UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
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GSI Commerce, Inc.

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April 25, 2008

 

Dear Stockholder:

 

We cordially invite you to attend the Annual Meeting of Stockholders of GSI Commerce, Inc. which will be held on Thursday, June 19, 2008 at 10:00 a.m. local time, at the Company’s headquarters, located at 935 First Avenue, King of Prussia, Pennsylvania 19406. The official notice of the Annual Meeting together with a proxy statement and proxy card are enclosed. Please give this information your careful attention.

 

At the Annual Meeting, stockholders of GSI Commerce, Inc. are being asked to elect nine directors of GSI Commerce, Inc., approve an amendment to GSI Commerce, Inc.’s 2005 Equity Incentive Plan to increase the number of shares of common stock issuable under this Plan, approve the Leadership Team Incentive Plan, ratify the appointment of Deloitte & Touche LLP as the Company’s independent registered public accounting firm for fiscal 2008, and act upon such other business as may properly come before the Annual Meeting.

 

Whether or not you expect to attend the meeting in person, it is important that your shares be voted at the meeting. I urge you to specify your choices by marking the enclosed proxy card and returning it promptly.

 

Sincerely,

 

Michael G. Rubin

Chairman of the Board, President

and Chief Executive Officer

 

935 First Avenue, King of Prussia, PA 19406 (610) 491-7000

TABLE OF CONTENTS

 

GSI COMMERCE, INC.
935 FIRST AVENUE
KING OF PRUSSIA, PA 19406

 

 

 

 

GSI Commerce, Inc.
935 First Avenue
King of Prussia, PA 19406

 

 

 

 

 

(iii) FOR approval of the GSI Leadership Team Incentive Plan;

 

(iv) FOR ratification of the appointment of Deloitte & Touche LLP; and

 

(v) in their discretion as to any other matter that may properly come before the Annual Meeting.

 

How are my votes counted?

 

You may either vote for or withhold authority to vote for a nominee for the Board. For the election of directors, withheld votes do not affect whether a nominee has received sufficient votes to be elected.

 

You may vote for or against or you may abstain from voting on any other proposal. For the purpose of determining whether the stockholders have approved matters other than the election of directors, abstentions are treated as shares present or represented and entitled to vote, so abstaining has the same effect as a vote against that proposal. Broker non-votes are not counted or deemed to be present or represented for the purpose of determining whether stockholders have approved a proposal.

 

How many votes are required to elect directors or to approve any other proposal?

 

The election of directors will be determined by a plurality vote and the nine nominees receiving the most votes will be elected. The affirmative vote of a majority of the shares of Common Stock present or represented by proxy and entitled to vote at the Annual Meeting is required to approve any other proposal at the Annual Meeting.

 

Can I change my vote?

 

Yes. You can change your vote at any time before your proxy is voted at the Annual Meeting. If you are a stockholder of record, you may revoke your proxy by:

 

 

The last vote received chronologically will supercede any prior vote.

 

If you hold your shares in street name, you must contact your broker, bank or other nominee regarding how to change your vote.

 

What does it mean if I receive more than one proxy card?

 

If you receive more than one proxy card, it means that you hold shares that are registered in more than one account. To ensure that all of your shares are voted, you will need to sign and return each proxy card you receive.

 

Could other matters be decided at the Annual Meeting?

 

GSI does not know of any other matters that will be considered at the Annual Meeting. If any other matters arise at the Annual Meeting, the proxies will be voted at the discretion of the proxy holders.

 

Fiscal Year End

 

As used in this Proxy Statement, “fiscal 2000,” “fiscal 2001,” “fiscal 2004,” “fiscal 2005”, “fiscal 2006,” and “fiscal 2007” refer to GSI’s fiscal years ended December 30, 2000, December 29, 2001, January 1, 2005, December 31, 2005, December 30, 2006, and December 29, 2007, respectively and “fiscal 2008” refers to GSI’s fiscal year ending January 3, 2009.

PROPOSAL 1 — ELECTION OF DIRECTORS

 

GSI’s amended and restated bylaws provide that the number of directors will be set at nine unless otherwise determined by the Board of Directors. The Board has set the number of directors at nine effective as of the appointment of Lawrence S. Smith as a director on February 4, 2008. The following table sets forth certain information regarding the nominees for election to the Board to serve for one-year terms until the 2009 Annual Meeting and until their respective successors are elected and qualified. All of the nominees currently serve as directors of GSI. The nominees have consented to being named in this Proxy Statement and to serve if elected.

 

 

 

 

Michael G. Rubin has served as GSI’s chairman of the board and chief executive officer since July 1995 and as president since August 2006. Previously, Mr. Rubin served as GSI’s co-president from May 2004 through August 2005 and as GSI’s president from June 2000 through May 2004.

 

M. Jeffrey Branman has been one of GSI’s directors since October 2001. Since March 2007, Mr. Branman has been a managing director of Hilco Consumer Capital LLC, a private equity firm focused on North American consumer products companies and brands. From February 2007 to March 2007, Mr. Branman was a managing director of Petsky Prunier LLC, a specialty investment bank. From March 2005 through February 2007, Mr. Branman was the president and owner of Interactive Commerce Partners LLC, a provider of financial advisory services. Mr. Branman served as president of Interactive Technology Services, a subsidiary of Comcast Corporation, a developer, manager and operator of broadband cable networks, from April 2000 through March 2005. Interactive Technology Services served as financial advisor to Interactive Technology Holdings, LLC, a joint venture of Comcast Corporation and QVC, Inc. which sought and made investments. From March 1996 to February 2000, Mr. Branman was senior vice president corporate development of Foot Locker, Inc., a retailer of athletic footwear and apparel, and chief executive officer of FootLocker.com, the internet and direct marketing subsidiary of Foot Locker. Mr. Branman is also a director of Sona Mobile Holdings Corp.

 

Michael J. Donahue has been one of GSI’s directors since June 2006. Since March 2005, Mr. Donahue has served as a self-employed advisor in the technology industry. From January 2000 to March 2005, Mr. Donahue served as the group executive vice president and chief operating officer of BearingPoint, Inc., a consulting and systems integration firm. Prior to January 2000, Mr. Donahue served as managing partner, solutions, for the consulting division of KPMG LLP, the global accounting firm, and as a member of the boards of directors of KPMG LLP US and KPMG Consulting KK Japan. Mr. Donahue is also a director of Air Products and Chemicals, Inc., Arbinet-theexchange, Inc. and The Orchard Enterprises, Inc.

 

Ronald D. Fisher has been one of GSI’s directors since March 2000. Mr. Fisher currently serves as the vice chairman of SOFTBANK Holdings Inc. and as a managing general partner of SOFTBANK Capital Partners LP, a private equity organization. He joined SOFTBANK in October 1995. From January 1990 to September 1995, Mr. Fisher was chief executive officer of Phoenix Technologies, Ltd., a developer and marketer of system software products. Mr. Fisher is also a director of SOFTBANK Corporation and E*TRADE Group, Inc.

John A. Hunter has been one of GSI’s directors since November 2005. Mr. Hunter currently serves as executive vice president of customer fulfillment services for QVC Inc., an electronic retailer. Prior to February 2007, Mr. Hunter was senior vice president of distribution for QVC. He joined QVC in 1991 as a vice president of customer service. Prior to 1991, Mr. Hunter was a senior vice president in the credit division of Citibank, where he was employed from 1982 to 1991.

 

Mark S. Menell has been one of GSI’s directors since April 2000. Mr. Menell has been a partner of Rustic Canyon Partners, a venture capital firm, since January 2000. From August 1990 to January 2000, Mr. Menell was an investment banker at Morgan Stanley & Co. Incorporated, most recently as principal and co-head of Morgan Stanley’s Technology Mergers and Acquisitions Group, in Menlo Park, CA.

 

Dr. Jeffrey F. Rayport has been one of GSI’s directors since April 1999. Dr. Rayport has been chairman of Marketspace LLC, a digital strategy advisory and research business of Monitor Group, since October 2003 and was chief executive officer of Marketspace from September 1998 to October 2003. From September 1991 through September 1999, Dr. Rayport was a faculty member in the marketing and service management units at the Harvard Business School. Dr. Rayport is also a director of ValueClick Inc.

 

Lawrence S. Smith has been one of GSI’s directors since February 2008. Mr. Smith served as an executive vice president and as co-chief financial officer of Comcast Corporation from November 2002 until his retirement in March 2007. Mr. Smith currently serves in a consulting capacity to Comcast. Prior to November 2002, Mr. Smith served as an executive vice president of Comcast Holdings Corporation, the predecessor of Comcast Corporation, for more than five years. Mr. Smith is also a director of Air Products and Chemicals, Inc. and Tyco Electronics Ltd.

 

Andrea M. Weiss has been one of GSI’s directors since June 2006. Since August 2002, Ms. Weiss has served as president and chief executive officer of Retail Consulting Inc., an international retail consulting company she owns. From April 2001 to August 2002, Ms. Weiss served as president of dELiA*s Corp., a direct marketing and retail company comprised of lifestyle brands for teenage girls. From May 1998 to February 2001, Ms. Weiss served as executive vice president and chief stores officer of Limited Brands, Inc., a specialty retail business. Ms. Weiss is also a director of CBRL Group, Inc. and eDiets.com Inc.

 

Right to Designate Directors

 

The stock purchase agreements, as amended, pursuant to which certain entities affiliated with SOFTBANK Capital Partners LP, SOFTBANK Capital LP and SOFTBANK Capital Advisors Fund LP, or SOFTBANK, acquired their shares of GSI Common Stock provide that SOFTBANK has the right to designate one member of GSI’s Board of Directors, depending on the number of shares of GSI Common Stock held by SOFTBANK. SOFTBANK also has the right to have its director serve as a member of each committee of GSI’s Board of Directors. Mr. Fisher is SOFTBANK’s designee to GSI’s Board of Directors.

 

The stock purchase agreement, as amended, pursuant to which a subsidiary of Liberty Media Corporation, together collectively with its subsidiaries referred to as Liberty, acquired its shares of GSI Common Stock provides that Liberty has the right to designate one member of GSI’s Board of Directors, depending on the number of shares of GSI Common Stock held by Liberty. Liberty also has the right to have its director serve as a member of each committee of GSI’s Board of Directors. Mr. Hunter is Liberty’s designee to GSI’s Board of Directors.

 

Voting Agreements

 

Mr. Rubin entered into a voting agreement in favor of SOFTBANK, pursuant to which, as amended, Mr. Rubin agreed that he would vote all shares of GSI Common Stock then held by him in favor of the election to GSI’s Board of Directors of the director that SOFTBANK is entitled to designate. In addition, Mr. Rubin, as a stockholder, agreed not to take any action to remove any GSI director designated by SOFTBANK.

 

SOFTBANK also entered into a voting agreement in favor of Mr. Rubin relating to the election of incumbent directors of GSI. Pursuant to this voting agreement, as amended, SOFTBANK agreed that it would vote all shares of GSI Common Stock then held by it with respect to all directorships other than those which it is entitled to designate (i) in favor of any member of GSI’s Board of Directors who was a member of the Board of Directors as of November 8, 2007, and any director who is thereafter chosen to fill any vacancy on the Board of Directors or who is

elected as a director, referred to as continuing director, and who, in either event, is not a director designated by SOFTBANK and in connection with his or her initial assumption of office is recommended for appointment or election by a majority of the continuing directors then on the Board of Directors, and (ii) against the election of any directors other than those directors specified in clause (i) of this sentence.

 

Mr. Rubin and Liberty are party to a voting agreement pursuant to which, as amended, (i) Mr. Rubin agreed that he would vote all of his shares of GSI Common Stock in favor of election to GSI’s Board of Directors of the director that Liberty is entitled to designate, and (ii) Liberty agreed that it would vote all of its shares of GSI Common Stock in favor of election to GSI’s Board of Directors of certain continuing directors (as such term is defined therein).

 

SOFTBANK and Liberty are party to a voting agreement whereby (i) SOFTBANK agreed that it would vote all of its shares of GSI Common Stock in favor of election to GSI’s Board of Directors of the directors that Liberty is entitled to designate, and (ii) Liberty agreed that it would vote all of its shares of GSI Common Stock in favor of election to GSI’s Board of Directors of the directors that SOFTBANK is entitled to designate.

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE FOR ELECTION OF ALL OF THE NOMINEES FOR DIRECTORS.

 

Board, Committees and Attendance at Meetings of the Board and Committees

 

The Board of Directors of GSI held eleven meetings during fiscal 2007. The Board of Directors also meets in executive session at each of its regularly scheduled meetings. During fiscal 2007, no current director attended fewer than 75% of the aggregate of (i) the total number of Board meetings held during the period for which he or she was a director and (ii) the total number of meetings held by committees of the Board of Directors on which he or she served during the period he served. A description of each of the committees of the Board of Directors of GSI is set forth below.

 

The Board has determined that the following directors, constituting a majority of the members of the Board of Directors, are independent as defined in the applicable listing standards of the Nasdaq Stock Market: Messrs. Donahue, Hunter, Fisher, Menell and Smith, Ms. Weiss and Dr. Rayport. The independence standards of Nasdaq are composed of objective standards and subjective standards. Under the objective standards, a director will not be deemed independent if he directly or indirectly receives compensation (other than as a director) in excess of certain thresholds or if certain described relationships exist. Under the subjective independence standard, a director will not be deemed independent if he has a relationship with GSI that, in the view of the Board, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. Under the Nasdaq Stock Market rules, an independent director must satisfy both the objective and the subjective standards.

 

In evaluating the independence of Mr. Fisher, the Board considered that he was affiliated with SOFTBANK, a principal stockholder of GSI. In evaluating the independence of Mr. Hunter, the Board considered that he was an employee of QVC, a subsidiary of Liberty, which is a principal stockholder of GSI. In evaluating the independence of Messrs. Donahue and Smith the Board considered that these directors each serve on the Board of Directors of Air Products and Chemicals, Inc. In each case, the Board concluded that, in their view, such relationships would not interfere with the exercise of such person’s independent judgment in carrying out their responsibilities as a director.

 

The Board of Directors has four standing committees.

 

Audit Committee.   The Board of Directors has a separately designated standing audit committee. The current members of the Audit Committee are Messrs. Menell (Chairman) and Donahue and Dr. Rayport. The Board of Directors has determined that each member of the Audit Committee is independent as defined in the applicable listing standards of the Nasdaq Stock Market and SEC regulations and that Mr. Menell qualifies as an audit committee financial expert as that term is defined in SEC regulations. The Audit Committee held nine meetings during fiscal 2007.

 

The Audit Committee’s responsibilities include:

 

 

 

The responsibilities of the Audit Committee are further described in the Audit Committee Charter adopted by the Audit Committee and the Board of Directors, a copy of which is available on GSI’s Web site at www.gsicommerce.com.

 

Compensation Committee.   The current members of the Compensation Committee are Ms. Weiss (Chairwoman) and Messrs. Hunter and Menell. Mr. Michael S. Perlis was a member of the Compensation Committee until June 15, 2007, at which time he ceased to be a member of GSI’s Board of Directors. Mr. Menell replaced Mr. Perlis on the Compensation Committee. The Board of Directors has determined that each member of the Compensation Committee is independent as defined in the applicable listing standards of the Nasdaq Stock Market. The Compensation Committee held nine meetings during fiscal 2007.

 

The Compensation Committee’s responsibilities include:

 

 

The responsibilities of the Compensation Committee are further described in the Compensation Committee Charter, a copy of which is available on GSI’s Web site at www.gsicommerce.com.

 

As provided in its charter, the Compensation Committee may, in its discretion, form and delegate all or a portion of its authority, duties and responsibilities to one or more subcommittees of the Compensation Committee. To date, the Compensation Committee has not delegated its responsibilities. Mr. Rubin, GSI’s president and chief executive officer, makes recommendations to the Compensation Committee with respect to the compensation of executive officers, other than himself. The Compensation Committee has the authority to retain independent counsel or other advisors and has, in the past, retained compensation consultants and outside counsel to assist it. For more information concerning the Compensation Committee’s processes and procedures for the determination of executive officer compensation, see “Executive Compensation — Compensation Discussion and Analysis.”

 

Nominating and Corporate Governance Committee.   The current members of the Nominating and Corporate Governance Committee are Dr. Rayport (Chairman) and Mr. Fisher and Ms. Weiss. The Board of Directors has determined that each member of the Nominating and Corporate Governance Committee is independent as defined in the applicable listing standards of the Nasdaq Stock Market. The Nominating and Corporate Governance Committee held one meeting during fiscal 2007.

 

The Nominating and Corporate Governance Committee’s responsibilities include:

 

 

 

The responsibilities of the Nominating and Corporate Governance Committee are further described in the Nominating and Corporate Governance Committee Charter, a copy of which is available on GSI’s Web site at www.gsicommerce.com.

 

Financings and Acquisitions Committee.   The current members of the Financings and Acquisitions Committee are Messrs. Branman (Chairman), Menell and Smith. The Financings and Acquisitions Committee held five meetings during fiscal 2007. The Financings and Acquisitions Committee’s responsibilities include reviewing potential mergers, acquisitions, divestitures, joint ventures, significant asset sales or purchases, significant investments and other significant business opportunities and making recommendations to the Board of Directors and reviewing structures and methods of financing and making recommendations to the Board of Directors.

 

Director Attendance at Annual Meeting

 

GSI does not have a policy with regard to Board members’ attendance at the Annual Meeting. Mr. Rubin attended GSI’s 2007 annual meeting of stockholders.

 

Director Nomination Process

 

Director Qualifications.   While GSI does not have any specific, minimum qualifications for Board nominees, in considering possible candidates for election as a director, the Nominating and Corporate Governance Committee will be guided by the following:

 

 

Director Nominee Selection Process.   Subject to the right of certain stockholders to designate directors described above, GSI’s Nominating and Corporate Governance Committee recommends qualified candidates as directors of GSI and recommends that the Board nominate such individuals for election to the Board at the next annual meeting of stockholders. The Nominating and Corporate Governance Committee will consider director candidates recommended by Board members, management and stockholders, as well as those identified by any third-party search firm it may retain. Director candidates recommended by stockholders which comply with the procedures set forth below, subject to GSI’s contractual obligations to certain stockholders described above, will receive the same consideration as candidates recommended by other persons.

 

In the case of considering a new director candidate, the selection process for director candidates includes the following steps:

 

 

In the past, on some occasions, the Nominating and Corporate Governance Committee has engaged a third party search firm to assist in identifying candidates to serve as members of GSI’s Board of Directors.

 

Procedure for Stockholders Recommending Director Candidates.   A stockholder who wishes to recommend a prospective director nominee should submit their recommendation to Chairman of the Nominating and Corporate Governance Committee in writing c/o GSI Commerce, Inc., 935 First Avenue, King of Prussia, PA 19406. The following information must be included in or attached to the letter:

 

 

The deadline for submitting stockholder recommendations pursuant to the foregoing procedures for the 2009 annual meeting of stockholders is December 26, 2008. All stockholder recommendations which are late will be rejected by the Company.

 

In connection with the 2008 Annual Meeting, GSI has not received a director nominee recommendation from any stockholder, or group of stockholders, that beneficially owns more than five percent of GSI’s Common Stock. Liberty has designated John A. Hunter to serve as its nominee on the Board, pursuant to its contractual right described above. In addition, SOFTBANK has designated Ronald D. Fisher to serve as its nominee on the Board, pursuant to its contractual right described above. Each of the current nominees listed for directors under Proposal 1 of this Proxy Statement is a current director standing for re-election.

 

Procedure for Stockholders Nominating Directors.   In addition, under GSI’s amended and restated bylaws, stockholders are permitted to nominate directors to be elected at a meeting of stockholders. GSI’s amended and restated bylaws set forth procedures which stockholders must follow for nominations of directors to be brought before a meeting of GSI’s stockholders.

 

According to GSI’s amended and restated bylaws, for nominations to be properly brought before an annual meeting by a stockholder, the stockholder must have given notice in writing to GSI’s Secretary at GSI’s principal executive offices not later than the close of business on the 90th day nor earlier than the close of business on the 120th day prior to the first anniversary of the preceding year’s annual meeting. The timing of the notice is subject to change in the event that the date of GSI’s annual meeting is advanced more than 30 days prior to or delayed by more than 30 days after the anniversary of the preceding year’s annual meeting, or in the event that the number of directors to be elected to GSI’s Board of Directors is increased and there is no public announcement naming all of the nominees for director or specifying the size of the increased Board of Directors made by GSI at least 100 days prior to the first anniversary of the preceding year’s annual meeting.

 

A stockholder’s notice must set forth:

 

(A) as to each person whom the stockholder proposes to nominate for election or reelection as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Rule 14a-4(d) thereunder (including such person’s written consent to being named in the proxy statement as a nominee and to serving as a director if elected); and

(B) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination is made (i) the name and address of such stockholder and of such beneficial owner, (ii) the class and number of shares which are owned beneficially and of record by such stockholder and such beneficial owner, and (iii) whether either such stockholder or beneficial owner intends to deliver a proxy statement and form of proxy to a sufficient number of holders of GSI’s voting shares to elect such nominee or nominees (an affirmative statement of such intent, a “Solicitation Notice”).

 

If the stockholder, or the beneficial owner on whose behalf any such nomination is made, has provided GSI with a Solicitation Notice, such stockholder or beneficial owner must, in the case of a nomination or nominations, have delivered a proxy statement and form of proxy to holders of a percentage of GSI’s voting shares reasonably believed by such stockholder or beneficial owner to be sufficient to elect the nominee or nominees proposed to be nominated by such stockholder, and must, in either case, have included in such materials the Solicitation Notice.

 

GSI’s amended and restated bylaws also set forth procedures which stockholders must follow for nominations of directors to be brought before a special meeting of stockholders.

 

Except as otherwise provided by law, the chairman of the meeting has the power and duty to determine whether a nomination to be brought before the meeting was made in accordance with the procedures set forth in GSI’s amended and restated bylaws and, if any proposed nomination is not in compliance with GSI’s amended and restated bylaws, to declare that the defective nomination will not be presented for stockholder action at the meeting and will be disregarded.

 

GSI’s amended and restated bylaws are available, at no cost, at the SEC’s Web site, www.sec.gov, as Exhibit 3.1 to GSI’s Form 8-K filed with the Securities and Exchange Commission on November 13, 2007 or upon the stockholder’s written request directed to the Corporate Secretary c/o GSI Commerce, Inc., 935 First Avenue, King of Prussia, PA 19406.

 

 

Discussion of Director Compensation

 

The compensation payable to each director, other than Messrs. Fisher, Hunter and Rubin, for services provided as a director during fiscal 2007, as set by GSI’s Nominating and Corporate Governance Committee, was as follows:

 

 

 

In accordance with GSI’s compensation policy for directors, on June 15, 2007, 2,212 restricted stock units, or RSUs, automatically were granted to each of Messrs. Branman, Donahue and Menell, Dr. Rayport and Ms. Weiss valued, in each case, at a price of $22.60 per share, the fair market value on the date of grant, and will vest in full one year from the date of grant. In connection with his election as a director, and in accordance with GSI’s compensation policy for directors, on February 4, 2008, Mr. Smith automatically was granted 7,383 RSUs valued at a price of $16.93 per share, the fair market value on the date of grant. These RSUs vest in equal annual installments over four years from the date of grant, provided that if he ceases to be a director during the four year period for any reason other than removal for cause or resignation, the RSUs will vest in full on such cessation.

 

In addition, as the chair of the Audit Committee, Mr. Menell received an additional cash retainer of $10,000 and each of Mr. Branman, Ms. Weiss and Dr. Rayport, as the chairs of the Finance and Acquisitions Committee, Compensation Committee and the Nominating and Corporate Governance Committee, respectively, received an additional cash retainer of $5,000.

 

Additionally, any director who serves, at GSI’s request, as a director or observer on the Board of Directors of another company with respect to which we have the contractual right to appoint a director or observer will receive an

annual cash fee of $10,000. Accordingly, Mr. Branman received an annual cash fee of $10,000 for serving as an observer on the board of directors of another company at GSI’s request.

 

In accordance with GSI’s director compensation policy, directors who are designees of stockholders that have a contractual right to appoint a director to GSI’s Board do not receive compensation under the policy described above. Accordingly, Messrs. Fisher and Hunter did not receive any compensation from GSI for acting in their capacity as a director in fiscal 2007. Mr. Rubin, GSI’s chairman, president and chief executive officer, did not receive any separate compensation for acting in his capacity as a director.

 

The director compensation policy has not changed for fiscal 2008.

 

Audit Committee Report

 

The Audit Committee reviewed and discussed with GSI’s management and Deloitte & Touche LLP, the Company’s independent registered public accounting firm, GSI’s audited financial statements, the results of Deloitte & Touche LLP’s audit, their evaluation of GSI’s system of internal control and the overall quality of GSI’s financial reporting process. The Audit Committee also discussed with Deloitte & Touche LLP the matters required to be discussed by Statement on Auditing Standards No. 114, “The Auditor’s Communication With Those Charged With Governance.” The Audit Committee received the written disclosures and the letter from Deloitte & Touche LLP required by Independence Standards Board Standard No. 1, “Independence Discussions with Audit Committees,” and discussed with Deloitte & Touche LLP their independence. Based upon the review and discussions referred to above, the Audit Committee recommended to the Board of Directors of GSI that the audited financial statements be included in GSI’s Annual Report on Form 10-K for fiscal 2007 for filing with the Securities and Exchange Commission.

 

 

Code of Ethics

 

GSI adopted a Code of Business Conduct, that applies to all employees, and a Finance Code of Professional Conduct (code of ethics) that applies to GSI’s principal executive officer, principal financial officer, principal accounting officer or controller, and persons performing similar functions. Copies of these documents are posted on GSI’s Web site located at www.gsicommerce.com. Amendments to the code of ethics are posted on GSI’s corporate Web site located at www.gsicommerce.com.

 

Stockholders’ Communication with the Board of Directors

 

Stockholders who wish to communicate with a member or members of the Board of Directors, including the chair of any committee of the Board or the non-management directors as a group, may do so by addressing their correspondence to the Board member or members, c/o Corporate Secretary, GSI Commerce, Inc., 935 First Avenue, King of Prussia, PA 19406. The Board of Directors has unanimously approved a process pursuant to which the Corporate Secretary will review and forward correspondence to the appropriate person or persons for response.

 

PROPOSAL 2 — AMENDMENT OF GSI’S 2005 EQUITY INCENTIVE PLAN

 

Description of the Proposal

 

In March 2005, the Board of Directors adopted, and in June 2005 GSI’s stockholders approved, GSI’s 2005 Equity Incentive Plan (the “2005 Equity Plan”). On April 18, 2008, the Board of Directors amended the 2005 Equity Plan, subject to stockholder approval, to increase the authorized number of shares of Common Stock reserved and issuable thereunder by an additional 2,250,000 shares of Common Stock.

 

Description of the 2005 Equity Plan

 

The material terms of the 2005 Equity Plan are summarized below. A copy of the full text of the 2005 Equity Plan, as amended, is attached as Appendix A to this Proxy Statement. This summary of the 2005 Equity Plan is not intended to be a complete description of the 2005 Equity Plan and is qualified in its entirety by the actual text of the 2005 Equity Plan to which reference is made.

 

The essential features of the 2005 Equity Plan are outlined below:

 

General

 

The 2005 Equity Plan provides for the grant of incentive stock options, nonstatutory stock options, stock appreciation rights, stock purchase awards, stock bonus awards, stock unit awards, and other forms of equity compensation (collectively, “stock awards”). Incentive stock options granted under the 2005 Equity Plan are intended to qualify as “incentive stock options” within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”). Nonstatutory stock options granted under the 2005 Equity Plan are not intended to qualify as incentive stock options under the Code. See “Federal Income Tax Information” for a discussion of the tax treatment of stock awards.

 

Purpose

 

The Board adopted the 2005 Equity Plan to provide a means to secure and retain the services of employees (including officers) and non-employee directors eligible to receive stock awards, to provide incentives for such individuals to exert maximum efforts for the success of GSI and its affiliates, and to provide a means by which such eligible individuals may be given an opportunity to benefit from increases in the value of GSI’s common stock through the grant of stock awards.

 

Administration

 

The Board administers the 2005 Equity Plan. Subject to the provisions of the 2005 Equity Plan, the Board has the authority to construe and interpret the plan, to determine the persons to whom and the dates on which stock awards will be granted, the number of shares of common stock to be subject to each stock award, the time or times during the term of each stock award within which all or a portion of the award may be exercised, the exercise, purchase, or strike price of each stock award, the type of consideration permitted to exercise or purchase each stock award, and other terms of the stock awards.

 

The Board has the authority to delegate some or all of the administration of the 2005 Equity Plan to a committee or committees. In the discretion of the Board, a committee may consist solely of two or more “non-employee directors” within the meaning of Rule 16b-3 of the Exchange Act or solely of two or more “outside directors” within the meaning of Section 162(m) of the Code. If administration is delegated to a committee, the committee has the authority to delegate certain administrative powers to a subcommittee of one or more members. The Board has delegated the authority to administer the 2005 Equity Plan to the Compensation Committee. As used herein with respect to the 2005 Equity Plan, the “Board” refers to the Compensation Committee and any committee the Board subsequently appoints or, if applicable, any subcommittee, as well as to the Board itself.

Eligibility

 

Stock awards under the 2005 Equity Plan may be granted to employees (including officers), directors and consultants of GSI and its affiliates, except that incentive stock options may be granted only to employees (including officers) of GSI and its affiliates.

 

Under the 2005 Equity Plan, no person may be granted stock awards, during any calendar year, whose value is determined by reference to an increase over an exercise or strike price of at least 100% of the fair market value of the common stock on the date of grant, covering more than 2,000,000 shares of common stock (the “Section 162(m) Limitation”).

 

Stock Subject to the 2005 Equity Plan

 

As of April 21, 2008:

 

 

On April 18, 2008, the Board of Directors approved an amendment to the 2005 Equity Plan to increase the number of shares of Common Stock issuable under the Plan by 2,250,000 shares, subject to stockholder approval. Assuming Proposal 2 is approved by stockholders, as of April 21, 2008, a total of 7,251,219 shares would be authorized and reserved for issuance under the 2005 Equity Plan, plus such number of shares that may become available for grant under the 2005 Equity Plan upon the cancellation, expiration, forfeiture or repurchase of outstanding awards under the 1996 Plan.

 

Under the 2005 Equity Plan, the number of shares authorized for issuance under the Plan is automatically increased from time to time by a number of shares equal to the number of shares of Common Stock that (i) are issuable pursuant to options or stock award agreements outstanding under the 1996 Plan as of the date the 2005 Equity Plan was approved by stockholders and (ii) but for the termination of the 1996 Plan, would otherwise have reverted to the share reserve of the 1996 Plan pursuant to the terms of the 1996 Plan. If a stock award granted under the 2005 Equity Plan or the 1996 Plan expires or otherwise terminates without being exercised in full, or if any shares of common stock issued pursuant to a stock award are forfeited to or repurchased by GSI, including, but not limited to, any repurchase or forfeiture caused by the failure to meet a contingency or condition required for the vesting of such shares, then the shares of common stock not issued under such stock award, or forfeited to or repurchased by GSI shall revert to and again become available for issuance under the 2005 Equity Plan. If any shares subject to a stock award are not delivered to a participant because such shares are withheld for the payment of taxes or the stock award is exercised through a reduction of shares subject to the stock award (i.e., “net exercised”), the number of shares that are not delivered shall remain available for issuance under the 2005 Equity Plan. If the exercise price of any stock award is satisfied by tendering shares of common stock held by the participant, then the number of shares so tendered shall remain available for issuance under the 2005 Equity Plan.

Terms of Options

 

Options may be granted under the 2005 Equity Plan pursuant to stock option agreements. The following is a description of the permissible terms of options under the 2005 Equity Plan. Individual stock option agreements may be more restrictive as to any or all of the permissible terms described below. GSI’s Board of Directors has adopted resolutions setting the terms of options granted to non-employee directors. For a description of these terms, please see “Terms of Options Granted to Non-Employee Directors” below.

 

Exercise Price.   The exercise price of incentive stock options may not be less than 100% of the fair market value of the stock subject to the option on the date of grant except that the exercise price of incentive stock options granted to any person who, at the time of the grant, owns (or is deemed to own) stock possessing more than 10% of the total combined voting power of GSI or its affiliates (a “10% Stockholder”) must be at least 110% of the fair market value of the stock subject to the option on the date of grant. The exercise price of nonstatutory stock options will be determined by the Board on the date of grant. As of April 21, 2008, the closing price of GSI’s common stock as reported on the Nasdaq Global Select Market was $11.73 per share.

 

Consideration.   The exercise price of options granted under the 2005 Equity Plan must be paid, to the extent permitted by applicable law and at the discretion of the Board, (i) by cash or check, (ii) by bank draft or money order payable to GSI, (iii) pursuant to a broker-assisted cashless exercise, (iv) by delivery of other common stock of GSI, (v) pursuant to a net exercise arrangement, (vi) according to a deferred payment or (vii) in any other form of legal consideration acceptable to the Board.

 

Vesting.   Options granted under the 2005 Equity Plan may become exercisable in cumulative increments, or “vest,” as determined by the Board. Vesting typically will occur during the optionholder’s continued service with GSI or an affiliate, whether such service is performed in the capacity of an employee or director (collectively, “service”) and regardless of any change in the capacity of the service performed. Shares covered by different options granted under the 2005 Equity Plan may be subject to different vesting terms. The Board has the authority to accelerate the time during which an option may vest or be exercised. In addition, options granted under the 2005 Equity Plan may permit exercise prior to vesting. However, any unvested shares acquired under such an early exercise arrangement will be subject to repurchase by GSI, should the participant’s service terminate before vesting.

 

Tax Withholding.   To the extent provided by the terms of a stock option agreement, GSI may cause a participant to satisfy any federal, state or local tax withholding obligation relating to the exercise of the option by a cash payment upon exercise, withholding a portion of the stock otherwise issuable to the participant, executing a loan or through such other method as set forth in the applicable stock award agreement.

 

Term.   The maximum term of options granted under the 2005 Equity Plan is 10 years, except that in the case of an incentive stock options granted to a 10% Stockholder, the maximum term is five years.

 

Additional Limitations on Incentive Stock Options.   The aggregate fair market value, determined on the date of grant, of the shares of common stock with respect to which incentive stock options are exercisable for the first time by a participant during any calendar year (under the 2005 Equity Plan and any other plans of GSI and its affiliates) may not exceed $100,000.

 

The aggregate maximum number of shares of common stock that may be issued under the 2005 Equity Plan pursuant to the exercise of incentive stock options is 4,000,000 shares.

 

Termination of Service.   Options granted under the 2005 Equity Plan generally terminate three months after termination of the participant’s service unless (i) termination is due to the participant’s disability, in which case the option may be exercised (to the extent the option was exercisable at the time of the termination of service) at any time within 12 months following termination; (ii) the participant dies before the participant’s service has terminated, or within generally three months after termination of service, in which case the option may be exercised (to the extent the option was exercisable at the time of the participant’s death) within 18 months following the participant’s death by the person or persons to whom the rights to such option have passed; or (iii) the option by its terms specifically provides otherwise. Under the 2005 Equity Plan, the option term may be extended in the event that exercise of the option following termination of service is prohibited by applicable securities laws. In no event,

however, may an option be exercised beyond the expiration of its term. The option will automatically terminate upon a participant’s termination for cause (as defined in the 2005 Equity Plan).

 

Restrictions on Transfer.   Unless provided otherwise by the Board, a participant in the 2005 Equity Plan may not transfer an option other than by will or by the laws of descent and distribution or pursuant to a domestic relations order. During the lifetime of the participant, only the participant (or the transferee pursuant to a domestic relations order) may exercise an option. A participant may also designate a beneficiary who may exercise an option following the participant’s death. Shares subject to repurchase by GSI pursuant to an early exercise arrangement may be subject to restrictions on transfer that the Board deems appropriate.

 

Terms of Stock Appreciation Rights

 

Stock appreciation rights may be granted under the 2005 Equity Plan pursuant to stock appreciation rights agreements.

 

Exercise.   Each stock appreciation right is denominated in shares of common stock equivalents. Upon exercise of a stock appreciation right, GSI will pay the participant an amount equal to the excess of (i) the aggregate fair market value of GSI’s common stock on the date of exercise, over (ii) the strike price determined by the Board on the date of grant.

 

Settlement of Awards.   The appreciation distribution upon exercise of a stock appreciation right may be paid in cash, shares of GSI’s common stock, or any other form of consideration determined by the Board.

 

Vesting.   Stock appreciation rights vest and become exercisable at the rate specified in the stock appreciation right agreement as determined by the Board.

 

Termination of Service.   Upon termination of a participant’s service, the participant generally may exercise any vested stock appreciation right for three months (or such longer or shorter period specified in the stock appreciation right agreement) after the date such service relationship ends. In no event may a stock appreciation right be exercised beyond the expiration of its term.

 

Terms of Stock Purchase Awards and Stock Bonus Awards

 

Stock purchase awards and stock bonus awards may be granted under the 2005 Equity Plan pursuant to stock purchase award agreements and stock bonus award agreements, respectively.

 

Purchase Price.   The purchase price for stock purchase awards must be at least the par value of GSI’s common stock.

 

Consideration.   The purchase price for stock purchase awards may be payable either (i) in cash or by check, (ii) by past service rendered to GSI, or (iii) in any other form of legal consideration acceptable to the Board. The Board may grant stock bonus awards in consideration for past services rendered to GSI or in exchange for any other form of legal consideration acceptable to the Board, without the payment of a purchase price.

 

Vesting.   Shares of stock acquired under a stock purchase or stock bonus award may, but need not, be subject to a repurchase option in favor of GSI or forfeiture to GSI in accordance with a vesting schedule as determined by the Board. The Board has the authority to accelerate the vesting of stock acquired pursuant to a stock purchase or stock bonus award.

 

Termination of Service.   Upon termination of a participant’s service, GSI may repurchase or otherwise reacquire any forfeited shares of stock that have not vested as of such termination under the terms of the applicable stock purchase award or stock bonus award agreement.

 

Restrictions on Transfer.   Rights to acquire shares under a stock purchase or stock bonus award may be transferred only upon such terms and conditions as determined by the Board.

 

Terms of Stock Unit Awards

 

Stock unit awards may be granted under the 2005 Equity Plan pursuant to stock unit award agreements.

Consideration.   The purchase price, if any, for stock unit awards may be paid in any form of legal consideration acceptable to the Board.

 

Settlement of Awards.   A stock unit award may be settled by the delivery of shares of GSI’s common stock, in cash, or by any combination of these means as determined by the Board.

 

Vesting.   Stock unit awards vest at the rate specified in the stock unit award agreement as determined by the Board. However, at the time of grant, the Board may impose additional restrictions or conditions that delay the delivery of stock or cash subject to the stock unit award after vesting.

 

Dividend Equivalents.   Dividend equivalent rights may be credited with respect to shares covered by a stock unit award. GSI does not anticipate paying cash dividends on its common stock for the foreseeable future, however.

 

Termination of Service.   Except as otherwise provided in the applicable award agreement, stock units that have not vested will be forfeited upon the participant’s termination of service.

 

Terms of Other Equity Awards

 

The Board may grant other equity awards that are valued in whole or in part by reference to GSI’s common stock. Subject to the provisions of the 2005 Equity Plan, the Board has the authority to determine the persons to whom and the dates on which such other equity awards will be granted, the number of shares of common stock (or cash equivalents) to be subject to each award, and other terms and conditions of such awards.

 

Performance-Based Stock Awards

 

Under the 2005 Equity Plan, a stock award may be granted, vest or be exercised based upon certain service conditions or upon the attainment during a certain period of time of certain performance goals. All employees of GSI and its affiliates and directors of GSI are eligible to receive performance-based stock awards under the 2005 Equity Plan. The length of any performance period, the performance goals to be achieved during the performance period, and the measure of whether and to what degree such performance goals have been attained shall be determined by the Board. The maximum amount to be received by any individual in any calendar year attributable to such performance-based stock awards may not exceed 2,000,000 shares of GSI’s common stock.

 

In granting a performance-based stock award, the Board will set a period of time (a “performance period”) over which the attainment of one or more goals (“performance goals”) will be measured for the purpose of determining whether the award recipient has a vested right in or to such stock award. Within the time period prescribed by Section 162(m) of the Code (typically before the 90th day of a performance period), the Board will establish the performance goals, based upon one or more pre-established criteria (“performance criteria”) enumerated in the 2005 Equity Plan and described below. As soon as administratively practicable following the end of the performance period, the Board will certify (in writing) whether the performance goals have been satisfied.

 

Performance goals under the 2005 Equity Plan shall be determined by the Board, based on a service condition or on one or more of the following performance criteria: (i) earnings per share; (ii) earnings before interest and taxes; (iii) earnings before interest, taxes and depreciation and/or amortization; (iv) total stockholder return; (v) return on equity; (vi) return on assets, investment, or capital employed; (vii) operating margin; (viii) gross margin; (ix) operating income; (x) net income (before or after taxes); (xi) net operating income; (xii) net operating income after tax; (xiii) pre-tax profit; (xiv) operating cash flow; (xv) sales or revenue targets; (xvi) increases in revenue or product revenue; (xvii) expenses and cost reduction goals; (xviii) improvement in or attainment of working capital levels; (xix) economic value added (or an equivalent metric); (xx) market share; (xxi) cash flow; (xxii) cash flow per share; (xxiii) share price performance; (xxiv) debt reduction; (xxv) implementation or completion of projects or processes; (xxvi) customer satisfaction; (xxvii) stockholders’ equity; and (xxviii) other measures of performance selected by the Board.

 

The Board is authorized at any time in its sole discretion, to adjust or modify the calculation of a performance goal for a performance period in order to prevent the dilution or enlargement of the rights of participants, (i) in the event of, or in anticipation of, any unusual or extraordinary corporate item, transaction, event or development; (ii) in recognition of, or in anticipation of, any other unusual or nonrecurring events affecting GSI, or the financial

statements of GSI, or in response to, or in anticipation of, changes in applicable laws, regulations, accounting principles, or business conditions; or (iii) in view of the Board’s assessment of the business strategy of GSI, performance of comparable organizations, economic and business conditions, and any other circumstances deemed relevant. Specifically, the Board is authorized to make adjustment in the method of calculating attainment of performance goals and objectives for a performance period as follows: (x) to exclude the dilutive effects of acquisitions or joint ventures; (y) to assume that any business divested by GSI achieved performance objectives at targeted levels during the balance of a performance period following such divestiture; and (z) to exclude the effect of any change in the outstanding shares of common stock of GSI by reason of any stock dividend or split, stock repurchase, reorganization, recapitalization, merger, consolidation, spin-off, combination or exchange of shares or other similar corporate change, or any distributions to common shareholders other than regular cash dividends. In addition, the Board is authorized to make adjustment in the method of calculating attainment of performance goals and objectives for a performance period as follows: (A) to exclude restructuring and/or other nonrecurring charges; (B) to exclude exchange rate effects, as applicable, for non-U.S. dollar denominated net sales and operating earnings; (C) to exclude the effects of changes to generally accepted accounting standards required by the Financial Accounting Standards Board; (D) to exclude the effects to any statutory adjustments to corporate tax rates; (E) to exclude the impact of any “extraordinary items” as determined under generally accepted accounting principles; and (F) to exclude any other unusual, non-recurring gain or loss or other extraordinary item.

 

Compensation attributable to performance-based stock awards under the 2005 Equity Plan will qualify as performance-based compensation, provided that: (i) the award is granted by a compensation committee comprised solely of “outside directors,” (ii) the award is granted (or exercisable) only upon the achievement of an objective performance goal established in writing by the compensation committee while the outcome is substantially uncertain, (iii) the Compensation Committee certifies in writing prior to the granting (or exercisability) of the award that the performance goal has been satisfied.

 

Dissolution or Liquidation

 

In the event of a dissolution or liquidation of GSI, unless otherwise determined by the Board in its sole discretion, all outstanding stock awards (other than stock awards consisting of vested and outstanding shares of common stock not subject to GSI’s right of repurchase) will terminate immediately prior to the completion of such dissolution or liquidation, and the shares of common stock subject to GSI’s repurchase option may be repurchased by GSI notwithstanding the fact that a holder of a stock award is providing continuous service.

 

Changes to Capital Structure

 

If any change is made to the outstanding shares of GSI’s common stock without GSI’s receipt of consideration (whether through a stock split or other specified change in the capital structure of GSI), appropriate adjustments will be made to: (i) the maximum number and/or class of securities issuable under the 2005 Equity Plan, (ii) the maximum number and/or class of securities for which any one person may be granted options and/or stock appreciation rights or performance-based stock awards per calendar year pursuant to the Section 162(m) Limitation, and (iii) the number and/or class of securities and the price per share in effect under each outstanding stock award under the 2005 Equity Plan.

 

Corporate Transactions; Changes in Control

 

Under the 2005 Equity Plan, unless otherwise provided in a written agreement between GSI or any affiliate and the holder of the stock award, in the event of a corporate transaction (as specified in the 2005 Equity Plan and described below), all outstanding stock awards under the 2005 Equity Plan may be assumed, continued or substituted for by any surviving or acquiring entity (or its parent company). If the surviving or acquiring entity (or its parent company) elects not to assume, continue or substitute for such stock awards, then (i) with respect to any such stock awards that are held by individuals whose continuous service with GSI or its affiliates has not terminated prior to the effective date of the corporate transaction or was terminated within the three-month period prior to the corporate transaction, the vesting and exercisability provisions of such stock awards will be accelerated in full and such awards will terminate if not exercised prior to the effective date of the corporate transaction, and (ii) with respect to any stock awards that are held by individuals whose continuous service with GSI or its affiliates

terminated more than three-months prior to the effective date of the corporate transaction, the vesting and exercisability provisions of such stock awards will not be accelerated and such awards will terminate if not exercised prior to the effective date of the corporate transaction (except that any reacquisition or repurchase rights held by GSI with respect to such stock awards shall not terminate and may continued to be exercised notwithstanding the corporate transaction). In the event a stock award will terminate if not exercised, the Board may provide, in its sole discretion, that the holder of such stock award may not exercise such stock award but will receive a payment equal to the excess of the value of the property the holder would have received upon exercise over any exercise price.

 

Other stock awards, such as stock purchase awards, may have their repurchase or forfeiture rights assigned to the surviving or acquiring entity (or its parent company) in the corporate transaction. If such repurchase or forfeiture rights are not assigned, then such stock awards will become fully vested.

 

For purposes of the 2005 Equity Plan, a corporate transaction will be deemed to occur in the event of (i) a sale of all or substantially all of the consolidated assets of GSI and its subsidiaries, (ii) the sale of at least 90% of the outstanding securities of GSI, (iii) the consummation of a merger or consolidation in which GSI is not the surviving corporation, or (iv) the consummation of a merger or consolidation in which GSI is the surviving corporation but shares of GSI’s outstanding common stock are converted into other property by virtue of the transaction.

 

The Board has the discretion to provide that a stock award under the 2005 Equity Plan will immediately vest as to all or any portion of the shares subject to the stock award (i) immediately upon the occurrence of certain specified change in control transactions, whether or not such stock award is assumed, continued, or substituted by a surviving or acquiring entity in the transaction, or (ii) in the event a participant’s service with GSI or a successor entity is terminated, actually or constructively, within a designated period following the occurrence of certain specified change in control transactions (as defined in the 2005 Equity Plan). Stock awards held by participants under the 2005 Equity Plan will not vest on such an accelerated basis unless specifically provided by the participant’s applicable award agreement.

 

Duration, Termination and Amendment

 

The Board may suspend or terminate the 2005 Equity Plan without stockholder approval or ratification at any time. Unless sooner terminated, the 2005 Equity Plan will terminate on March 8, 2015.

 

The Board may amend or modify the 2005 Equity Plan at any time. However, no amendment shall be effective unless approved by the stockholders of GSI to the extent stockholder approval is necessary to satisfy applicable law.

 

The Board also may submit for stockholder approval any other amendment to the 2005 Equity Plan intended to satisfy the requirements of Section 162(m) of the Code regarding the exclusion of performance-based compensation from the limitation on the deductibility of compensation paid to certain employees.

 

Prior Stockholder Approval Required for Repricing, or Cancellation and Regrant

 

Unless GSI’s stockholders have previously approved such an action, GSI does not have the authority to either reprice any outstanding stock awards under the 2005 Equity Plan, cancel and re-grant any outstanding stock awards under the 2005 Equity Plan, or buyout any underwater options for cash.

 

Federal Income Tax Information

 

The following is a summary of the principal United States federal income taxation consequences to employees and GSI with respect to participation in the 2005 Equity Plan. This summary is not intended to be exhaustive, and does not discuss the income tax laws of any city, state or foreign jurisdiction in which a participant may reside. This discussion is intended for the information of stockholders considering how to vote at the Annual Meeting and not as tax guidance to the participants in the 2005 Equity Plan, as the consequences may vary with the types of awards made, the identity of the participants and the method of payment.

 

Incentive Stock Options.   Incentive stock options granted under the 2005 Equity Plan are intended to be eligible for the favorable federal income tax treatment accorded “incentive stock options” under the Code. There

generally are no federal income tax consequences to the participant or GSI by reason of the grant or exercise of an incentive stock option. However, the exercise of an incentive stock option may increase the participant’s alternative minimum tax liability, if any.

 

If a participant holds stock acquired through exercise of an incentive stock option for more than two years from the date on which the option was granted and more than one year after the date the option was exercised for those shares, any gain or loss on a disposition of those shares (a “qualifying disposition”) will be a long-term capital gain or loss. Upon such a qualifying disposition, GSI will not be entitled to any income tax deduction.

 

Generally, if the participant disposes of the stock before the expiration of either of these holding periods (a “disqualifying disposition”), then at the time of disposition the participant will realize taxable ordinary income equal to the lesser of (i) the excess of the stock’s fair market value on the date of exercise over the exercise price, or (ii) the participant’s actual gain, if any, on the purchase and sale. The participant’s additional gain or any loss upon the disqualifying disposition will be a capital gain or loss, which will be long-term or short-term depending on whether the stock was held for more than one year.

 

To the extent the participant recognizes ordinary income by reason of a disqualifying disposition, generally GSI will be entitled (subject to the requirement of reasonableness, the provisions of Section 162(m) of the Code, and the satisfaction of a tax reporting obligation) to a corresponding income tax deduction in the tax year in which the disqualifying disposition occurs.

 

Nonstatutory Stock Options.   No taxable income is recognized by a participant upon the grant of a nonstatutory stock option. Upon exercise of a nonstatutory stock option, the participant will recognize ordinary income equal to the excess, if any, of the fair market value of the purchased shares on the exercise date over the exercise price paid for those shares. Generally, GSI will be entitled (subject to the requirement of reasonableness, the provisions of Section 162(m) of the Code, and the satisfaction of a tax reporting obligation) to a corresponding income tax deduction in the tax year in which such ordinary income is recognized by the participant.

 

However, if the shares acquired upon exercise of the nonstatutory stock option are unvested and subject to repurchase by GSI in the event of the participant’s termination of service prior to vesting in those shares, the participant will not recognize any taxable income at the time of exercise, but will have to report as ordinary income, as and when GSI’s repurchase right lapses, an amount equal to the excess of (i) the fair market value of the shares on the date the repurchase right lapses, over (ii) the exercise price paid for the shares. The participant may, however, elect (within 30 days from the date of exercise) under Section 83(b) of the Code to include as ordinary income in the year of exercise of the option an amount equal to the excess of (i) the fair market value of the purchased shares on the exercise date, over (ii) the exercise price paid for such shares. If the Section 83(b) election is made, the participant will not recognize any additional income as and when the repurchase right lapses. GSI is required to withhold on ordinary income realized from the exercise and/or vesting of shares acquired pursuant to a nonstatutory stock option.

 

Upon disposition of the stock, the participant will recognize a capital gain or loss equal to the difference between the selling price and the sum of the amount paid for such stock plus any amount recognized as ordinary income upon acquisition (or vesting) of the stock. Such gain or loss will be long-term or short-term depending on whether the stock was held for more than one year from the date(s) such stock resulted in ordinary income to a participant as described in the prior two paragraphs.

 

Stock Appreciation Rights.   No taxable income is realized upon the receipt of a stock appreciation right. Upon exercise of the stock appreciation right, the fair market value of the shares (or cash in lieu of shares) received is recognized as ordinary income to the participant in the year of such exercise. Generally, with respect to employees, GSI is required to withhold from the payment made on exercise of the stock appreciation right or from regular wages or supplemental wage payments an amount based on the ordinary income recognized. Subject to the requirement of reasonableness, Section 162(m) of the Code and the satisfaction of a reporting obligation, GSI will be entitled to an income tax deduction equal to the amount of ordinary income recognized by the participant.

 

Stock Purchase Awards and Stock Bonus Awards.   Upon receipt of a stock purchase or stock bonus award, the participant will recognize ordinary income equal to the excess, if any, of the fair market value of the shares on the date of issuance over the purchase price, if any, paid for those shares. GSI will be entitled (subject to the requirement

of reasonableness, the provisions of Section 162(m) of the Code, and the satisfaction of a tax reporting obligation) to a corresponding income tax deduction in the tax year in which such ordinary income is recognized by the participant.

 

However, if the shares issued upon the grant of a stock purchase or stock bonus award are unvested and subject to repurchase by GSI in the event of the participant’s termination of service prior to vesting in those shares, the participant will not recognize any taxable income at the time of issuance, but will have to report as ordinary income, as and when GSI’s repurchase right lapses, an amount equal to the excess of (i) the fair market value of the shares on the date the repurchase right lapses, over (ii) the purchase price, if any, paid for the shares. The participant may, however, elect under Section 83(b) of the Code to include as ordinary income in the year of issuance an amount equal to the excess of (x) the fair market value of the shares on the date of issuance, over (y) the purchase price, if any, paid for such shares. If the Section 83(b) election is made, the participant will not recognize any additional income as and when the repurchase right lapses.

 

Upon disposition of the stock acquired upon the receipt of a stock purchase or stock bonus award, the participant will recognize a capital gain or loss equal to the difference between the selling price and the sum of the amount paid for such stock plus any amount recognized as ordinary income upon issuance (or vesting) of the stock. Such gain or loss will be long-term or short-term depending on whether the stock was held for more than one year.

 

Stock Unit Awards.   No taxable income is recognized upon receipt of a stock unit award. The participant will recognize ordinary income in the year in which the shares subject to that unit are actually issued to the participant in an amount equal to the fair market value of the shares on the date of issuance. The participant and GSI will be required to satisfy certain tax withholding requirements applicable to such income. Subject to the requirement of reasonableness, Section 162(m) of the Code and the satisfaction of a tax reporting obligation, GSI will be entitled to an income tax deduction equal to the amount of ordinary income recognized by the participant at the time the shares are issued. In general, the deduction will be allowed for the taxable year in which such ordinary income is recognized by the participant.

 

Potential Limitation on Company Deductions.   Section 162(m) of the Code denies a deduction to any publicly-held corporation for compensation paid to certain “covered employees” in a taxable year to the extent that compensation to such covered employee exceeds $1 million. It is possible that compensation attributable to awards, when combined with all other types of compensation received by a covered employee from GSI, may cause this limitation to be exceeded in any particular year.

 

Certain kinds of compensation, including qualified “performance-based compensation,” are disregarded for purposes of the deduction limitation. In accordance with Treasury Regulations issued under Section 162(m) of the Code, compensation attributable to stock options and stock appreciation rights will qualify as performance-based compensation if such awards are granted by a compensation committee comprised solely of “outside directors” and the plan contains a per-employee limitation on the number of shares for which such awards may be granted during a specified period, the per-employee limitation is approved by the stockholders, and the exercise or strike price of the award is no less than the fair market value of the stock on the date of grant.

 

Compensation attributable to stock options or stock appreciation rights with exercise or strike prices less than fair market value on the date of grant, stock purchase awards, stock bonus awards, and stock unit awards will qualify as performance-based compensation, provided that: (i) the award is granted by a compensation committee comprised solely of “outside directors,” (ii) the award is granted (or exercisable) only upon the achievement of an objective performance goal established in writing by the compensation committee while the outcome is substantially uncertain, (iii) the Compensation Committee certifies in writing prior to the granting (or exercisability) of the award that the performance goal has been satisfied, and (iv) prior to the granting (or exercisability) of the award, stockholders have approved the material terms of the award (including the class of employees eligible for such award, the business criteria on which the performance goal is based, and the maximum amount, or formula used to calculate the amount, payable upon attainment of the performance goal).

New Plan Benefits

 

No stock awards have been granted under the 2005 Equity Plan on the basis of the share increase that forms part of this Proposal. Since benefits under the 2005 Equity Plan will depend on the individuals selected at the discretion of the Board and/or the Compensation Committee to receive stock awards, the number of shares to be awarded and the fair market value of our common stock at various future dates, it is not possible at this time to determine the benefits that will be received under the Plan by all eligible employees, officers, directors or consultants.

 

Section 162(m)(4)(c)(i) of the Code and as a “non-employee director” within the meaning of Rule 16-b(3) under the Exchange Act.

 

The Committee will determine all awards to employees who are Officers of GSI. To the extent that the Committee, CEO, individual or other committee administers the Bonus Plan, all references to Administrator herein will be deemed to refer to such Committee, CEO, individual or other committee.

 

The Administrator has the authority to (i) establish rules and regulations relating to the Bonus Plan, (ii) interpret the Bonus Plan and those rules and regulations, (iii) select participants for the Bonus Plan, (iv) determine each participant’s target award, performance goals, and actual award, (v) make all factual and other determinations in connection with the Bonus Plan, and (vi) take all other actions necessary or appropriate for the proper administration of the Bonus Plan, including delegation of such authority or power, where appropriate. The determinations of the Administrator are made in its sole discretion and are final, binding and conclusive.

 

Eligibility for Participation.   All senior managers of GSI and its subsidiaries are eligible to participate in the Bonus Plan as identified and designated by the Administrator for each performance period.

 

Target Awards and Performance Goals.   At the beginning of each performance period, the Administrator will establish a target award for each participant that will be expressed as a percentage of the participant’s base salary. Unless the Administrator determines otherwise, each performance period will consist of an annual period beginning on the first day of the fiscal year, and ending on the last day of the fiscal year. Target awards will be based on a number of factors, including, but not limited to, (i) market competitiveness of the position, (ii) job level, (iii) base salary level, (iv) past individual performance, and (v) expected contribution to future Company performance and business impact. The Administrator will also establish a maximum award that may be paid for the performance period, which will remain fixed for the entire performance period, for each participant who is an Officer of GSI.

 

The Bonus Plan permits the Administrator to impose and specify objective performance goals that must be met with respect to the awards earned by the participants under the Bonus Plan. Generally, prior to, but not more than 90 days after the beginning of the performance period or the date on which 25% of the performance period has been completed (whichever is earlier), the Administrator will establish in writing (i) the performance goals that must be met, (ii) the threshold, target, and maximum amounts that may be paid if the applicable performance goals are met, and (iii) any other conditions that the Administrator deems appropriate and consistent with the Plan, and in the case of employees who are Officers of GSI, in compliance with section 162(m) of the Code. The performance goals for each participant who is an Officer of GSI for each performance period are intended to satisfy the requirements for “qualified performance-based compensation” under section 162(m) of the Code.

 

The performance goals, to the extent designed to meet the requirements of section 162(m) of the Code, will be based on one or more of the following measures: EBT (earnings before tax), earnings, adjusted earnings, earnings per share, adjusted EBITDA (earnings before interest, taxes, depreciation, amortization and stock based compensation expense), net income, non-GAAP income from operations, non-GAAP net income (provided that net income is determined net of amounts payable under this Plan), net earnings, operating or other earnings, operating or other margin, variable contribution margin, profits, gross profit, revenues, net cash flow, free cash flow, financial return ratios, return on assets, stock price, stockholder return, return on equity, growth in assets, unit volume, sales, or market share, cost containment, cost reduction, employee metrics (e.g., reduced turnover, etc.), customer service metric (e.g., call abandonment rate), fulfillment metric (e.g., units per hour), technology metric (e.g., uptime), business development metric (e.g., partner renewals), partner satisfaction, projects delivered, service quality or quality improvements or other similar metrics. The foregoing measures may be based on the employee’s business unit or the performance of GSI and its parents, subsidiaries and affiliates as a whole, or any combination of the foregoing.

 

Each participant will earn an award for a performance period based on the level of achievement of the performance goals established by the Administrator. The Administrator will have the discretion to interpolate between threshold, target and maximum levels to determine the level of achievement of the performance goals and the amount of the corresponding award for achievement of the performance goals. The maximum award that may be paid to an employee who is an Officer of GSI for a performance period will not exceed $5,000,000. The

Administrator may establish a lower maximum award for an employee who is an Officer of GSI as it deems necessary or appropriate.

 

Performance-Vested Grants.   In addition to target awards described above, the Administrator may award performance-vested grants under the Bonus Plan in the form of shares of common stock, stock units, options or cash, or any combination thereof, which vest with reference to the performance goals specified by the Administrator. The performance goals applicable to a particular performance-vested grant do not have to be identical to the specific performance goals applicable to a particular target award. Except as may be otherwise provided in the relevant performance-vested grant award agreement, all performance-vested grants will be subject to the terms and conditions applicable to target awards under the Bonus Plan described herein; provided however, that no provision contained in a performance-vested grant award agreement to any Officer of GSI will be inconsistent with the intended treatment of performance-vested grants as “qualified performance-based compensation” under section 162(m) of the Code.

 

Payment of Awards.   The Administrator will certify and announce to the participants the awards that will be paid by GSI as soon as practicable following the final determination of GSI’s financial results for the performance period. Target awards will be paid in shares of common stock, stock units, options or cash, or a combination of shares of common stock, stock units, options or cash as soon as practicable after the close of the performance period, but in no event later than two and one-half months after the close of the performance period; provided that, if the Administrator determines that an award will be subject to a vesting schedule then such award will be payable in accordance with the applicable vesting schedule set forth in the award agreement. With respect to employees who are Officers of GSI who participate in the Bonus Plan, the Administrator will certify in writing that the performance goals and other material terms have been met prior to payment of any awards under the Bonus Plan to such employees.

 

The portion of a participant’s award that the Administrator determines will be paid in stock units or options, if any, will be equal to the result of dividing the amount of the award to be converted to stock units by the fair market value of a share of common stock as of the date of the award for stock units, or in the case of options, by the fair market value as the Committee in its sole discretion determines. All stock units or options awarded under the Bonus Plan will vest according to the schedule determined by the Administrator on the date of the award and set forth in the participant’s award agreement. Unless provided otherwise in the Bonus Plan, a participant’s award agreement or employment agreement, if any, with GSI, a participant will immediately forfeit all unvested stock units or options if the participant incurs a cessation of continuous service prior to fully vesting in the participant’s stock units or options. However, in the event of the participant’s death or disability, or consummation of a change in control, if and to the extent that the relevant grant instrument, plan provision or agreement provides for it, a participant will fully vest in all unvested stock units or options.

 

Participants must be employed on the last day of the performance period and on the payment date to be eligible for an award from the Bonus Plan, except as the Administrator may otherwise determine. However, in the event of a participant’s death or disability, the Committee may determine in its sole discretion that pro rata portion of the participants award will be paid, based on actual achievement of performance goals for the prorated performance period and calculated in whole months based on the relative time spent in the eligible position during the performance period. In the event that following a change in control GSI terminates the participant’s employment without cause or the participant resigns for good reason, if applicable and as defined or provided for in the relevant grant instrument, plan provision or agreement, the participant will be paid a pro rata portion of the participants award.

 

The Administrator may permit participants to elect to defer amounts payable or distributable under the Bonus Plan to the Leadership Team Deferral Plan or any successor thereto or another comparable deferred compensation plan. The Administrator will have the authority to amend the Leadership Team Deferral Plan or comparable deferred compensation plan as the Administrator deems necessary or appropriate to coordinate the provisions of such plan with the Bonus Plan.

 

The Administrator may establish appropriate terms and conditions to accommodate newly-hired and promoted employees, consistent, in the case of employees who are Officers of GSI, with section 162(m) of the Code.

Adjustment Provisions.   At any time prior to the final determination of awards for participants other than Officers of GSI, the Administrator may adjust the performance goals and target awards to reflect (i) a change in corporate capitalization (such as a stock dividend or stock split), or (ii) a corporate transaction (such as a merger, reorganization, separation, consolidation or partial or complete liquidation), or (iii) equitably the occurrence of an extraordinary event, any change in applicable accounting rules or principles, any change in GSI’s method of accounting, or any change in applicable law.

 

Amendment and Termination of the Bonus Plan.   The Administrator may amend or terminate the Bonus Plan at any time, subject to stockholder approval if such approval is required under any applicable laws or stock exchange requirements. With respect to Officers, the Bonus Plan must be re-approved by GSI’s stockholders no later than the first stockholder meeting that occurs in the fifth year following the year in which the stockholders previously approved the Bonus Plan, or at such other times, if any, if required by section 162(m) of the Code.

 

Restrictions on Awards and Transfers; No Right of Employment.   Except upon death, a participant’s right and interest under the Bonus Plan may not be assigned or transferred. The granting of any award does not create any rights in the participant with respect to the participant’s continued employment with GSI.

 

Federal Income Tax Consequences

 

The following provides only a general description of the application of federal income tax laws to awards under the Bonus Plan. This discussion is intended for the information of stockholders considering how to vote at the Annual Meeting and not as tax guidance to participants in the Bonus Plan, as the consequences may vary with the types of awards made, the identity of the participants and the method of payment. The summary does not address the effects of other federal taxes (including possible “golden parachute” excise taxes) or taxes imposed under state, local or foreign tax laws.

 

From the participants’ standpoint, as a general rule, the granting of an award will not result in taxable income to the participant. The participant will generally recognize ordinary income upon payment of the award, provided, however, that grants subject to additional vesting or performance requirements will not generally be taxable until earned. Assuming as expected that compensation paid under the Bonus Plan is “qualified performance-based compensation” under section 162(m) of the Code, GSI will be entitled to a tax deduction that corresponds in time and amount to the ordinary income recognized by the participant.

 

Section 162(m) of the Code generally disallows a publicly-held corporation’s tax deduction for compensation paid to its chief executive officer or any of its four other most highly compensated officers in excess of $1,000,000 in any year. Compensation that qualifies as “performance-based compensation” is excluded from the $1,000,000 deductibility cap, and therefore remains fully deductible by the corporation that pays it. GSI intends that incentive awards granted under the Bonus Plan will qualify as “performance-based compensation” and the Administrator will condition such grants on the achievement of specific performance goals in accordance with the requirements of section 162(m) of the Code.

 

While it is intended that the incentive awards will not be subject to section 409A of the Code, a participant’s award may be subject to a 20% excise tax in addition to ordinary income tax inclusion at the time the award becomes vested, plus interest, if the award constitutes “deferred compensation” under section 409A of the Code and the requirements of section 409A of the Code are not satisfied. To the extent a participant’s award is paid in cash or Common Stock, such cash amounts or Common Stock will not be subject to section 409A of the Code. However, if a participant’s award is paid in restricted stock units or options granted at other than a fair market value excise price, such amounts will be subject to section 409A of the Code. Accordingly, all grants of stock units will be intended to comply with the requirements of section 409A of the Code. Because the rules under section 409A of the Code are substantially uncertain at this time, the Bonus Plan and award agreements permit the Administrator to amend the Bonus Plan and award agreements to effect compliance with all the requirements of section 409A of the Code.

 

GSI may deduct from a participant’s award any and all federal, state and local taxes or other amounts required by law to be withheld.

New Plan Benefits

 

The amounts payable under the Bonus Plan for 2008 cannot be determined until after the 2008 fiscal year is completed and achievement of the various performance goals is determined. Accordingly, the benefits or amounts of awards, if any, that will be received by or allocated to: (a) our Chief Executive Officer; (b) our Chief Financial Officer; (c) each of our other Named Officers; (d) the executive officers of the Company as a group; and (e) Company employees who are not executive officers as a group, are not yet determinable. Directors of GSI who are not employees do not participate in the Plan.

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR PROPOSAL 3.

 

 

Audit Fees for fiscal 2007 and 2006 were for professional services rendered for the integrated audit of GSI’s consolidated financial statements, including auditing the effectiveness of GSI’s internal controls over financial reporting, review of the interim consolidated financial statements included in quarterly reports and services that are normally provided by Deloitte & Touche in connection with statutory and regulatory filings or engagements. Audit fees for fiscal 2007 also included professional services rendered in connection with audit procedures performed related to GSI’s registration statements on Form S-8 and Form S-3 and professional services rendered in connection with audit procedures performed related to the acquisition of Accretive Commerce, Inc.

 

Audit-Related Fees for fiscal 2007 and 2006 were for audits of GSI’s 401(k) Plan and audit services related to a governmental incentive program.

 

Tax Fees for fiscal 2007 and 2006 were for professional services for federal and state tax compliance, tax advice, and tax planning.

 

Other Fees for fiscal 2007 were for a subscription to an on-line research library.

 

Pre-Approval Policies and Procedures.   The Audit Committee has adopted policies and procedures for pre-approving all audit and non-audit work performed by Deloitte & Touche. All audit-related services, tax services and other services must be pre-approved by the Audit Committee. In accordance with GSI’s policy and applicable SEC rules and regulations, the Audit Committee pre-approves services provided to GSI by Deloitte & Touche (“Auditor Services”). Pre-approval is detailed as to the particular service or category of services. If Auditor Services are required prior to a regularly scheduled Audit Committee meeting, a member of the Audit Committee is authorized to approve such services, provided that they are consistent with GSI’s policy and applicable SEC rules and regulations, and that the full Audit Committee is advised of such services at the next regularly scheduled Audit Committee meeting. For fiscal 2007 and 2006, all audit and non-audit services described above were pre-approved by the Audit Committee. The Audit Committee has considered and concluded that the provision of such audit and non-audit services by Deloitte & Touche was compatible with the maintenance of that firm’s independence in the conduct of its auditing functions.

 

BENEFICIAL OWNERSHIP OF COMMON STOCK

 

The following table sets forth information, as of April 21, 2008, concerning the beneficial ownership of GSI Common Stock by:

 

 

Unless otherwise specified, all persons listed below have sole voting and investment power with respect to their shares. The securities “beneficially owned” by an individual are determined in accordance with the definition of “beneficial ownership” set forth in the regulations of the Securities and Exchange Commission. Accordingly, they include securities as to which the individual has or shares voting or investment power or has the right to acquire under outstanding stock options or warrants within 60 days of April 21, 2008 or which are issuable upon the vesting of outstanding unvested restricted stock or restricted stock units, referred to as RSUs, within 60 days of April 21, 2008. Beneficial ownership may be disclaimed as to certain of the securities. The business address of GSI’s executive officers and directors is the same as GSI’s address.

 

 

 

 

 

 

EXECUTIVE COMPENSATION

 

Compensation Discussion and Analysis

 

Objectives of Our Compensation Program

 

The compensation paid to our executive officers is structured into four broad categories:

 

 

Our overall compensation program with respect to our executive officers is designed to achieve the following objectives:

 

 

Determination of Compensation for Named Officers Other than Our Chief Executive Officer

 

Overall Compensation Program.   Pursuant to our bylaws, compensation paid to officers at the senior vice president level and above, including all of our executive officers, must be approved by our Board of Directors or Compensation Committee. Mr. Rubin or his designee can determine compensation for officers at the vice president level and below. For purposes of this Compensation Discussion and Analysis only, and except where the context otherwise requires, references to our “Named Officers” means all of the executive officers named in the Summary Compensation Table on page 43 of this proxy statement, except for Mr. Rubin, our president and chief executive officer.

 

With respect to the Named Officers each of the four main components of compensation are determined as part of a total compensation amount. Each component serves to meet one or more of our compensation objectives, and we discuss the particular objectives of each component in our discussion of each element of total compensation below. In conjunction with our Compensation Committee and our compensation consultants, we have assessed the components of our total compensation program and believe that it operates well to serve the current, short-term and

long-term compensation needs of the Named Officers, as well as to meet the objectives of our compensation program stated above.

 

In 2003, the Compensation Committee engaged KPMG Compensation Consulting to act as independent compensation consultant to the Compensation Committee and prepare a compensation study and recommendations with respect to our compensation policies and procedures, including with respect to executive compensation. At the request of the Compensation Committee, KPMG Compensation Consulting updated the study and recommendations in 2005 with respect to executive compensation. We believe that KPMG Compensation Consulting was independent because, prior to our engagement of KPMG Compensation Consulting in 2003, neither KPMG Compensation Consulting nor KPMG LLP had provided any services to us or any of our subsidiaries.

 

The total amounts of executive compensation were established in consideration of the compensation study prepared in 2003 by KPMG Compensation Consulting and the update to this study prepared in 2005 by KPMG Compensation Consulting. KPMG Compensation Consulting and the Compensation Committee carefully considered the composition of an appropriate peer group, referred to as the 2005 Peer Group, in light of the unique nature of our business which varies greatly and encompasses several industries, including retail, ecommerce, outsourcing, business services, technology and marketing. The companies included in the 2005 Peer Group represent companies in these industries with revenues similar in size to those of our company. We believe that the 2005 KPMG Compensation Consulting study and the 2005 Peer Group continued to provide an appropriate benchmark for Named Officer compensation in fiscal year 2007.

 

The 2005 Peer Group included the following companies:

 

 

In fiscal 2005, our Compensation Committee set the total compensation of our senior executives, including the Named Officers, at approximately the 60th to 75th percentile of the 2005 Peer Group for the appropriate level and area of responsibility of each Named Officer. We established a total compensation amount that was higher than the 2005 Peer Group median for several reasons. We believe it is important for our compensation to be competitive and attractive when compared to other companies in the 2005 Peer Group and to ensure we are able to recruit from companies in the 2005 Peer Group and companies not in the 2005 Peer Group in order to acquire the talent to lead the Company. Because we are experiencing a high level of growth, we desire to attract executives who will be able to lead an organization that is larger than we are today. We believe that setting compensation above the mean for the 2005 Peer Group supports this objective. We believe an attractive compensation program materially aids us in our search for talented executive personnel. It also allows us to offer a suitable reward to both new and existing executive officers dedicating time and energy to a company that is experiencing a high level of growth.

 

The total compensation amount for our Named Officers was also established relative to our officers at levels above and below them, which we believe rewards them for increased levels of knowledge, experience and responsibility. To create an atmosphere of fairness in our compensation setting, we make an effort to maintain a reasonable level of parity in compensation among Named Officers and other officers of the same or similar rank, although we do permit some deviation in individual total compensation amounts to reward particular executives for individual personal achievement, overall contribution to the success of the organization and to better reflect the differentials in total compensation within the 2005 Peer Group for executives with different roles and responsibilities.

 

For fiscal 2007, Mr. Rubin made recommendations to the Compensation Committee as to the total compensation package for each Named Officer and as to the components of each compensation package. Mr. Rubin consulted with James F. Flanagan, our executive vice president of human resources, in making these

recommendations to the Compensation Committee. The allocation between each of the elements comprising the total compensation, including cash and non-cash compensation, was based on the 2005 KPMG Compensation Consulting study.

 

For fiscal 2008, the Compensation Committee engaged Hay Group to act as independent compensation consultant to the Compensation Committee, to update the 2005 KPMG Compensation Consulting study and make recommendations with respect to the executive compensation program for all executive officers other than Mr. Rubin. We believe that Hay Group is independent because, prior to our engagement, Hay Group had not provided any services to us or any of our subsidiaries. The Hay Group was instructed to conduct a proxy analysis of the compensation of our Named Officers and other executive officers with respect to base salary, total cash compensation and total direct compensation. The 2008 Hay Group study will be considered by the Compensation Committee in determining the elements of compensation for fiscal 2009, including total compensation, compensation vehicles and the allocation between the elements of total compensation. As part of the 2008 compensation study, the Compensation Committee worked with Hay Group to review and update the peer group used 2006 in connection with the negotiation of the employment agreement with Mr. Rubin, which is described below under “— Determination of Compensation for GSI’s Chief Executive Officer — Overall Compensation Program”. The goal of the review was to create a peer group that reflects companies, primarily in internet retail and internet software and services industries, with revenues similar to ours which we believe we compete with when recruiting and retaining executive talent. This new peer group is referred to as the 2008 Peer Group.

 

The 2008 Peer Group includes:

 

 

Base Salary.   Base salary represents amounts paid during the year to Named Officers as direct compensation for their services to us. Base salaries are used to reward individual performance of each Named Officer on a day-to-day basis during the year, and to encourage them to perform at their highest levels. We also use our base salary to attract and retain top quality executives and other management employees from other companies. Moreover, base salary and increases to base salary recognize the overall experience, position and responsibilities of the executive and expected contributions.

 

In the first quarter of 2007, the Compensation Committee increased the base salaries of Michael R. Conn, our executive vice president, finance and chief financial officer, Stephen J. Gold, our executive vice president and chief information officer, and Damon Mintzer, our executive vice president. Mr. Conn’s base salary was increased from $304,316 to $375,000, Mr. Gold’s base salary was increased from $354,000 to $389,000 and Mr. Mintzer’s base salary was increased from $379,158 to $429,158 for 2007. These increases were approved by our Compensation Committee. These increases were based on the recommendations of Mr. Rubin and Mr. Flanagan and were derived in part from an assessment of the 2005 Peer Group and other companies with which we compete for executive talent, and in part by comparing the new salary amounts to other members of our senior management as well as considering our financial performance during fiscal 2006.

 

In 2007, the base salary of J. Scott Hardy, our executive vice president, business management, was set at $400,000 pursuant to the terms of Mr. Hardy’s offer letter dated March 26, 2007. Mr. Hardy’s salary was approved by the Compensation Committee as part of Mr. Hardy’s total compensation package based upon the recommendations of Mr. Rubin and Mr. Flanagan and negotiations with Mr. Hardy. These recommendations were derived in part from market data acquired by the Company as part of its search for an executive vice president of business

management, from Mr. Hardy’s experiences and skills relative to other executives considered for the position and our other executives, and from Mr. Hardy’s compensation package with his then current employer.

 

Non-Performance Based Bonuses.   The Compensation Committee has, from time to time, granted non-performance based bonuses to new employees. This type of bonus is used to attract and recruit qualified executives and is not based on specific individual or company performance achievements. In most cases these non-performance payments are designed to “buy out” a candidate who is leaving a cash incentive, equity, pension or other compensation at his current employer. In fiscal 2007, Mr. Hardy was granted a signing bonus of $100,000 and a guaranteed bonus of $200,000, the amount of a 100% payout under our leadership team incentive plan described below, in connection with his acceptance of employment with us.

 

Performance-Based Cash Bonuses.   We use cash bonuses to reward eligible employees at the director level and above, including the Named Officers, for our financial performance and to a lesser extent their individual performance during the year. These bonuses are designed to reward these employees for their short-term contributions to our company and to link compensation to our annual financial performance goals. The performance-based cash bonus plan is referred to as the leadership bonus plan. The Compensation Committee did not award any performance-based cash bonuses for fiscal 2007.

 

Under the leadership bonus plan for fiscal 2007, the Compensation Committee set bonus target awards and performance goals for eligible employees, including the Named Officers. At the beginning of the year, the Compensation Committee established the target award for each employee who is eligible under the plan, including each Named Officer, which is expressed as a percentage of base salary. The target awards were based upon the recommendations of Messrs. Rubin, Flanagan and Conn and upon the 2005 KPMG Compensation Study. For 2007 each Named Officer’s bonus target award was equal to 50% of that Named Officer’s base salary.

 

At the beginning of the year, the Compensation Committee also established the performance goals that must be met in order for an award to be payable. Under the 2007 leadership bonus plan the Compensation Committee selected the following two performance targets:

 

(i) Net Adjusted EBITDA: income from operations excluding stock-based compensation and depreciation and amortization expenses, net of bonus amounts and excluding any significant one time gains or losses on assets or equity sales or any other extraordinary, non-operating revenue or expense; and

 

(ii) Net Non-GAAP Net Income: net income excluding stock-based compensation expense, amortization of acquisition-related intangibles, cumulative effect of change in accounting principle related to the adoption of Statement of Financial Accounting Standards No. 123R, and income tax benefits related to the release of our valuation allowances, net of bonus amounts and excluding any significant one time gains or losses on assets or equity sales or any other extraordinary, non-operating revenue or expense.

 

One half of each eligible employee’s bonus was contingent on our meeting each of the net adjusted EBITDA and net non-GAAP net income targets set forth in the table below. Net adjusted EBITDA and net non-GAAP net income were chosen as performance metrics under the 2007 leadership bonus plan because they are two of the financial metrics used by management and our investors to evaluate our performance.

 

For fiscal 2007, the performance goals were approved by the Compensation Committee based upon the recommendation of Mr. Rubin who consulted with Mr. Flanagan and Mr. Conn. These targets were based upon management-developed long-term operating and financial forecasts. The target level for a 100% payout was equal to the high end of the fiscal 2007 guidance range for each performance goal issued by us with our fiscal 2006 operating results. The performance targets and corresponding payouts were as set forth in the following tables.

Awards paid for results between the levels indicated on the tables below would have been determined by linear interpolation.

 

 

For fiscal 2007, the Compensation Committee had the flexibility to increase, decrease or eliminate the amounts paid under the leadership bonus plan, based on individual performance during the year, regardless of whether the targets were met. The decision to increase or decrease an actual payout award is generally based on a variety of subjective factors the Compensation Committee deems appropriate and based upon the recommendation of Mr. Rubin. Having this discretion permits individual performance to have a more direct impact on the ultimate payout. In the event the performance targets are not met, the Compensation Committee can reward individuals who exhibit superior individual performance during the year. Also, in the event the performance targets are met, the Compensation Committee can adjust downward a payout to an individual who did not perform up to expectations. To date, the Compensation Committee has not used its discretionary authority to adjust bonus payouts for the Named Officers.

 

The Compensation Committee did not award any bonuses under the 2007 leadership bonus plan because we did not meet the net adjusted EBITDA or net non-GAAP net income targets. Mr. Rubin could have recommended discretionary bonus payments for the Named Officers to the Compensation Committee. However, in determining not to recommend discretionary adjustments in 2007, Mr. Rubin considered the overall performance of the Company and the internal performance evaluations of each Named Officer.

 

Equity-Based Compensation.   In 2007, we issued equity-based compensation to our Named Officers under our 2005 Equity Plan. All equity-based compensation we issued to our Named Officers in 2007 took the form of restricted stock units, or RSUs. An RSU entitles the holder to receive shares of our common stock upon the vesting date. An RSU award is generally issued pursuant to a vesting schedule and cannot be paid in stock until and to the extent it vests. Historically, through fiscal 2005, we had used a combination of stock options, restricted stock and RSUs, with greater emphasis placed on stock options. Beginning in fiscal 2006 and in 2007, we awarded only RSUs to our Named Officers. The shift from stock option and restricted stock awards to RSUs corresponded with our adoption of FAS 123R which requires us to record as compensation expense the grant date fair value of stock awards over the vesting period of the award. As the result of the volatility of our common stock, we determined that issuing stock options would result in a larger compensation expense than issuing RSUs because the Black- Scholes value of our options exceeds their perceived value. The use of stock options also results in a larger pool of equity being granted which has a less favorable impact on share utilization than RSUs. We also chose to issue RSUs in 2007 instead of restricted stock because RSUs do not require the issuance of common stock unless and until they are vested and received by the employee and do not result in a tax event for the employee until shares are received.

 

Generally, we make three types of RSU grants to our Named Officers:

 

 

In 2007, our Compensation Committee approved grants of RSUs to our Named Officers, after receiving and reviewing Mr. Rubin’s proposed recommendations. The rationale for these recommendations is described below.

 

An initial grant of RSUs when an executive officer is hired serves to help us recruit new executives, especially executives we seek to hire from larger, more financially stable companies with longer and historically more profitable and predictable operating histories. Because these initial grants are structured as an incentive for employment, the amount of these grants may vary from executive to executive depending on the particular circumstances of the executive and are usually made based upon recommendations made by Mr. Rubin, after consulting with Mr. Flanagan, and approved by the Compensation Committee. In 2007, pursuant to his offer letter, we made an initial RSU grant to Mr. Hardy with a grant date fair value of approximately $1.25 million or 56,792 shares of common stock.

 

Annual, time-vested grants of RSUs are designed to compensate our executives, including our Named Officers, for their contributions to our long-term performance. In 2007, Messrs. Conn, Gold and Mintzer each received an RSU award with a grant date fair market value of $325,000, which was approximately 100% of the average of the fiscal 2006 base salaries of the members of the Company’s senior management team. Mr. Flanagan’s advice and Mr. Rubin’s recommendations to the Compensation Committee regarding this percentage were based in substantial part on the 2005 KPMG Compensation Consulting study.

 

Retention grants are intended to retain the services of key employees, including the Named Officers, in view of the fact that we did not fully achieve our financial objectives despite the extraordinary efforts of many of our employees. There were no retention grants awarded in 2007. Retention grants were awarded in 2008, however, to bonus eligible employees, including each of the Named Officers. The Compensation Committee made these retention grants in recognition of the progress we made during fiscal 2007 with respect to our strategic growth initiatives, including acquisitions, international expansion and marketing services, and to retain the members of the management team, many of whom had been hired over the course of the past few years. The Compensation Committee determined the amount of these retention grants as a percentage of the Named Officer’s base salary based on the recommendations of Mr. Rubin and Mr. Flanagan. The retention awards granted to the Named Officers had a fair market value on the date of grant equal to 37.5% of the annual base salary for such Named Officer in fiscal 2007. For the Named Officers and other members of our senior management team, the value of the retention award was equal to 75% of such employee’s target bonus payment for 2007. For other bonus eligible employees the retention award was equal to 100% of such employee’s target bonus payment for 2007.

 

The number of shares issued under an RSU award equals the total dollar value of that RSU grant divided by the fair market value of a share of our common stock on the date of grant. Fair market value is determined by reference to the closing price of our common stock on the relevant valuation date. Generally, for purposes of an initial grant of equity-based compensation, the date of grant is the later of the date the Compensation Committee approves the grant or the employee’s hire date. For all other purposes, the date of grant is the date the Compensation Committee approves the grant.

 

Our annual grants of equity awards are approved at the first regularly scheduled Compensation Committee meeting of each fiscal year, which typically occurs one to two weeks after we issue our year-end earnings release. Retention grants issued in 2008 were approved at the regularly scheduled meeting of the Compensation Committee in March 2008. For new hires, we generally approve grants of equity compensation at the regularly scheduled quarterly Compensation Committee meeting following acceptance of an offer of employment, which meetings is typically held two weeks after our quarterly earnings release, although we occasionally find it necessary to approve a grant between these quarterly meetings. In such a case, it is company policy to hold a telephonic special meeting of the Compensation Committee. While we prefer not to take action by written consent to grant equity-based awards, we do not prohibit the Compensation Committee from doing so where necessary or desirable.

 

In general, RSUs granted to Named Officers as either initial or annual grants vest in equal annual installments over a four-year period, beginning on the first anniversary of the date of grant. However, Mr. Hardy’s initial grant vests in equal annual installments over a five-year period, beginning on the first anniversary of the date of grant. Retention awards vest in full on the second annual anniversary of the date of grant. The Compensation Committee selected a four-year vesting schedule for initial and annual grants to reflect our objectives of rewarding each Named Officer’s contributions to our long-term performance and aligning their interests with those of our stockholders. The

Compensation Committee determined that Mr. Hardy’s initial grant would vest over five years because his award was larger than the usual initial awards to members of our senior management team and the Committee determined to increase the vesting schedule by one year. The two-year vesting schedule for retention grants was selected to encourage retention for at least two years. All of the RSU awards issued to Named Officers in 2007 vest based upon the continued employment of the Named Officer upon each of the respective vesting dates.

 

401(k) Plan Matching Contributions.   For 2007, we matched, in cash, contributions to our 401(k) plan that each employee, including each Named Officer, made during the year in an amount of $.50 on each dollar contributed. For each eligible employee, this match is limited to the first six percent of such employee’s salary and subject to further limitations imposed through IRS discrimination testing. We provide these matching grants to all of our employees, including Named Officers who participate in the 401(k) plan, to encourage them to systematically save for retirement. The maximum amount of our matching contribution is limited by our 401(k) plan. For 2008, we intend to continue our policy of matching employee contributions to our 401(k) plan at the same level as in 2007.

 

Deferred Compensation Plan.   We maintain a non-qualified deferred compensation plan that allows eligible employees, including executive officers, to defer compensation that the employee cannot defer under the applicable tax-qualified plans because of limits under the Internal Revenue Code on the amount of compensation that can be deferred. There is currently no company match under our deferred compensation plan. Mr. Rubin and some of our executive officers have elected to participate in this plan, although none of the other Named Officers participated in this plan in fiscal 2007. For more information, see “— Nonqualified Deferred Compensation.”

 

Change in Control Agreements.   On August 1, 2006, the Compensation Committee approved a form of change in control agreement for certain members of senior management, including all of our current Named Officers, and certain other employees. We implemented this form to standardize the applicable change in control protections among our senior management and other key employees (except Mr. Rubin), which until that time had varied from executive to executive. We believe that change in control protections are important to protect our Named Officers from a termination or significant change in responsibilities arising after a change in control of GSI. Equity awards are a significant component of the compensation packages of our Named Officers and these protections provide that the named executives will not lose the value of these awards due to certain change of control events not related to the performance of any individual executive. We also sought to establish a uniform set of protections to achieve fairness among our executives and to make it easier for us to understand and communicate these policies.

 

Among other things, these agreements provide for a “double trigger” mechanism, requiring both a change in control and an ensuing negative employment action before severance is payable. The double trigger mechanism was chosen so that the vesting of equity awards would not accelerate in connection with a change in control where an executive had not suffered any adverse employment consequences. Generally, these change in control provisions provide that all previously unvested equity awards held by the executive will vest in full, and the post-termination exercise period for stock options will be extended until the option’s expiration date.

 

Perquisites, Personal Benefits and Other Compensation.   During 2007, each of our Named Officers received a limited amount of perquisites and other personal benefits that we paid on their behalf or for which we provided reimbursement. During 2007, Mr. Hardy received a greater amount of perquisites in connection with his relocation to King of Prussia, Pennsylvania. Mr. Hardy’s relocation benefits are described below under “— Employment Agreements and Arrangements — J. Scott Hardy”. We believe that the nature of the perquisites, as well as total cost of perquisites provided in 2007, is reasonable. Furthermore, we believe providing our Named Officers with these benefits is justified because our Named Officers contribute substantially to our financial and operating performance and to the growth and development of our business. The perquisites and other personal benefits provided to our Named Officers are disclosed below in the “Summary Compensation Table.”

 

Determination of Compensation for GSI’s Chief Executive Officer

 

Pursuant to our bylaws, our Board of Directors or our Compensation Committee must approve compensation paid to the chief executive officer. In January 2006, our Compensation Committee engaged Semler Brossy Consulting Group to act as its independent compensation consultants to the Compensation Committee and advise the Compensation Committee in the design of a multi-year compensation agreement for Mr. Rubin. The

Compensation Committee believes Semler Brossy was independent because, Semler Brossy had not provided consulting or other services to us or any of our subsidiaries prior to or subsequent to this engagement. Our Compensation Committee also engaged the law firm of Gibson, Dunn & Crutcher LLP to act as outside legal counsel to the Compensation Committee in negotiating and documenting Mr. Rubin’s compensation package. While Gibson Dunn has previously been engaged by the Board or a committee of the Board to act as independent legal counsel, the Compensation Committee viewed this firm as independent with respect to GSI because it had not provided legal services to us or any of our subsidiaries. Mr. Rubin was represented by separate legal counsel.

 

On August 23, 2006, we entered into a new employment arrangement with Mr. Rubin, which entirely restructured his overall compensation program. Our Compensation Committee approved this arrangement on August 1, 2006.

 

Prior to August 2006, Mr. Rubin’s compensation had consisted of:

 

 

The components of Mr. Rubin’s compensation package approved by our Compensation Committee, effective July 1, 2006, are as follows:

 

 

Mr. Rubin is not eligible to participate in the Company’s leadership bonus plan. For more information, see “— Employment Agreements and Arrangements — Michael G. Rubin.”

 

Overall Compensation Program.   Our Compensation Committee began the process by determining a target range for Mr. Rubin’s total compensation. The Compensation Committee determined that the total amount of compensation to be received, including annual salary, annual grant of RSUs and annual grant of PRSUs, should be approximately $2.6 and $3.3 million at the target and maximum levels, respectively. In setting these amounts, our Compensation Committee relied upon both external and internal references.

First, the Compensation Committee worked with Semler Brossy to develop an external peer group of 29 other companies. Many of the constituents of the peer group were Internet-based companies and retailers with similar focuses and revenue sizes as GSI. The peer group also included some companies that were larger than us but which the Compensation Committee believed represented our future growth potential. The constituents of this peer group included the following:

 

 

Based on this peer group, the $2.6 million total compensation package for Mr. Rubin at the target level was close to the 75th percentile for chief executive officer compensation. While this amount was higher than the median of the peer group, we believe that a higher level of compensation for Mr. Rubin was appropriate to reward him for his continued leadership, industry knowledge and business development skills. As our founder, our Compensation Committee recognized that Mr. Rubin’s vision and drive are essential to our future success and could not easily be replaced. The Compensation Committee also placed his compensation at the higher end of the peer group range based on the fact that a greater percentage of Mr. Rubin’s total compensation was in the form of performance- and equity-based compensation, which the Compensation Committee believed better aligned Mr. Rubin’s compensation with the Company’s success.

 

The Compensation Committee also considered Mr. Rubin’s total compensation relative to the total compensation of other senior executives of GSI. For example, the total compensation of our then president and chief operating officer was valued at $1.5 million, and value of total compensation at the executive vice present level was approximately $900,000. The Compensation Committee, with input from senior management, believes that Mr. Rubin’s total creates an appropriate differential between the total pay of our chief executive officer and that of our then chief operating officer, as well as that of our other executive vice presidents. Furthermore, because Mr. Rubin is also fulfilling critical roles as strategic thinker, tireless advocate, industry expert and visionary leader, the Committee believed that this differential in compensation is warranted.

 

In recognition of the potential total value of Mr. Rubin’s compensation package, the Compensation Committee structured the bulk of Mr. Rubin’s equity compensation in the form of PRSU grants, which cannot be earned unless we have achieved stated performance goals. Mr. Rubin is the only Named Officer to have received PRSUs at this time, which underscores the Compensation Committee’s belief that Mr. Rubin’s involvement with GSI is unique and critical to our future success. This structure also aligns a significant part of Mr. Rubin’s compensation with our stockholders by ensuring that they receive increased value as Mr. Rubin’s compensation increases.

 

Base Salary.   Base salary represents the amount paid to Mr. Rubin during the year as direct compensation for his services and is set to reward his individual performance on a day-to-day basis during the year and to encourage him to perform at his highest level. The base salary for Mr. Rubin during the term of the employment agreement was set at $474,000, which was a $49,000 increase from Mr. Rubin’s prior base salary. Mr. Rubin’s base salary was $24,000 higher than the $450,000 base salary of our then president and chief operating officer. Prior to the effective date of Mr. Rubin’s employment agreement, he had received a monthly automobile allowance of $2,000. Our Compensation Committee determined that this allowance would be discontinued and $24,000 would be included in his base salary.

Annual RSU Grant.   The annual RSU grant of $675,000 was computed by multiplying Mr. Rubin’s new base salary by a factor of approximately 1.4. This relationship between base salary and the RSU grant was set by taking into consideration the relationship between these compensation components for other members of our senior management team. In general, members of the senior management team received RSU grants equal to approximately 1 times base salary and for our then president and chief operation officer, the RSU grant was set at approximately 1.2 times base salary. Mr. Rubin’s RSU grant was set at a correspondingly higher level. The Compensation Committee chose to make an annual grant rather than a multi-year grant because of our rapid economic growth, lack of predictable long-term financial results and our desire to maintain maximum flexibility to determine the amount and vesting of grants each year as our operations and compensation needs change. Mr. Rubin’s annual RSU grant vests in equal annual installments over a four-year period, beginning on the first anniversary of the date of grant. The annual RSU grant for Mr. Rubin serves the same purpose as the annual time-vested RSU grants issued under our 2005 Equity Plan to our other Named Officers; that is, to reward Mr. Rubin for his individual contribution to our long-term performance. Also, the time-based vesting feature of this grant rewards Mr. Rubin for continuing to lead us in the long-term and provides balance to the substantial amount of performance-based awards in Mr. Rubin’s total compensation, as described below.

 

This component of Mr. Rubin’s compensation was paid in RSUs rather than cash, for several reasons. The ownership of equity aligns Mr. Rubin’s interests more closely with those of our stockholders, as the value of the compensation will change depending upon the market price of our stock. Furthermore, the issuance of our common stock under this RSU grant is conditioned upon Mr. Rubin’s continued employment with us, which provides Mr. Rubin additional incentive to remain with us. We also considered it significant that Mr. Rubin specifically requested to receive his performance-based compensation in PRSUs rather than cash.

 

In March 2007, Mr. Rubin was awarded the annual RSU grant under his employment agreement in the amount of $675,000 and a discretionary RSU grant in the amount of $1.05 million in recognition of his service to us. The value of the discretionary RSU grant was determined in consideration of Mr. Rubin’s performance of his duties during fiscal 2006.

 

Performance-Based RSU Grant.   Under Mr. Rubin’s employment agreement, his total compensation has been heavily weighted towards performance-based incentive compensation. Consistent with our compensation philosophies described above, this element of compensation is based on overall company performance.

 

Our Compensation Committee preferred this type of performance-vested equity award to other alternatives, such as a cash bonus, stock options, additional time-vested RSUs and a value-sharing plan. We believe that the PRSU award closely matches chief executive officer compensation to our long-term stock and financial performance and stockholder return. Also, Mr. Rubin’s performance-based compensation represents approximately 55% of his total compensation at the target level and approximately 65% at the maximum level, which is also appropriate given the Compensation Committee’s desire to provide Mr. Rubin with a competitive total compensation package. The Compensation Committee chose to use PRSUs rather than other equity-based forms, such as stock options and stock appreciation rights, to avoid the increased stock-based compensation expense associated with these alternative awards under FAS 123R. Mr. Rubin’s annual PRSU grant vests in equal annual installments over a two-year period, beginning on the first anniversary of the date the PRSU is earned. In addition to tying Mr. Rubin’s compensation to our financial performance, the annual PRSU grant encourages Mr. Rubin to continue to lead us in the long-term.

The Compensation Committee chose the same performance targets as it chose for the 2007 leadership bonus plan, net adjusted EBITDA and net non-GAAP net income, as the performance targets for Mr. Rubin’s 2007 PRSU grant. However, the payout schedule under Mr. Rubin’s employment agreement differed from the payout schedule for other bonus-eligible employees, including the Named Officers. The payout schedule for Mr. Rubin’s PRSUs is set forth in the tables below. The PRSU earned for results between the levels indicated on the tables below would have been determined by linear interpolation.

 

 

The Compensation Committee chose net adjusted EBITDA and net non-GAAP net income because they are widely accepted in our industry as measures of economic performance. Given our historical rapid rate of business expansion, we have found it difficult to predict or forecast accurately our operating results for periods greater than a year and the Compensation Committee determined that annual rather than multi-year targets were appropriate. The Compensation Committee determined that neither performance target was achieved in 2007. Therefore, none of the PRSU awards granted in 2007 was earned by Mr. Rubin.

 

Change in Control and Severance Provisions.   Mr. Rubin’s employment agreement contains termination provisions that provide him with a severance arrangement of approximately $2.5 million payable over 24 months plus continuation of his medical benefits for up to 24 months if his employment is terminated without cause or if he terminates his employment for good reason, as defined in Mr. Rubin’s employment agreement, including within a specified period of time after a change in control. However, Mr. Rubin would forfeit any unvested PRSUs and RSUs, other than with respect to a termination in connection with a change in control. See “— Potential Payments Upon Termination of Employment or Change in Control.”

 

The Compensation Committee provided Mr. Rubin with a severance payment to protect him in the event of an actual termination of his employment agreement for no reason or a constructive termination of the agreement. We selected a severance payment amount that was approximately equal to the total current value of his base salary, annual RSUs and performance-based RSUs for one year.

 

Mr. Rubin agreed that as a condition prior to receiving any severance payments, he will provide us with a general release and to abide by customary confidentiality and non-disparagement provisions. He also agreed not to compete with us while we are paying him severance, which also prohibits him from soliciting employees, consultants, agents, representatives, partners, customers, clients or prospects of us or any of our subsidiaries.

 

Perquisites, Personal Benefits and Other Compensation.   During 2006, our chief executive officer received a limited amount of perquisites and other personal benefits that we paid on his behalf or for which we provided reimbursement. We believe that the nature of the perquisites, as well as total cost of perquisites provided in 2007, was reasonable. We believe that providing our chief executive officer with these benefits is justified because his employment is critical to our future financial and operating performance and the growth and development of our business, and providing these benefits allows him to efficiently devote his efforts to our success.

Policy on Deductibility of Compensation

 

Our policy is to maximize the tax deductibility of compensation paid to our most highly compensated executives under Section 162(m) of the Internal Revenue Code and related regulations. Our stockholders have approved our 2005 Equity Plan and a performance criteria formula that is designed and administered to qualify compensation awarded under that plan as “performance-based.” We may, however, authorize payments to our Named Officers that may not be fully deductible if we believe such payments are in our stockholders’ interests. Mr. Rubin’s performance-based RSU award has been structured to qualify as performance-based compensation exempt from the limitations on deductibility imposed by Section 162(m).

 

 

 

 

Other benefits consisted of the following: (i) for Mr. Conn, a car allowance; (ii) for Mr. Gold, reimbursement for housing expenses; and (iii) for Mr. Hardy, reimbursement for relocation expenses.

 

Additionally, GSI purchases season tickets to sporting events for business use. If the tickets are not used for business purposes, they are made available to GSI’s directors, officers and other employees for personal use. There is no incremental cost to GSI for the personal use of such tickets.

 

 

 

 

 

 

Employment Agreements and Arrangements

 

The following describes employment agreements and arrangements with GSI’s Named Officers:

 

Michael G. Rubin.   On August 23, 2006, GSI entered into an employment agreement with Michael G. Rubin, its chairman, president and chief executive officer. The employment agreement was effective as of July 1, 2006 with an initial term of one and one-half years until December 31, 2007, and automatically renews for subsequent one year periods thereafter until a notice of nonrenewal is delivered by GSI or Mr. Rubin. The employment agreement automatically renewed for a one year term ending December 31, 2008.

 

Under the employment agreement, Mr. Rubin receives an annual base salary of $474,000 per year and an annual restricted stock unit award granted under GSI’s 2005 Equity Plan with an aggregate fair market value of at least $675,000 as of the date of grant. The annual stock award will vest as to 25% of the total number of restricted stock units on each of the first four anniversaries of the date of grant. Such vesting will be subject to Mr. Rubin’s “continuous service,” as defined in the 2005 Equity Plan, to the Company and to acceleration in certain circumstances following a change in control. On March 6, 2007, the Compensation Committee granted Mr. Rubin a restricted stock unit award for 35,507 shares, representing the annual stock award for 2007.

 

Mr. Rubin also is entitled to receive an award of performance restricted stock units, referred to as a “PRSU Award,” to be granted on or before March 31 of each year, except that the PRSU Award for the period from July 1, 2006 to December 31, 2006 was granted on August 23, 2006. The number of shares to be issued pursuant to a PRSU Award is based on the Company achieving certain performance targets during a certain performance period, each as established by the Compensation Committee of GSI’s Board of Directors. Depending on the level of the performance targets that is achieved during the performance period, Mr. Rubin will be entitled to the issuance of shares having a fair market value, as of the date of grant, of between $700,000 and $2,100,000. However, in the case of the PRSU Award for the period from July 31, 2006 to December 31, 2006, Mr. Rubin was entitled to the issuance of shares with a fair market value, as of the date of grant, that was one-half of such values. If the Company fails to achieve the 90% level of the performance targets, Mr. Rubin will not be entitled to the issuance of any shares. Once issued, the shares will be subject to additional time based vesting restrictions, with 50% of the shares vesting on the first anniversary of the date the PRSU Award is earned and the remaining shares vesting on the second anniversary of the date the PRSU Award is earned.

 

The employment agreement contains a “clawback” provision. In the event that the Board or the Compensation Committee determines in good faith that the earlier determination as to the achievement of the performance targets was based on incorrect data, which incorrect data would require the restatement of GSI’s financial statements for reasons other than changes in law or accounting principles, and that in fact the performance targets had not been achieved or had been achieved to a lesser extent than originally determined and a portion of any performance restricted stock units granted under any PRSU Award would not have been issued, vested or settled, given the correct data, then:

 

 

 

On March 6, 2007, under Mr. Rubin’s employment agreement described above, the Compensation Committee granted Mr. Rubin a PRSU Award for 73,645 shares, referred to as the target units, representing the PSRU Award for 2007. If the Company achieved 100% of the EBITDA target and non-GAAP net income target established by the Compensation Committee for fiscal 2007, Mr. Rubin would have received 100% of the target units. If the Company achieved 90% of the EBITDA target and non-GAAP net income target for the performance period, Mr. Rubin would have received 50% of the target units. If the Company would have achieved 110% of the EBITDA target and non-GAAP net income target or higher for the performance period, Mr. Rubin would have received 150% of the target units. If the Company failed to achieve 90% of the EBITDA target and non-GAAP net income target for the performance period, Mr. Rubin would have received no target units. If the Company’s EBITDA or non-GAAP net income performance falls between the 90% and 110% of the EBITDA target or non-GAAP net income target for the performance period, will receive a number of target units determined according to linear interpolation. The performance restricted stock unit vests in the following increments, or earlier upon certain events: 50% on the first anniversary of the date earned and 50% on the second anniversary of the date earned. Vested performance units result in the delivery to Mr. Rubin of shares of common stock. On March 4, 2008, the Compensation Committee determined that neither the EBITDA target nor the non-GAAP net income target was met and, accordingly, the PRSU award was not earned.

 

Mr. Rubin will also continue to be entitled to participate in the Company’s stock purchase, profit sharing, savings, health insurance, life insurance, group insurance, disability insurance, pension, retirement and other benefit plans or programs on the same terms and to the same extent as the other senior executives of the Company.

 

Michael R. Conn.   GSI does not have an employment agreement with Michael R. Conn, GSI’s executive vice president, finance and chief financial officer. Mr. Conn receives an annual base salary of $390,000 in fiscal 2008 and is entitled to participate in GSI’s bonus and equity award plans. Mr. Conn also receives a car allowance.

 

Stephen J. Gold.   On January 31, 2005, GSI entered into an offer letter with Mr. Gold to serve as GSI’s executive vice president, technology and chief technology officer. Under this letter, Mr. Gold is entitled to (i) receive an annual base salary of $325,000 to be increased to $350,0000 beginning January 1, 2006, subject to review annually, (ii) participate in the annual bonus plan available to GSI’s similarly situated employees, with a guaranteed bonus of no less than 50% of his base salary in fiscal 2005, (iii) receive a housing allowance of $2,500 per month, less payroll deductions and all required withholdings, for the duration of his employment and (iv) other benefits similar to those provided to GSI’s other officers. In addition, Mr. Gold’s offer letter provided that upon commencement of his employment, Mr. Gold would be granted a restricted stock unit award under the 1996 Plan to acquire common stock having an aggregate value of $1,000,000. GSI also agreed to pay Mr. Gold a signing bonus equal to $160,000 in the aggregate. See also “— Potential Payments Upon Termination of Employment or Change in Control.” Mr. Gold receives an annual base salary of $404,000 in fiscal 2008.

 

J. Scott Hardy.   On March 26, 2007, GSI entered into an offer letter with Mr. Hardy to serve as its executive vice president, business management. Under this letter, Mr. Hardy is entitled to (i) receive an annual base salary of $400,000; (ii) participate in the annual bonus plan available to similarly situated employees at GSI, with a guaranteed bonus in 2007 (to be paid in March 2008) of no less than 50% of his base pay; (iii) receive, subject to the approval of the Board of Directors, a restricted stock unit award having an aggregate value of $1,250,000 and vesting as to 20% of the total number of shares on each of the first, second, third, fourth and fifth annual anniversary of the date of grant; (iv) participate in all employee benefit plans or programs provided to similarly situated employees at GSI; (v) a reimbursement of his actual and reasonable expenses relating to his relocation from Atlanta, GA to King of Prussia, PA, including moving costs; temporary living and storage in King of Prussia; two house hunting trips; an amount equal to 2% of the purchase price of his new home to cover some of the costs associated with that purchase; home sale protection , up to a maximum of $100,000; a relocation allowance of up to $50,000 less taxes; and in the event he is carrying two mortgages simultaneously, GSI will cover the interest cost of the lower of the two mortgages for up to four months. If Mr. Hardy resigns his employment or GSI terminates his employment with “cause” during the first two years of his employment, he must repay the Company a pro-rata portion of all

amounts incurred or reimbursed by GSI in connection with his relocation as follows: 100% will be reimbursed if such a departure occurs in the first year of employment and the reimbursement will decline by 1/12th for each month in the second year. Mr. Hardy is also entitled to receive a one-time signing bonus of $100,000 less taxes, subject to the same repayment terms previously noted in the event of his resignation or termination for “cause” during the first two years of employment. Mr. Hardy and GSI may terminate Mr. Hardy’s employment at any time and for any reason. See also “— Potential Payments Upon Termination of Employment or Change in Control.” Mr. Hardy receives an annual base salary of $415,000 in fiscal 2008.

 

Damon Mintzer.   GSI does not have an employment agreement with Damon Mintzer, GSI’s executive vice president, sales. Mr. Mintzer receives an annual base salary of $444,158 in fiscal 2008 and is entitled to participate in GSI’s bonus and equity award plans.

 

2007 Leadership Bonus Plan.

 

On March 6, 2007, GSI’s Compensation Committee approved the 2007 leadership bonus plan for certain management-level employees, including the Named Officers. Under the 2007 leadership bonus plan, Named Officers, would receive an annual incentive cash bonus targeted at 50% of base salary if: (i) GSI achieved certain adjusted EBITDA targets and non-GAAP net income targets as determined by GSI’s Compensation Committee; and (ii) the eligible employee performed at an acceptable level as determined by Mr. Rubin. One half of each eligible employee’s bonus was contingent on GSI meeting each of the adjusted EBITDA and non-GAAP net income (net income plus stock-based compensation, amortization of acquisition-related intangibles and cumulative effect of accounting change, minus non-cash income tax benefit) targets. For each of these targets, the Compensation Committee has established a range whereby, if a minimum target of 90% of the target amount is reached, each employee would receive 50% of the bonus amount contingent upon the target, and if the target is exceeded by 10%, the bonus amount contingent on the target would be increased by 20%. In addition, the amount of bonus that a participant would actually receive may be adjusted upward, in an amount not to exceed 40%, downward, in an amount up to 20%, or eliminated, based on that individual’s performance during the year. Each eligible participant’s bonus will be funded from a fixed pool and will be based upon a percentage of that participant’s base salary.

 

See “Compensation Discussion and Analysis” for a discussion regarding the amount of salary and bonus in proportion to the total compensation of the Named Officers as well as the targets under the 2007 Leadership Bonus Plan.

 

 

 

 

 

 

Equity Incentive Plans

 

GSI maintains equity incentive plans pursuant to which eligible employees, including the Named Officers, receive equity based awards. GSI’s 2005 Equity Plan, which was adopted by our stockholders at the 2005 annual meeting of stockholders and amended in June 2007, replaced GSI’s 1996 Equity Incentive Plan (described below), referred to as the “1996 Plan.” The 2005 Equity Plan is summarized under “Proposal 2 — Amendment to GSI’s 2005 Equity Incentive Plan.”

 

1996 Equity Incentive Plan

 

The following is a summary of the 1996 Plan:

 

GSI’s 1996 Plan was intended to promote the long-term retention of its key employees and other persons who are in a position to make significant contributions to GSI’s success, further reward these employees and other persons for their contributions to GSI’s growth and expansion, provide additional incentive to these employees and other persons to continue making similar contributions and to further align the interests of these employees and other persons with those of GSI’s stockholders.

 

To achieve these purposes, the 1996 Plan permitted grants of incentive stock options, options not intended to qualify as incentive stock options, stock appreciation rights, restricted and unrestricted stock awards, deferred stock awards, performance awards, loans and supplemental awards. The maximum total number of shares for which awards could have been granted under the 1996 Plan was 9,500,000 shares of common stock, subject to appropriate adjustment in a manner determined by the Board of Directors to reflect changes in GSI’s capitalization.

 

The 1996 Plan is administered by our Board of Directors, which determines, among other things and subject to certain conditions, whether to accelerate the exercise or vesting schedule or waive any other terms or conditions of each award, whether to reduce the exercise price of an option after the date of grant, whether to amend or cancel an award and the form of any instrument used under the 1996 Plan. The Board of Directors has the right to adopt rules

for the administration of the 1996 Plan, settle all controversies regarding the 1996 Plan or any award, and construe and correct defects and omissions in the 1996 Plan or any award. The 1996 Plan may be amended, suspended or terminated by the Board of Directors, subject to certain conditions, provided that stockholder approval will be required whenever necessary for the 1996 Plan to continue to satisfy the requirements of certain securities and tax laws, rules and regulations. The Board of Directors may delegate its authority under the 1996 Plan to a committee of the board. The Board of Directors has delegated its authority to the Compensation Committee and the Nominating and Corporate Governance Committee.

 

As of April 21, 2008, 94,715 restricted stock units, 4,275 shares of unvested restricted stock and options to purchase 3,994,726 shares of Common Stock were outstanding under the 1996 Plan. No additional awards may be granted under the 1996 Plan.

 

Nonqualified Deferred Compensation

 

On June 8, 2006, GSI’s Compensation Committee approved the Leadership Team Deferral Plan, referred to as the “Deferral Plan,” which was amended and restated on March 5, 2008 to reflect compliance with the requirements of Section 409A of the Internal Revenue Code. The Deferral Plan is a non-qualified deferred compensation plan that allows eligible employees, including executive officers, to defer compensation that the employee cannot defer under our applicable tax-qualified plans because of limits under the Internal Revenue Code on the amount of compensation that can be deferred.

 

Under the Deferral Plan, GSI provides participants with the opportunity to make annual elections to defer a specified percentage of up to 100% of their eligible compensation, including salary, bonus and restricted stock unit awards (“RSU Awards”). Elective deferrals of cash compensation are withheld from a participant’s paycheck and credited, as applicable, to a bookkeeping account established in the name of the participant. A participant is always 100% vested in his or her own elective cash deferrals and any earnings thereon. An RSU Award, which a participant may generally only elect to defer if, among other conditions set forth in the Deferral Plan, it does not vest until at least thirteen months from the grant date, vests in accordance with the vesting schedule set forth the award agreement. GSI may also make discretionary contributions to participants’ accounts in the future, although it does not currently plan to do so. Discretionary contributions made by GSI in the future, if any, will be subject to such vesting arrangements as GSI may determine. Amounts contributed to a participant’s account through elective deferrals, deferrals of RSU Awards or through GSI’s discretionary contributions, are generally not subject to income tax, and GSI does not receive a deduction, until they are distributed from the accounts.

 

Under the Deferral Plan, GSI is obligated to deliver on a future date deferred compensation credited to the participant’s account, as adjusted for earnings and losses. A participant’s elective cash deferral account and any GSI discretionary contribution account, if applicable, are adjusted for any positive or negative investment results from phantom investment alternatives selected by the participant that are available under the Deferral Plan. A participant may make changes to phantom investments on a daily basis in accordance with rules established by the Committee. A participant’s RSU account is credited with an equivalent number of shares of the Company’s common stock each time the participant elects to defer an RSU Award under the Deferral Plan. A participant’s RSU account is automatically allocated to a Company’s common stock measurement fund. Amounts payable under the Deferral Plan are unfunded, unsecured general obligations of GSI. Amounts in a participant’s elective cash deferral account and any GSI discretionary contribution account will be payable in cash, and amounts in a participant’s RSU account will be payable in the Company’s common stock, commencing upon the distribution date selected by the participant at the time of deferral. Payments will be distributed in the form of a lump sum payment or in up to ten annual installments, depending upon, if applicable, the election made by a participant at the time of deferral. However, if a participant’s service with GSI terminates prior to the selected distribution date or dates, payments will commence as soon as practicable but not later than seventy days following termination of service. Notwithstanding the foregoing, if a participant’s service terminates with GSI due to disability or death, or a participant is receiving installment payments and dies or becomes disabled prior to payment of all the installments, all amounts will become immediately payable in the following calendar year. Any payments made to specified employees that commence upon a separation from service will be delayed six months in accordance with the requirements of Section 409A of the Internal Revenue Code. In addition, in the event a participant suffers one or more specified unforeseeable emergencies, the Committee may, in its sole discretion, accelerate the payment of the participant’s deferred cash

awards. Payments scheduled to be made under the Deferral Plan may be otherwise delayed or accelerated only upon the occurrence of certain specified events that comply with the requirements of Section 409A of the Internal Revenue Code.

 

Through December 29, 2007, among GSI’s Named Officers, only Mr. Rubin elected to participate in the Deferral Plan. Accordingly, the following table provides information concerning amounts held under the Deferral Plan for the benefit of Mr. Rubin.