GSIC Resolves Accounting Errors; Restates Results

GSI Commerce Inc. resolved the two matters previously disclosed – the investigation of whether $283,000 of credits recorded in the fourth quarter of fiscal 2004 were recorded in the proper period and the reconciliation of the company's accounts payable balance. In conjunction with the resolution of these matters, the company will be restating certain of its financial results. The impact of the restatement is to record an additional $493,000 of net income to the company's previously reported cumulative results. The company concluded that because the impact to fiscal 2004 was to change previously reported net income of $340,000 to a net loss of $337,000, it should restate its financial results.

Conclusion of Investigation into $283,000 of Credits

In August 2005, GSI Commerce's internal auditor and its controller found potential discrepancies with certain credits, amounting to approximately $283,000, that were recorded as part of the company's fiscal fourth quarter 2004 results, some portion of which potentially should have been recorded in fiscal year 2005. The company alerted both its audit committee and independent auditors of the potential discrepancies. The audit committee retained independent counsel and commenced an independent investigation. The investigation covered the specific credits initially identified as well as other entries recorded during the same period. As a result of the investigation, which is now concluded, GSI Commerce determined that $91,000 of net income recorded in fiscal 2004 should have been recorded in fiscal 2005.

Reconciliation of Accounts Payable Balance

During the third quarter of fiscal 2005, the company determined that a systemic control on which the company relied to reconcile its accounts payable balance was no longer reliable. The result meant the company could not validate its general ledger balance for the account. Subsequently, the company changed to a manual control to validate this account. Based on the manual calculation, the company estimated it might need to record a charge of as much as $300,000, or a gain of as much as $1.2 million.

Based on further analysis, the company determined that its accounts payable balance was overstated by $439,000 as of July 2, 2005 and that a positive adjustment to net income of that amount should be recorded in order to properly state its accounts payable balance. Based on this analysis, GSI Commerce determined that the cumulative impact of adjusting its accounts payable balance was material and that it should restate its financial results to correct the error. The company determined that the cumulative correcting entries to its accounts payable balance, which resulted in $1.0 million in the aggregate of net income for the company, related to an error that occurred prior to fiscal year 2002.

Details of Restatement

In conjunction with the restatement of its financial results, GSI Commerce considered not only the impact of the reconciliation on its accounts payable balance, but also other known errors and the $91,000 impact of the investigation referred to above. The impact on net income/loss as a result of the restatement is as follows:

     1) Fiscal year ended Jan. 1, 2005 (fiscal 2004):  Previously reported net
        income of $340,000 is restated to a net loss of $337,000.
     2) Fiscal year ended Jan. 3, 2004 (fiscal 2003):  Previously reported net
        loss of $12,062,000 is restated to a net loss of $11,887,000.
     3) Fiscal year ended Dec. 28, 2002 (fiscal 2002):  Previously reported
        net loss of $33,809,000 remains unchanged.
     4) Six months ended July 2, 2005:  Previously reported net loss of
        $4,453,000 is restated to a net loss of $4,499,000.
     5) Six months ended July 3, 2004:  Previously reported net loss of
        $7,174,000 is restated to a net loss of $7,349,000.
     6) Three months ended July 2, 2005:  Previously reported net loss of
        $2,777,000 is restated to a net loss of $2,945,000.
     7) Three months ended July 3, 2004:  Previously reported net loss of
        $3,146,000 remains unchanged.
     8) Three months ended April 2, 2005:  Previously reported net loss of
        $1,676,000 is restated to a net loss of $1,554,000.
     9) Three months ended April 3, 2004:  Previously reported net loss of
        $4,028,000 is restated to a net loss of $4,203,000.