject to, or dependent upon, the closing of the divestiture transaction.

A preliminary proxy statement containing important information about the Company, eBay and the proposed Merger was filed with the SEC on April 18, 2011.

Litigation

Following the announcement of the Company’s proposed Merger with eBay, five putative stockholder class action complaints challenging the transaction were filed in the Delaware Court of Chancery (the “Delaware Court”) on each of March 29, 2011, April 1, 2011, April 4, 2011, April 5, 2011, and April 11, 2011, respectively, against various combinations of eBay, Merger Sub, NRG, the Company, the individual members of the Company’s board of directors, and certain of the Company’s non-director officers. Two of these complaints subsequently have been amended. The complaints generally allege, among other things, that the members of the Company’s board of directors breached their fiduciary duties owed to the Company’s public stockholders by entering into the Merger Agreement, approving the proposed Merger, failing to take steps to maximize the Company’s value to the Company’s public stockholders, and failing to make adequate disclosures; that Mr. Rubin breached his fiduciary duties owed to the Company’s public stockholders by engaging in a transaction pursuant to which eBay agreed to sell certain subsidiaries of the Company to NRG after the completion of the Merger; and that various combinations of eBay, Merger Sub, NRG, and the Company aided and abetted such breaches of fiduciary duties. In addition, the complaints allege that the transactions improperly favor eBay and Mr. Rubin and unjustly enrich certain of the defendants; and that certain provisions of the Merger Agreement unduly restrict the Company’s ability to negotiate with other potential bidders. In one of these actions, the plaintiff also purports to bring derivative claims on behalf of the Company, alleging that the individual members of the board of directors and certain non-director officers are wasting corporate assets, unjustly enriching themselves, and breaching their fiduciary duties, and that eBay and Merger Sub are aiding and abetting such breaches of fiduciary duties. The complaints generally seek, among other things, declaratory and injunctive relief concerning the alleged fiduciary breaches, injunctive relief prohibiting the defendants from consummating the proposed Merger, as well as damages and other forms of equitable relief.

Beginning on April 5, 2011, various plaintiffs in these lawsuits filed motions to consolidate the suits, to expedite the proceedings, to appoint lead plaintiff and lead counsel, and for preliminary injunction.

On April 27, 2011, the Delaware Court held a hearing on these motions. On April 29, 2011, the Delaware Court issued a letter opinion consolidating the Delaware cases, appointing lead plaintiff and lead counsel, and directing the parties to submit an order setting forth a schedule and effectuating the letter opinion. By order dated May 4, 2011, the Delaware court scheduled a hearing on the plaintiffs' motion to preliminarily enjoin the proposed merger for June 10, 2011.

On April 21, 2011, a putative stockholder class action complaint challenging the transaction was filed in the Court of Common Pleas for Montgomery County, Pennsylvania (the “Pennsylvania Court”) against eBay, Merger Sub, NRG, the Company, and the individual members of the Company’s board of directors. The complaint alleges, among other things, that the members of the Company’s board of directors breached their fiduciary duties owed to the Company’s public stockholders by entering into the Merger Agreement, approving the proposed Merger, failing to take steps to maximize the Company’s value to the Company’s public stockholders, and failing to make adequate disclosures; that Mr. Rubin breached his fiduciary duties owed to the Company’s public stockholders by engaging in a transaction pursuant to which eBay agreed to sell certain subsidiaries of the Company to NRG after the completion of the Merger; and that eBay, NRG, and the Company aided and abetted such breaches of fiduciary duties. In addition, the complaint alleges that the transactions improperly favor eBay and Mr. Rubin, and that certain provisions of the Merger Agreement unduly restrict the Company’s ability to negotiate with other potential bidders. The complaint seeks, among other things, injunctive relief prohibiting the defendants from consummating the proposed Merger, and other forms of equitable relief.

On April 21, 2011, the plaintiff also filed a motion for expedited proceedings and preliminary injunction. This motion is currently pending before the Pennsylvania Court. A hearing on the motion for expedited proceedings is scheduled for May 5, 2011.

One of the conditions to the closing of the Merger is that no restraining order, injunction, or ruling by a court or other governmental entity shall be in effect that prevents the consummation of the Merger or that makes the consummation of the Merger illegal. As such, while the defendants believe the actions described above are without merit and intend to defend against them vigorously, if the plaintiffs in any of the actions are successful in obtaining an injunction prohibiting the defendants from completing the Merger on the agreed-upon terms, then such injunction may prevent the Merger from becoming effective, or from becoming effective within the expected timeframe. While these cases are in their early stages, the Company believes that the claims asserted therein are without merit and intends to contest the lawsuits vigorously.

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 our product and service offerings; our ability to execute operationally to attract and retain qualified personnel, to successfully integrate our recent acquisitions of other businesses, including Fanatics, Inc. (“Fanatics”); and the performance of acquired businesses, including Fanatics. More information about potential factors that could affect us is described in Part I, Item 1A in our Annual Report on Form 10-K for the fiscal year ended January 1, 2011, filed with the SEC on March 1, 2011(the “2010 Form 10-K”). We expressly disclaim any intent or obligation to update these forward-looking statements.

Executive Overview

First Quarter of Fiscal 2011 Financial Results Compared to the First Quarter of Fiscal 2010, and Significant Events:

•

On March 27, 2011, we entered into an agreement to be acquired by eBay Inc. (“eBay”) for $29.25 per share. We expect the acquisition to close in the third quarter of fiscal 2011. Expenses of $7.3 million related to this transaction are included in our loss from operations for the first quarter of fiscal 2011. For more information regarding this acquisition, see Item 1 of Part I, Financial Statements, Note 12, Merger Agreement with eBay.

•

On March 15, 2011 we acquired Fanatics, Inc. (“Fanatics”), an online retailer of licensed sports merchandise for approximately $258 million, including $168 million of cash and 5.0 million shares of our common stock, including assumed unvested options, valued at $90 million.

•

We entered into a new $400 million credit agreement (“the New Credit Facility”) that closed simultaneously with the closing of the Fanatics acquisition. The New Credit Facility replaced our $150 million credit facility and includes a $285 million revolving line of credit and a $115 million term loan, with the option to increase the commitments under these facilities by up to an additional $50 million to a total of $450 million.

•

On March 15, 2011, we commenced a share buy-back program, which was previously approved by our Board of Directors, of up to an aggregate of $50 million during the period from March 15, 2011 to March 15, 2013. Shares of our common stock may be repurchased from time to time at prevailing prices in the open market, including pursuant to Rule 10b5-1 trading plans. During the period beginning on March 15, 2011 and ending on April 2, 2011, no shares were repurchased by the Company.

•

Net revenues increased by $50.9 million, or 19%, net revenues from product sales increased by $19.6 million, or 12%, and service fee revenues increased $31.3 million, or 28%.

•

Loss from operations was $27.9 million compared to a loss of $12.9 million.

•

Net loss was $13.6 million including a benefit for income taxes of $17.9 million, compared to a net loss of $8.1 million including a benefit for income taxes of $10.3 million.

Consolidated Results (amounts in tables in millions):

Total Net Revenues, Costs and Expenses and Loss from Operations

		First Quarter
		Fiscal				% of Net				Fiscal				% of Net				Increase/
		2010				Revenues				2011				Revenues				(Decrease)				% Change
Revenues:
Net revenues from product sales		$	159.3				58	%		$	178.9				55	%		$	19.6				12	%
Service fee revenues			113.3				42	%			144.6				45	%			31.3				28	%
Total net revenues			272.6				100	%			323.5				100	%			50.9				19	%
Costs and expenses:
Cost of revenues from product sales			117.5				43	%			129.1				40	%			11.6				10	%
Marketing			10.8				4	%			14.7				5	%			3.9				36	%
Account management and operations			77.7				29	%			91.3				28	%			13.6				18	%
Product development			34.3				13	%			46.6				14	%			12.3				36	%
General and administrative			24.4				9	%			46.5				14	%			22.1				91	%
Depreciation and amortization			18.7				7	%			23.2				7	%			4.5				24	%
Changes in fair value of deferred acquisition payments			2.1				1	%			—				0	%			(2.1	)
Total costs and expenses			285.5				105	%			351.4				109	%			65.9				23	%
Income loss from operations		$	(12.9	)			(5	%)		$	(27.9	)			(9	%)		$	(15.0	)			116	%

Net Revenues from Product Sales

The increase in net revenues from product sales in the first quarter of fiscal 2011 was primarily driven by the growth of RueLaLa, Inc. (“Rue La La”) in the Consumer Engagement segment, the acquisition of Fanatics in March 2011, and higher shipping revenue due to increased volume of unit shipments in the Global e-Commerce Services (“GeC”) segment.

Service Fee Revenues

The increase in service fee revenues in the first quarter of fiscal 2011 was primarily driven by growth in the GeC and Global Marketing Services (“GMS”) 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 past twelve months.

Costs and Expenses

Cost of Revenues from Product Sales

		First Quarter
		Fiscal 2010				Fiscal 2011
Cost of revenues from product sales		$	117.5			$	129.1
As a percentage of net revenues from product sales			74	%			72	%

The increase in cost of revenues from product sales in the first quarter of fiscal 2011 was driven by increased net revenues from product sales in the Consumer Engagement and GeC segments including the acquisition of Fanatics in March 2011. Cost of revenue from product sales as a percentage of net revenues from product sales decreased as a result of a favorable mix of product sales from higher margin webstores.

Marketing

The absolute dollar increase in marketing expenses was driven by the increase in net revenues from product sales in the GeC segment, including the acquisition of Fanatics, an increase in the GMS segment due to companies acquired in the past twelve months, and the Consumer Engagement segment. As a percentage of net revenues from product sales, marketing expenses increased from 7% in the first quarter of fiscal 2010 to 8% in the first quarter of fiscal 2011 primarily due to the acquisition of Fanatics.

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 GeC and Consumer Engagement segments driven by increased order and shipment volume in the GeC segment and the growth in the Consumer Engagement segment.

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 $10.5 million of due diligence and transaction related expenses for the Fanatics acquisition and the pending eBay Merger and $3.2 million of earnout expenses related to the acquisition of Fetchback, Inc. The remaining increase was driven by increased payroll and related expenses and professional fees in each of our segments including expenses from the companies acquired in the past twelve months. Acquisition related due diligence, transaction and integration expenses were $2.5 million in the first quarter of fiscal 2010.

Depreciation and Amortization

Depreciation expense increased by $3.4 million for the first quarter of fiscal 2011 primarily due to an increase in capital expenditures in the GeC segment as well as depreciation on assets from companies acquired in the past twelve months. Amortization expense increased by $1.1 million for the first quarter of fiscal 2011 due to the intangible asset amortization related to the companies acquired in fiscal 2010 and fiscal 2011.

Changes in Fair Value of Deferred Acquisition Payments

The decrease in the fair value of deferred acquisition payments was due to a revision in the fourth quarter of fiscal 2010 of our estimate of the amount of deferred acquisition payments that will be paid to the former shareholders of Rue La La based on Rue La La’s financial performance in fiscal 2010 and revised financial projections for fiscal years 2011 and 2012. Based on these revised estimates, we do not expect Rue La La to achieve the minimum earnings thresholds needed to trigger any of the deferred acquisition payments and have determined that the fair value of the deferred acquisition payment liability is $0 as of the end of the first quarter of fiscal 2011.

Other (Income) Expense

		First Quarter
		Fiscal 2010				Fiscal 2011				Change
Interest expense		$	5.2			$	5.3			$	0.1
Interest income			(0.3	)			(0.1	)			0.2
Other (income) expense			0.5				(1.1	)			(1.6	)
Total other expense		$	5.4			$	4.1			$	(1.3	)

Other (income) expense is primarily comprised of foreign currency exchange gains and losses on transactions denominated in currencies other than the functional currency. The foreign currency exchange loss in fiscal 2010 was primarily due to the strengthening of the U.S. Dollar against the Euro and British Pound. The foreign currency exchange gain in fiscal 2011 was primarily due to the weakening of the U.S. Dollar against the Euro and British Pound.

Income Taxes

We recorded a benefit of $17.9 million in the first quarter of fiscal 2011. Our tax provision for the first quarter of fiscal 2011 was determined using an estimate of our annual effective tax rate of 60.0 % for fiscal 2011 plus any discrete items that effect taxes that occur during the quarter. The effective tax rate of 56.0% was higher than the 35% federal statutory tax rate primarily due to non-deductible permanent book to tax differences. Estimated annual losses from certain international operations yield no tax benefit and were removed from the calculation of the annual effective tax rate. We do not provide for U.S. taxes on our undistributed earnings of foreign subsidiaries since it intends to invest such undistributed earnings indefinitely outside of the U.S.

Segment Results

		First Quarter
		Fiscal 2010				Fiscal 2011				$ Change				% Change
GeC:
Net revenues		$	201.4			$	231.8			$	30.4				15	%
Segment profit(1)		$	9.2			$	12.4			$	3.2				35	%
GMS:
Net revenues		$	38.4			$	50.3			$	11.9				31	%
Segment profit(1)		$	9.3			$	7.0			$	(2.3	)			-25	%
Consumer engagement:
Net revenues		$	44.4			$	57.6			$	13.2				30	%
Segment profit (loss)(1)		$	(1.1	)		$	(4.6	)		$	(3.5	)			-318	%
Segment Margins:
GeC			4.6	%			5.3	%
GMS			24.2	%			13.9	%
Consumer engagement			(2.5	%)			(8.0	%)

GeC Segment:

Net revenues increased 15% in the first quarter of fiscal 2011. The increase in net revenues was driven by an increase in revenue from clients that operated for the entirely of both periods, an increase in shipping revenue due to increased unit shipments, and the acquisition of Fanatics.

Segment profit increased $3.2 million or 35% in the first quarter of fiscal 2011 compared to the first quarter of fiscal 2010 and segment operating margins increased to 5.3% in the first quarter of fiscal 2011 versus 4.6% in the first quarter of fiscal 2010. The increase in segment operating margins was driven primarily by service fee revenues comprising a larger percentage of total net revenues as service fee revenue has no associated cost of revenue or marketing expenses. If the National Football League work stoppage is not settled prior to the scheduled start of the 2011 football season, revenues for the remainder of fiscal 2011 from the www.nflshop.com website that we manage could be adversely impacted compared to the same period in fiscal 2010.

GMS Segment:

Net revenues increased 31% in the first quarter of fiscal 2011. The increase is primarily driven by revenue from companies acquired in the fiscal 2010 and the first quarter of fiscal 2011.

Segment profit decreased $2.3 million or 25% in the first quarter of fiscal 2011 compared to the first quarter of fiscal 2010. Segment operating margins decreased from 24.2% to 13.9% in the first quarter of fiscal 2011 compared to the first quarter of fiscal 2010. The decrease in segment profit was primarily driven by an unfavorable mix of revenue from lower margin services, and expenses associated with hiring an executive management team for the segment.

Consumer Engagement Segment:

Net revenues increased $13.2 million in the first quarter of fiscal 2011. The increase is primarily driven by Rue La La which accounted for substantially all of the segment revenues. Segment profit decreased $3.5 million due to Rue La La and ShopRunner, Inc (“ShopRunner”). Although Rue La La’s revenue grew significantly in the first quarter of fiscal 2011, we continued to invest in the business to support expected continued growth throughout fiscal 2011. ShopRunner’s segment profit also decreased as we continue to invest in the business. Shoprunner began operations in late fiscal 2009 but did not begin to generate any revenue until the fourth quarter of fiscal 2010.

Seasonality

We have experienced and expect to continue to experience seasonal fluctuations in our revenues from GeC. These seasonal patterns will cause quarterly fluctuations in our operating results. We also expect to experience seasonal fluctuations from Consumer Engagement, but to a lesser degree than with GeC. We experience less seasonality in our revenues from GMS. 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 1,				April 2,
		2011				2011
		(in millions)
Cash and cash equivalents		$	242.1			$	109.6
Percentage of total assets			22	%			9	%

As of April 2, 2011 and January 1, 2011, our cash and cash equivalents was comprised entirely of bank deposits.

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 either from cash generated from operating activities, cash and cash equivalents, or financing activities.

Sources of Cash

Our principal sources of liquidity in the first three months of fiscal 2011 were our cash and cash equivalents balances and $155 million of borrowings on our New Credit Facility.

As of April 2, 2011 we had $155 million of borrowings under our New Credit Facility. We did not have any borrowings under our former credit facility as of January 1, 2011. The New 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 2011, if necessary.

Uses of Cash

We used $92.5 million and $85.2 million of cash to fund operating activities in the first three months of fiscal 2011 and fiscal 2010, 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 $169.9 million in cash for acquisitions in the first three months of fiscal 2011, which included the acquisition of Fanatics. We are obligated to pay up to an additional $227.4 million in earnout payments through 2016 based on the achievement of certain performance targets by certain of our acquired companies, of which we have the ability to pay up to $55.8 million with shares of our common stock.

Our capital expenditures totaled $18.5 million and $15.9 million in the first three months of fiscal 2011 and fiscal 2010, 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 6, Commitments and Contingencies, for additional discussion of our principal contractual commitments.

Outlook

We expect to generate positive cash flow from operations in fiscal 2011, all of which we expect to 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 New Credit Facility will be sufficient to meet our anticipated operating cash needs, including any deferred acquisition payments, for at least the next 12 months. 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 existing and new secured revolving bank credit facilities contain negative covenants including restrictions 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.

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 2010 Form 10-K.

Recent Accounting Pronouncements

There were no new accounting pronouncements that could have an effect on us.

ITEM 3:		QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.