e10vk
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
February 3, 2007
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission File
No. 1-32637
GameStop Corp.
(Exact name of registrant as
specified in its Charter)
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Delaware
(State or other
jurisdiction of
incorporation or organization)
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20-2733559
(I.R.S. Employer
Identification No.)
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625 Westport Parkway
Grapevine, Texas
(Address of principal
executive offices)
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76051
(Zip
Code)
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Registrants telephone number, including area code:
(817) 424-2000
Securities registered pursuant to Section 12(b) of the
Act:
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(Title of Class)
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(Name of Exchange on Which Registered)
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Class A Common Stock,
$.001 par value per share
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New York Stock Exchange
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Class B Common Stock,
$.001 par value per share
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New York Stock Exchange
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Rights to Purchase Series A
Junior Participating Preferred
Stock, $.001 par value per share
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New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No
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Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the
registrant: (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act. (Check one):
Large Accelerated
Filer þ Accelerated
Filer o Non-accelerated
Filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
The aggregate market value of the voting and non-voting stock
held by non-affiliates of the registrant was approximately
$3,049,000,000, based upon the closing market prices of
$42.22 per share of Class A Common Stock and $38.10 of
Class B Common Stock on the New York Stock Exchange as of
July 28, 2006.
Number of shares of $.001 par value Class A Common
Stock outstanding as of March 23, 2007: 152,577,362
Number of shares of $.001 par value Class B Common
Stock outstanding as of March 23, 2007: 0
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the definitive proxy statement of the registrant to
be filed pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended, for the 2007 Annual Meeting of
Stockholders are incorporated by reference into Part III.
PART I
General
GameStop Corp. (GameStop or the Company)
is the worlds largest retailer of video game products and
PC entertainment software. We sell new and used video game
hardware, video game software and accessories, as well as PC
entertainment software, and related accessories and other
merchandise. As of February 3, 2007, we operated 4,778
stores in the United States, Australia, Canada and Europe,
primarily under the names GameStop and EB Games. We also operate
the electronic commerce websites www.gamestop.com and
www.ebgames.com and publish Game Informer, the
largest multi-platform video game magazine in the United States
based on circulation, with approximately 2.7 million
subscribers.
GameStop is a holding company that was created to facilitate the
combination of GameStop Holdings Corp. and Electronics Boutique
Holdings Corp., which we refer to as Historical GameStop and EB
or Electronics Boutique, respectively. On April 17, 2005,
Historical GameStop and EB entered into a merger agreement
pursuant to which, effective October 8, 2005, separate
subsidiaries of GameStop were merged with and into Historical
GameStop and EB, respectively, and Historical GameStop and EB
became wholly-owned subsidiaries of GameStop (the
mergers). As of February 3, 2007, our
Class A common stock and our Class B common stock
traded on the New York Stock Exchange under the symbols GME and
GME.B, respectively. On February 7, 2007, all outstanding
Class B common stock was converted into Class A common
stock on a
one-for-one
basis and the Company no longer has any Class B common
stock. On March 16, 2007, the Company completed a
two-for-one stock split of its Class A common stock.
Historical GameStops subsidiary Babbages Etc. LLC
(Babbages) began operations in November 1996.
In October 1999, Babbages was acquired by, and became a
wholly-owned subsidiary of, Barnes & Noble, Inc.
(Barnes & Noble). In June 2000,
Barnes & Noble acquired Funco, Inc. (Funco)
and thereafter, Babbages became a wholly-owned subsidiary
of Funco. In December 2000, Funco changed its name to GameStop,
Inc. On February 12, 2002, Historical GameStop completed an
initial public offering of its Class A common stock and was
a majority-owned subsidiary of Barnes & Noble until
November 12, 2004, when Barnes & Noble distributed
its holdings of outstanding Historical GameStop Class B
common stock to its stockholders.
EB was incorporated under the laws of the State of Delaware in
March 1998 as a holding company for EBs operating
activities and completed its initial public offering in July of
that same year. EBs predecessor was incorporated in the
Commonwealth of Pennsylvania in 1977.
In the mergers, Historical GameStops stockholders received
one share of GameStops common stock for each share of
Historical GameStops common stock owned. EB stockholders
received $19.08 in cash and .39398 of a share of GameStops
common stock for each EB share owned. In aggregate,
40.5 million shares of GameStops common stock were
issued to EB stockholders and approximately $993.3 million
in cash was paid in consideration for all outstanding common
stock of EB and all outstanding stock options of EB.
In the fiscal year ended February 3, 2007, our sales were
$5.3 billion from our four business segments: the United
States, Canada, Europe and Australia. Of our 4,778 stores, 3,799
stores are located in the U.S. and 979 stores are located in
Australia, Canada and Europe. Our stores, which average
approximately 1,500 square feet, carry a balanced mix of
new and used video game hardware, video game software and
accessories, which we refer to as video game products, and PC
entertainment software. Our used video game products provide a
unique value proposition to our customers, and our purchasing of
used video game products provides our customers with an
opportunity to trade in their used video game products for store
credits and apply those credits towards other merchandise,
which, in turn, increases sales.
Our corporate office and one of our distribution facilities are
housed in a 480,000 square foot facility in Grapevine,
Texas. We purchased this facility in March 2004 and improved and
equipped it prior to relocating headquarters and distribution
center operations to this facility in fiscal 2005 (the
52 weeks ending January 28, 2006).
2
Recent
Developments
On February 7, 2007, following approval by a majority of
the Class B common stockholders in a Special Meeting of the
Companys Class B common stockholders, all outstanding
Class B common shares were converted into Class A
common shares on a
one-for-one
basis (the Conversion). In addition, on
February 9, 2007, the Board of Directors of the Company
authorized a
two-for-one
stock split, effected by a
one-for-one
stock dividend to stockholders of record at the close of
business on February 20, 2007, paid on March 16, 2007
(the Stock Split). Unless otherwise indicated, all
numbers in this Annual Report on
Form 10-K
have been restated to reflect the Conversion and the Stock Split.
On February 9, 2007, the Board of Directors of the Company
also authorized an additional $150,000,000 for the buyback of
the Companys senior floating rate notes and senior notes.
The timing and amount of the repurchases will be determined by
the Companys management based on their evaluation of
market conditions and other factors. In addition, the
repurchases may be suspended or discontinued at any time.
Disclosure
Regarding Forward-looking Statements
This report on
Form 10-K
and other oral and written statements made by the Company to the
public contain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the
Securities Act), and Section 21E of the
Securities Exchange Act of 1934, as amended (the Exchange
Act). The forward-looking statements involve a number of
risks and uncertainties. A number of factors could cause our
actual results, performance, achievements or industry results to
be materially different from any future results, performance or
achievements expressed or implied by these forward-looking
statements. These factors include, but are not limited to:
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our reliance on suppliers and vendors for sufficient quantities
of their products and for new product releases;
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economic conditions affecting the electronic game industry;
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the competitive environment in the electronic game industry;
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our ability to open and operate new stores;
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our ability to attract and retain qualified personnel;
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the impact and costs of litigation and regulatory compliance;
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unanticipated litigation results;
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the risks involved with our international operations;
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alternate sources of distribution of video game
software; and
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other factors described in this
Form 10-K,
including those set forth under the caption, Item 1A.
Risk Factors.
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In some cases, forward-looking statements can be identified by
the use of terms such as anticipates,
believes, continues, could,
estimates, expects, intends,
may, plans, potential,
predicts, will, should,
seeks, pro forma or similar expressions.
These statements are only predictions based on current
expectations and assumptions and involve known and unknown
risks, uncertainties and other factors that may cause our or our
industrys actual results, levels of activity, performance
or achievements to be materially different from any future
results, levels of activity, performance or achievements
expressed or implied by such forward-looking statements. You
should not place undue reliance on these forward-looking
statements.
Although we believe that the expectations reflected in our
forward-looking statements are reasonable, we cannot guarantee
future results, levels of activity, performance or achievements.
We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new
information, future events or otherwise after the date of this
Form 10-K.
In light of these risks and uncertainties, the forward-looking
events and circumstances contained in this
Form 10-K
may not occur, causing actual results to differ materially from
those anticipated or implied by our forward-looking statements.
3
Industry
Background
According to NPD Group, Inc., a market research firm, the
electronic game industry was an approximately $13.5 billion
market in the United States in 2006. Of this $13.5 billion
market, approximately $12.5 billion was attributable to
video game products, excluding sales of used video game
products, and approximately $1.0 billion was attributable
to PC entertainment software. According to International
Development Group, a market research firm, retail sales of video
game hardware and software and PC entertainment software totaled
approximately $10.3 billion in Europe in 2006. The Canadian
Press has reported that the video game product market in Canada
was approximately $800 million in 2006. According to the
Interactive Entertainment Association of Australia, the
Australian market for video game products was approximately
$700 million in 2006.
New Video Game Products. The Entertainment
Software Association (formerly the Interactive Digital Software
Association), or ESA, estimates that 69% of all American heads
of households play video or computer games. We expect the
following trends to result in increased sales of video game
products:
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Hardware Platform Technology Evolution. Video
game hardware has evolved significantly from the early products
launched in the 1980s. The processing speed of video game
hardware has increased from 8-bit speeds in the 1980s to high
speed processors in next-generation systems such as Sony
PlayStation 3 and Nintendo Wii, launched in November 2006 in
North America and worldwide, respectively, and Microsoft Xbox
360, launched in November 2005. In addition, portable handheld
video game devices have evolved from the 8-bit Nintendo Game Boy
to the
128-bit
Nintendo DS, which was introduced in November 2004, and the Sony
PSP, which was introduced in March 2005. Technological
developments in both chip processing speed and data storage have
provided significant improvements in advanced graphics and audio
quality, which allow software developers to create more advanced
games, encourage existing players to upgrade their hardware
platforms and attract new video game players to purchase an
initial system. As general computer technology advances, we
expect video game technology to make similar advances.
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Next-Generation Systems Provide Multiple Capabilities Beyond
Gaming. Many next-generation hardware platforms,
including Sony PlayStation 2 and 3 and Microsoft Xbox and Xbox
360, utilize a DVD software format and have the potential to
serve as multi-purpose entertainment centers by doubling as a
player for DVD movies and compact discs. In addition, Sony
PlayStation 3 and PSP, Nintendo DS and Wii and Microsoft Xbox
360 all provide internet connectivity.
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Backward Compatibility. Sony PlayStation 2
and 3, Nintendo DS and Wii and Microsoft Xbox 360 are
backward compatible, meaning that titles produced for the
earlier version of the hardware platform may be used on the new
hardware platform. We believe that backward compatibility
results in more stable industry growth because the decrease in
consumer demand for products associated with existing hardware
platforms that typically precedes the release of next-generation
hardware platforms is diminished.
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Introduction of Next-Generation Hardware Platforms Drives
Software Demand. Sales of video game software
generally increase as next-generation platforms mature and gain
wider acceptance. Historically, when a new platform is released,
a limited number of compatible game titles are immediately
available, but the selection grows rapidly as manufacturers and
third-party publishers develop and release game titles for that
new platform. For example, when Microsoft Xbox 360 was released
in November 2005, approximately 20 game titles were available
for sale. Currently, there are over 115 titles for the Microsoft
Xbox 360 platform available for sale.
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Broadening Demographic Appeal. While the
typical electronic game enthusiast is male between the ages of
14 and 35, the electronic game industry is broadening its
appeal. More females are playing electronic video games, in part
due to the development of video game products that appeal to
them. According to ESA, approximately 38% of all electronic game
players are female. More adults are also playing video games as
a portion of the population that played video games in their
childhood continues to play and advance to the next-generation
video game products. According to ESA, the average game player
is 33 years old. In addition, the availability of used
video game products for sale has enabled a lower-economic
demographic, that may not have been able to afford the
considerably more expensive new video game products, to
participate in the video game industry.
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Used Video Game Market. As the installed base
of video game hardware platforms has increased and new hardware
platforms are introduced, a growing used video game market has
evolved. Based on reports published by NPD, we believe that, as
of December 2006, the installed base of video game hardware
systems in the United States, based on original sales, totaled
over 200 million units, including approximately 700,000
Sony PlayStation 3 units, 1 million Nintendo Wii
units, 4.5 million Microsoft Xbox 360 units,
6.7 million Sony PSP units, 37 million Sony
PlayStation 2 units, 14 million Microsoft Xbox units,
11 million Nintendo GameCube units, 44 million
Nintendo DS, Game Boy Advance SP and Game Boy Advance units and
over 100 million units of older hardware platforms
including Sony PlayStation, Sega Dreamcast, Nintendo 64,
Nintendo Game Boy and Game Boy Color, Sega Genesis and Super
Nintendo systems. Hardware manufacturers and third-party
software publishers have produced a wide variety of software
titles for each of these hardware platforms. Based on internal
company estimates, we believe that the installed base of video
game software units in the United States exceeds 1 billion
units. According to the International Development Group, the
installed base of hardware systems in Europe is approximately
77 million units.
PC Entertainment Software. PC entertainment
software is generally sold in the form of CD-ROMs and played on
multimedia PCs featuring fast processors, expanded memories, and
enhanced graphics and audio capabilities.
Business
Strategy
Our goal is to strengthen our position as the worlds
largest retailer of new and used video game products and PC
entertainment software by focusing on the following strategies:
Continue to Execute Our Proven Growth
Strategies. We intend to continue to execute our
proven growth strategies, including:
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Continuing to open new strip center stores in our target markets
and new mall stores in selected mall locations; and
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Increasing our comparable store sales and operating earnings by
capitalizing on industry growth and increasing sales of used
video game products and our Game Informer magazine.
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Targeting a Broad Audience of Game Players. We
have created a store environment targeting a broad audience
including the electronic game enthusiast, the casual gamer and
the seasonal gift giver. Our stores focus on the electronic game
enthusiast who demands the latest merchandise featuring the
hottest technology immediately on the day of release
and the value-oriented customer who wants a wide selection of
value-priced used video game products. Our stores offer the
opportunity to trade in used video game products in exchange for
store credits applicable to future purchases, which, in turn,
drives more sales.
Enhancing our Image as a Destination
Location. Our stores serve as destination
locations for game players due to our broad selection of
products, knowledgeable sales associates, game-oriented
environment and unique pricing proposition. We offer all major
video game platforms, provide a broad assortment of video game
products and offer a larger and more current selection of
merchandise than other retailers. We provide a high level of
customer service by hiring game enthusiasts and providing them
with ongoing sales training, as well as training in the latest
technical and functional elements of our products and services.
Our stores are equipped with several video game sampling areas,
which provide our customers the opportunity to play games before
purchase, as well as equipment to play video game clips.
Offering the Largest Selection of Used Video Game
Products. We are the largest retailer of used
video games in the world and carry the broadest selection of
used video game products for both current and previous
generation platforms. We are one of the only retailers that
provide video game software for previous generation platforms,
giving us a unique advantage in the video game retail industry.
The opportunity to trade in and purchase used video game
products offers our customers a unique value proposition
generally unavailable at most mass merchants, toy stores and
consumer electronics retailers. We obtain most of our used video
game products from trade-ins made in our stores by our
customers. Used video game products generate significantly
higher gross margins than new video game products.
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Building the GameStop Brand. We currently
operate most of Historical GameStops stores under the
GameStop name. Within the next 12 to 18 months, we intend
to rebrand the remaining EB stores to the GameStop brand.
Building the GameStop brand has enabled us to leverage brand
awareness and to capture advertising and marketing efficiencies.
Our branding strategy is further supported by the GameStop
loyalty card and our web site. The GameStop loyalty card, which
is obtained as a bonus with a paid subscription to our Game
Informer magazine, offers customers discounts on selected
merchandise in our stores. Our web site allows our customers to
buy games on-line and to learn about the latest video game
products and PC entertainment software and their availability in
our stores.
Providing a
First-to-Market
Distribution Network. We employ a variety of
rapid-response distribution methods in our efforts to be the
first-to-market
for new video game products and PC entertainment software. We
strive to deliver popular new releases to selected stores within
hours of release and to all of our stores by the next morning.
This highly efficient distribution network is essential, as a
significant portion of a new titles sales will be
generated in the first few days and weeks following its release.
As the worlds largest retailer of video game products and
PC entertainment software with a proven capability to distribute
new releases to our customers quickly, we believe that we
regularly receive a disproportionately large allocation of
popular new video game products and PC entertainment
software. On a daily basis, we actively monitor sales trends,
customer reservations and store manager feedback to ensure a
high in-stock position for each store. To assist our customers
in obtaining immediate access to new releases, we offer our
customers the opportunity to pre-order products in our stores or
through our web site prior to their release.
Investing in our Information Systems and Distribution
Capabilities. We employ sophisticated and
fully-integrated inventory management, store-level point of sale
and financial systems and
state-of-the-art
distribution facilities. These systems enable us to maximize the
efficiency of the flow of over 5,000 SKUs, improve store
efficiency, optimize store in-stock positions and carry a broad
selection of inventory. Our proprietary inventory management
system enables us to maximize sales of new release titles and
avoid markdowns as titles mature and utilizes electronic
point-of-sale
equipment that provides corporate headquarters with daily
information regarding store-level sales and available inventory
levels to automatically generate replenishment shipments to each
store at least twice a week. In addition, our highly-customized
inventory management system allows us to actively manage the
pricing and product availability of our used video game products
across our store base and to reallocate our inventory as
necessary. Our systems enable each store to carry a merchandise
assortment uniquely tailored to its own sales mix and customer
needs. Our ability to react quickly to consumer purchasing
trends has resulted in a target mix of inventory, reduced
shipping and handling costs for overstocks and reduced our need
to discount products.
Growth
Strategy
New Store Expansion. We intend to continue to
open new stores in our targeted markets. We opened 421 new
stores in the fiscal year ended February 3, 2007
(fiscal 2006), and Historical GameStop opened 221
new stores in fiscal 2005 prior to the consummation of the
mergers on October 8, 2005. EB opened 415 stores in fiscal
2005 prior to the consummation of the mergers. Between the
consummation of the mergers and the end of fiscal 2005, we
opened 156 stores. We plan to open approximately 500 to 550 new
stores in the fiscal year ending February 2, 2008
(fiscal 2007). Our primary growth vehicles will be
the expansion of our strip center store base in the United
States and the expansion of our international store base. Our
strategy within the U.S. is to open strip center stores in
targeted major metropolitan markets and in regional shopping
centers in other markets. Our international strategy is to
continue our expansion in Europe and to continue to open stores
in advantageous markets and locations in Canada and Australia.
We analyze each market relative to target population and other
demographic indices, real estate availability, competitive
factors and past operating history, if available. In some cases,
these new stores may adversely impact sales at existing stores,
but our goal is to minimize the impact.
Increase Comparable Store Sales. We plan to
increase our comparable store sales by capitalizing on the
growth in the video game industry, expanding our sales of used
video game products and increasing awareness of the GameStop
name.
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Capitalize on Growth in Demand. Our sales of
new video game hardware, new video game software and used video
game products grew by approximately 140%, 60% and 58%,
respectively, in fiscal 2005 and by an additional 113%, 62% and
63%, respectively, in fiscal 2006, due primarily to the mergers.
Comparable store sales on a pro forma basis for Historical
GameStop and EB decreased 1.4% in fiscal 2005, due to soft
demand leading up to the U.S. launch of the Microsoft Xbox 360
in November 2005. In fiscal 2006, our comparable store sales
increased 11.9%, driven in large measure by the North American
launch of the Sony PlayStation 3 and the worldwide launch of the
Nintendo Wii, which were launched in November 2006, and the
availability of the Microsoft Xbox 360 in all markets. During
fiscal 2005, despite limited supplies of the Microsoft Xbox 360,
we capitalized on the demand for video game software and
accessories that followed that launch and the launch in March
2005 of the Sony PlayStation Portable. During fiscal 2006,
despite again facing limited supplies of the newly launched Sony
PlayStation 3 and Nintendo Wii, we capitalized on the demand for
these new video game systems and the related video game software
and accessories that followed these launches. Over the next few
years, we expect to continue to capitalize on the increasing
installed base for these latest generation platforms and the
related growth in video game software and accessories sales.
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Increase Sales of Used Video Game Products. We
will continue to expand the selection and availability of used
video game products in our U.S. and international stores. Our
strategy consists of increasing consumer awareness of the
benefits of trading in and buying used video game products at
our stores through increased marketing activities. We expect the
continued growth of new platform technology to drive trade-ins
of previous generation products, as well as next generation
platforms, thereby expanding the supply of used video game
products.
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Increase GameStop Brand Awareness. We intend
to increase customer awareness of the GameStop brand. In
connection with our brand-building efforts, in each of the last
three fiscal years, we increased the amount of media advertising
in targeted markets. In fiscal 2007, we plan to continue to
increase media advertising, to expand our GameStop loyalty card
program, to aggressively promote trade-ins of used video game
products in our stores and to leverage our web sites at
www.gamestop.com and www.ebgames.com.
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Merchandise
Substantially all of our revenues are derived from the sale of
tangible products. Our product offerings consist of new and used
video game products, PC entertainment software, and related
products, such as trading cards and strategy guides. Our
in-store inventory generally consists of a constantly changing
selection of over 5,000 SKUs. We have buying groups in the U.S.,
Canada, Australia and Europe that negotiate terms, discounts and
cooperative advertising allowances for the stores in their
respective geographic areas. We use customer requests and
feedback, advance orders, industry magazines and product reviews
to determine which new releases are expected to be hits. Advance
orders are tracked at individual stores to distribute titles and
capture demand effectively. This merchandise management is
essential because a significant portion of a games sales
are usually generated in the first days and weeks following its
release.
Video Game Software. We purchase new video
game software directly from the leading manufacturers, including
Sony Computer Entertainment of America, Nintendo of America,
Inc. and Microsoft Corp., as well as over 40 third-party game
publishers, such as Electronic Arts, Inc. and Activision, Inc.
We are one of the largest customers of video game titles sold by
these publishers. We generally carry over 1,000 SKUs of new
video game software at any given time across a variety of
genres, including Sports, Action, Strategy, Adventure/Role
Playing and Simulation.
Used Video Game Products. We are the largest
retailer of used video games in the world. We provide our
customers with an opportunity to trade in their used video game
products in our stores in exchange for store credits which can
be applied towards the purchase of other products, primarily new
merchandise. We have the largest selection (approximately
3,500 SKUs) of used video game titles which have an average
price of $14 as compared to an average price of $36 for new
video game titles and which generate significantly higher gross
margins than new video game products. Our trade-in program
provides our customers with a unique value proposition which is
generally unavailable at mass merchants, toy stores and consumer
electronics retailers. This program provides us
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with an inventory of used video game products which we resell to
our more value-oriented customers. In addition, our
highly-customized inventory management system allows us to
actively manage the pricing and product availability of our used
video game products across our store base and to reallocate our
inventory as necessary. Our trade-in program also allows us to
be one of the only suppliers of previous generation platforms
and related video games. We also operate refurbishment centers
in the U.S., Canada, Australia and Europe where defective video
game products can be tested, repaired, relabeled, repackaged and
redistributed back to our stores.
Video Game Hardware. We offer the video game
platforms of all major manufacturers, including Sony PlayStation
2 and 3 and PSP, Microsoft Xbox and Xbox 360, Nintendo Wii, DS,
GameCube and Game Boy Advance SP. We also offer extended service
agreements on video game hardware and software. In support of
our strategy to be the destination location for electronic game
players, we aggressively promote the sale of video game
platforms. Video game hardware sales are generally driven by the
introduction of new platform technology and the reduction in
price points as platforms mature. Due to our strong
relationships with the manufacturers of these platforms, we
often receive disproportionately large allocations of new
release hardware products, which is an important component of
our strategy to be the destination of choice for electronic game
players. We believe that selling video game hardware increases
store traffic and promotes customer loyalty, leading to
increased sales of video game software and accessories, which
have higher gross margins than video game hardware.
PC Entertainment and Other Software. We
purchase PC entertainment software from over 45 publishers,
including Electronic Arts, Microsoft and Vivendi Universal. We
offer PC entertainment software across a variety of genres,
including Sports, Action, Strategy, Adventure/Role Playing and
Simulation.
Accessories and Other Products. Video game
accessories consist primarily of controllers, memory cards and
other add-ons. PC entertainment accessories consist primarily of
joysticks and mice. We also carry strategy guides and magazines,
as well as trading cards. We carry over 350 SKUs of accessories
and other products. In general, this category has higher margins
than new video game and PC entertainment products.
Store
Operations
As of February 3, 2007, we operated 4,778 stores, primarily
under the names GameStop or EB Games. Each of our stores
typically carries over 5,000 SKUs. We design our stores to
provide an electronic gaming atmosphere with an engaging and
visually captivating layout. Our stores are equipped with
several video game sampling areas, which provide our customers
the opportunity to play games before purchase, as well as
equipment to play video game clips. We use store configuration,
in-store signage and product demonstrations to produce marketing
opportunities both for our vendors and for us.
Our stores, which average approximately 1,500 square feet,
carry a balanced mix of new and used video game products and PC
entertainment software. Our stores are generally located in
high-traffic power strip centers, local neighborhood
strip centers and high-traffic shopping malls, primarily in
major metropolitan areas. These locations provide easy access
and high frequency of visits and, in the case of strip center
stores, high visibility. We target strip centers that are
conveniently located, have a mass merchant or supermarket anchor
tenant and have a high volume of customers.
Operating
Segments
Following the completion of the mergers, we operate our business
in the following segments: United States, Canada, Australia and
Europe. We identified these segments based on a combination of
geographic areas, the methods with which we analyze performance
and the division of management responsibility. Each of the
segments consists primarily of retail operations with all stores
engaged in the sale of new and used video game systems, software
and accessories and PC entertainment software and related
accessories. These products are substantially the same
regardless of geographic location, with the only differences in
merchandise carried being the timing of release of new products.
Stores in all segments are similar in size at approximately
1,500 square feet each.
Segment results for the United States include retail operations
in the 50 states, the District of Columbia, Guam and Puerto
Rico, the electronic commerce websites www.gamestop.com
and www.ebgames.com and Game Informer magazine.
Segment results for Canada include retail operations in stores
throughout Canada and segment
8
results for Australia include retail operations in Australia and
New Zealand. Segment results for Europe include retail
operations in 11 European countries. Prior to the mergers,
Historical GameStop had operations in Ireland and the United
Kingdom which were not material to our business.
Our U.S. segment is supported by distribution centers in
Texas and Kentucky, and further supported through the use of
third-party distribution centers for new release titles. We
distribute merchandise to our Canadian segment from a
distribution center in Ontario. We have a distribution center
near Brisbane, Australia which supports our Australian
operations and a small distribution facility in New Zealand
which supports the stores in New Zealand. European segment
operations are supported by five regionally-located distribution
centers.
Our international segments purchase products from many of the
same vendors as the U.S., including Sony and Electronic Arts.
Products from certain other vendors such as Microsoft and
Nintendo are obtained through distributors operating in the
various countries in which we operate.
Additional information, including financial information,
regarding our operating segments can be found in
Managements Discussion and Analysis of Financial Condition
and Results of Operations elsewhere in this Annual Report on
Form 10-K
and in Note 17 of Notes to Consolidated Financial
Statements.
Site
Selection and Locations
Site Selection. In the U.S., we have a
dedicated staff of real estate personnel experienced in
selecting store locations. International locations are selected
by the management in each region or country. Site selections for
new stores are made after an extensive review of demographic
data and other information relating to market potential,
competitor access and visibility, compatible nearby tenants,
accessible parking, location visibility, lease terms and the
location of our other stores. Most of our stores are located in
highly visible locations within malls and strip centers.
Locations. The table below sets forth the
number of our stores located in the U.S., Canada, Europe and
Australia as of February 3, 2007:
|
|
|
|
|
|
|
Number
|
|
United States
|
|
of Stores
|
|
|
Alabama
|
|
|
66
|
|
Alaska
|
|
|
4
|
|
Arizona
|
|
|
75
|
|
Arkansas
|
|
|
26
|
|
California
|
|
|
400
|
|
Colorado
|
|
|
55
|
|
Connecticut
|
|
|
47
|
|
Delaware
|
|
|
16
|
|
District of Columbia
|
|
|
2
|
|
Florida
|
|
|
266
|
|
Georgia
|
|
|
129
|
|
Guam
|
|
|
2
|
|
Hawaii
|
|
|
18
|
|
Idaho
|
|
|
8
|
|
Illinois
|
|
|
164
|
|
Indiana
|
|
|
68
|
|
Iowa
|
|
|
30
|
|
Kansas
|
|
|
32
|
|
Kentucky
|
|
|
49
|
|
Louisiana
|
|
|
57
|
|
Maine
|
|
|
9
|
|
9
|
|
|
|
|
|
|
Number
|
|
United States
|
|
of Stores
|
|
|
Maryland
|
|
|
95
|
|
Massachusetts
|
|
|
75
|
|
Michigan
|
|
|
113
|
|
Minnesota
|
|
|
53
|
|
Mississippi
|
|
|
33
|
|
Missouri
|
|
|
64
|
|
Montana
|
|
|
7
|
|
Nebraska
|
|
|
21
|
|
Nevada
|
|
|
31
|
|
New Hampshire
|
|
|
22
|
|
New Jersey
|
|
|
144
|
|
New Mexico
|
|
|
26
|
|
New York
|
|
|
201
|
|
North Carolina
|
|
|
118
|
|
North Dakota
|
|
|
8
|
|
Ohio
|
|
|
160
|
|
Oklahoma
|
|
|
46
|
|
Oregon
|
|
|
29
|
|
Pennsylvania
|
|
|
189
|
|
Puerto Rico
|
|
|
45
|
|
Rhode Island
|
|
|
13
|
|
South Carolina
|
|
|
61
|
|
South Dakota
|
|
|
4
|
|
Tennessee
|
|
|
74
|
|
Texas
|
|
|
340
|
|
Utah
|
|
|
29
|
|
Vermont
|
|
|
7
|
|
Virginia
|
|
|
120
|
|
Washington
|
|
|
74
|
|
West Virginia
|
|
|
23
|
|
Wisconsin
|
|
|
46
|
|
Wyoming
|
|
|
5
|
|
|
|
|
|
|
Sub-total
for United States
|
|
|
3,799
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
|
|
|
Canada
|
|
|
267
|
|
|
|
|
|
|
Australia
|
|
|
191
|
|
New Zealand
|
|
|
28
|
|
|
|
|
|
|
Sub-total
for Australia
|
|
|
219
|
|
|
|
|
|
|
Austria
|
|
|
6
|
|
Denmark
|
|
|
26
|
|
Finland
|
|
|
1
|
|
10
|
|
|
|
|
|
|
Number
|
|
International
|
|
of Stores
|
|
|
Germany
|
|
|
95
|
|
Ireland
|
|
|
35
|
|
Italy
|
|
|
157
|
|
Norway
|
|
|
12
|
|
Spain
|
|
|
101
|
|
Sweden
|
|
|
46
|
|
Switzerland
|
|
|
8
|
|
United Kingdom
|
|
|
6
|
|
|
|
|
|
|
Sub-total
for Europe
|
|
|
493
|
|
|
|
|
|
|
Sub-total
for International
|
|
|
979
|
|
|
|
|
|
|
Total stores
|
|
|
4,778
|
|
|
|
|
|
|
Game
Informer
We publish Game Informer, a monthly video game magazine
featuring reviews of new title releases, tips and secrets about
existing games and news regarding current developments in the
electronic game industry. The magazine is sold through
subscription and through displays in our United States and
Ireland stores. For its February 2007 issue, the magazine had
approximately 2.7 million paid subscriptions. According to
Mediaweek magazine, Game Informer is the
23rd largest consumer publication in the U.S. Game
Informer revenues are also generated through the sale of
advertising space. In addition, we offer the GameStop loyalty
card as a bonus with each paid subscription, providing our
subscribers with a discount on selected merchandise.
E-Commerce
We operate electronic commerce web sites at
www.gamestop.com and www.ebgames.com that allow
our customers to buy video game products and other merchandise
on-line. The sites also offer customers information and content
about available games, release dates for upcoming games, and
access to store information, such as location and product
availability. In 2005, we entered into an arrangement with
Barnes & Noble under which www.gamestop.com is
the exclusive specialty video game retailer listed on
www.bn.com, Barnes & Nobles
e-commerce
site.
Advertising
Our U.S. stores are primarily located in high traffic, high
visibility areas of regional shopping malls and strip centers.
Given the high foot traffic drawn past the stores themselves, we
use in-store marketing efforts such as window displays and
coming soon signs to attract customers, as well as
to promote used video game products and subscriptions to our
Game Informer magazine. Inside the stores, we feature
selected products through the use of vendor displays,
coming soon or preview videos, signs, catalogs,
point-of-purchase
materials and end-cap displays. These advertising efforts are
designed to increase the initial sales of new titles upon their
release.
On a global basis, we receive cooperative advertising and market
development funds from manufacturers, distributors, software
publishers and accessory suppliers to promote their respective
products. Generally, vendors agree to purchase advertising space
in one of our advertising vehicles. Once we run the advertising,
the vendor pays to us an agreed amount.
In the last three years, as part of our brand-building efforts
and targeted growth strategies, we expanded our advertising and
promotional activities in certain targeted markets at certain
key times of the year. In addition, we expanded our use of radio
advertising in certain markets to promote brand awareness and
store openings. We plan to continue these efforts in fiscal 2007.
11
Information
Management
Our operating strategy involves providing a broad merchandise
selection to our customers as quickly and as cost-effectively as
possible. We use our inventory management systems to maximize
the efficiency of the flow of products to our stores, enhance
store efficiency and optimize store in-stock and overall
investment in inventory.
Distribution. We operate a 380,000 square
foot distribution center in Grapevine, Texas and a
260,000 square foot distribution center in Louisville,
Kentucky. EB operated a 315,000 square foot distribution
center in Sadsbury Township, Pennsylvania which was sold in June
2006. EBs distribution operations in Pennsylvania were
moved to facilities in Texas and Kentucky. We have integrated
the distribution operations of both Historical GameStop and EB
and currently use the center in Louisville, Kentucky to support
our
first-to-market
distribution efforts, while our Grapevine, Texas facility
supports efforts to replenish stores. In order to enhance our
first-to-market
distribution network, we also utilize the services of several
off-site, third-party operated distribution centers that pick up
products from our suppliers, repackage the products for each of
our stores and ship those products to our stores by package
carriers. Our ability to rapidly process incoming shipments of
new release titles at the Louisville and third-party facilities
and deliver those shipments to all of our stores, either that
day or by the next morning, enables us to meet peak demand and
replenish stores at least twice a week.
The
state-of-the-art
facilities in Grapevine, Texas and Louisville, Kentucky are
designed to effectively control and minimize inventory levels.
Technologically-advanced conveyor systems and flow-through racks
control costs and improve speed of fulfillment in both
facilities. The technology used in the distribution centers
allow for high-volume receiving, distributions to stores and
returns to vendors. Inventory is shipped to each store at least
twice a week, or daily, if necessary, in order to keep stores in
supply of products.
We also operate distribution centers in Canada, Australia and in
various locations in Europe.
Management Information Systems. Our
integration efforts were completed in the first half of fiscal
2006 and focused on the conversion of the
point-of-sale
system used in the Historical GameStop stores to the
point-of-sale
technology developed by EB and used in the EB stores and the
conversion of the
point-of-sale
technology in the EB stores to report results to the proprietary
inventory management system used by Historical GameStop. Our
proprietary inventory management system and
point-of-sale
technology show daily sales and in-store stock by title by
store. Systems in place now and after integration use this data
to automatically generate replenishment shipments to each store
from our distribution centers, enabling each store to carry a
merchandise assortment uniquely tailored to its own sales mix
and rate of sale. Our call lists and reservation system also
provide our buying staff with information to determine order
size and inventory management for
store-by-store
inventory allocation. We constantly review and edit our
merchandise categories with the objective of ensuring that
inventory is
up-to-date
and meets customer needs.
To support our U.S. operations, we use a large-scale,
Intel-based computing environment with a
state-of-the-art
storage area network and a wired and wireless corporate network
installed at our U.S. headquarters, and a secure, virtual
private network to access and provide services to computing
assets located in our stores, distribution centers and satellite
offices and to our mobile workforce. This strategy has proven to
minimize initial outlay of capital while allowing for
flexibility and growth as operations expand. To support our
international operations, we use a mid-range, scalable computing
environment and a
state-of-the-art
storage area network. Computing assets and our mobile workforce
around the globe access this environment via a secure, virtual
private network. Regional communication links exist to each of
our distribution centers and offices in international locations
with connectivity to our U.S. data center as required by
our international, distributed applications.
Our in-store
point-of-sale
system enables us to efficiently manage in-store transactions.
This proprietary
point-of-sale
system has been enhanced to facilitate trade-in transactions,
including automatic
look-up of
trade-in prices and printing of machine-readable bar codes to
facilitate in-store restocking of used video games. In addition,
our central database of all used video game products allows us
to actively manage the pricing and product availability of our
used video game products across our store base and re-allocate
our used video game products as necessary.
12
Field
Management and Staff
GameStops U.S. store operations are managed by a
centrally-located senior vice president of stores, four vice
presidents of stores and 28 regional store operations directors.
The regions are further divided into districts, each with a
district manager covering an average of 14 stores. In total,
there are approximately 260 districts. Our stores in Europe are
managed by two vice presidents and managing directors in each
country. Our stores in Australia and Canada are each managed by
a vice president. Each store employs, on average, one manager,
one assistant manager and between two and ten sales associates,
many of whom are part-time employees. Each store manager is
responsible for managing their personnel and the economic
performance of their store. We have cultivated a work
environment that attracts employees who are actively interested
in electronic games. We seek to hire and retain employees who
know and enjoy working with our products so that they are better
able to assist customers. To encourage them to sell the full
range of our products and to maximize our profitability, we
provide our employees with targeted incentive programs to drive
overall sales and sales of higher margin products. We also
provide our U.S. employees with the opportunity to take
home and try new video games, which enables them to better
discuss those games with our customers. In addition, employees
are casually dressed to encourage customer access and increase
the game-oriented focus of the stores. We also
employ regional loss prevention managers who assist the stores
in implementing security to prevent theft of our products.
Our stores communicate with our corporate offices daily via
e-mail. This
e-mail
allows for better tracking of trends in upcoming titles,
competitor strategies and in-stock inventory positions. In
addition, this communication allows title selection in each
store to be continuously updated and tailored to reflect the
tastes and buying patterns of the stores local market.
These communications also give field management access to
relevant inventory levels and loss prevention information. We
have invested in significant management training programs for
our store managers and our district managers to enhance their
business management skills. We also sponsor annual store
managers conferences in the U.S., Canada, Europe and
Australia, which we invite all video game software publishers to
attend, and operate an intense educational training program to
provide our employees with information about the video game
products that will be released by those publishers in the
holiday season.
Customer
Service
Our store personnel provide value-added services to each
customer, such as maintaining lists of regular customers and
reserving new releases for customers with a down payment to
ensure product availability. In addition, our store personnel
readily provide product reviews to ensure customers are making
informed purchasing decisions and inform customers of available
resources, including Game Informer, to increase a
customers enjoyment of the product upon purchase.
Vendors
We purchase substantially all of our new products worldwide from
approximately 75 manufacturers and software publishers and
approximately five distributors. Purchases from the top ten
vendors accounted for approximately 65% of our new product
purchases in fiscal 2006. Only Microsoft Corp., Sony Computer
Entertainment of America, Nintendo of America and Electronic
Arts, Inc. (which accounted for 14%, 13%, 11% and 10%,
respectively) individually accounted for more than 10% of our
new product purchases during fiscal 2006. We have established
price protections and return privileges with our primary vendors
in order to reduce the risk of inventory obsolescence. In
addition, we have no purchase contracts with trade vendors and
conduct business on an
order-by-order
basis, a practice that is typical throughout the industry. We
believe that maintaining and strengthening our long-term
relationships with our vendors is essential to our operations
and continued expansion. We believe that we have very good
relationships with our vendors.
Competition
The electronic game industry is intensely competitive and
subject to rapid changes in consumer preferences and frequent
new product introductions. In the U.S., we compete with mass
merchants and regional chains, including Wal-Mart Stores, Inc.
and Target Corporation; computer product and consumer
electronics stores, including Best Buy Co., Inc. and Circuit
City Stores, Inc.; other video game and PC software specialty
stores
13
located in malls and other locations; toy retail chains,
including Toys R Us, Inc.; mail-order businesses;
catalogs; direct sales by software publishers; and online
retailers and game rental companies. In addition, video games
are available for sale and rental from many video stores, such
as Movie Gallery Inc. and Blockbuster, Inc. Video game products
may also be distributed through other methods which may emerge
in the future. We also compete with sellers of used video game
products. Additionally, we compete with other forms of
entertainment activities, including movies, television, theater,
sporting events and family entertainment centers.
Competitors in Europe include Game Group PLC and its
subsidiaries, which operates in the United Kingdom, Ireland,
Scandinavia, France, Australia, Spain and Portugal and Media
Markt, which operates throughout Europe. Competitors in Canada
include Wal-Mart, Best Buy and its subsidiary Future Shop. In
Australia, competitors include K-Mart, Target, Myer Department
stores, Big W discount department stores and Dick Smith
electronics stores.
Seasonality
Our business, like that of many retailers, is seasonal, with the
major portion of our sales and operating profit realized during
the fourth fiscal quarter, which includes the holiday selling
season. During fiscal 2006, we generated approximately 43% of
our sales and approximately 67% of our operating earnings during
the fourth quarter. During fiscal 2005, on a pro forma basis, we
generated approximately 38% of our sales and approximately 75%
of our operating earnings during the fourth quarter.
Trademarks
We have a number of trademarks and servicemarks, including
GameStop, Game Informer, EB
Games, Electronics Boutique,
Babbages and FuncoLand, all of
which have been registered by us with the United States Patent
and Trademark Office. For many of our trademarks and
servicemarks, we also have registered or have registrations
pending with the trademark authorities for our international
locations. We maintain a policy of pursuing registration of our
principal marks and opposing any infringement of our marks.
Employees
We have approximately 12,000 full-time salaried and hourly
employees and between 20,000 and 30,000 part-time hourly
employees worldwide, depending on the time of year. Fluctuation
in the number of part-time hourly employees is due to the
seasonality of our business. We believe that our relationship
with our employees is excellent. None of our employees is
represented by a labor union or is a member of a collective
bargaining unit.
Available
Information
We make available on our website (www.gamestop.com),
under Investor Relations SEC Filings,
free of charge, our annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and amendments to those reports as soon as reasonably
practicable after we electronically file or furnish such
material with the Securities and Exchange Commission
(SEC). You may read and copy this information or
obtain copies of this information by mail from the Public
Reference Room of the SEC, 100 F Street, N.E.,
Washington, D.C. 20549, at prescribed rates. Further
information on the operation of the SECs Public Reference
Room in Washington, D.C. can be obtained by calling the SEC
at
1-800-SEC-0330.
The SEC also maintains a website that contains reports, proxy
statements and other information about issuers, like GameStop,
who file electronically with the SEC. The address of that site
is http://www.sec.gov. In addition to copies of our annual
reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and amendments to those reports, the Companys Code of
Standards, Ethics and Conduct is available on our website under
Investor Relations Corporate Governance
and is available to our stockholders in print, free of charge,
upon written request to the Companys Investor Relations
Department at GameStop Corp., 625 Westport Parkway,
Grapevine, Texas 76051.
An investment in our Company involves a high degree of risk. You
should carefully consider the risks below, together with the
other information contained in this report, before you make an
investment decision with respect to
14
our Company. The risks described below are not the only ones
facing our Company. Additional risks not presently known to us,
or that we consider immaterial, may also impair our business
operations. Any of the following risks could materially
adversely affect our business, operating results or financial
condition, and could cause a decline in the trading price of our
common stock and the value of your investment.
Risks
Related to Our Business
We
depend upon our key personnel and they would be difficult to
replace.
Our success depends upon our ability to attract, motivate and
retain key management for our stores and skilled merchandising,
marketing and administrative personnel at our headquarters. We
depend upon the continued services of our key executive
officers, R. Richard Fontaine, our Chairman of the Board and
Chief Executive Officer; Daniel A. DeMatteo, our Vice Chairman
and Chief Operating Officer; Steven R. Morgan, our President;
and David W. Carlson, our Executive Vice President and Chief
Financial Officer. The loss of services of any of our key
personnel could have a negative impact on our business.
We
depend upon the timely delivery of products.
We depend on major hardware manufacturers, primarily Sony,
Nintendo and Microsoft, to deliver new and existing video game
platforms on a timely basis and in anticipated quantities. In
addition, we depend on software publishers to introduce new and
updated software titles. Any material delay in the introduction
or delivery, or limited allocations, of hardware platforms or
software titles could result in reduced sales in one or more
fiscal quarters.
We
depend upon third parties to develop products and
software.
Our business depends upon the continued development of new and
enhanced video game platforms, PC hardware and video game
and PC entertainment software. Our business could suffer due to
the failure of manufacturers to develop new or enhanced video
game platforms, a decline in the continued technological
development and use of multimedia PCs, or the failure of
software publishers to develop popular game and entertainment
titles for current or future generation video game systems or PC
hardware.
Our
ability to obtain favorable terms from our suppliers may impact
our financial results.
Our financial results depend significantly upon the business
terms we can obtain from our suppliers, including competitive
prices, unsold product return policies, advertising and market
development allowances, freight charges and payment terms. We
purchase substantially all of our products directly from
manufacturers, software publishers and approximately five
distributors. Our largest vendors worldwide are Microsoft, Sony,
Nintendo and Electronic Arts, which accounted for 14%, 13%, 11%
and 10%, respectively, of our new product purchases in fiscal
2006. If our suppliers do not provide us with favorable business
terms, we may not be able to offer products to our customers at
competitive prices.
If our
vendors fail to provide marketing and merchandising support at
historical levels, our sales and earnings could be negatively
impacted.
The manufacturers of video game hardware and software and PC
entertainment software have typically provided retailers with
significant marketing and merchandising support for their
products. As part of this support, we receive cooperative
advertising and market development payments from these vendors.
These cooperative advertising and market development payments
enable us to actively promote and merchandise the products we
sell and drive sales at our stores and on our websites. We
cannot assure you that vendors will continue to provide this
support at historical levels. If they fail to do so, our sales
and earnings could be negatively impacted.
The
electronic game industry is cyclical, which could cause
significant fluctuation in our earnings.
The electronic game industry has been cyclical in nature in
response to the introduction and maturation of new technology.
Following the introduction of new video game platforms, sales of
these platforms and related software
15
and accessories generally increase due to initial demand, while
sales of older platforms and related products generally decrease
as customers migrate toward the new platforms. New video game
platforms have historically been introduced approximately every
five years. If video game platform manufacturers fail to develop
new hardware platforms, our sales of video game products could
decline.
Pressure
from our competitors may force us to reduce our prices or
increase spending, which could decrease our
profitability.
The electronic game industry is intensely competitive and
subject to rapid changes in consumer preferences and frequent
new product introductions. We compete with mass merchants and
regional chains, including Wal-Mart and Target; computer product
and consumer electronics stores, including Best Buy and Circuit
City; other U.S. and international video game and PC software
specialty stores located in malls and other locations, such as
Game Group PLC and Media Markt; toy retail chains, including
Toys R Us; mail-order businesses; catalogs; direct
sales by software publishers; and online retailers and game
rental companies. In addition, video games are available for
sale and rental from many video stores, such as Movie Gallery
and Blockbuster. Video game products may also be distributed
through other methods which may emerge in the future. We also
compete with sellers of used video game products. Some of our
competitors in the electronic game industry have longer
operating histories and may have greater financial resources
than we do. Additionally, we compete with other forms of
entertainment activities, including movies, television, theater,
sporting events and family entertainment centers. If we lose
customers to our competitors, or if we reduce our prices or
increase our spending to maintain our customers, we may be less
profitable.
International
events could delay or prevent the delivery of products to our
suppliers.
Our suppliers rely on foreign sources, primarily in Asia, to
manufacture a portion of the products we purchase from them. As
a result, any event causing a disruption of imports, including
the imposition of import restrictions or trade restrictions in
the form of tariffs or quotas, could increase the cost and
reduce the supply of products available to us, which could lower
our sales and profitability.
Our
international operations expose us to numerous
risks.
We have international retail operations in Australia, Canada and
Europe. Because release schedules for hardware and software
introduction in these markets often differ from release
schedules in the United States, the timing of increases and
decreases in foreign sales may differ from the timing of
increases or decreases in domestic sales. We are also subject to
a number of other factors that may affect our current or future
international operations. These include:
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economic downturns;
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currency exchange rate fluctuations;
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international incidents;
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government instability; and
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an increasing number of competitors entering our current and
potential markets.
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Possible
changes in our global tax rate.
As a result of our operations in many foreign countries, our
global tax rate is derived from a combination of applicable tax
rates in the various jurisdictions in which we operate.
Depending upon the sources of our income, any agreements we may
have with taxing authorities in various jurisdictions and the
tax filing positions we take in various jurisdictions, our
overall tax rate may be higher than other companies or higher
than our tax rates have been in the past. We base our estimate
of an annual effective tax rate at any given point in time on a
calculated mix of the tax rates applicable to our company and to
estimates of the amount of income to be derived in any given
jurisdiction. A change in the mix of our business from year to
year and from country to country, changes in rules related to
accounting for income taxes, changes in tax laws in any of the
multiple jurisdictions in which we operate or adverse
16
outcomes from the tax audits that regularly are in process in
any jurisdiction in which we operate could result in an
unfavorable change in our overall tax rate, which could have a
material effect on our business and results of our operations.
If we
are unable to renew or enter into new leases on favorable terms,
our revenue growth may decline.
All of our retail stores are located in leased premises. If the
cost of leasing existing stores increases, we cannot assure you
that we will be able to maintain our existing store locations as
leases expire. In addition, we may not be able to enter into new
leases on favorable terms or at all, or we may not be able to
locate suitable alternative sites or additional sites for new
store expansion in a timely manner. Our revenues and earnings
may decline if we fail to maintain existing store locations,
enter into new leases, locate alternative sites or find
additional sites for new store expansion.
The
ability to download video games and play video games on the
Internet could lower our sales.
While it is currently only possible to download a limited amount
of video game content to the next generation video game systems,
at some point in the future this technology may become more
prevalent. A limited selection of PC entertainment software and
older generation video games is currently available for download
over the Internet. If advances in technology continue to expand
our customers ability to access software through these and
other sources, our customers may no longer choose to purchase
video games or PC entertainment software in our stores. As a
result, sales and earnings could decline.
If we
fail to keep pace with changing industry technology, we will be
at a competitive disadvantage.
The interactive entertainment industry is characterized by
swiftly changing technology, evolving industry standards,
frequent new and enhanced product introductions and product
obsolescence. These characteristics require us to respond
quickly to technological changes and to understand their impact
on our customers preferences. If we fail to keep pace with
these changes, our business may suffer.
An
adverse trend in sales during the holiday selling season could
impact our financial results.
Our business, like that of many retailers, is seasonal, with the
major portion of our sales and operating profit realized during
the fourth fiscal quarter, which includes the holiday selling
season. During fiscal 2006, we generated approximately 43% of
our sales and approximately 67% of our operating earnings during
the fourth quarter. Any adverse trend in sales during the
holiday selling season could lower our results of operations for
the fourth quarter and the entire year.
Our
results of operations may fluctuate from quarter to quarter,
which could affect our business, financial condition and results
of operations.
Our results of operations may fluctuate from quarter to quarter
depending upon several factors, some of which are beyond our
control. These factors include:
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the timing and allocations of new product releases;
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the timing of new store openings; and
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shifts in the timing of certain promotions.
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These and other factors could affect our business, financial
condition and results of operations, and this makes the
prediction of our financial results on a quarterly basis
difficult. Also, it is possible that our quarterly financial
results may be below the expectations of public market analysts.
Our
failure to effectively manage new store openings could lower our
sales and profitability.
Our growth strategy is largely dependent upon opening new stores
and operating them profitably. We opened 421 stores in fiscal
2006 and expect to open approximately 500 to 550 new stores in
fiscal 2007. Our ability to open
17
new stores and operate them profitably depends upon a number of
factors, some of which may be beyond our control. These factors
include:
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the ability to identify new store locations, negotiate suitable
leases and build out the stores in a timely and cost efficient
manner;
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the ability to hire and train skilled associates;
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the ability to integrate new stores into our existing
operations; and
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the ability to increase sales at new store locations.
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Our growth will also depend on our ability to process increased
merchandise volume resulting from new store openings through our
inventory management systems and distribution facilities in a
timely manner. If we fail to manage new store openings in a
timely and cost efficient manner, our growth may decrease.
If our
management information systems fail to perform or are
inadequate, our ability to manage our business could be
disrupted.
We rely on computerized inventory and management systems to
coordinate and manage the activities in our distribution
centers, as well as to communicate distribution information to
the off-site, third-party operated distribution centers with
which we work. The third-party distribution centers pick up
products from our suppliers, repackage the products for each of
our stores and ship those products to our stores by package
carriers. We use inventory replenishment systems to track sales
and inventory. Our ability to rapidly process incoming shipments
of new release titles and deliver them to all of our stores,
either that day or by the next morning, enables us to meet peak
demand and replenish stores at least twice a week, to keep our
stores in stock at optimum levels and to move inventory
efficiently. If our inventory or management information systems
fail to adequately perform these functions, our business could
be adversely affected. In addition, if operations in any of our
distribution centers were to shut down for a prolonged period of
time or if these centers were unable to accommodate the
continued store growth in a particular region, our business
could suffer.
We may
engage in acquisitions which could negatively impact our
business if we fail to successfully complete and integrate
them.
To enhance our efforts to grow and compete, we may engage in
acquisitions. Our plans to pursue future acquisitions are
subject to our ability to negotiate favorable terms for these
acquisitions. Accordingly, we cannot assure you that future
acquisitions will be completed. In addition, to facilitate
future acquisitions, we may take actions that could dilute the
equity interests of our stockholders, increase our debt or cause
us to assume contingent liabilities, all of which may have a
detrimental effect on the price of our common stock. Finally, if
any acquisitions are not successfully integrated with our
business, our ongoing operations could be adversely affected.
Litigation
and litigation results could negatively impact our future
financial condition and results of operation.
In the ordinary course of our business, the Company is, from
time to time, subject to various litigation and legal
proceedings. In the future, the costs or results of such legal
proceedings, individually or in the aggregate, could have a
negative impact on the Companys operations or financial
condition.
Legislative
actions and potential new accounting pronouncements are likely
to cause our general and administrative expenses to increase and
impact our future financial condition and results of
operations.
In order to comply with the New York Stock Exchange listing
standards and rules adopted by the SEC or other regulatory
bodies, we may be required to increase our expenditures and hire
additional personnel and additional outside legal, accounting
and advisory services, all of which may cause our general and
administrative costs to increase. Changes in the accounting
rules could materially increase the expenses that we report
under U.S. generally accepted accounting principles
(GAAP) and adversely affect our operating results.
18
Risks
Relating to Our Indebtedness
To
service our indebtedness, we will require a significant amount
of cash, the availability of which depends on many factors
beyond our control.
Our ability to make scheduled payments or to refinance our debt
obligations depends on our financial and operating performance,
which is subject to prevailing economic and competitive
conditions and to certain financial, business and other factors
beyond our control. These factors include:
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our reliance on suppliers and vendors for sufficient quantities
of their products and new product releases and our ability to
obtain favorable terms from these suppliers and vendors;
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economic conditions affecting the electronic game industry as a
whole;
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the highly competitive environment in the electronic game
industry and the resulting pressure from our competitors
potentially forcing us to reduce our prices or increase spending;
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our ability to open and operate new stores;
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our ability to attract and retain qualified personnel; and
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our dependence upon software publishers to develop popular game
and entertainment titles for video game systems and PCs.
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If our financial condition or operating results deteriorate, our
relations with our creditors, including holders of our senior
floating rate notes and our senior notes (collectively, the
notes), the lenders under our Senior Credit Facility
and our suppliers, may be materially and adversely impacted.
As a
result of the mergers, we have substantial debt that could
adversely impact cash availability for growth and operations and
may increase our vulnerability to general adverse economic and
industry conditions.
We incurred significant additional debt as a result of the
mergers. As of February 3, 2007, we had approximately
$856 million of indebtedness. Our debt service obligations
with respect to this increased indebtedness could have an
adverse impact on our earnings and cash flows for as long as the
indebtedness is outstanding.
Our increased indebtedness could have important consequences,
including the following:
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our ability to obtain additional financing for working capital,
capital expenditures, acquisitions or general corporate purposes
may be impaired;
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we must use a substantial portion of our cash flow from
operations to make debt service payments on the notes and our
Senior Credit Facility, which will reduce the funds available to
us for other purposes such as potential acquisitions and capital
expenditures;
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we may have a higher level of indebtedness than some of our
competitors, which may put us at a competitive disadvantage and
reduce our flexibility in planning for, or responding to,
changing conditions in our industry, including increased
competition; and
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we are more vulnerable to general economic downturns and adverse
developments in our business.
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If our cash flows and capital resources are insufficient to fund
our debt service obligations, we may be forced to reduce or
delay capital expenditures, sell assets, seek additional capital
or restructure or refinance our indebtedness, including the
notes. These alternative measures may not be successful and may
not permit us to meet our scheduled debt service obligations. In
the absence of such operating results and resources, we could
face substantial liquidity problems and might be required to
dispose of material assets or operations to meet our debt
service and other obligations. Our Senior Credit Facility and
the indenture governing the notes restrict our ability to
dispose of assets and use the proceeds from such dispositions.
We may not be able to consummate those dispositions, dispose of
our assets at prices that we believe are fair or use the
proceeds from asset sales to make payments on the notes and
these proceeds may not be adequate to meet any debt service
obligations then due.
19
Because
of our incurrence of floating rate debt resulting from financing
arrangements entered into in connection with the mergers, we may
be adversely affected by interest rate changes.
Our financial position is affected, in part, by fluctuations in
interest rates. The Senior Floating Rate Notes are subject to
floating interest rates, as is our Senior Credit Facility.
Interest rates are highly sensitive to many factors, including
governmental monetary policies, domestic and international
economic and political conditions and other factors beyond our
control. A significant increase in interest rates could have a
material adverse effect on our financial position and results of
operations.
Our
operations are substantially restricted by the indenture
governing the notes and the terms of our Senior Credit
Facility.
The indenture for the notes imposes, and the terms of any future
debt may impose, significant operating and financial
restrictions on us. These restrictions, among other things,
limit the issuers of the notes ability and the ability of
GameStops restricted subsidiaries to:
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incur, assume or permit to exist additional indebtedness or
guaranty obligations;
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incur liens or agree to negative pledges in other agreements;
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engage in sale and leaseback transactions;
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make loans and investments;
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declare dividends, make payments or redeem or repurchase capital
stock;
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engage in mergers, acquisitions and other business combinations;
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prepay, redeem or purchase certain indebtedness;
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amend or otherwise alter the terms of our organizational
documents and our indebtedness, including the notes;
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sell assets; and
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transact with affiliates.
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We cannot assure you that these covenants will not adversely
affect our ability to finance our future operations or capital
needs or to pursue available business opportunities.
The Senior Credit Facility contains various restrictive
covenants prohibiting us, in certain circumstances, from, among
other things, prepaying, redeeming or purchasing certain
indebtedness.
Despite
current anticipated indebtedness levels and restrictive
covenants, we may incur additional indebtedness in the
future.
Despite our current level of indebtedness, we may be able to
incur substantial additional indebtedness in the future,
including additional secured indebtedness. Although the terms of
the indenture governing the notes and our Senior Credit Facility
restrict the issuers of the notes and GameStops restricted
subsidiaries from incurring additional indebtedness, these
restrictions are subject to important exceptions and
qualifications. If we incur additional indebtedness, the risks
that we now face as a result of our leverage could intensify.
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Item 1B.
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Unresolved
Staff Comments
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None.
All of our stores are leased. Store leases typically provide for
an initial lease term of three to ten years, plus renewal
options. This arrangement gives us the flexibility to pursue
extension or relocation opportunities that arise
20
from changing market conditions. We believe that, as current
leases expire, we will be able to obtain either renewals at
present locations or leases for equivalent locations in the same
area.
The terms of the store leases for the 4,778 leased stores open
as of February 3, 2007 expire as follows:
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Number
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Lease Terms to Expire During
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of Stores
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(12 Months Ending on or About
January 31)
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Expired and in negotiations
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815
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2008
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941
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2009
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1,035
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2010
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756
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2011
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536
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2012 and later
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695
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4,778
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In March 2004, we purchased a 480,000 square foot facility
in Grapevine, Texas, which houses our corporate headquarters and
certain of our distribution operations. In May 2006, we
purchased an additional 65,000 square foot building at the
Grapevine, Texas location which is currently being used in our
refurbishing operations. We also own the following distribution
facilities: an 80,000 square foot distribution facility in
Arlov, Sweden; a 120,000 square foot distribution facility
in Brampton, Ontario, Canada; a 107,500 square foot
distribution facility in Milan, Italy; a 67,000 square foot
distribution facility in Memmingen, Germany; and a
70,000 square foot distribution facility in Pinkenba,
Queensland, Australia.
In addition to our stores, we lease the following distribution
or office facilities: a 260,000 square foot distribution
center in Louisville, Kentucky under a lease which expires in
July 2010; a 13,000 square foot distribution facility in
New Zealand under a lease which expires in April 2010; a
22,000 square foot distribution facility in Valencia, Spain
under a lease which expires in March 2009; a 15,000 square
foot office facility in Valencia, Spain under a lease which
expires in August 2009; a 11,700 square foot office
facility in Minneapolis, Minnesota which houses the operations
of Game Informer magazine, under a lease which expires in
February 2012; a 15,000 square foot facility in Dublin,
Ireland under a lease which expires in January 2013; and a
6,100 square foot office facility in West Chester,
Pennsylvania under a lease which expires in August 2008.
We lease a 27,000 square foot distribution center in
Betzigau, Germany under a lease which, by its terms, expires in
September 2011. This facility is no longer in use and we are
actively seeking a settlement with the landlord with respect to
the remaining term of the lease.
On June 15, 2006, the Company sold EBs
140,000 square foot corporate office building in West
Chester, Pennsylvania and EBs 315,000 square foot
distribution facility in Sadsbury Township, Pennsylvania. The
Company retired a $9.2 million mortgage related to the
Pennsylvania distribution facility.
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Item 3.
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Legal
Proceedings
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On October 19, 2004, Milton Diaz filed a complaint against
a subsidiary of EB in the U.S. District Court for the
Western District of New York. Mr. Diaz claimed to represent
a group of current and former employees to whom Electronics
Boutique of America Inc. (EBOA) allegedly failed to
pay minimum wages and overtime compensation in violation of the
Fair Labor Standards Act (FLSA) and New York law.
The plaintiff, joined by four other former employees, moved to
conditionally certify a group of similarly situated individuals
under the FLSA and in March 2005, there was a hearing on this
motion. In March 2005, plaintiffs filed a motion on behalf of
current and former store managers and assistant store managers
in New York to certify a class under New York wage and hour
laws. In August 2005, EBOA filed a motion for summary judgment
as to certain claims and renewed its request that certification
of the claims be denied. On October 17, 2005, the District
Court issued an Order denying plaintiffs request for
conditional certification under the FLSA and for class
certification of plaintiffs New York claims. Plaintiffs
requested permission from the Second Circuit Court of Appeals to
appeal the District Courts Order denying class
certification of their New York claims. EBOAs summary
judgment motion was scheduled to be heard
21
in December 2005. Before the hearing on the summary judgment
motion, the parties agreed to attempt to resolve the matter
without further litigation. The matter now has been resolved and
both the District Court and Second Circuit proceedings have been
dismissed with prejudice. The settlement did not have a material
impact on the Companys financial position or results of
operations.
On February 14, 2005, and as amended, Steve Strickland, as
personal representative of the Estate of Arnold Strickland,
deceased, Henry Mealer, as personal representative of the Estate
of Ace Mealer, deceased, and Willie Crump, as personal
representative of the Estate of James Crump, deceased, filed a
wrongful death lawsuit against GameStop, Sony, Take-Two
Interactive, Rock Star Games and Wal-Mart (collectively, the
Defendants) and Devin Moore in the Circuit Court of
Fayette County, Alabama, alleging that Defendants actions
in designing, manufacturing, marketing and supplying Defendant
Moore with violent video games were negligent and contributed to
Defendant Moore killing Arnold Strickland, Ace Mealer and James
Crump. Plaintiffs are seeking damages of $600 million under
the Alabama wrongful death statute and punitive damages.
GameStop and the other defendants intend to vigorously defend
this action. The Defendants filed a motion to dismiss the case
on various grounds, which was heard in November 2005 and was
denied. The Defendants appealed the denial of the motion to
dismiss and on March 24, 2006, the Alabama Supreme Court
denied the Defendants application. Discovery is
proceeding. Mr. Moore was found guilty of capital murder in
a criminal trial in Alabama and was sentenced to death in August
2005. We do not believe there is sufficient information to
estimate the amount of the possible loss, if any, resulting from
the lawsuit.
On April 18, 2006, former and current store managers
Charles Kohler, James O. Little, III, Jason Clayton, Nick
Quintois, Kirk Overby and Amy Johnson (collectively the
plaintiffs) filed a complaint against the Company in
the U.S. District Court for the Eastern District of
Louisiana, alleging that GameStops salaried retail
managers were misclassified as exempt in violation of the FLSA
and should have been paid overtime. The plaintiffs sought to
represent all current and former salaried retail managers who
were employed by GameStop (as well as a subsidiary of EB) for
the three years before April 18, 2006. The Company filed a
motion to dismiss, transfer or stay the case based on the
pendency of a prior action. After the parties fully briefed the
motion but were still awaiting the courts decision, they
negotiated a settlement of the plaintiffs individual
claims. In November 2006, the court approved the settlement and
the case has been dismissed. The settlement did not have a
material impact on the Companys financial position or
results of operations.
In the ordinary course of our business, the Company is, from
time to time, subject to various other legal proceedings.
Management does not believe that any such other legal
proceedings, individually or in the aggregate, will have a
material adverse effect on the Companys operations or
financial condition.
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Item 4.
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Submission
of Matters to a Vote of Security Holders
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There were no matters submitted to a vote of security holders
during the 14 weeks ended February 3, 2007.
PART II
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Item 5.
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Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
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Price
Range of Common Stock
The Companys Class A common stock is traded on the
New York Stock Exchange (NYSE) under the symbol
GME. The Companys Class B common stock
was traded on the NYSE under the symbol GME.B until
February 7, 2007 when, immediately following approval by a
majority of the Class B common stockholders in a Special
Meeting of the Companys Class B common stockholders,
all outstanding Class B common shares were converted into
Class A common shares on a
one-for-one
basis.
22
The following table sets forth, for the periods indicated, the
high and low sales prices (as adjusted for the Stock Split) of
the Class A common stock on the NYSE Composite Tape:
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Fiscal 2006
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High
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Low
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Fourth Quarter
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$
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29.21
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$
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24.51
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Third Quarter
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$
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26.37
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$
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20.05
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Second Quarter
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$
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24.26
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$
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17.94
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First Quarter
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$
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24.84
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$
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18.63
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Fiscal 2005
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High
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Low
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Fourth Quarter
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$
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20.55
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$
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15.10
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Third Quarter
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$
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19.21
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$
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14.30
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Second Quarter
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$
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18.09
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$
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12.31
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First Quarter
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$
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12.85
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$
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9.27
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The following table sets forth, for the periods indicated, the
high and low sales prices of the Class B common stock on
the NYSE Composite Tape:
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Fiscal 2006
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High
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Low
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Fourth Quarter
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$
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58.32
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$
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47.73
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Third Quarter
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$
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51.15
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$
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36.25
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Second Quarter
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$
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44.09
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$
|
32.58
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First Quarter
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$
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45.68
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$
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33.90
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Fiscal 2005
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High
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Low
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Fourth Quarter
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$
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37.85
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$
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27.20
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Third Quarter
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$
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34.93
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$
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26.55
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Second Quarter
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$
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33.76
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$
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23.30
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First Quarter
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$
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25.20
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$
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18.65
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The high and low sales prices of the Class B shares do not
include the effects of the Conversion or the Stock Split. The
Class B shares were trading as of February 3, 2007, so
this information is provided in accordance with SEC requirements.
Approximate
Number of Holders of Common Equity
As of March 5, 2007, there were approximately 1,198 record
holders of the Companys Class A common stock, par
value $.001 per share.
Dividends
The Company has never declared or paid any dividends on its
common stock. We may consider in the future the advisability of
paying dividends. However, our payment of dividends is and will
continue to be restricted by or subject to, among other
limitations, applicable provisions of federal and state laws,
our earnings and various business considerations, including our
financial condition, results of operations, cash flow, the level
of our capital expenditures, our future business prospects, our
status as a holding company and such other matters that our
board of directors deems relevant. In addition, the terms of the
Senior Credit Facility we entered into in October 2005 and the
terms of the Indenture governing the notes each restrict our
ability to pay dividends. See Liquidity and Capital
Resources included in Managements Discussion
and Analysis of Financial Condition and Results of
Operations.
23
Securities
Authorized for Issuance under Equity Compensation
Plans
Information for our equity compensation plans in effect as of
February 3, 2007 is as follows:
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Number of Securities
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Remaining Available for
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Weighted-Average
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Future Issuance Under
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Number of Securities to
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Exercise Price of
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Equity Compensation
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be Issued Upon Exercise
|
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Outstanding
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|
|
Plans (Excluding
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of Outstanding Options,
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Options, Warrants
|
|
|
Securities Reflected in
|
|
|
|
Warrants and Rights
|
|
|
and Rights
|
|
|
Column(a))
|
|
Plan Category
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
Equity compensation plans approved
by security holders
|
|
|
19,337,000
|
|
|
$
|
8.64
|
|
|
|
3,621,000
|
|
Equity compensation plans not
approved by security holders
|
|
|
0
|
|
|
|
not applicable
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
19,337,000
|
|
|
$
|
8.64
|
|
|
|
3,621,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subsequent to February 3, 2007, an additional 939,000
options to purchase our Class A common stock at an exercise
price of $26.68 per share and 956,000 shares of
restricted stock were granted under our Amended and Restated
2001 Incentive Plan, as amended. These options and restricted
shares vest in equal increments over three years and the options
expire on February 8, 2017.
Purchases
of Equity Securities by the Issuer and Affiliated
Purchasers
There were no repurchases of the Companys equity
securities during the fourth quarter of fiscal 2006. As of
February 3, 2007, the Company had no amount available for
purchases under any repurchase program.
24
|
|
Item 6.
|
Selected
Consolidated Financial Data
|
The following table sets forth our selected consolidated
financial and operating data for the periods and at the dates
indicated. Our fiscal year is composed of 52 or 53 weeks
ending on the Saturday closest to January 31. The fiscal
year ended February 3, 2007 consisted of 53 weeks and
the fiscal years ended January 28, 2006, January 29,
2005, January 31, 2004 and February 1, 2003 consisted
of 52 weeks. The Statement of Operations Data
for the fiscal years ended February 3, 2007,
January 28, 2006 and January 29, 2005 and the
Balance Sheet Data as of February 3, 2007 and
January 28, 2006 are derived from, and are qualified by
reference to, our audited financial statements which are
included elsewhere in this
Form 10-K.
The Statement of Operations Data for fiscal years
ended January 31, 2004 and February 1, 2003 and the
Balance Sheet Data as of January 29, 2005,
January 31, 2004 and February 1, 2003 are derived from
our audited financial statements which are not included
elsewhere in this
Form 10-K.
Our selected financial data set forth below should be read in
conjunction with Managements Discussion and Analysis
of Financial Condition and Results of Operations and the
consolidated financial statements and notes thereto included
elsewhere in this
Form 10-K.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53 Weeks
|
|
|
52 Weeks
|
|
|
52 Weeks
|
|
|
52 Weeks
|
|
|
52 Weeks
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
February 3,
|
|
|
January 28,
|
|
|
January 29,
|
|
|
January 31,
|
|
|
February 1,
|
|
|
|
2007
|
|
|
2006(1)
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands, except per share data and statistical data)
|
|
|
Statement of Operations
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
5,318,900
|
|
|
$
|
3,091,783
|
|
|
$
|
1,842,806
|
|
|
$
|
1,578,838
|
|
|
$
|
1,352,791
|
|
Cost of sales
|
|
|
3,847,458
|
|
|
|
2,219,753
|
|
|
|
1,333,506
|
|
|
|
1,145,893
|
|
|
|
1,012,145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
1,471,442
|
|
|
|
872,030
|
|
|
|
509,300
|
|
|
|
432,945
|
|
|
|
340,646
|
|
Selling, general and
administrative expenses(2)
|
|
|
1,000,135
|
|
|
|
598,996
|
|
|
|
373,364
|
|
|
|
299,193
|
|
|
|
230,461
|
|
Depreciation and amortization(2)
|
|
|
109,862
|
|
|
|
66,355
|
|
|
|
36,789
|
|
|
|
29,368
|
|
|
|
23,114
|
|
Stock-based compensation(3)
|
|
|
20,978
|
|
|
|
347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merger-related expenses(4)
|
|
|
6,788
|
|
|
|
13,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings
|
|
|
333,679
|
|
|
|
192,732
|
|
|
|
99,147
|
|
|
|
104,384
|
|
|
|
87,071
|
|
Interest expense (income), net
|
|
|
73,324
|
|
|
|
25,292
|
|
|
|
236
|
|
|
|
(804
|
)
|
|
|
(630
|
)
|
Merger-related interest expense(4)
|
|
|
|
|
|
|
7,518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt extinguishment expense
|
|
|
6,059
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes
|
|
|
254,296
|
|
|
|
159,922
|
|
|
|
98,911
|
|
|
|
105,188
|
|
|
|
87,701
|
|
Income tax expense
|
|
|
96,046
|
|
|
|
59,138
|
|
|
|
37,985
|
|
|
|
41,721
|
|
|
|
35,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
158,250
|
|
|
$
|
100,784
|
|
|
$
|
60,926
|
|
|
$
|
63,467
|
|
|
$
|
52,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per common
share basic(5)
|
|
$
|
1.06
|
|
|
$
|
0.87
|
|
|
$
|
0.56
|
|
|
$
|
0.56
|
|
|
$
|
0.47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
outstanding basic(5)
|
|
|
149,924
|
|
|
|
115,840
|
|
|
|
109,324
|
|
|
|
112,660
|
|
|
|
112,578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per common
share diluted(5)
|
|
$
|
1.00
|
|
|
$
|
0.81
|
|
|
$
|
0.53
|
|
|
$
|
0.53
|
|
|
$
|
0.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
outstanding diluted(5)
|
|
|
158,284
|
|
|
|
124,972
|
|
|
|
115,592
|
|
|
|
119,528
|
|
|
|
120,838
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53 Weeks
|
|
|
52 Weeks
|
|
|
52 Weeks
|
|
|
52 Weeks
|
|
|
52 Weeks
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
February 3,
|
|
|
January 28,
|
|
|
January 29,
|
|
|
January 31,
|
|
|
February 1,
|
|
|
|
2007
|
|
|
2006(1)
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands, except per share data and statistical data)
|
|
|
Store Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stores open at the end of period
|
|
|
4,778
|
|
|
|
4,490
|
|
|
|
1,826
|
|
|
|
1,514
|
|
|
|
1,231
|
|
Comparable store sales increase
(decrease)(6)
|
|
|
11.9
|
%
|
|
|
(1.4
|
)%
|
|
|
1.7
|
%
|
|
|
0.8
|
%
|
|
|
11.4
|
%
|
Inventory turnover
|
|
|
5.2
|
|
|
|
5.0
|
|
|
|
5.4
|
|
|
|
4.9
|
|
|
|
4.9
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
$
|
353,284
|
|
|
$
|
234,293
|
|
|
$
|
111,093
|
|
|
$
|
188,378
|
|
|
$
|
174,482
|
|
Total assets(2)
|
|
|
3,349,584
|
|
|
|
3,015,821
|
|
|
|
915,983
|
|
|
|
902,189
|
|
|
|
806,237
|
|
Total debt
|
|
|
855,899
|
|
|
|
975,990
|
|
|
|
36,520
|
|
|
|
|
|
|
|
|
|
Total liabilities(2)
|
|
|
1,973,706
|
|
|
|
1,901,108
|
|
|
|
372,972
|
|
|
|
308,156
|
|
|
|
257,562
|
|
Stockholders equity
|
|
|
1,375,878
|
|
|
|
1,114,713
|
|
|
|
543,011
|
|
|
|
594,033
|
|
|
|
548,675
|
|
|
|
|
(1) |
|
Includes the results of operations of EB from October 9,
2005, the day after completion of the mergers, through
January 28, 2006. The addition of EBs results affects
the comparability of amounts from fiscal periods before fiscal
2005. |
|
(2) |
|
In the fiscal year ended January 29, 2005 (fiscal
2004), we revised our method of accounting for rent
expense to conform to GAAP, as clarified by the Chief Accountant
of the SEC in a February 2005 letter to the American Institute
of Certified Public Accountants. A non-cash, after-tax
adjustment of $3,312 was made in the fourth quarter of fiscal
2004 to correct the method of accounting for rent expense (and
related deferred rent liability) to include the impact of
escalating rents for periods in which we are reasonably assured
of exercising lease options and to include any rent
holiday period (a period during which the Company is not
obligated to pay rent) the lease allows while the store is being
constructed. We also corrected our calculation of depreciation
expense for leasehold improvements for those leases which do not
include an option period. The impact of these corrections on
periods prior to fiscal 2004 was not material and the adjustment
does not affect historical or future cash flows or the timing of
payments under related leases. See Note 1 of Notes to
Consolidated Financial Statements of the Company for
additional information concerning lease accounting. |
|
(3) |
|
In December 2004, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards No. 123 (Revised 2004), Share-Based
Payment, (SFAS 123(R)). This Statement
requires companies to expense the estimated fair value of stock
options and similar equity instruments issued to employees in
its financial statements. The Company adopted the provisions of
SFAS 123(R) using the modified prospective application
method beginning on the first day of fiscal 2006. The
implementation of SFAS 123(R) affects the comparability of
amounts from fiscal periods before fiscal 2006. |
|
(4) |
|
The Companys results of operations for fiscal 2006 and
fiscal 2005 include expenses believed to be of a one-time or
short-term nature associated with the mergers, which included
$6.8 million and $13.6 million, respectively,
considered in operating earnings and $7.5 million included
in fiscal 2005 in interest expenses. The $6.8 million and
$13.6 million included $1.9 million and
$9.0 million, respectively, in charges associated with
assets of the Company considered to be impaired as a result of
the mergers and $4.9 million and $4.6 million,
respectively, in costs associated with integrating the
operations of Historical GameStop and EB. Costs related to the
mergers included in interest expense in fiscal 2005 include a
fee of $7.1 million for an unused bridge financing facility
which the Company obtained as financing insurance in connection
with the mergers. The Company does not anticipate incurring any
additional merger-related expenses. |
|
(5) |
|
Weighted average shares outstanding and earnings per common
share have been adjusted to reflect the Conversion and the Stock
Split. |
|
(6) |
|
Stores are included in our comparable store sales base beginning
in the 13th month of operation. |
26
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
The following discussion should be read in conjunction with
the information contained in our consolidated financial
statements, including the notes thereto. Statements regarding
future economic performance, managements plans and
objectives, and any statements concerning assumptions related to
the foregoing contained in Managements Discussion and
Analysis of Financial Condition and Results of Operations
constitute forward-looking statements. Certain factors, which
may cause actual results to vary materially from these
forward-looking statements, accompany such statements or appear
elsewhere in this
Form 10-K,
including the factors disclosed under
Item 1A. Risk Factors.
General
GameStop Corp. (GameStop or the Company)
is the worlds largest retailer of video game products and
PC entertainment software. We sell new and used video game
hardware, video game software and accessories, as well as PC
entertainment software and related accessories and other
merchandise. As of February 3, 2007, we operated 4,778
stores, in the United States, Australia, Canada and Europe,
primarily under the names GameStop and EB Games. We also operate
electronic commerce websites under the names
www.gamestop.com and www.ebgames.com and publish
Game Informer, the industrys largest multi-platform
video game magazine in the United States based on circulation.
Our fiscal year is composed of 52 or 53 weeks ending on the
Saturday closest to January 31. The fiscal year ended
February 3, 2007 (fiscal 2006) consisted of
53 weeks. The fiscal years ended January 28, 2006
(fiscal 2005) and January 29, 2005
(fiscal 2004) consisted of 52 weeks.
On October 8, 2005, GameStop Holdings Corp.
(Historical GameStop), formerly known as GameStop
Corp., and Electronics Boutique Holdings Corp. (EB
or Electronics Boutique) completed their previously
announced mergers pursuant to the Agreement and Plan of Merger,
dated as of April 17, 2005 (the Merger
Agreement). Upon the consummation of the mergers,
Historical GameStop and EB became wholly-owned subsidiaries of
the Company, a Delaware corporation formed for the purpose of
consummating the business combination (the mergers).
The mergers of Historical GameStop and EB have been treated as a
purchase business combination for accounting purposes, with
Historical GameStop designated as the acquirer. Therefore, the
historical financial statements of Historical GameStop became
the historical financial statements of the Company. The
accompanying consolidated financial statements and notes thereto
include the results of operations of EB from October 9,
2005 forward. Therefore, the Companys operating results
for the fiscal year ended January 28, 2006 include
16 weeks of EBs results and 52 weeks,
respectively, of Historical GameStops results. The
Companys operating results for the fiscal year ended
February 3, 2007 include 53 weeks for both Historical
GameStop and EB. As a result, sales mix, cost of sales, gross
profit, selling general and administrative expenses,
depreciation and amortization and interest expense in fiscal
2006 was significantly impacted by including the operations of
EB for a full year, as opposed to 16 weeks in fiscal 2005,
which included the holiday selling season. Growth in each of
these statement of operations line items came from each of the
Companys business segments.
Under the terms of the Merger Agreement, Historical
GameStops stockholders received one share of the
Companys common stock for each share of Historical
GameStops common stock owned. Approximately
104.2 million shares of the Companys common stock
were issued in exchange for all outstanding common stock of
Historical GameStop based on the
one-for-one
ratio. EB stockholders received $19.08 in cash and .39398 of a
share of the Companys common stock for each share of EB
common stock owned. In aggregate, 40.5 million shares of
the Companys common stock were issued to EB stockholders
at a value of approximately $437.1 million (based on the
closing price of $10.81 of Historical GameStops common
stock on April 15, 2005, the last trading day before the
date the mergers were announced). In addition, approximately
$993.3 million in cash was paid in consideration for
(i) all outstanding common stock of EB, based upon the
pro-ration provisions of the Merger Agreement, and (ii) all
outstanding stock options of EB. Including transaction costs of
$13.6 million, the total consideration paid was
approximately $1.4 billion.
On February 7, 2007, following approval by a majority of
the Class B common stockholders in a Special Meeting of the
Companys Class B common stockholders, all outstanding
Class B common shares were converted into Class A
common shares on a
one-for-one
basis (the Conversion). In addition, on
February 9, 2007, the Board of Directors of the Company
authorized a
two-for-one
stock split, effected by a
one-for-one
stock dividend to
27
stockholders of record at the close of business on
February 20, 2007, paid on March 16, 2007 (the
Stock Split). Unless otherwise indicated, all
numbers in this Managements Discussion and Analysis of
Financial Condition and Results of Operations have been
restated to reflect the Conversion and the Stock Split.
Growth in the video game industry is driven by the introduction
of new technology. In fiscal 2005 in the North American markets,
Sony introduced the PlayStation Portable (the PSP)
in March and Microsoft introduced the Xbox 360 in November. In
November 2006, Nintendo introduced the Wii hardware platform
worldwide and Sony introduced the PlayStation 3 hardware
platform in the North American markets. Typically, following the
introduction of new video game platforms, sales of new video
game hardware increase as a percentage of sales in the first
full year following introduction. As video game platforms
mature, the sales mix attributable to complementary video game
software and accessories, which generate higher gross margins,
generally increases in the second and third years. The net
effect is generally a decline in gross margins in the first full
year following new platform releases and an increase in gross
margins in the second and third years. Unit sales of maturing
video game platforms are typically also driven by
manufacturer-funded retail price decreases, further driving
sales of related software and accessories. We expect that the
installed base of the hardware platforms listed above and sales
of related software and accessories will increase in the future.
The Companys gross margin in fiscal 2006 was impacted by
the recent launches of these new products.
Critical
Accounting Policies
The Company believes that the following are its most significant
accounting policies which are important in determining the
reporting of transactions and events:
Use of Estimates. The preparation of financial
statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. In preparing these financial statements, management has
made its best estimates and judgments of certain amounts
included in the financial statements, giving due consideration
to materiality. Changes in the estimates and assumptions used by
management could have significant impact on the Companys
financial results. Actual results could differ from those
estimates.
Revenue Recognition. Revenue from the sales of
the Companys products is recognized at the time of sale.
The sales of used video game products are recorded at the retail
price charged to the customer. Sales returns (which are not
significant) are recognized at the time returns are made.
Subscription and advertising revenues are recorded upon release
of magazines for sale to consumers and are stated net of sales
discounts. Magazine subscription revenue is recognized on a
straight-line basis over the subscription period. Revenue from
the sales of product replacement plans is recognized on a
straight-line basis over the coverage period. Gift cards sold to
customers are recognized as a liability on the balance sheet
until redeemed.
Stock-Based Compensation. In December 2004,
the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 123
(Revised 2004), Share-Based Payment,
(SFAS 123(R)). This Statement requires
companies to expense the estimated fair value of stock options
and similar equity instruments issued to employees in its
financial statements. The Company adopted the provisions of
SFAS 123(R) using the modified prospective application
method beginning on the first day of fiscal 2006. Under
SFAS 123(R), the Company records stock-based compensation
expense based on the grant-date fair value estimated in
accordance with the original provisions of Statement of
Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation, and previously presented in the
pro forma footnote disclosures, for all options granted prior
to, but not vested as of, the adoption date. In addition, the
Company records compensation expense for the share-based awards
issued after the adoption date in accordance with
SFAS 123(R). As of February 3, 2007, the unrecognized
compensation expense related to the unvested portion of our
stock options and restricted stock was $21.7 million and
$8.2 million, respectively which is expected to be
recognized over a weighted average period of 1.0 and
2.0 years, respectively. Note 1 of Notes to
Consolidated Financial Statements provides additional
information on stock-based compensation.
Merchandise Inventories. Our merchandise
inventories are carried at the lower of cost or market using the
average cost method. Used video game products traded in by
customers are recorded as inventory at the amount of
28
the store credit given to the customer. In valuing inventory,
management is required to make assumptions regarding the
necessity of reserves required to value potentially obsolete or
over-valued items at the lower of cost or market. Management
considers quantities on hand, recent sales, potential price
protections and returns to vendors, among other factors, when
making these assumptions.
Property and Equipment. Property and equipment
are carried at cost less accumulated depreciation and
amortization. Depreciation on furniture, fixtures and equipment
is computed using the straight-line method over estimated useful
lives (ranging from two to eight years). Maintenance and repairs
are expensed as incurred, while betterments and major remodeling
costs are capitalized. Leasehold improvements are capitalized
and amortized over the shorter of their estimated useful lives
or the terms of the respective leases, including renewal options
in which the exercise of the option is reasonably assured
(generally ranging from three to ten years). Costs incurred to
third parties in purchasing management information systems are
capitalized and included in property and equipment. These costs
are amortized over their estimated useful lives from the date
the systems become operational. The Company periodically reviews
its property and equipment whenever events or changes in
circumstances indicate that their carrying amounts may not be
recoverable or their depreciation or amortization periods should
be accelerated. The Company assesses recoverability based on
several factors, including managements intention with
respect to its stores and those stores projected
undiscounted cash flows. An impairment loss is recognized for
the amount by which the carrying amount of the assets exceeds
their fair value, as approximated by the present value of their
projected cash flows. As a result of the mergers and an analysis
of assets to be abandoned, the Company impaired assets totaling
$9.0 million in fiscal 2005 and $1.9 million in fiscal
2006 prior to October 8, 2006, the anniversary of the
mergers. These impairment costs are included in merger-related
expenses in the consolidated statements of operations.
Write-downs incurred by the Company through February 3,
2007 which were not related to the mergers have not been
material.
Merger-Related Costs. In connection with the
mergers, management incurred merger-related costs and
integration activities which have resulted in involuntary
employment terminations, lease terminations, disposals of
property and equipment and other costs and expenses.
Approximately $64.3 million of these costs were charged to
acquisition costs, representing a portion of the recorded
goodwill, and approximately $21.1 million were charged to
costs in the accompanying consolidated statement of operations.
The remaining liability for involuntary termination benefits
covers severance amounts, payroll taxes and benefit costs for
former EB employees, primarily in general and administrative
functions in EBs Pennsylvania corporate office and
distribution center and Nevada call center which have been
closed. Termination of these employees began in October 2005 and
is now complete. The Pennsylvania corporate office and
distribution center were owned facilities that were sold in July
2006. These assets were classified in the January 28, 2006
consolidated balance sheet as Assets held for sale.
The liability for lease terminations is associated with stores
to be closed. If the Company is unsuccessful in negotiating
lease terminations or sublease agreements, the lease liability
will be paid over the remaining lease terms, the majority of
which expire in the next 3 to 5 years, with the last of
such leases expiring in 2015. The Company intends to close these
stores in the next 9 to 12 months. The disposals of
property and equipment are related to assets which were either
impaired or have been either abandoned or disposed of due to the
mergers. Certain costs associated with the disposition of these
assets remained accrued until the assets were disposed of and
the costs were paid. The disposition of property and equipment
is now complete.
Merger-related costs include professional fees, financing costs
and other costs associated with the mergers and include certain
costs associated with integrating the operations of Historical
GameStop and EB, including relocation costs. The Company
finalized integration plans and related liabilities and all
integration activities in fiscal 2006. Rebranding of EB stores
to the GameStop name is expected to be completed in the next 12
to 18 months. Note 2 of Notes to Consolidated
Financial Statements provides additional information on
the merger costs and related liabilities.
Goodwill. Goodwill, aggregating
$340.0 million was recorded in the acquisition of Funco in
2000 and through the application of push-down
accounting in accordance with Securities and Exchange Commission
Staff Accounting Bulletin No. 54
(SAB 54) in connection with the acquisition of
Babbages in 1999 by a subsidiary of Barnes &
Noble, Inc. (Barnes & Noble). Goodwill in
the amount of $2.9 million was recorded in connection with
the acquisition of Gamesworld Group Limited in 2003. Goodwill in
the amount of $1,074.9 million was recorded in
29
connection with the mergers. Goodwill in the amount of
$8.1 million was recorded in the acquisition in January
2007 of Game Brands Inc. (operating as Rhino Video Games stores).
Goodwill represents the excess purchase price over tangible net
assets and identifiable intangible assets acquired. The Company
evaluates goodwill for impairment on at least an annual basis.
In accordance with the requirements of Statement of Financial
Accounting Standards No. 142, Goodwill and Other
Intangible Assets (SFAS 142), the Company
completed annual impairment tests of the goodwill attributable
to its reporting unit as of the first day of the fourth quarter
of fiscal 2004 and concluded that none of its goodwill was
impaired. Until October 8, 2005, the date of the mergers,
the Company determined that it had one reporting unit based upon
the similar economic characteristics of its operations. Fair
value of this reporting unit was estimated using market
capitalization methodologies. Subsequent to the mergers, the
Company determined that it has four reporting units, the United
States, Australia, Canada and Europe, based upon the similar
economic characteristics of operations and separate management
within those regions. The Company employed the services of an
independent valuation specialist to assist in the allocation of
goodwill resulting from the mergers to the four reporting units
as of October 8, 2005. The Company also completed its
annual impairment test of goodwill as of the first day of the
fourth quarter of fiscal 2005 and fiscal 2006 and concluded that
none of its goodwill was impaired. Note 7 of Notes to
Consolidated Financial Statements of the Company provides
additional information concerning goodwill.
Intangible Assets and Other Noncurrent
Assets. Intangible assets consist of non-compete
agreements,
point-of-sale
software and amounts attributed to favorable leasehold interests
acquired in the mergers and are included in other non-current
assets in the consolidated balance sheet. The total
weighted-average amortization period for the intangible assets,
excluding goodwill, is approximately four years. The intangible
assets are being amortized based upon the pattern in which the
economic benefits of the intangible assets are being utilized,
with no expected residual value.
The deferred financing fees associated with the Companys
revolving credit facility and the senior notes and senior
floating rate notes issued in connection with the financing of
the mergers are separately shown in the consolidated balance
sheet. The deferred financing fees are being amortized over
five, six and seven years to match the terms of the revolving
credit facility, the senior floating rate notes and the senior
notes, respectively.
Cash Consideration Received from Vendors. The
Company and its vendors participate in cooperative advertising
programs and other vendor marketing programs in which the
vendors provide the Company with cash consideration in exchange
for marketing and advertising the vendors products. Our
accounting for cooperative advertising arrangements and other
vendor marketing programs, in accordance with FASB Emerging
Issues Task Force Issue
02-16 or
EITF
02-16,
results in a portion of the consideration received from our
vendors reducing the product costs in inventory. The
consideration serving as a reduction in inventory is recognized
in cost of sales as inventory is sold. The amount of vendor
allowances recorded as a reduction of inventory is determined by
calculating the ratio of vendor allowances in excess of
specific, incremental and identifiable advertising and
promotional costs to merchandise purchases. The Company then
applies this ratio to the value of inventory in determining the
amount of vendor reimbursements recorded as a reduction to
inventory reflected on the balance sheet. Because of the
variability in the timing of our advertising and marketing
programs throughout the year, the Company uses significant
estimates in determining the amount of vendor allowances
recorded as a reduction of inventory in interim periods,
including estimates of full year vendor allowances, specific,
incremental and identifiable advertising and promotional costs,
merchandise purchases and value of inventory. Estimates of full
year vendor allowances and the value of inventory are dependent
upon estimates of full year merchandise purchases. Determining
the amount of vendor allowances recorded as a reduction of
inventory at the end of the fiscal year no longer requires the
use of estimates as all vendor allowances, specific, incremental
and identifiable advertising and promotional costs, merchandise
purchases and value of inventory are known.
Although management considers its advertising and marketing
programs to be effective, we do not believe that we would be
able to incur the same level of advertising expenditures if the
vendors decreased or discontinued their allowances. In addition,
management believes that the Companys revenues would be
adversely affected if its vendors decreased or discontinued
their allowances, but management is unable to quantify the
impact.
Lease Accounting. As previously disclosed, in
fiscal 2004, the Company, similar to many other retailers,
revised its method of accounting for rent expense (and related
deferred rent liability) and leasehold improvements
30
funded by landlord incentives for allowances under operating
leases (tenant improvement allowances) to conform to GAAP, as
clarified by the Chief Accountant of the SEC in a February 2005
letter to the American Institute of Certified Public
Accountants. For all stores opened since the beginning of fiscal
2002, the Company had calculated straight-line rent expense
using the initial lease term, but was generally depreciating
leasehold improvements over the shorter of their estimated
useful lives or the initial lease term plus the option periods.
The Company corrected its calculation of straight-line rent
expense to include the impact of escalating rents for periods in
which it is reasonably assured of exercising lease options and
to include in the lease term any period during which the Company
is not obligated to pay rent while the store is being
constructed (rent holiday). The Company also
corrected its calculation of depreciation expense for leasehold
improvements for those leases which do not include an option
period. Because the effects of the correction were not material
to any previous years, a non-cash, after-tax adjustment of
$3.3 million was made in the fourth quarter of fiscal 2004
to correct the method of accounting for rent expense (and
related deferred rent liability). Of the $3.3 million
after-tax adjustment, $1.8 million pertained to the
accounting for rent holidays, $1.4 million pertained to the
calculation of straight-line rent expense to include the impact
of escalating rents for periods in which the Company is
reasonably assured of exercising lease options and
$0.1 million pertained to the calculation of depreciation
expense for leasehold improvements for the small portion of
leases which do not include an option period. The aggregate
effect of these corrections relating to prior years was
$1.9 million. The correction does not affect historical or
future cash flows or the timing of payments under related leases.
Income Taxes. The Company accounts for income
taxes in accordance with the provisions of Statement of
Financial Accounting Standards No. 109 Accounting for
Income Taxes (SFAS 109). SFAS 109
utilizes an asset and liability approach, and deferred taxes are
determined based on the estimated future tax effect of
differences between the financial reporting and tax bases of
assets and liabilities using enacted tax rates. As a result of
our operations in many foreign countries, our global tax rate is
derived from a combination of applicable tax rates in the
various jurisdictions in which we operate. We base our estimate
of an annual effective tax rate at any given point in time on a
calculated mix of the tax rates applicable to our company and to
estimates of the amount of income to be derived in any given
jurisdiction. We file our tax returns based on our understanding
of the appropriate tax rules and regulations. However,
complexities in the tax rules and our operations, as well as
positions taken publicly by the taxing authorities, may lead us
to conclude that accruals for uncertain tax positions are
required. We generally maintain accruals for uncertain tax
positions until examination of the tax year is completed by the
taxing authority, available review periods expire or additional
facts and circumstances cause us to change our assessment of the
appropriate accrual amount.
In July 2006, the FASB issued Interpretation No. 48
Accounting for Uncertainty in Income Taxes
(FIN 48). FIN 48 requires the use of a
two-step approach for recognizing and measuring tax benefits
taken or expected to be taken in a tax return and disclosures
regarding uncertainties in income tax positions. We were
required to adopt FIN 48 effective February 4, 2007.
The cumulative effect of initially adopting FIN 48 is to
record an adjustment to opening retained earnings in the year of
adoption. Only tax positions that meet the more likely than not
recognition threshold at the effective date may be recognized
upon adoption of FIN 48. The Company is evaluating the
impact of implementing the provisions of FIN 48 on its
financial position and future results of operations, but does
not expect that the impact will be material.
31
Results
of Operations
The following table sets forth certain income statement items as
a percentage of sales for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53 Weeks Ended
|
|
|
52 Weeks Ended
|
|
|
52 Weeks Ended
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
February 3,
|
|
|
January 28,
|
|
|
January 29,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Statement of Operations
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of sales
|
|
|
72.3
|
|
|
|
71.8
|
|
|
|
72.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
27.7
|
|
|
|
28.2
|
|
|
|
27.6
|
|
Selling, general and
administrative expenses
|
|
|
18.8
|
|
|
|
19.4
|
|
|
|
20.2
|
|
Depreciation and amortization
|
|
|
2.1
|
|
|
|
2.2
|
|
|
|
2.0
|
|
Stock-based compensation
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
Merger-related expenses
|
|
|
0.1
|
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings
|
|
|
6.3
|
|
|
|
6.2
|
|
|
|
5.4
|
|
Interest expense, net
|
|
|
1.4
|
|
|
|
0.8
|
|
|
|
|
|
Merger-related interest expense
|
|
|
|
|
|
|
0.2
|
|
|
|
|
|
Debt extinguishment expense
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes
|
|
|
4.8
|
|
|
|
5.2
|
|
|
|
5.4
|
|
Income tax expense
|
|
|
1.8
|
|
|
|
1.9
|
|
|
|
2.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
|
3.0
|
%
|
|
|
3.3
|
%
|
|
|
3.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company includes purchasing, receiving and distribution
costs in selling, general and administrative expenses, rather
than cost of goods sold, in the statement of operations. For the
fiscal years ended February 3, 2007, January 28, 2006
and January 29, 2005, these purchasing, receiving and
distribution costs amounted to $22.3 million,
$20.6 million and $9.2 million, respectively. The
Company includes processing fees associated with purchases made
by check and credit cards in cost of sales, rather than selling,
general and administrative expenses, in the statement of
operations. For the fiscal years ended February 3, 2007,
January 28, 2006 and January 29, 2005 these processing
fees amounted to $40.9 million, $20.9 million and
$12.0 million, respectively. As a result of these
classifications, our gross margins are not comparable to those
retailers that include purchasing, receiving and distribution
costs in cost of sales and include processing fees associated
with purchases made by check and credit cards in selling,
general and administrative expenses. The net effect of the
Companys classifications is that its cost of sales as a
percentage of sales is higher than, and its selling, general and
administrative expenses as a percentage of sales are lower than,
they would have been had the Companys treatment conformed
with those retailers that include purchasing, receiving and
distribution costs in cost of sales and include processing fees
associated with purchases made by check and credit cards in
selling, general and administrative expenses, by 0.3%, 0.0% and
0.2% for the fiscal years ended February 3, 2007,
January 28, 2006 and January 29, 2005, respectively.
The following table sets forth sales (in millions) by
significant product category for the periods indicated:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53 Weeks
|
|
|
52 Weeks
|
|
|
52 Weeks
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
February 3,
|
|
|
January 28,
|
|
|
January 29,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
Percent
|
|
|
|
|
|
Percent
|
|
|
|
Sales
|
|
|
of Total
|
|
|
Sales
|
|
|
of Total
|
|
|
Sales
|
|
|
of Total
|
|
|
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New video game hardware
|
|
$
|
1,073.7
|
|
|
|
20.2
|
%
|
|
$
|
503.2
|
|
|
|
16.3
|
%
|
|
$
|
209.2
|
|
|
|
11.4
|
%
|
New video game software
|
|
|
2,012.5
|
|
|
|
37.8
|
%
|
|
|
1,244.9
|
|
|
|
40.3
|
%
|
|
|
776.7
|
|
|
|
42.1
|
%
|
Used video game products
|
|
|
1,316.0
|
|
|
|
24.8
|
%
|
|
|
808.0
|
|
|
|
26.1
|
%
|
|
|
511.8
|
|
|
|
27.8
|
%
|
Other
|
|
|
916.7
|
|
|
|
17.2
|
%
|
|
|
535.7
|
|
|
|
17.3
|
%
|
|
|
345.1
|
|
|
|
18.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,318.9
|
|
|
|
100.0
|
%
|
|
$
|
3,091.8
|
|
|
|
100.0
|
%
|
|
$
|
1,842.8
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
The following table sets forth gross profit (in millions) and
gross profit percentages by significant product category for the
periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53 Weeks
|
|
|
52 Weeks
|
|
|
52 Weeks
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
February 3,
|
|
|
January 28,
|
|
|
January 29,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
Gross
|
|
|
Profit
|
|
|
Gross
|
|
|
Profit
|
|
|
Gross
|
|
|
Profit
|
|
|
|
Profit
|
|
|
Percent
|
|
|
Profit
|
|
|
Percent
|
|
|
Profit
|
|
|
Percent
|
|
|
Gross Profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New video game hardware
|
|
$
|
77.0
|
|
|
|
7.2
|
%
|
|
$
|
30.9
|
|
|
|
6.1
|
%
|
|
$
|
8.5
|
|
|
|
4.1
|
%
|
New video game software
|
|
|
427.3
|
|
|
|
21.2
|
%
|
|
|
266.5
|
|
|
|
21.4
|
%
|
|
|
151.9
|
|
|
|
19.6
|
%
|
Used video game products
|
|
|
651.9
|
|
|
|
49.5
|
%
|
|
|
383.0
|
|
|
|
47.4
|
%
|
|
|
231.6
|
|
|
|
45.3
|
%
|
Other
|
|
|
315.2
|
|
|
|
34.4
|
%
|
|
|
191.6
|
|
|
|
35.8
|
%
|
|
|
117.3
|
|
|
|
34.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,471.4
|
|
|
|
27.7
|
%
|
|
$
|
872.0
|
|
|
|
28.2
|
%
|
|
$
|
509.3
|
|
|
|
27.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
Information
Following the completion of the mergers, the Company now
operates its business in the following segments: United States,
Australia, Canada and Europe. Segment results for the United
States include retail operations in 50 states, the District
of Columbia, Guam and Puerto Rico, the electronic commerce
websites www.gamestop.com and www.ebgames.com and
Game Informer magazine. Segment results for Canada
include retail operations in Canada and segment results for
Australia include retail operations in Australia and New
Zealand. Segment results for Europe include retail operations in
11 European countries. Prior to the mergers, Historical GameStop
had operations in Ireland and the United Kingdom which were not
material. The mergers significantly increased our operations in
foreign currencies, including the euro, Australian dollar, New
Zealand dollar, Canadian dollar, British pound, Swiss franc,
Danish kroner, Swedish krona and the Norwegian kroner.
Sales by operating segment in U.S. dollars were as follows
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53 Weeks
|
|
|
52 Weeks
|
|
|
52 Weeks
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
February 3,
|
|
|
January 28,
|
|
|
January 29,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
United States
|
|
$
|
4,269.5
|
|
|
$
|
2,709.8
|
|
|
$
|
1,818.2
|
|
Canada
|
|
|
319.7
|
|
|
|
111.4
|
|
|
|
|
|
Australia
|
|
|
288.1
|
|
|
|
94.4
|
|
|
|
|
|
Europe
|
|
|
441.6
|
|
|
|
176.2
|
|
|
|
24.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,318.9
|
|
|
$
|
3,091.8
|
|
|
$
|
1,842.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings (loss) by operating segment in
U.S. dollars were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53 Weeks
|
|
|
52 Weeks
|
|
|
52 Weeks
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
February 3,
|
|
|
January 28,
|
|
|
January 29,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
United States
|
|
$
|
285.4
|
|
|
$
|
173.7
|
|
|
$
|
102.1
|
|
Canada
|
|
|
20.0
|
|
|
|
7.9
|
|
|
|
|
|
Australia
|
|
|
27.3
|
|
|
|
11.0
|
|
|
|
|
|
Europe
|
|
|
1.0
|
|
|
|
0.1
|
|
|
|
(3.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
333.7
|
|
|
$
|
192.7
|
|
|
$
|
99.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
Total assets by operating segment in U.S. dollars were as
follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 3,
|
|
|
January 28,
|
|
|
January 29,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
United States
|
|
$
|
2,618.9
|
|
|
$
|
2,347.8
|
|
|
$
|
897.1
|
|
Canada
|
|
|
210.4
|
|
|
|
210.4
|
|
|
|
|
|
Australia
|
|
|
210.7
|
|
|
|
214.7
|
|
|
|
|
|
Europe
|
|
|
309.6
|
|
|
|
242.9
|
|
|
|
18.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,349.6
|
|
|
$
|
3,015.8
|
|
|
$
|
916.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Canada and Australia segments have a longer history of
operations than the Europe segment and their older store base
generates more operating earnings than Europe. As stores in
Europe mature, the Company expects operating profit to increase.
The segment results for the 52 weeks ended January 28,
2006 only include operations from Canada, Australia and most of
Europe from October 8, 2005 through January 28, 2006
due to the mergers. Prior to the mergers, the Companys
international operations only included Ireland and the United
Kingdom. Having segment results for fiscal 2006 from Canada,
Australia and Europe increased international segment sales and
operating earnings as a percentage of total sales and operating
earnings from 12.4% and 9.9%, respectively, in fiscal 2005 to
19.7% and 14.5%, respectively, in fiscal 2006. Management does
not believe that a further comparison of the international
segment results for the 53 weeks ended February 3,
2007 would be meaningful.
The notes issued in connection with the mergers are reflected in
the U.S. segment. See Note 21 of the consolidated
financial statements for more information.
Fiscal
2006 Compared to Fiscal 2005
Sales increased by $2,227.1 million, or 72.0%, to
$5,318.9 million in the 53 weeks of fiscal 2006
compared to $3,091.8 million in the 52 weeks of fiscal
2005. Sales for the 53rd week included in fiscal 2006 were
$99.1 million. The remaining increase in sales was
attributable to approximately $1,408.4 million of sales in
EB stores in fiscal 2006 prior to the anniversary of the
mergers, approximately $247.1 million in non-comparable
store sales resulting from the approximately 800 new GameStop
stores opened since January 29, 2005, with the remaining
increase of $472.5 million due primarily to an increase in
comparable store sales. The comparable store sales increase was
11.9% on a pro forma basis for fiscal 2006 when compared to
fiscal 2005 and was expected due to the launch of the Sony
PlayStation 3 and Nintendo Wii in November 2006. Stores are
included in our comparable store sales base beginning in the
thirteenth month of operation. The pro forma comparable store
sales increase of 11.9% was calculated by using the first
52 weeks of fiscal 2006 compared to the 52 weeks in
fiscal 2005.
New video game hardware sales increased $570.5 million or
113.4%, from fiscal 2005 to fiscal 2006, primarily due to the
mergers, the 53rd week of sales included in fiscal 2006 and
the launches of Microsoft Xbox 360 in November 2005 and
Playstation 3 and Nintendo Wii in November 2006. New hardware
sales increased as a percentage of sales from 16.3% in fiscal
2005 to 20.2% in fiscal 2006 due primarily to the first full
year since the Microsoft Xbox 360 launch and due to the launches
of the new platforms in 2006. New video game software sales also
increased $767.6 million, or 61.7%, from fiscal 2005 to
fiscal 2006, primarily due to the mergers, the 53rd week of
sales in fiscal 2006 and a strong lineup of new video game
titles. New software sales as a percentage of total sales
decreased from 40.3% in fiscal 2005 to 37.8% in fiscal 2006 due
to the increase in new hardware sales as a percentage of total
sales. Used video game product sales also grew due to the
mergers, the 53rd week of sales in fiscal 2006 and the
increase in store count, with an increase in sales of
$508.0 million, or 62.9%, from fiscal 2005. Sales of other
product categories, including PC entertainment and other
software and accessories, magazines and trading cards, grew
71.1%, or $381.0 million, from fiscal 2005 to fiscal 2006,
primarily due to the mergers and the 53rd week of sales in
fiscal 2006.
Cost of sales increased by $1,627.7 million, or 73.3%, from
$2,219.8 million in fiscal 2005 to $3,847.5 million in
fiscal 2006 as a result of the mergers, the 53rd week of
sales in fiscal 2006 and the changes in gross profit discussed
below.
34
Gross profit increased by $599.4 million, or 68.7%, from
$872.0 million in fiscal 2005 to $1,471.4 million in
fiscal 2006. Gross profit as a percentage of sales decreased
from 28.2% in fiscal 2005 to 27.7% in fiscal 2006. This decrease
was primarily due to the increase in hardware sales as a
percentage of total sales. New hardware sales carry a lower
overall gross profit compared to other sales categories. The
increase in hardware sales was driven by new product launches in
fiscal 2006. The gross profit on new hardware increased from
6.1% of sales in fiscal 2005 to 7.2% in fiscal 2006 due to an
emphasis on selling product replacement plans along with
hardware platforms. Gross profit as a percentage of sales on new
software remained comparable at 21.4% in fiscal 2005 and 21.2%
in fiscal 2006. Gross profit as a percentage of sales on other
products decreased from 35.8% in fiscal 2005 to 34.4% in fiscal
2006 due to a shift in sales to lower margin products within the
other product categories. Gross profit as a percentage of sales
on used video game products increased from 47.4% in fiscal 2005
to 49.5% in fiscal 2006 due to increased efforts to monitor
margin rates and the application of GameStops
merchandising algorithms to EBs used video game category
for all of fiscal 2006 compared to only the period following the
mergers in fiscal 2005.
Selling, general and administrative expenses increased by
$401.1 million, or 67.0%, from $599.0 million in
fiscal 2005 to $1,000.1 million in fiscal 2006. The
increase was primarily attributable to the mergers, the increase
in the number of stores in operation, and the related increases
in store, distribution and corporate office operating expenses
as well as expenses from the 53rd week included in fiscal
2006. Selling, general and administrative expenses as a
percentage of sales decreased from 19.4% in fiscal 2005 to 18.8%
in fiscal 2006. The decrease in selling, general and
administrative expenses as a percentage of sales was primarily
due to synergies obtained from the mergers, including the
shut-down of EBs corporate headquarters and distribution
center. Foreign currency transaction gains and (losses) are
included in selling, general and administrative expenses and
amounted to ($1.0) million in fiscal 2006, compared to
$2.6 million in fiscal 2005.
Depreciation and amortization expense increased from
$66.4 million in fiscal 2005 to $109.9 million in
fiscal 2006. This increase of $43.5 million was due
primarily to the mergers, with the remaining increase due to
capital expenditures for 421 new GameStop stores and the
Companys new corporate headquarters and distribution
facility. Depreciation and amortization expense will increase
from fiscal 2006 to fiscal 2007 due to continued capital
expenditures for new stores and management information systems.
Beginning January 29, 2006, the Company adopted the
provisions of SFAS 123(R) using the modified prospective
application method. Under this method, the Company records
stock-based compensation expense based on the estimated
grant-date fair value previously presented in the pro forma
footnote disclosures for all options granted prior to, but not
vested as of, the adoption date. In addition, the Company
records compensation expense for the share-based awards granted
after the adoption date in accordance with SFAS 123(R). As
a result of the adoption, the Company recognized
$21.0 million in stock-based compensation expense for
fiscal 2006. In accordance with SFAS 123(R), prior periods
have not been restated.
The Companys results of operations for fiscal 2006 and
fiscal 2005 include expenses believed to be of a one-time or
short-term nature associated with the mergers, which included
$6.8 million and $13.6 million, respectively,
considered in operating earnings and $7.5 million included
in fiscal 2005 in interest expenses. The $6.8 million and
$13.6 million included $1.9 million and
$9.0 million, respectively, in charges associated with
assets of the Company considered to be impaired as a result of
the mergers and $4.9 million and $4.6 million,
respectively, in costs associated with integrating the
operations of Historical GameStop and EB. Costs related to the
mergers included in interest expense in fiscal 2005 include a
fee of $7.1 million for an unused bridge financing facility
which the Company obtained as financing insurance in connection
with the mergers. The Company does not anticipate incurring any
additional merger-related expenses.
Interest income resulting from the investment of excess cash
balances increased from $5.1 million in fiscal 2005 to
$11.3 million in fiscal 2006 due to interest earned on
invested assets. Interest expense increased from
$30.4 million in fiscal 2005 to $84.7 million in
fiscal 2006 primarily due to the first full year of interest
incurred on the senior notes payable and the senior floating
rate notes payable and the interest incurred on the note payable
to Barnes & Noble in connection with the repurchase of
Historical GameStops Class B common stock in fiscal
2004. Debt extinguishment expense of $6.1 million was
incurred in fiscal 2006 for the loss associated with the
Companys repurchase of $50.0 million of its senior
notes payable and $50.0 million of its senior floating rate
notes payable.
35
Income tax expense increased by $36.9 million, from
$59.1 million in fiscal 2005 to $96.0 million in
fiscal 2006. The Companys effective tax rate increased
from 37.0% in fiscal 2005 to 37.8% in fiscal 2006 due to
corporate restructuring. See Note 12 of Notes to
Consolidated Financial Statements of the Company for
additional information regarding income taxes.
The factors described above led to an increase in operating
earnings of $141.0 million, or 73.2%, from
$192.7 million in fiscal 2005 to $333.7 million in
fiscal 2006 and an increase in net earnings of
$57.5 million, or 57.0%, from $100.8 million in fiscal
2005 to $158.3 million in fiscal 2006.
Fiscal
2005 Compared to Fiscal 2004
Sales increased by $1,249.0 million, or 67.8%, from
$1,842.8 million in fiscal 2004 to $3,091.8 million in
fiscal 2005. The increase in sales was primarily attributable to
approximately $996.8 million in sales from EB for the
16 weeks of its operations owned by the Company,
approximately $216.0 million in non-comparable store sales
resulting from the 574 net new GameStop stores opened since
January 31, 2004 and approximately $29.6 million due
to an increase in comparable Historical GameStop store sales of
1.7%. This comparable store sales increase was expected due to
the launch of Sony PlayStation Portable in March 2005 and the
launch of Microsoft Xbox 360 hardware in November 2005. On a pro
forma basis, comparable store sales decreased 1.4% in fiscal
2005. Stores are included in our comparable store sales base
beginning in the thirteenth month of operation.
The mergers and the release of the Sony PSP and the Microsoft
Xbox 360 led to an increase in new video game hardware sales of
$294.0 million, or 140.5%, from fiscal 2004 to fiscal 2005.
New hardware sales increased as a percentage of sales from 11.4%
in fiscal 2004 to 16.3% in fiscal 2005 due primarily to the Sony
PSP and Microsoft Xbox 360 launches. The mergers led to an
increase in new video game software sales of
$468.2 million, or 60.3%, from fiscal 2004 to fiscal 2005.
New software sales as a percentage of total sales decreased from
42.1% in fiscal 2004 to 40.3% in fiscal 2005, due to the
increase in new hardware sales as a percentage of total sales.
Used video game product sales also grew due to an increase in
store count, efforts to increase the supply of used inventory
available for sale and the mergers, with an increase in sales of
$296.2 million, or 57.9%, from fiscal 2004. Sales of other
product categories, including PC entertainment and other
software and accessories, magazines and character-related
merchandise, grew 55.2%, or $190.6 million, from fiscal
2004 to fiscal 2005, due to the mergers.
Cost of sales increased by $886.3 million, or 66.5%, from
$1,333.5 million in fiscal 2004 to $2,219.8 million in
fiscal 2005 as a result of the changes in gross profit discussed
below.
Gross profit increased by $362.7 million, or 71.2%, from
$509.3 million in fiscal 2004 to $872.0 million in
fiscal 2005. Gross profit as a percentage of sales increased
from 27.6% in fiscal 2004 to 28.2% in fiscal 2005. This increase
was primarily the result of increases in vendor allowances
received in excess of advertising expenses, which are recorded
as a reduction in cost of sales. In fiscal 2005, vendor
allowances received in excess of advertising expenses were
$74.7 million compared to $29.9 million in fiscal
2004. This increase was due to the ownership of EB during the
fourth fiscal quarter, during which much of the years
advertising allowances are generated, and due to the launch of
the Xbox 360, which generated additional advertising allowances.
Gross profit as a percentage of sales on new hardware, new
software and other products increased due to the increase in
vendor allowances received as discussed above. The gross profit
on new hardware increased from 4.1% of sales in fiscal 2004 to
6.1% in fiscal 2005. Because new hardware platforms typically
have lower margins than established hardware platforms, as
expected, the launch of the Sony PSP and the Microsoft Xbox 360
had an offsetting effect on new hardware gross profit as a
percentage of sales. Gross profit as a percentage of sales on
new software increased from 19.6% in fiscal 2004 to 21.4% in
fiscal 2005 due to the increase in vendor allowances received,
as discussed above. Gross profit as a percentage of sales on
other products increased from 34.0% in fiscal 2004 to 35.8% in
fiscal 2005. Gross profit as a percentage of sales on used video
game products increased from 45.3% in fiscal 2004 to 47.4% in
fiscal 2005 due to increased efforts to monitor margin rates
and, following the mergers, the application of GameStops
merchandising algorithms to EBs used video game category.
Selling, general and administrative expenses increased by
$225.9 million, or 60.5%, from $373.4 million in
fiscal 2004 to $599.3 million in fiscal 2005. Approximately
$165.9 million of this increase was attributable to the
mergers and the remainder was due to increases in the number of
stores in operation, and the related increases in store,
distribution, and corporate office operating expenses. Selling,
general and administrative expenses as a
36
percentage of sales decreased from 20.2% in fiscal 2004 to 19.4%
in fiscal 2005. The decrease in selling, general and
administrative expenses as a percentage of sales was primarily
due to combining the full year results of Historical
GameStops operations with the 16 weeks of EBs
operations, including the fourth quarter of the fiscal year. The
fourth quarter of the fiscal year typically experiences high
leveraging of selling, general and administrative expenses due
to the holiday selling season. Foreign currency transaction
gains and (losses) are included in selling, general and
administrative expenses and amounted to $2.6 million in
fiscal 2005, compared to an immaterial amount of loss in fiscal
2004.
Depreciation and amortization expense increased from
$36.8 million in fiscal 2004 to $66.4 million in
fiscal 2005. This increase of $29.6 million was due
primarily to depreciation of EBs assets of
$22.4 million after the mergers, with the remaining
increase due to capital expenditures for 296 new GameStop stores
and management information systems and the commencement in the
third quarter of fiscal 2005 of full operations in the
Companys new distribution facility.
The Companys results of operations for fiscal 2005 include
expenses believed to be of a one-time or short-term nature
associated with the mergers, which included $13.6 million
included in operating earnings and $7.5 million included in
interest expenses. The $13.6 million included
$9.0 million in one-time charges associated with assets of
the Company considered to be impaired because they were
redundant as a result of the mergers. The $7.5 million of
merger-related interest expense resulted primarily from a
commitment fee of $7.1 million for bridge financing as a
contingency in the event that we were unable to issue the senior
notes and senior floating rate notes prior to the consummation
of the mergers.
Interest income resulting from the investment of excess cash
balances increased from $1.9 million in fiscal 2004 to
$5.1 million in fiscal 2005 due to an increase in the
average yield on the investments, interest of $0.8 million
earned on the investment of the $941.5 million in proceeds
of the offering of the senior notes and the senior floating rate
notes from the issuance date on September 28, 2005 until
the date of the mergers on October 8, 2005 and interest
income earned by EB after the mergers on its invested assets.
Interest expense increased from $2.2 million in fiscal 2004
to $30.4 million in fiscal 2005 primarily due to the
interest incurred on the $650 million senior notes payable and
the $300 million senior floating rate notes payable and the
interest incurred on the note payable to Barnes & Noble
in connection with the repurchase of Historical GameStops
Class B common stock in fiscal 2004.
Income tax expense increased by $21.1 million, from
$38.0 million in fiscal 2004 to $59.1 million in
fiscal 2005. The Companys effective tax rate decreased
from 38.4% in fiscal 2004 to 37.0% in fiscal 2005 due to
expenses related to the mergers and corporate restructuring. See
Note 12 of Notes to Consolidated Financial
Statements of the Company for additional information
regarding income taxes.
The factors described above led to an increase in operating
earnings of $93.6 million, from $99.1 million in
fiscal 2004 to $192.7 million in fiscal 2005 and an
increase in net earnings of $39.9 million, or 65.5%, from
$60.9 million in fiscal 2004 to $100.8 million in
fiscal 2005.
Liquidity
and Capital Resources
During fiscal 2006, cash provided by operations was
$423.5 million, compared to cash provided by operations of
$291.4 million in fiscal 2005 and cash provided by
operations of $146.0 million in fiscal 2004. The increase
in cash provided by operations of $132.1 million from
fiscal 2005 to fiscal 2006 resulted from an increase in net
income of $57.5 million, primarily due to the addition of
EBs results of operations since the mergers and the
53rd week included in fiscal 2006; an increase in
depreciation and amortization of $43.5 million due
primarily to the mergers; an increase in the growth in accounts
payable and accrued liabilities, net of growth in merchandise
inventories and the provision for inventory reserves of
$47.9 million caused by growth of the Company and efforts
to manage working capital; an increase in the cash provided by
prepaid taxes of $43.6 million offset by the change in the
effect of the tax benefit realized from the exercise of stock
options of $56.0 million; and an increase in the non-cash
adjustment for stock-based compensation expense due to the
implementation of FAS 123(R) in fiscal 2006 of
$20.6 million, all of which were offset by a net decrease
in prepaid expenses and other current assets of
$41.0 million due primarily to the store growth and the
timing of rent payments at the end of the fiscal 2006.
37
The cash provided by operations during fiscal 2005 was
$291.4 million, compared to cash provided by operations of
$146.0 million in fiscal 2004. The increase in cash
provided by operations of $145.4 million from fiscal 2004
to fiscal 2005 resulted from an increase in net income of
$39.9 million, primarily due to EBs results of
operations since the mergers; an increase in depreciation and
amortization of $29.7 million due primarily to the mergers;
an increase in the growth in accounts payable, net of growth in
merchandise inventories, of $26.8 million caused by growth
of the Company and efforts to manage working capital; an
increase in the growth of accrued liabilities of
$29.9 million due primarily to increases in liabilities for
customer reservations caused by the growth of the Company; and a
net decrease in prepaid expenses of $19.5 million due
primarily to the timing of rent payments at the end of the
fiscal 2004.
Cash used in investing activities was $125.9 million and
$996.8 million during fiscal 2006 and fiscal 2005,
respectively. During fiscal 2006, $133.9 million of capital
expenditures were primarily used to invest in information and
distribution systems in support of the integration of the
operations of EB and Historical GameStop, to open new stores in
the United States and for international expansion. Also, during
the fourth quarter of fiscal 2006, the Company purchased Game
Brands Inc., a 72 store video game retailer, for
$11.3 million. These investing activities were offset by
$19.3 million of cash provided by the sale of the
Pennsylvania corporate office and distribution center which were
acquired in the mergers. During fiscal 2005, $886.1 million
of cash was used to acquire EB. Our capital expenditures in
fiscal 2005 also included approximately $9.7 million to
complete the build-out of our new corporate headquarters and
distribution center facility in Grapevine, Texas. The remaining
$101.0 million in capital expenditures was used to open new
stores, remodel existing stores and invest in information and
distribution systems in support of the integration of the
operations of EB and Historical GameStop. During fiscal 2004,
our capital expenditures included approximately
$27.7 million to acquire and begin the build-out of our new
corporate headquarters and distribution center facility. The
remaining $70.6 million in capital expenditures was used to
open new stores, remodel existing stores and invest in
information systems.
Cash used in financing activities was $46.7 million during
fiscal 2006. Cash flows provided by financing activities were
$935.7 million during fiscal 2005. The cash used in
financing activities for fiscal 2006 was primarily due to the
repurchase of $50.0 million and $50.0 million of
principal value of the Companys Senior Notes and Senior
Floating Rate Notes, respectively, and the repayment of
long-term debt, including the payoff of the $9.2 million
mortgage associated with the Pennsylvania distribution center
sold in June 2006 and the $12.2 million principal payment
in October 2006 on the Barnes & Noble promissory note.
These decreases in cash flows were offset by $33.9 million
received for the issuance of shares relating to stock option
exercises and $43.7 million for the realization of tax
benefits relating to the stock option exercises. The increase in
cash flows for fiscal 2005 was primarily due to the issuance of
the Senior Notes and the Senior Floating Rate Notes in
connection with the mergers.
Our future capital requirements will depend on the number of new
stores we open and the timing of those openings within a given
fiscal year. We opened 421 stores in fiscal 2006 and expect to
open approximately 500 to 550 stores in fiscal 2007. Within the
next 12 to 18 months, we intend to rebrand all of the EB
stores to the GameStop brand. Capital expenditures for fiscal
2007 are projected to be approximately $135.0 million to
$145.0 million, to be used primarily to fund new store
openings, rebrand EB stores and invest in distribution and
information systems in support of operations.
In October 2005, in connection with the mergers, the Company
entered into a five-year, $400 million Credit Agreement
(the Revolver), including a $50 million letter
of credit
sub-limit,
secured by the assets of the Company and its
U.S. subsidiaries. The Revolver places certain restrictions
on the Company and the borrower subsidiaries, including
limitations on asset sales, additional liens, and the incurrence
of additional indebtedness.
The availability under the Revolver is limited to a borrowing
base which allows the Company to borrow up to the lesser of
(x) approximately 70% of eligible inventory and
(y) 90% of the appraisal value of the inventory, in each
case plus 85% of eligible credit card receivables, net of
certain reserves. Letters of credit reduce the amount available
to borrow by their face value. The Companys ability to pay
cash dividends, redeem options, and repurchase shares is
generally prohibited, except that if availability under the
Revolver is or will be after any such payment equal to or
greater than 25% of the borrowing base the Company may
repurchase its capital stock and pay cash dividends. In
addition, in the event that credit extensions under the Revolver
at any time exceed 80% of the
38
lesser of the total commitment or the borrowing base, the
Company will be subject to a fixed charge coverage ratio
covenant of 1.5:1.0.
The interest rate on the Revolver is variable and, at the
Companys option, is calculated by applying a margin of
(1) 0.0% to 0.25% above the higher of the prime rate of the
administrative agent or the federal funds effective rate plus
0.50% or (2) 1.25% to 1.75% above the LIBO rate. The
applicable margin is determined quarterly as a function of the
Companys consolidated leverage ratio. As of
February 3, 2007, the applicable margin was 0.0% for prime
rate loans and 1.50% for LIBO rate loans. In addition, the
Company is required to pay a commitment fee, currently 0.375%,
for any unused portion of the total commitment under the
Revolver.
As of February 3, 2007, there were no borrowings
outstanding under the Revolver and letters of credit outstanding
totaled $4.3 million.
On September 28, 2005, the Company, along with GameStop,
Inc. (which was then a direct wholly-owned subsidiary of
Historical GameStop and is now, as a result of the mergers, an
indirect wholly-owned subsidiary of the Company) as co-issuer
(together with the Company, the Issuers), completed
the offering of U.S. $300 million aggregate principal
amount of Senior Floating Rate Notes due 2011 (the Senior
Floating Rate Notes) and U.S. $650 million
aggregate principal amount of Senior Notes due 2012 (the
Senior Notes and, together with the Senior Floating
Rate Notes, the Notes). The Notes were issued under
an indenture (the Indenture), dated
September 28, 2005, by and among the Issuers, the
subsidiary guarantors party thereto, and Citibank, N.A., as
trustee (the Trustee). Concurrently with the
consummation of the mergers on October 8, 2005, EB and its
direct and indirect domestic wholly-owned subsidiaries
(together, the EB Guarantors) became subsidiaries of
the Company and entered into a first supplemental indenture,
dated October 8, 2005, by and among the Issuers, the EB
Guarantors and the Trustee, pursuant to which the EB Guarantors
assumed all the obligations of a subsidiary guarantor under the
Notes and the Indenture. The net proceeds of the offering were
used to pay the cash portion of the merger consideration paid to
the stockholders of EB in connection with the mergers.
The Senior Floating Rate Notes bear interest at LIBOR plus
3.875%, mature on October 1, 2011 and were priced at 100%.
The rate of interest on the Senior Floating Rate Notes as of
February 3, 2007 was 9.235% per annum. The Senior
Notes bear interest at 8.0% per annum, mature on
October 1, 2012 and were priced at 98.688%, resulting in a
discount at the time of issue of $8.5 million. The discount
is being amortized using the effective interest method. As of
February 3, 2007, the unamortized original issue discount
was $6.7 million.
The Issuers pay interest on the Senior Floating Rate Notes
quarterly, in arrears, every January 1, April 1,
July 1 and October 1, to holders of record on the
immediately preceding December 15, March 15, June 15
and September 15, and at maturity. The Issuers pay interest
on the Senior Notes semi-annually, in arrears, every
April 1 and October 1, to holders of record on the
immediately preceding March 15 and September 15, and at
maturity.
The Indenture contains affirmative and negative covenants
customary for such financings, including, among other things,
limitations on (1) the incurrence of additional debt,
(2) restricted payments, (3) liens, (4) sale and
leaseback transactions and (5) asset sales. Events of
default provided for in the Indenture include, among other
things, failure to pay interest or principal on the Notes, other
breaches of covenants in the Indenture, and certain events of
bankruptcy and insolvency.
As of February 3, 2007, the Company was in compliance with
all covenants associated with the Revolver and the Indenture.
The offering of the Notes was conducted in a private transaction
under Rule 144A under the United States Securities Act of
1933, as amended (the Securities Act), and in
transactions outside the United States in reliance upon
Regulation S under the Securities Act. In connection with
the closing of the offering, the Issuers also entered into a
registration rights agreement, dated September 28, 2005, by
and among the Issuers, the subsidiary guarantors listed on
Schedule I-A
thereto, and Citigroup Global Markets Inc., for themselves and
as representatives of the several initial purchasers listed on
Schedule II thereto (the Registration Rights
Agreement). The Registration Rights Agreement required the
Issuers to, among other things, (1) file a registration
statement with the SEC to be used in connection with the
exchange of the Notes for publicly registered notes with
substantially identical terms, (2) use their reasonable
best efforts to cause the registration statement to be declared
effective within 210 days from
39
the date the Notes were issued, and (3) use their
commercially reasonable efforts to consummate the exchange offer
with respect to the Notes within 270 days from the date the
Notes were issued. In April 2006, the Company filed a
registration statement on
Form S-4
in order to register new notes (the New Notes) with
the same terms and conditions as the Notes in order to
facilitate an exchange of the New Notes for the Notes. This
registration statement on
Form S-4
was declared effective by the SEC on May 10, 2006 and the
Company commenced an exchange offer to exchange the New Notes
for the Notes. This exchange offer was completed in June 2006
with 100% participation.
In November 2006, Citibank, N.A. resigned as Trustee for the
Notes and Wilmington Trust Company was appointed as the new
Trustee for the Notes.
Under certain conditions, the Issuers may on any one or more
occasions prior to maturity redeem up to 100% of the aggregate
principal amount of Senior Floating Rate Notes
and/or
Senior Notes issued under the Indenture at redemption prices at
or in excess of 100% of the principal amount thereof plus
accrued and unpaid interest, if any, to the redemption date. The
circumstances which would limit the percentage of the Notes
which may be redeemed or which would require the Company to pay
a premium in excess of 100% of the principal amount are defined
in the Indenture. Upon a Change of Control (as defined in the
Indenture), the Issuers are required to offer to purchase all of
the Notes then outstanding at 101% of the principal amount
thereof plus accrued and unpaid interest, if any, to the date of
purchase.
The Issuers may acquire Senior Floating Rate Notes and Senior
Notes by means other than redemption, whether by tender offer,
open market purchases, negotiated transactions or otherwise, in
accordance with applicable securities laws, so long as such
acquisitions do not otherwise violate the terms of the Indenture.
In May 2006, the Company announced that its Board of Directors
authorized the buyback of up to an aggregate of
$100.0 million of its Senior Floating Rate Notes and Senior
Notes. As of February 3, 2007, the Company had repurchased
the maximum authorized amount, having acquired
$50.0 million of its Senior Notes, and $50.0 million
of its Senior Floating Rate Notes and delivered the Notes to the
Trustee for cancellation. The associated loss on retirement of
debt is $6.1 million.
Subsequently, on February 9, 2007, the Company announced
that its Board of Directors authorized the buyback of up to an
aggregate of an additional $150.0 million of its Senior
Floating Rate Notes and Senior Notes. The timing and amount of
the repurchases will be determined by the Companys
management based on their evaluation of market conditions and
other factors. In addition, the repurchases may be suspended or
discontinued at any time. At the time of filing, the Company had
repurchased $14.9 million of its Senior Notes and
$64.6 million of its Senior Floating Rate Notes pursuant to
this new authorization and delivered the Notes to the Trustee
for cancellation. The associated loss on retirement of debt is
$5.1 million.
In October 2004, Historical GameStop issued a promissory note in
favor of Barnes & Noble in the principal amount of
$74.0 million in connection with the repurchase of
Historical GameStops common shares held by
Barnes & Noble. Payments of $37.5 million,
$12.2 million and $12.2 million were made in January
2005, October 2005 and October 2006, respectively, as required
by the promissory note, which also requires a final payment of
$12.2 million in October 2007. The note is unsecured and
bears interest at 5.5% per annum, payable when principal
installments are due.
On May 25, 2005, a subsidiary of EB closed on a
10-year,
$9.5 million mortgage agreement collateralized by a new
315,000 square foot distribution facility located in
Sadsbury Township, Pennsylvania. In June 2006, the outstanding
principal balance under the mortgage of approximately
$9.2 million was paid in full in conjunction with the sale
of the distribution facility.
Based on our current operating plans, we believe that available
cash balances, cash generated from our operating activities and
funds available under the Revolver will be sufficient to fund
our operations, required interest payments on the Notes and our
note payable to Barnes & Noble, store expansion and
remodeling activities and corporate capital expenditure programs
for at least the next 12 months.
40
Contractual
Obligations
The following table sets forth our contractual obligations (in
millions) as of February 3, 2007:
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|
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|
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Payments Due by Period
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Less Than
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|
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More Than
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Contractual Obligations
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Total
|
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1 Year
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1-3 Years
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3-5 Years
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5 Years
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(In millions)
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Long-Term Debt(1)
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|
$
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1,242.8
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|
|
$
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83.7
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|
|
$
|
142.6
|
|
|
$
|
384.5
|
|
|
$
|
632.0
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|
Operating Leases
|
|
$
|
858.8
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|
|
$
|
219.0
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|
|
$
|
333.1
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|
|
$
|
169.7
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|
|
$
|
137.0
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|
Purchase Obligations(2)
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|
$
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626.0
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|
$
|
626.0
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|
$
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|
|
$
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|
|
|
$
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|
|
Involuntary Employment Termination
Costs(3)
|
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$
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1.2
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|
$
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1.2
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$
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|
$
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$
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Total
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$
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2,728.8
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|
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$
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929.9
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|
|
$
|
475.7
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|
|
$
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554.2
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|
|
$
|
769.0
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(1) |
|
The long-term debt consists of $600.0 million (principal
value), which bears interest at 8.0%, $250.0 million of
floating rate notes which bore interest at 9.235% as of
February 3, 2007 and $12.2 million which bears
interest at 5.5%. Amounts include contractual interest payments
(using the interest rate as of February 3, 2007 for the
floating rate notes). |
|
(2) |
|
Purchase obligations represent outstanding purchase orders for
merchandise from vendors. These purchase orders are generally
cancelable until shipment of the products. |
|
(3) |
|
Involuntary employment termination costs include known,
remaining amounts committed to former employees, primarily in
general and administrative functions in EBs Pennsylvania
corporate office and distribution center and Nevada call center,
which were closed in the first half of fiscal 2006. |
In addition to minimum rentals, the operating leases generally
require the Company to pay all insurance, taxes and other
maintenance costs and may provide for percentage rentals.
Percentage rentals are based on sales performance in excess of
specified minimums at various stores. Leases with step rent
provisions, escalation clauses or other lease concessions are
accounted for on a straight-line basis over the lease term,
including renewal options for those leases in which it is
reasonably assured that the Company will exercise the renewal
option. The Company does not have leases with capital
improvement funding.
The Company has entered into employment agreements with R.
Richard Fontaine, Daniel A. DeMatteo, Steven R. Morgan and David
W. Carlson. The terms of the employment agreement for
Mr. Fontaine and Mr. DeMatteo commenced on
April 11, 2005 and continue for a period of three years
thereafter, with automatic annual renewals thereafter unless
either party gives notice of non-renewal at least six months
prior to automatic renewal. The term of the employment agreement
for Mr. Morgan commenced on December 9, 2005 and
continues through February 12, 2008, with automatic annual
renewals thereafter unless either party gives notice of
non-renewal at least six months prior to automatic renewal. The
term of the employment agreement for Mr. Carlson commenced
on April 3, 2006 and continues for a period of two years
thereafter, with automatic annual renewals thereafter unless
either party gives notice of non-renewal at least six months
prior to automatic renewal. Mr. Fontaines minimum
annual salary during the term of his employment under the
employment agreement shall be no less than $650,000.
Mr. DeMatteos minimum annual salary during the term
of his employment under the employment agreement shall be no
less than $535,000. Mr. Morgans minimum annual salary
during the term of his employment under the employment agreement
shall be no less than $450,000. Mr. Carlsons minimum
annual salary during the term of his employment under the
employment agreement shall be no less than $350,000. The Board
of Directors of the Company has set Mr. Fontaines,
Mr. DeMatteos, Mr. Morgans and
Mr. Carlsons salaries for fiscal 2007 at $1,000,000,
$800,000, $500,000 and $400,000, respectively.
As of February 3, 2007, we had standby letters of credit
outstanding in the amount of $4.3 million and had cash
collateralized bank guarantees outstanding in the amount of
$4.1 million. The Company had no standby repurchase
obligations outstanding as of February 3, 2007.
41
Off-Balance
Sheet Arrangements
The Company remains contingently liable for the BC Sports
Collectibles store leases assigned to Sports Collectibles
Acquisition Corporation (SCAC). SCAC is owned by the
family of James J. Kim, Chairman of EB at the time and currently
one of the Companys directors. If SCAC were to default on
these lease obligations, the Company would be liable to the
landlords for up to $0.1 million in minimum rent and
landlord charges as of February 3, 2007. Mr. Kim has
entered into an indemnification agreement with EB with respect
to these leases, therefore no accrual was recorded for this
contingent obligation.
Impact of
Inflation
We do not believe that inflation has had a material effect on
our net sales or results of operations.
Certain
Relationships and Related Transactions
The Company operates departments within ten bookstores operated
by Barnes & Noble. The Company pays a license fee to
Barnes & Noble in amounts equal to 7.0% of the gross
sales of such departments. Management deems the license fee to
be reasonable and based upon terms equivalent to those that
would prevail in an arms length transaction. During the
53 weeks ended February 3, 2007 and the 52 weeks
ended January 28, 2006 and January 29, 2005, these
charges amounted to $1.0 million, $0.9 million and
$0.9 million, respectively.
Until June 2005, Historical GameStop participated in
Barnes & Nobles workers compensation,
property and general liability insurance programs. The costs
incurred by Barnes & Noble under these programs were
allocated to Historical GameStop based upon total payroll
expense, property and equipment, and insurance claim history of
Historical GameStop. Management deemed the allocation
methodology to be reasonable. Although Historical GameStop
secured its own insurance coverage, costs will likely continue
to be incurred by Barnes & Noble on insurance claims
which were incurred under its programs prior to June 2005 and
any such costs applicable to insurance claims against Historical
GameStop will be allocated to the Company. During the
53 weeks ended February 3, 2007 and the 52 weeks
ended January 28, 2006 and January 29, 2005, these
allocated charges amounted to $0.8 million,
$1.7 million and $2.7 million, respectively.
In October 2004, the Board of Directors of Historical GameStop
authorized a repurchase of Historical GameStop common stock held
by Barnes & Noble. Historical GameStop repurchased
12,214,000 shares of common stock at a price equal to
$9.13 per share for aggregate consideration before expenses
of $111.5 million. The repurchase price per share was
determined by using a discount of 3.5% on the last reported
trade of Historical GameStops common stock on the New York
Stock Exchange prior to the time of the transaction. Historical
GameStop paid $37.5 million in cash and issued a promissory
note in the principal amount of $74.0 million, the
remaining balance of which is payable in October 2007 and bears
interest at 5.5% per annum, payable when the final payment
is due. Scheduled principal payments of $37.5 million,
$12.2 million and $12.2 million were made in January
2005, October 2005 and October 2006, respectively. Interest
expense on the promissory note for the 53 weeks ended
February 3, 2007 and the 52 weeks ended
January 28, 2006 and January 29, 2005 totaled
$1.1 million, $1.8 million and $1.3 million,
respectively.
In May 2005, we entered into an arrangement with
Barnes & Noble under which www.gamestop.com is
the exclusive specialty video game retailer listed on
www.bn.com, Barnes & Nobles
e-commerce
site. Under the terms of this agreement, the Company pays a fee
to Barnes & Noble for sales of video game or PC
entertainment products sold through www.bn.com. For the
53 weeks ended February 3, 2007 and the 52 weeks
ended January 28, 2006, the fee to Barnes & Noble
totaled $0.3 million and $0.3 million, respectively.
On November 2, 2002, EB sold its BC Sports Collectibles
business to SCAC for cash and the assumption of lease related
liabilities. The purchaser, SCAC, is owned by the family of
James J. Kim, Chairman of EB at the time and currently one of
the Companys directors. As EB remains contingently liable
for the BC store leases, Mr. Kim has agreed to indemnify EB
against any liabilities associated with these leases.
42
Recent
Accounting Pronouncements
In July 2006, the FASB issued FIN 48, which requires the
use of a two-step approach for recognizing and measuring tax
benefits taken or expected to be taken in a tax return and
disclosures regarding uncertainties in income tax positions. We
were required to adopt FIN 48 effective February 4,
2007. The cumulative effect of initially adopting FIN 48 is
to record an adjustment to opening retained earnings in the year
of adoption. Only tax positions that meet the more likely than
not recognition threshold at the effective date may be
recognized upon adoption of FIN 48. The Company is
evaluating the impact of implementing the provisions of
FIN 48 on its financial position and future results of
operations, but does not expect that the impact will be material.
In September 2006, the FASB issued Statement of Financial
Accounting Standard No. 157, Fair Value Measurements
(SFAS No. 157). This statement defines
fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands
disclosures about fair value measurements. This statement
applies under other accounting pronouncements that require or
permit fair value measurements. SFAS No. 157 is
effective for fiscal years beginning after November 15,
2007. The Company is currently assessing the impact that the
adoption of SFAS No. 157 will have on its consolidated
financial statements.
In September 2006, the SEC issued Securities and Exchange
Commission Staff Accounting Bulletin No. 108
(SAB No. 108) in order to eliminate the
diversity of practice surrounding how public companies quantify
financial statement misstatements. In SAB No. 108, the
SEC staff established an approach that requires quantification
of financial statement misstatements based on the effects of the
misstatements on each of the Companys financial statements
and the related financial statement disclosures.
SAB No. 108 is effective for fiscal years ending after
November 15, 2006. The Company adopted of
SAB No. 108 in fiscal 2006, which did not have a
material impact on its consolidated financial statements.
In June 2006, the Emerging Issues Task Force (EITF)
ratified its conclusion on EITF
No. 06-03,
How Taxes Collected From Customers and Remitted to
Governmental Authorities Should Be Presented in the Income
Statement (That Is, Gross Versus Net
Presentation)(EITF
06-03).
The EITF concluded that the presentation of taxes assessed by a
governmental authority that is directly imposed on a
revenue-producing transaction between a seller and a customer
such as sales, use, value added and certain excise taxes, is an
accounting policy decision that should be disclosed in a
companys financial statements. Additionally, companies
that record such taxes on a gross basis should disclose the
amounts of those taxes in interim and annual financial
statements for each period for which an income statement is
presented if those amounts are significant. EITF
06-03 is
effective for fiscal years beginning after December 15,
2006. The Company presents such taxes on a net basis for all
periods presented.
In February 2007, the FASB issued Statement of Financial
Accounting Standard No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities
(SFAS No. 159). This statement permits
entities to choose to measure many financial instruments and
certain other items at fair value. Companies should report
unrealized gains and losses on items for which the fair value
option has been elected in earnings at each subsequent reporting
date. This statement is effective as of the beginning of an
entitys first fiscal year that begins after
November 15, 2007. The Company is currently assessing the
potential impact, if any, of the adoption of
SFAS No. 159 on its consolidated financial statements.
Seasonality
Our business, like that of many retailers, is seasonal, with the
major portion of sales and operating profit realized during the
fourth quarter which includes the holiday selling season.
Results for any quarter are not necessarily indicative of the
results that may be achieved for a full fiscal year. Quarterly
results may fluctuate materially depending upon, among other
factors, the timing of new product introductions and new store
openings, sales contributed by new stores, increases or
decreases in comparable store sales, adverse weather conditions,
shifts in the timing of certain holidays or promotions and
changes in our merchandise mix.
43
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
Interest
Rate Exposure
We do not use derivative financial instruments to hedge interest
rate exposure. We limit our interest rate risks by investing our
excess cash balances in short-term, highly-liquid instruments
with a maturity of one year or less. In addition, the Notes
issued in connection with the mergers include both fixed rate
and floating rate notes with the intent to minimize exposure to
changes in interest rates. A hypothetical increase (or decrease)
of 10% of the effective rate on the floating rate notes would
result in a change in the annual interest expense of
$2.3 million. The effective rate on the floating rate notes
was 9.2350% on February 3, 2007. We do not expect any
material losses from our invested cash balances, and we believe
that our interest rate exposure is modest.
Foreign
Currency Risk
The mergers significantly increased our exposure to foreign
currency fluctuations because a larger amount of our business is
now transacted in foreign currencies. While Historical GameStop
generally did not enter into derivative instruments with respect
to foreign currency risks, EB routinely used forward exchange
contracts and cross-currency swaps to manage currency risk and
had a number of open positions designated as hedge transactions
as of the merger date. The Company discontinued hedge accounting
treatment for all derivative instruments acquired in connection
with the mergers.
The Company follows the provisions of Statement of Financial
Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities,
(SFAS 133) as amended by Statement of Financial
Accounting Standards No. 138, Accounting for Certain
Derivative Instruments and Certain Hedging Activities.
SFAS 133 requires that all derivative instruments be
recorded on the balance sheet at fair value. Changes in the fair
value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on whether the
derivative is designated as part of a hedge transaction, and if
it is, depending on the type of hedge transaction.
The Company uses forward exchange contracts, foreign currency
options and cross-currency swaps, (together, the Foreign
Currency Contracts) to manage currency risk primarily
related to intercompany loans denominated in non-functional
currencies and certain foreign currency assets and liabilities.
These Foreign Currency Contracts are not designated as hedges
and, therefore, changes in the fair values of these derivatives
are recognized in earnings, thereby offsetting the current
earnings effect of the re-measurement of related intercompany
loans and foreign currency assets and liabilities. The aggregate
fair value of the Foreign Currency Contracts at February 3,
2007 was a liability of $1.9 million. A hypothetical
strengthening or weakening of 10% in the foreign exchange rates
underlying the Foreign Currency Contracts from the market rate
at February 3, 2007 would result in a gain or (loss) in
value of the forwards and swaps of $1.8 million or
($1.5 million), respectively. The Company had no Foreign
Currency Contracts prior to October 8, 2005.
|
|
Item 8.
|
Consolidated
Financial Statements and Supplementary Data
|
See Item 15(a)(1) and (2) of this
Form 10-K.
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
None.
Item 9A. Controls
and Procedures
(a) Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, the
Companys management conducted an evaluation, under the
supervision and with the participation of the principal
executive officer and principal financial officer, of the
Companys disclosure controls and procedures (as defined in
Rules 13a-15(e)
and
15d-15(e)
under the Exchange Act). Based on this evaluation, the principal
executive officer and principal financial officer concluded
that, as of the end of the period covered by this report, the
Companys disclosure controls and procedures are effective.
Notwithstanding the foregoing, a control system, no matter how
well designed and operated, can provide only
44
reasonable, not absolute, assurance that it will detect or
uncover failures within the Company to disclose material
information otherwise required to be set forth in the
Companys periodic reports.
(b) Managements Annual Report on Internal Control
Over Financial Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term
is defined in Exchange Act
Rules 13a-15(f).
Under the supervision and with the participation of our
management, including our principal executive officer and
principal financial officer, we conducted an evaluation of the
effectiveness of our internal control over financial reporting
based on the framework in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on our
evaluation under the framework in Internal
Control Integrated Framework, our management
concluded that our internal control over financial reporting was
effective as of February 3, 2007. Our managements
assessment of the effectiveness of our internal control over
financial reporting as of February 3, 2007 has been audited
by BDO Seidman, LLP, an independent registered public accounting
firm, as stated in their report which is included herein.
April 2, 2007
45
Report of
Independent Registered Public Accounting Firm
Board of Directors and Stockholders
GameStop Corp.
Grapevine, Texas
We have audited managements assessment, included in the
accompanying Managements Annual Report on Internal Control
over Financial Reporting appearing under Item 9A of the
Annual Report on
Form 10-K,
that GameStop Corp. maintained effective internal control over
financial reporting as of February 3, 2007, based on the
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Management of
GameStop Corp. is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on managements
assessment and an opinion on the effectiveness of the internal
control over financial reporting of GameStop Corp. based on our
audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinions.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that GameStop Corp.
maintained effective internal control over financial reporting
as of February 3, 2007, is fairly stated, in all material
respects, based on criteria established in Internal
Control Integrated Framework issued by the COSO.
Also, in our opinion, GameStop Corp. maintained, in all material
respects, effective internal control over financial reporting as
of February 3, 2007, based on the criteria established in
Internal Control Integrated Framework issued
by COSO.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of GameStop Corp. as of
February 3, 2007 and January 28, 2006 and the related
consolidated statements of operations, stockholders
equity, and cash flows for the 53 week period ended
February 3, 2007 and for the 52 week periods ended
January 28, 2006 and January 29, 2005. We have also
audited the schedule listed in Item 15(a)(2) for this
Form 10-K.
Our report dated April 2, 2007 expressed an unqualified
opinion on those consolidated financial statements and schedule.
BDO Seidman, LLP
Dallas, Texas
April 2, 2007
46
(c) Changes in Internal Controls Over Financial Reporting
At the time of the mergers, EB operated on different information
technology systems than the Company. The Company implemented its
information technology systems and integrated its internal
control processes at EB during fiscal 2006. Changes to certain
processes, information technology systems, and other components
of internal controls resulting from the acquisition of EB
occurred and were evaluated by management as such integration
activities were implemented. Other than the impact of the
acquisition of EB, there was no change in the Companys
internal control over financial reporting (as such term is
defined in
Rules 13a-15(f)
and
15d-15(f)
under the Exchange Act) during the Companys most recently
completed fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the Companys
internal control over financial reporting.
|
|
Item 9B.
|
Other
Information
|
None.
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance(*)
|
Code of
Ethics
The Company has adopted a Code of Ethics that is applicable to
the Companys Chairman of the Board and Chief Executive
Officer, Vice Chairman and Chief Operating Officer, President,
Chief Financial Officer, Chief Accounting Officer and any
Executive Vice President of the Company. This Code of Ethics is
attached as Exhibit 14.1 to this
Form 10-K.
In accordance with SEC rules, the Company intends to disclose
any amendment (other than any technical, administrative, or
other non-substantive amendment) to, or any waiver from, a
provision of the Code of Ethics on the Companys website
(www.gamestop.com) within five business days following such
amendment or waiver.
|
|
Item 11.
|
Executive
Compensation(*)
|
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters(*)
|
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence(*)
|
|
|
Item 14.
|
Principal
Accountant Fees and Services(*)(
|
(*) The information not otherwise provided herein that is
required by Items 10, 11, 12, 13 and 14 will be set
forth in the definitive proxy statement relating to the 2007
Annual Meeting of Stockholders of the Company, which is to be
filed with the SEC pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended. This definitive
proxy statement relates to a meeting of stockholders involving
the election of directors and the portions therefrom required to
be set forth in this
Form 10-K
by Items 10, 11, 12, 13 and 14 are incorporated herein
by reference pursuant to General Instruction G(3) to
Form 10-K.
47
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
(a) The following documents are filed as a part of this
Form 10-K:
(1) Index and Consolidated Financial Statements
The list of consolidated financial statements set forth in the
accompanying Index to Consolidated Financial Statements at
page F-2
herein is incorporated herein by reference. Such consolidated
financial statements are filed as part of this report on
Form 10-K.
(2) Financial Statement Schedules required to be filed
by Item 8 of this form:
The following financial statement schedule for the 53 weeks
ended February 3, 2007 and the 52 weeks ended
January 28, 2006 and January 29, 2005 is filed as part
of this report on
Form 10-K
and should be read in conjunction with our Consolidated
Financial Statements appearing elsewhere in this
Form 10-K:
Schedule II
Valuation and Qualifying Accounts
For the 53 weeks ended February 3, 2007 and the
52 weeks ended January 28, 2006 and January 29,
2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Column A
|
|
Column B
|
|
|
Column C(1)
|
|
|
Column C(2)
|
|
|
Column D
|
|
|
Column E
|
|
|
|
|
|
|
|
|
|
Charged to Other
|
|
|
Deductions-
|
|
|
|
|
|
|
Balance at
|
|
|
Charged to
|
|
|
Accounts-
|
|
|
Write-Offs
|
|
|
Balance at
|
|
|
|
Beginning
|
|
|
Costs and
|
|
|
Accounts
|
|
|
Net of
|
|
|
End of
|
|
|
|
of Period
|
|
|
Expenses
|
|
|
Payable*
|
|
|
Recoveries
|
|
|
Period
|
|
|
|
(In thousands)
|
|
|
Inventory Reserve, deducted from
asset accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53 Weeks Ended February 3,
2007
|
|
$
|
53,277
|
|
|
$
|
50,779
|
|
|
$
|
27,792
|
|
|
$
|
78,032
|
|
|
$
|
53,816
|
|
52 Weeks Ended January 28,
2006
|
|
|
14,804
|
|
|
|
25,103
|
|
|
|
54,560
|
|
|
|
41,190
|
|
|
|
53,277
|
|
52 Weeks Ended January 29,
2005
|
|
|
12,274
|
|
|
|
17,808
|
|
|
|
9,856
|
|
|
|
25,134
|
|
|
|
14,804
|
|
|
|
|
* |
|
Includes $36,287 acquired in the mergers and recorded in the
52 weeks ended January 28, 2006. |
The Company does not maintain a reserve for estimated sales
returns and allowances as amounts are considered to be
immaterial. All other schedules are omitted because they are not
applicable.
(b) Exhibits
The following exhibits are filed as part of this
Form 10-K:
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
2
|
.1
|
|
Agreement and Plan of Merger,
dated as of April 17, 2005, among GameStop Corp. (f/k/a GSC
Holdings Corp.), Electronics Boutique Holdings Corp., GameStop,
Inc., GameStop Holdings Corp. (f/k/a GameStop Corp.), Cowboy
Subsidiary LLC and Eagle Subsidiary LLC.(1)
|
|
3
|
.1
|
|
Second Amended and Restated
Certificate of Incorporation.(2)
|
|
3
|
.2
|
|
Amended and Restated Bylaws.(3)
|
|
4
|
.1
|
|
Indenture, dated
September 28, 2005, by and among GameStop Corp. (f/k/a GSC
Holdings Corp.), GameStop, Inc., the subsidiary guarantors party
thereto, and Citibank N.A., as trustee.(4)
|
|
4
|
.2
|
|
First Supplemental Indenture,
dated October 8, 2005, by and among GameStop Corp. (f/k/a
GSC Holdings Corp.), GameStop, Inc., the subsidiary guarantors
party thereto, and Citibank N.A., as trustee.(5)
|
|
4
|
.3
|
|
Registration Rights Agreement,
dated September 28, 2005, by and among GameStop Corp.
(f/k/a GSC Holdings Corp.), GameStop, Inc., the subsidiary
guarantors listed on
Schedule I-A
thereto, and Citigroup Global Markets Inc., for themselves and
as representatives of the several initial purchasers listed on
Schedule II thereto.(4)
|
|
4
|
.4
|
|
Rights Agreement, dated as of
June 27, 2005, between GameStop Corp. (f/k/a GSC Holdings
Corp.) and The Bank of New York, as Rights Agent.(3)
|
|
4
|
.5
|
|
Form of Indenture.(6)
|
|
10
|
.1
|
|
Separation Agreement, dated as of
January 1, 2002, between Barnes & Noble, Inc. and
GameStop Holdings Corp. (f/k/a GameStop Corp.).(7)
|
48
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.2
|
|
Tax Disaffiliation Agreement,
dated as of January 1, 2002, between Barnes &
Noble, Inc. and GameStop Holdings Corp. (f/k/a GameStop
Corp.).(8)
|
|
10
|
.3
|
|
Insurance Agreement, dated as of
January 1, 2002, between Barnes & Noble, Inc. and
GameStop Holdings Corp. (f/k/a GameStop Corp.).(8)
|
|
10
|
.4
|
|
Operating Agreement, dated as of
January 1, 2002, between Barnes & Noble, Inc. and
GameStop Holdings Corp. (f/k/a GameStop Corp.).(8)
|
|
10
|
.5
|
|
Amended and Restated 2001
Incentive Plan.(9)
|
|
10
|
.6
|
|
Amendment to Amended and Restated
2001 Incentive Plan.(5)
|
|
10
|
.7
|
|
Amendment to Amended and Restated
2001 Incentive Plan, as amended.(10)
|
|
10
|
.8
|
|
Amended and Restated Supplemental
Compensation Plan.(11)
|
|
10
|
.9
|
|
Form of Option Agreement.(12)
|
|
10
|
.10
|
|
Form of Restricted Share
Agreement.(12)
|
|
10
|
.11
|
|
Stock Purchase Agreement, dated as
of October 1, 2004, by and among GameStop Holdings Corp.
(f/k/a GameStop Corp.), B&N GameStop Holding Corp. and
Barnes & Noble, Inc.(13)
|
|
10
|
.12
|
|
Promissory Note, dated as of
October 1, 2004, made by GameStop Holdings Corp. (f/k/a
GameStop Corp.) in favor of B&N GameStop Holding Corp.(13)
|
|
10
|
.13
|
|
Credit Agreement, dated as of
October 11, 2005, by and among GameStop Corp. (f/k/a GSC
Holdings Corp.), certain subsidiaries of GameStop Corp., Bank of
America, N.A. and the other lending institutions listed in the
Agreement, Bank of America, N.A. and Citicorp North America,
Inc., as Issuing Banks, Bank of America, N.A., as Administrative
Agent and Collateral Agent, Citicorp North America, Inc., as
Syndication Agent, and Merrill Lynch Capital, a division of
Merrill Lynch Business Financial Services Inc., as Documentation
Agent.(14)
|
|
10
|
.14
|
|
Guaranty, dated as of
October 11, 2005, by GameStop Corp. (f/k/a GSC Holdings
Corp.) and certain subsidiaries of GameStop Corp. in favor of
the agents and lenders.(14)
|
|
10
|
.15
|
|
Security Agreement, dated
October 11, 2005, by GameStop Corp. (f/k/a GSC Holdings
Corp.) and certain subsidiaries of GameStop Corp. in favor of
Bank of America, N.A., as Collateral Agent for the Secured
Parties.(14)
|
|
10
|
.16
|
|
Patent and Trademark Security
Agreement, dated as of October 11, 2005 by GameStop Corp.
(f/k/a GSC Holdings Corp.) and certain subsidiaries of GameStop
Corp. in favor of Bank of America, N.A., as Collateral Agent.(14)
|
|
10
|
.17
|
|
Mortgage, Security Agreement, and
Assignment and Deeds of Trust, dated October 11, 2005,
between GameStop of Texas, L.P. and Bank of America, N.A., as
Collateral Agent.(14)
|
|
10
|
.18
|
|
Mortgage, Security Agreement, and
Assignment and Deeds of Trust, dated October 11, 2005,
between Electronics Boutique of America, Inc. and Bank of
America, N.A., as Collateral Agent.(14)
|
|
10
|
.19
|
|
Form of Securities Collateral
Pledge Agreement, dated as of October 11, 2005.(14)
|
|
10
|
.20
|
|
Registration Rights Agreement,
dated October 8, 2005, among EB Nevada Inc., James J. Kim
and GameStop Corp. (f/k/a GSC Holdings Corp.).(14)
|
|
10
|
.21
|
|
Executive Employment Agreement,
dated as of April 11, 2005, between GameStop Holdings Corp.
(f/k/a GameStop Corp.) and R. Richard Fontaine.(15)
|
|
10
|
.22
|
|
Executive Employment Agreement,
dated as of April 11, 2005, between GameStop Holdings Corp.
(f/k/a GameStop Corp.) and Daniel A. DeMatteo.(15)
|
|
10
|
.23
|
|
Executive Employment Agreement,
dated as of December 9, 2005, between GameStop Corp. and
Steven R. Morgan.(16)
|
|
10
|
.24
|
|
Executive Employment Agreement,
dated as of April 3, 2006, between GameStop Corp. and David
W. Carlson.(17)
|
|
12
|
.1
|
|
Computation of Ratio of Earnings
to Fixed Charges.
|
|
14
|
.1
|
|
Code of Ethics for Senior
Financial Officers.(18)
|
|
21
|
.1
|
|
Subsidiaries.
|
49
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
23
|
.1
|
|
Consent of BDO Seidman, LLP.
|
|
31
|
.1
|
|
Certification of Chief Executive
Officer pursuant to
Rule 13a-14(a)/15d-14(a)
under the Securities Exchange Act of 1934, as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
31
|
.2
|
|
Certification of Chief Financial
Officer pursuant to
Rule 13a-14(a)/15d-14(a)
under the Securities Exchange Act of 1934, as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
32
|
.1
|
|
Certification of Chief Executive
Officer pursuant to
Rule 13a-14(b)
under the Securities Exchange Act of 1934 and 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
|
|
32
|
.2
|
|
Certification of Chief Financial
Officer pursuant to
Rule 13a-14(b)
under the Securities Exchange Act of 1934 and 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
|
|
|
|
(1) |
|
Incorporated by reference to GameStop Holdings Corp.s
Form 8-K
filed with the Securities and Exchange Commission on
April 18, 2005. |
|
(2) |
|
Incorporated by reference to the Registrants
Form 8-K
filed with the Securities and Exchange Commission on
February 7, 2007. |
|
(3) |
|
Incorporated by reference to the Registrants Amendment
No. 1 to Form
S-4 filed
with the Securities and Exchange Commission on July 8, 2005. |
|
(4) |
|
Incorporated by reference to GameStop Holdings Corp.s
Form 8-K
filed with the Securities and Exchange Commission on
September 30, 2005. |
|
(5) |
|
Incorporated by reference to the Registrants
Form 10-Q
for the fiscal quarter ended October 29, 2005 filed with
the Securities and Exchange Commission on December 8, 2005. |
|
(6) |
|
Incorporated by reference to the Registrants
Form S-3ASR
filed with the Securities and Exchange Commission on
April 10, 2006. |
|
(7) |
|
Incorporated by reference to GameStop Holdings Corp.s
Amendment No. 4 to
Form S-1
filed with the Securities and Exchange Commission on
February 5, 2002. |
|
(8) |
|
Incorporated by reference to GameStop Holdings Corp.s
Amendment No. 3 to
Form S-1
filed with the Securities and Exchange Commission on
January 24, 2002. |
|
(9) |
|
Incorporated by reference to GameStop Holdings Corp.s
Form 10-K
for the fiscal year ended January 29, 2005 filed with the
Securities and Exchange Commission on April 11, 2005. |
|
(10) |
|
Incorporated by reference to the Registrants
Form 8-K
filed with the Securities and Exchange Commission on
December 18, 2006. |
|
(11) |
|
Incorporated by reference to the Registrants
Form 10-Q
for the fiscal quarter ended July 29, 2006 filed with the
Securities and Exchange Commission on September 5, 2006. |
|
(12) |
|
Incorporated by reference to GameStop Holdings Corp.s
Form 8-K
filed with the Securities and Exchange Commission on
September 12, 2005. |
|
(13) |
|
Incorporated by reference to GameStop Holdings Corp.s
Form 8-K
filed with the Securities and Exchange Commission on
October 5, 2004. |
|
(14) |
|
Incorporated by reference to the Registrants
Form 8-K
filed with the Securities and Exchange Commission on
October 12, 2005. |
|
(15) |
|
Incorporated by reference to GameStop Holdings Corp.s
Form 8-K
filed with the Securities and Exchange Commission on
April 15, 2005. |
|
(16) |
|
Incorporated by reference to the Registrants
Form 8-K
filed with the Securities and Exchange Commission on
December 13, 2005. |
|
(17) |
|
Incorporated by reference to the Registrants
Form 10-K
for the fiscal year ended January 28, 2006 filed with the
Securities and Exchange Commission on April 3, 2006. |
|
(18) |
|
Incorporated by reference to GameStop Holdings Corp.s
Form 10-K
for the fiscal year ended January 31, 2004 filed with the
Securities and Exchange Commission on April 14, 2004. |
50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this
Form 10-K
to be signed on its behalf by the undersigned, thereunto duly
authorized.
GAMESTOP CORP.
|
|
|
|
By:
|
/s/ R.
Richard Fontaine
|
R. Richard Fontaine
Chairman of the Board and Chief Executive Officer
Date: April 4, 2007
Pursuant to the requirements of the Securities Exchange Act of
1934, this
Form 10-K
has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
|
|
|
|
|
|
|
Name
|
|
Capacity
|
|
Date
|
|
/s/ R.
Richard
Fontaine
R.
Richard Fontaine
|
|
Chairman of the Board,
Chief Executive Officer and Director (Principal Executive
Officer)
|
|
April 4, 2007
|
|
|
|
|
|
/s/ David
W. Carlson
David
W. Carlson
|
|
Executive Vice President,
Chief Financial Officer and Assistant Secretary (Principal
Financial Officer)
|
|
April 4, 2007
|
|
|
|
|
|
/s/ Robert
A. Lloyd
Robert
A. Lloyd
|
|
Senior Vice President,
Chief Accounting Officer
(Principal Accounting Officer)
|
|
April 4, 2007
|
|
|
|
|
|
/s/ Daniel
A. DeMatteo
Daniel
A. DeMatteo
|
|
Vice Chairman and
Chief Operating Officer and Director
|
|
April 4, 2007
|
|
|
|
|
|
/s/ Michael
N. Rosen
Michael
N. Rosen
|
|
Secretary and Director
|
|
April 4, 2007
|
|
|
|
|
|
/s/ Jerome
L. Davis
Jerome
L. Davis
|
|
Director
|
|
April 4, 2007
|
|
|
|
|
|
/s/ James
J. Kim
James
J. Kim
|
|
Director
|
|
April 4, 2007
|
|
|
|
|
|
/s/ Leonard
Riggio
Leonard
Riggio
|
|
Director
|
|
April 4, 2007
|
|
|
|
|
|
/s/ Stephanie
M. Shern
Stephanie
M. Shern
|
|
Director
|
|
April 4, 2007
|
|
|
|
|
|
/s/ Stanley
P.
Steinberg
Stanley
P. Steinberg
|
|
Director
|
|
April 4, 2007
|
51
|
|
|
|
|
|
|
Name
|
|
Capacity
|
|
Date
|
|
/s/ Gerald
R.
Szczepanski
Gerald
R. Szczepanski
|
|
Director
|
|
April 4, 2007
|
|
|
|
|
|
/s/ Edward
A. Volkwein
Edward
A. Volkwein
|
|
Director
|
|
April 4, 2007
|
|
|
|
|
|
/s/ Lawrence
S. Zilavy
Lawrence
S. Zilavy
|
|
Director
|
|
April 4, 2007
|
52
Report of
Independent Registered Public Accounting Firm
Board of Directors and Stockholders
GameStop Corp.
Grapevine, Texas
We have audited the accompanying consolidated balance sheets of
GameStop Corp. as of February 3, 2007 and January 28,
2006 and the related consolidated statements of operations,
stockholders equity, and cash flows for the 53 week
period ended February 3, 2007 and for the 52 week
periods ended January 28, 2006 and January 29, 2005.
We have also audited the schedule listed in Item 15(a)(2)
of this
Form 10-K.
These financial statements and schedule are the responsibility
of the Companys management. Our responsibility is to
express an opinion on these financial statements and schedule
based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and
schedule are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements and schedule, assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of
the financial statements and schedule. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of GameStop Corp. at February 3, 2007 and
January 28, 2006 and the results of its operations and its
cash flows for the 53 week period ended February 3,
2007 and for each of the 52 week periods ended
January 28, 2006 and January 29, 2005, in conformity
with accounting principles generally accepted in the United
States of America.
Also, in our opinion, the schedule presents fairly, in all
material respects, the information set forth herein.
As discussed in Note 1 to the consolidated financial
statements, the Company changed its method of accounting for
share-based payment arrangements in accordance with the
provisions of Statement of Financial Accounting Standards
No. 123(R) Share-based Payment, on January 29,
2006.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of GameStop Corp.s internal control over
financial reporting as of February 3, 2007, based on
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report
dated April 2, 2007 expressed an unqualified opinion
thereon.
BDO Seidman, LLP
Dallas, Texas
April 2, 2007
F-2
GAMESTOP
CORP.
|
|
|
|
|
|
|
|
|
|
|
February 3,
|
|
|
January 28,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
652,403
|
|
|
$
|
401,593
|
|
Receivables, net
|
|
|
34,268
|
|
|
|
38,738
|
|
Merchandise inventories, net
|
|
|
675,385
|
|
|
|
603,178
|
|
Prepaid expenses and other current
assets
|
|
|
37,882
|
|
|
|
16,339
|
|
Prepaid taxes
|
|
|
5,545
|
|
|
|
21,068
|
|
Deferred taxes
|
|
|
34,858
|
|
|
|
41,051
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,440,341
|
|
|
|
1,121,967
|
|
|
|
|
|
|
|
|
|
|
Property and equipment:
|
|
|
|
|
|
|
|
|
Land
|
|
|
10,712
|
|
|
|
10,257
|
|
Buildings and leasehold improvements
|
|
|
305,806
|
|
|
|
262,908
|
|
Fixtures and equipment
|
|
|
425,841
|
|
|
|
343,897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
742,359
|
|
|
|
617,062
|
|
Less accumulated depreciation and
amortization
|
|
|
285,896
|
|
|
|
184,937
|
|
|
|
|
|
|
|
|
|
|
Net property and equipment
|
|
|
456,463
|
|
|
|
432,125
|
|
|
|
|
|
|
|
|
|
|
Goodwill, net
|
|
|
1,403,907
|
|
|
|
1,392,352
|
|
Assets held for sale
|
|
|
|
|
|
|
19,297
|
|
Deferred financing fees
|
|
|
14,375
|
|
|
|
18,561
|
|
Deferred taxes
|
|
|
5,804
|
|
|
|
|
|
Other noncurrent assets
|
|
|
28,694
|
|
|
|
31,519
|
|
|
|
|
|
|
|
|
|
|
Total other assets
|
|
|
1,452,780
|
|
|
|
1,461,729
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,349,584
|
|
|
$
|
3,015,821
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
717,868
|
|
|
$
|
543,288
|
|
Accrued liabilities
|
|
|
357,013
|
|
|
|
331,859
|
|
Notes payable, current portion
|
|
|
12,176
|
|
|
|
12,527
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
1,087,057
|
|
|
|
887,674
|
|
|
|
|
|
|
|
|
|
|
Deferred taxes
|
|
|
|
|
|
|
13,640
|
|
Senior notes payable, long-term
portion, net
|
|
|
593,311
|
|
|
|
641,788
|
|
Senior floating rate notes payable,
long-term portion
|
|
|
250,000
|
|
|
|
300,000
|
|
Note payable, long-term portion
|
|
|
412
|
|
|
|
21,675
|
|
Deferred rent and other long-term
liabilities
|
|
|
42,926
|
|
|
|
36,331
|
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities
|
|
|
886,649
|
|
|
|
1,013,434
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,973,706
|
|
|
|
1,901,108
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
(Notes 10 and 11)
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock
authorized 5,000 shares; no shares issued or outstanding
|
|
|
|
|
|
|
|
|
Class A common
stock $.001 par value; authorized
300,000 shares; 152,305 and 145,594 shares issued and
outstanding, respectively
|
|
|
152
|
|
|
|
146
|
|
Additional
paid-in-capital
|
|
|
1,021,903
|
|
|
|
921,335
|
|
Accumulated other comprehensive
income
|
|
|
3,227
|
|
|
|
886
|
|
Retained earnings
|
|
|
350,596
|
|
|
|
192,346
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
1,375,878
|
|
|
|
1,114,713
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
3,349,584
|
|
|
$
|
3,015,821
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-3
GAMESTOP
CORP.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53 Weeks
|
|
|
52 Weeks
|
|
|
52 Weeks
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
February 3,
|
|
|
January 28,
|
|
|
January 29,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except per share data)
|
|
|
Sales
|
|
$
|
5,318,900
|
|
|
$
|
3,091,783
|
|
|
$
|
1,842,806
|
|
Cost of sales
|
|
|
3,847,458
|
|
|
|
2,219,753
|
|
|
|
1,333,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
1,471,442
|
|
|
|
872,030
|
|
|
|
509,300
|
|
Selling, general and
administrative expenses
|
|
|
1,000,135
|
|
|
|
598,996
|
|
|
|
373,364
|
|
Depreciation and amortization
|
|
|
109,862
|
|
|
|
66,355
|
|
|
|
36,789
|
|
Stock-based compensation
|
|
|
20,978
|
|
|
|
347
|
|
|
|
|
|
Merger-related expenses
|
|
|
6,788
|
|
|
|
13,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings
|
|
|
333,679
|
|
|
|
192,732
|
|
|
|
99,147
|
|
Interest income
|
|
|
(11,338
|
)
|
|
|
(5,135
|
)
|
|
|
(1,919
|
)
|
Interest expense
|
|
|
84,662
|
|
|
|
30,427
|
|
|
|
2,155
|
|
Merger-related interest expense
|
|
|
|
|
|
|
7,518
|
|
|
|
|
|
Debt extinguishment expense
|
|
|
6,059
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income tax expense
|
|
|
254,296
|
|
|
|
159,922
|
|
|
|
98,911
|
|
Income tax expense
|
|
|
96,046
|
|
|
|
59,138
|
|
|
|
37,985
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
158,250
|
|
|
$
|
100,784
|
|
|
$
|
60,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per common
share basic
|
|
$
|
1.06
|
|
|
$
|
0.87
|
|
|
$
|
0.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common
stock basic
|
|
|
149,924
|
|
|
|
115,840
|
|
|
|
109,324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per common
share diluted
|
|
$
|
1.00
|
|
|
$
|
0.81
|
|
|
$
|
0.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common
stock diluted
|
|
|
158,284
|
|
|
|
124,972
|
|
|
|
115,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-4
GAMESTOP
CORP.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Additional
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
Paid in
|
|
|
Comprehensive
|
|
|
Retained
|
|
|
Treasury
|
|
|
|
|
|
|
Shares
|
|
|
Stock
|
|
|
Capital
|
|
|
Income
|
|
|
Earnings
|
|
|
Stock
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Balance at January 31, 2004
|
|
|
118,004
|
|
|
$
|
118
|
|
|
$
|
510,597
|
|
|
$
|
296
|
|
|
$
|
118,028
|
|
|
$
|
(35,006
|
)
|
|
$
|
594,033
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings for the 52 weeks
ended January 29, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60,926
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61,197
|
|
Exercise of employee stock options
(including tax benefit of $5,082)
|
|
|
2,392
|
|
|
|
2
|
|
|
|
14,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,556
|
|
Repurchase and retirement of common
stock
|
|
|
(12,214
|
)
|
|
|
(12
|
)
|
|
|
(24,377
|
)
|
|
|
|
|
|
|
(87,392
|
)
|
|
|
|
|
|
|
(111,781
|
)
|
Treasury stock acquired,
1,918 shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,994
|
)
|
|
|
(14,994
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 29, 2005
|
|
|
108,182
|
|
|
|
108
|
|
|
|
500,774
|
|
|
|
567
|
|
|
|
91,562
|
|
|
|
(50,000
|
)
|
|
|
543,011
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings for the 52 weeks
ended January 28, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100,784
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101,103
|
|
Elimination of treasury stock
|
|
|
(6,526
|
)
|
|
|
(6
|
)
|
|
|
(49,994
|
)
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
|
|
|
|
Issuance of stock to Electronics
Boutique stockholders
|
|
|
40,458
|
|
|
|
41
|
|
|
|
437,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
437,144
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
347
|
|
Exercise of employee stock options
(including tax benefit of $12,308)
|
|
|
3,480
|
|
|
|
3
|
|
|
|
33,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 28, 2006
|
|
|
145,594
|
|
|
|
146
|
|
|
|
921,335
|
|
|
|
886
|
|
|
|
192,346
|
|
|
|
|
|
|
|
1,114,713
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings for the 53 weeks
ended February 3, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
158,250
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
160,591
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
20,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,978
|
|
Exercise of employee stock options
and issuance of shares upon vesting of restricted stock grant
(including tax benefit of $45,735)
|
|
|
6,711
|
|
|
|
6
|
|
|
|
79,590
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79,596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at February 3, 2007
|
|
|
152,305
|
|
|
$
|
152
|
|
|
$
|
1,021,903
|
|
|
$
|
3,227
|
|
|
$
|
350,596
|
|
|
$
|
|
|
|
$
|
1,375,878
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-5
GAMESTOP
CORP.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53 Weeks
|
|
|
52 Weeks
|
|
|
52 Weeks
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
February 3,
|
|
|
January 28,
|
|
|
January 29,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
158,250
|
|
|
$
|
100,784
|
|
|
$
|
60,926
|
|
Adjustments to reconcile net
earnings to net cash flows provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
(including amounts in cost of sales)
|
|
|
110,176
|
|
|
|
66,659
|
|
|
|
37,019
|
|
Provision for inventory reserves
|
|
|
50,779
|
|
|
|
25,103
|
|
|
|
17,808
|
|
Amortization and retirement of
deferred financing fees
|
|
|
4,595
|
|
|
|
1,229
|
|
|
|
432
|
|
Amortization and retirement of
original issue discount on senior notes
|
|
|
1,523
|
|
|
|
316
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
20,978
|
|
|
|
347
|
|
|
|
|
|
Deferred taxes
|
|
|
(3,080
|
)
|
|
|
(3,675
|
)
|
|
|
5,402
|
|
Loss on disposal and impairment of
property and equipment
|
|
|
4,261
|
|
|
|
11,648
|
|
|
|
382
|
|
Increase in deferred rent and other
long-term liabilities
|
|
|
9,702
|
|
|
|
3,669
|
|
|
|
5,349
|
|
Increase in liability to landlords
for tenant allowances, net
|
|
|
1,602
|
|
|
|
202
|
|
|
|
1,644
|
|
Minority interest
|
|
|
|
|
|
|
|
|
|
|
(96
|
)
|
Decrease in value of foreign
exchange contracts
|
|
|
(4,450
|
)
|
|
|
(2,421
|
)
|
|
|
|
|
Changes in operating assets and
liabilities, net of business acquired
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables, net
|
|
|
2,866
|
|
|
|
(9,995
|
)
|
|
|
(267
|
)
|
Merchandise inventories
|
|
|
(118,417
|
)
|
|
|
(91,363
|
)
|
|
|
(10,578
|
)
|
Prepaid expenses and other current
assets
|
|
|
(21,543
|
)
|
|
|
19,484
|
|
|
|
(4,060
|
)
|
Prepaid taxes
|
|
|
52,663
|
|
|
|
9,069
|
|
|
|
9,072
|
|
Excess tax benefit realized from
exercise of stock options
|
|
|
(43,707
|
)
|
|
|
12,308
|
|
|
|
5,082
|
|
Accounts payable and accrued
liabilities
|
|
|
197,306
|
|
|
|
148,054
|
|
|
|
17,872
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows provided by
operating activities
|
|
|
423,504
|
|
|
|
291,418
|
|
|
|
145,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(133,930
|
)
|
|
|
(110,696
|
)
|
|
|
(98,305
|
)
|
Merger with Electronics Boutique,
net of cash acquired
|
|
|
|
|
|
|
(886,116
|
)
|
|
|
|
|
Acquisitions, net of cash acquired
(including purchase of Game Brands Inc.)
|
|
|
(11,303
|
)
|
|
|
|
|
|
|
(62
|
)
|
Sale of assets held for sale
|
|
|
19,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows used in investing
activities
|
|
|
(125,936
|
)
|
|
|
(996,812
|
)
|
|
|
(98,367
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of senior notes payable
relating to Electronics Boutique merger, net of discount
|
|
|
|
|
|
|
641,472
|
|
|
|
|
|
Issuance of senior floating rate
notes payable relating to Electronics Boutique merger
|
|
|
|
|
|
|
300,000
|
|
|
|
|
|
Repurchase of notes payable
|
|
|
(100,000
|
)
|
|
|
|
|
|
|
|
|
Purchase of treasury shares through
repurchase program
|
|
|
|
|
|
|
|
|
|
|
(14,994
|
)
|
Repurchase of common stock from
Barnes & Noble
|
|
|
|
|
|
|
|
|
|
|
(111,781
|
)
|
Issuance of debt relating to the
repurchase of common stock from Barnes & Noble
|
|
|
|
|
|
|
|
|
|
|
74,020
|
|
Repayment of debt relating to the
repurchase of common stock from Barnes & Noble
|
|
|
(12,173
|
)
|
|
|
(12,173
|
)
|
|
|
(37,500
|
)
|
Repayment of other debt
|
|
|
(9,441
|
)
|
|
|
(956
|
)
|
|
|
|
|
Proceeds from exercise of stock
options
|
|
|
33,861
|
|
|
|
20,800
|
|
|
|
9,474
|
|
Excess tax benefit realized from
exercise of stock options
|
|
|
43,707
|
|
|
|
|
|
|
|
|
|
Net increase in other noncurrent
assets and deferred financing fees
|
|
|
(2,609
|
)
|
|
|
(13,466
|
)
|
|
|
(825
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows provided by (used
in) financing activities
|
|
|
(46,655
|
)
|
|
|
935,677
|
|
|
|
(81,606
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange rate effect on cash and
cash equivalents
|
|
|
(103
|
)
|
|
|
318
|
|
|
|
73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and
cash equivalents
|
|
|
250,810
|
|
|
|
230,601
|
|
|
|
(33,913
|
)
|
Cash and cash equivalents at
beginning of period
|
|
|
401,593
|
|
|
|
170,992
|
|
|
|
204,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of
period
|
|
$
|
652,403
|
|
|
$
|
401,593
|
|
|
$
|
170,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-6
GAMESTOP
CORP.
|
|
1.
|
Summary
of Significant Accounting Policies
|
Background
and Basis of Presentation
GameStop Corp., formerly known as GSC Holdings Corp., (the
Company or GameStop), is a Delaware
corporation formed for the purpose of consummating the business
combination (the mergers) of GameStop Holdings
Corp., formerly known as GameStop Corp. (Historical
GameStop), and Electronics Boutique Holdings Corp.
(EB or Electronics Boutique), which was
completed on October 8, 2005. The Company is the
worlds largest retailer of new and used video game systems
and software and personal computer entertainment software and
related accessories primarily through its GameStop and EB Games
trade names, websites (www.gamestop.com and
www.ebgames.com) and Game Informer magazine. The
Companys stores, which totaled 4,778 at February 3,
2007, are located in major regional shopping malls and strip
centers in the United States, Australia, Canada and Europe. The
Company operates its business in four segments: United States,
Australia, Canada and Europe.
The merger of Historical GameStop and EB has been treated as a
purchase business combination for accounting purposes, with
Historical GameStop designated as the acquirer. Therefore, the
historical financial statements of Historical GameStop became
the historical financial statements of the Company. The
accompanying condensed consolidated statements of operations and
cash flows for the 52 weeks ended January 28, 2006
include the results of operations of EB from October 9,
2005 forward. Therefore, the Companys operating results
for the 52 weeks ended January 28, 2006 include
16 weeks of EBs results and 52 weeks of
Historical GameStops results. The Companys operating
results for the fiscal year ended February 3, 2007 include
53 weeks for both Historical GameStop and EB. Note 2
provides summary unaudited pro forma information and details on
the purchase accounting.
Historical GameStops wholly-owned subsidiary
Babbages Etc. LLC (Babbages) began
operations in November 1996. In October 1999, Babbages was
acquired by, and became a wholly-owned subsidiary of,
Barnes & Noble, Inc. (Barnes &
Noble). In June 2000, Barnes & Noble acquired
Funco, Inc. (Funco) and thereafter, Babbages
became a wholly-owned subsidiary of Funco. In December 2000,
Funco changed its name to GameStop, Inc. Historical GameStop was
incorporated under the laws of the State of Delaware in August
2001 as a holding company for GameStop, Inc. In February 2002,
Historical GameStop completed a public offering of
41,528 shares of Class A common stock at $9.00 per
share (the Offering). Upon the effective date of the
Offering, Historical GameStops Board of Directors approved
the authorization of 5,000 shares of preferred stock and
300,000 shares of Class A common stock. At the same
time, Historical GameStops common stock outstanding was
converted to 72,018 shares of common stock.
Until October 2004, Barnes & Noble held
72,018 shares of Historical GameStop common stock. In
October 2004, Historical GameStops Board of Directors
authorized a repurchase of 12,214 shares of common stock
held by Barnes & Noble. Historical GameStop repurchased
the shares at a price equal to $9.13 per share for
aggregate consideration of $111,520 before costs of $261. The
repurchased shares were immediately retired. On
November 12, 2004, Barnes & Noble distributed to
its stockholders its remaining 59,804 shares of Historical
GameStops common stock in a tax-free dividend. All of the
outstanding shares of Historical GameStops common stock
were exchanged for the Companys common stock.
Consolidation
The consolidated financial statements include the accounts of
the Company, its wholly-owned subsidiaries and its
majority-owned subsidiary, GameStop Group Limited (formerly
Gamesworld Group Limited). All significant intercompany accounts
and transactions have been eliminated in consolidation. All
dollar and share amounts in the consolidated financial
statements and notes to the consolidated financial statements
are stated in thousands unless otherwise indicated.
F-7
GAMESTOP
CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Year-End
The Companys fiscal year is composed of the 52 or
53 weeks ending on the Saturday closest to the last day of
January. Fiscal 2006 consisted of the 53 weeks ending on
February 3, 2007. Fiscal 2005 consisted of the
52 weeks ending on January 28, 2006. Fiscal 2004
consisted of the 52 weeks ending on January 29, 2005.
Cash
and Cash Equivalents
The Company considers all short-term, highly-liquid instruments
purchased with an original maturity of three months or less to
be cash equivalents. The Companys cash and cash
equivalents are carried at cost, which approximates market
value, and consist primarily of time deposits, commercial paper
and money market investment accounts.
Merchandise
Inventories
Our merchandise inventories are carried at the lower of cost or
market using the average cost method. Used video game products
traded in by customers are recorded as inventory at the amount
of the store credit given to the customer. In valuing inventory,
management is required to make assumptions regarding the
necessity of reserves required to value potentially obsolete or
over-valued items at the lower of cost or market. Management
considers quantities on hand, recent sales, potential price
protections and returns to vendors, among other factors, when
making these assumptions. Inventory reserves as of
February 3, 2007 and January 28, 2006 were $53,816 and
$53,277, respectively.
Property
and Equipment
Property and equipment are carried at cost less accumulated
depreciation and amortization. Depreciation on furniture,
fixtures and equipment is computed using the straight-line
method over their estimated useful lives ranging from two to
eight years. Maintenance and repairs are expensed as incurred,
while betterments and major remodeling costs are capitalized.
Leasehold improvements are capitalized and amortized over the
shorter of their estimated useful lives or the terms of the
respective leases, including option periods in which the
exercise of the option is reasonably assured (generally ranging
from three to ten years). Costs incurred in purchasing
management information systems are capitalized and included in
property and equipment. These costs are amortized over their
estimated useful lives from the date the systems become
operational.
The Company periodically reviews its property and equipment when
events or changes in circumstances indicate that their carrying
amounts may not be recoverable or their depreciation or
amortization periods should be accelerated. The Company assesses
recoverability based on several factors, including
managements intention with respect to its stores and those
stores projected undiscounted cash flows. An impairment
loss would be recognized for the amount by which the carrying
amount of the assets exceeds their fair value, as approximated
by the present value of their projected cash flows. As a result
of the mergers and an analysis of assets to be abandoned, the
Company impaired retail store assets totaling $9,016 in fiscal
2005 in its United States operating segment and impaired retail
store assets totaling $1,936 in its European segment in fiscal
2006. Write-downs incurred by the Company through
February 3, 2007 which were not related to the mergers have
not been material. Note 2 provides additional information
concerning the mergers.
Goodwill
Goodwill, aggregating $339,991 was recorded in the acquisition
of Funco in 2000 and through the application of
push-down accounting in accordance with Securities
and Exchange Commission Staff Accounting
Bulletin No. 54 (SAB 54) in
connection with the acquisition of Babbages in 1999 by a
subsidiary of Barnes & Noble. Goodwill in the amount of
$2,931 was recorded in connection with the acquisition of
Gamesworld Group Limited in 2003. Goodwill in the amount of
$1,074,937 was recorded in connection with the mergers. Goodwill
in the amount of $8,083 was recorded in connection with the
purchase of Game Brands Inc. in January 2007. Goodwill
represents the excess purchase price over tangible net assets
and identifiable intangible assets acquired.
F-8
GAMESTOP
CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The Company accounts for goodwill according to the provisions of
Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets
(SFAS 142). SFAS 142 requires, among other
things, that companies no longer amortize goodwill, but instead
evaluate goodwill for impairment on at least an annual basis. In
accordance with the requirements of SFAS 142, the Company
completed its annual impairment test of the goodwill
attributable to its reporting unit on the first day of the
fourth quarter of fiscal 2004 and concluded that none of its
goodwill was impaired. Through October 8, 2005, the date of
the mergers, the Company determined that it had one reporting
unit based upon the similar economic characteristics of its
operations. The fair value of this reporting unit was estimated
using market capitalization methodologies.
Subsequent to the mergers, the Company determined that it has
four reporting units, the United States, Australia, Canada and
Europe, based on a combination of geographic areas, the methods
in which we analyze performance and division of management
responsibility. The Company employed the services of an
independent valuation specialist to assist in the allocation of
goodwill resulting from the mergers to the four reporting units
as of October 8, 2005, the merger date. Additionally, the
Company completed its annual impairment test of goodwill on the
first day of the fourth quarter of fiscal 2005 and fiscal 2006
and concluded that none of its goodwill was impaired.
Note 7 provides additional information concerning goodwill.
Revenue
Recognition
Revenue from the sales of the Companys products is
recognized at the time of sale. The sales of used video game
products are recorded at the retail price charged to the
customer. Sales returns (which are not significant) are
recognized at the time returns are made. Subscription and
advertising revenues are recorded upon release of magazines for
sale to consumers and are stated net of sales discounts.
Magazine subscription revenue is recognized on a straight-line
basis over the subscription period. Revenue from the sales of
product replacement plans is recognized on a straight-line basis
over the coverage period. The deferred revenues for magazine
subscriptions and deferred financing plans are included in
accrued liabilities (see Note 6).
Customer
Liabilities
The Company establishes a liability upon the issuance of
merchandise credits and the sale of gift cards. Revenue is
subsequently recognized when the credits and gift cards are
redeemed. In addition, income (breakage) is
recognized quarterly on unused customer liabilities older than
three years to the extent that the Company believes the
likelihood of redemption by the customer is remote, based on
historical redemption patterns. Breakage has historically been
immaterial. To the extent that future redemption patterns differ
from those historically experienced, there will be variations in
the recorded breakage.
Pre-Opening
Expenses
All costs associated with the opening of new stores are expensed
as incurred. Pre-opening expenses are included in selling,
general and administrative expenses in the accompanying
consolidated statements of operations.
Closed
Store Expenses
Upon a formal decision to close or relocate a store, the Company
charges unrecoverable costs to expense. Such costs include the
net book value of abandoned fixtures and leasehold improvements
and, once the store is vacated, a provision for future lease
obligations, net of expected sublease recoveries. Costs
associated with store closings are included in selling, general
and administrative expenses in the accompanying consolidated
statements of operations. Costs associated with closings of
Historical GameStop stores which are directly attributable to
the mergers are included in merger-related expenses in the
accompanying consolidated statements of operations. Note 2
provides additional information concerning stores to be closed
in connection with the mergers.
F-9
GAMESTOP
CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Advertising
Expenses
The Company expenses advertising costs for newspapers and other
media when the advertising takes place. Advertising expenses for
newspapers and other media during the 53 weeks ended
February 3, 2007 and the 52 weeks ended
January 28, 2006 and January 29, 2005, were $16,043,
$12,448 and $8,881, respectively.
Income
Taxes
The Company accounts for income taxes in accordance with the
provisions of Statement of Financial Accounting Standards
No. 109, Accounting for Income Taxes
(SFAS 109). SFAS 109 utilizes an asset
and liability approach, and deferred taxes are determined based
on the estimated future tax effect of differences between the
financial reporting and tax bases of assets and liabilities
using enacted tax rates.
U.S. income taxes have not been provided on remaining
undistributed earnings of foreign subsidiaries as of
February 3, 2007. The Company did not have undistributed
earnings of foreign subsidiaries prior to the mergers. The
Company reinvested earnings of foreign subsidiaries in foreign
operations since the mergers and expects that future earnings
will also be reinvested in foreign operations indefinitely.
Lease
Accounting
As previously disclosed, in fiscal 2004, the Company, similar to
many other retailers, revised its method of accounting for rent
expense (and related deferred rent liability) and leasehold
improvements funded by landlord incentives for allowances under
operating leases (tenant improvement allowances) to conform to
generally accepted accounting principles (GAAP), as
clarified by the Chief Accountant of the SEC in a February 2005
letter to the American Institute of Certified Public
Accountants. For all stores opened since the beginning of fiscal
2002, the Company had calculated straight-line rent expense
using the initial lease term, but was generally depreciating
leasehold improvements over the shorter of their estimated
useful lives or the initial lease term plus the option periods.
In fiscal 2004, the Company corrected its calculation of
straight-line rent expense to include the impact of escalating
rents for periods in which it is reasonably assured of
exercising lease options and to include in the lease term any
period during which the Company is not obligated to pay rent
while the store is being constructed (rent holiday).
The Company also corrected its calculation of depreciation
expense for leasehold improvements for those leases which do not
include an option period. Because the effects of the correction
were not material to any previous years, a non-cash, after-tax
adjustment of $3,312 was made in the fourth quarter of fiscal
2004 to correct the method of accounting for rent expense (and
related deferred rent liability). Of the $3,312 after-tax
adjustment, $1,761 pertained to the accounting for rent
holidays, $1,404 pertained to the calculation of straight-line
rent expense to include the impact of escalating rents for
periods in which the Company is reasonably assured of exercising
lease options and $147 pertained to the calculation of
depreciation expense for leasehold improvements for the small
portion of leases which do not include an option period. The
aggregate effect of these corrections relating to prior years
was $1,929. The correction does not affect historical or future
cash flows or the timing of payments under related leases.
Foreign
Currency Translation
GameStop has determined that the functional currencies of its
foreign subsidiaries are the subsidiaries local
currencies. The accounts of the foreign subsidiaries are
translated in accordance with Statement of Financial Accounting
Standards No. 52, Foreign Currency Translation. The
assets and liabilities of the subsidiaries are translated at the
applicable exchange rate as of the end of the balance sheet date
and revenue and expenses are translated at an average rate over
the period. Currency translation adjustments are recorded as a
component of other comprehensive income. Transaction gains and
(losses) are included in net income and amounted to ($962),
$2,606 and ($20) for the 53 weeks ended February 3,
2007 and the 52 weeks ended January 28, 2006 and
January 29, 2005, respectively.
The merger with Electronics Boutique has significantly increased
our exposure to foreign currency fluctuations because a larger
amount of our business is now transacted in foreign currencies.
While Historical GameStop
F-10
GAMESTOP
CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
generally did not enter into derivative instruments with respect
to foreign currency risks, Electronics Boutique routinely used
forward exchange contracts and cross-currency swaps to manage
currency risk and had a number of open positions designated as
hedge transactions as of the merger date. The Company
discontinued hedge accounting treatment for all derivative
instruments acquired in connection with the mergers.
The Company follows the provisions of Statement of Financial
Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities
(SFAS 133), as amended by Statement of
Financial Accounting Standards No. 138, Accounting for
Certain Derivative Instruments and Certain Hedging Activities
(SFAS 138). SFAS 133 requires that all
derivative instruments be recorded on the balance sheet at fair
value. Changes in the fair value of derivatives are recorded
each period in current earnings or other comprehensive income,
depending on whether the derivative is designated as part of a
hedge transaction, and if it is, depending on the type of hedge
transaction.
The Company uses forward exchange contracts, foreign currency
options and cross-currency swaps, (together, the Foreign
Currency Contracts) to manage currency risk primarily
related to intercompany loans denominated in non-functional
currencies and certain foreign currency assets and liabilities.
These Foreign Currency Contracts are not designated as hedges
and, therefore, changes in the fair values of these derivatives
are recognized in earnings, thereby offsetting the current
earnings effect of the re-measurement of related intercompany
loans and foreign currency assets and liabilities. The aggregate
fair value of these Foreign Currency Contracts at
February 3, 2007 was a liability of $1,892, of which $2,540
is included in accrued liabilities, and $390 is included in
other long-term liabilities, with an offsetting amount of $1,038
included in other non-current assets in the accompanying
consolidated balance sheet. The aggregate fair value of these
Foreign Currency Contracts at January 28, 2006 was a
liability of $7,083, of which $6,513 is included in accrued
liabilities and the remainder is included in other long-term
liabilities in the accompanying consolidated balance sheet. The
Company had no forward exchange contracts and currency swaps
prior to October 8, 2005.
Net
Earnings Per Common Share
Net earnings per common share is presented in accordance with
Statement of Financial Accounting Standards No. 128,
Earnings Per Share (SFAS 128). Basic
earnings per common share is computed by dividing the net income
available to common stockholders by the weighted average number
of common shares outstanding during the period. Diluted earnings
per common share is computed by dividing the net income
available to common stockholders by the weighted average number
of common shares outstanding and potentially dilutive securities
outstanding during the period. Potentially dilutive securities
include stock options and unvested restricted stock outstanding
during the period, using the treasury stock method. Potentially
dilutive securities are excluded from the computations of
diluted earnings per share if their effect would be
antidilutive. Note 4 provides additional information
regarding net earnings per common share.
Stock
Options
In December 2004, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards No. 123 (Revised 2004), Share-Based
Payment, (SFAS 123(R)). This Statement
requires companies to expense the estimated fair value of stock
options and similar equity instruments issued to employees in
their financial statements. Previously, companies were required
to calculate the estimated fair value of these share-based
payments and could elect to either include the estimated cost in
earnings or disclose the pro forma effect in the footnotes to
their financial statements. We chose to disclose the pro forma
effect for all periods through January 28, 2006.
In March 2005, the SEC issued Staff Accounting
Bulletin No. 107 (SAB No. 107)
regarding the Staffs interpretation of SFAS 123(R).
This interpretation provides the Staffs views regarding
interactions between SFAS 123(R) and certain SEC rules and
regulations and provides interpretations of the valuation of
share-based payments for public companies. Following the
guidance prescribed in SAB No. 107, on
January 29, 2006, the
F-11
GAMESTOP
CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Company adopted the provisions of SFAS 123(R) using the
modified prospective application method, and accordingly, we
have not restated the consolidated results of income from prior
interim periods and fiscal years.
Under SFAS 123(R), the Company records stock-based
compensation expense based on the grant-date fair value
estimated in accordance with the original provisions of
Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation, and previously
presented in the pro forma footnote disclosures, for all options
granted prior to, but not vested as of, the adoption date. In
addition, the Company records compensation expense for the
share-based awards issued after the adoption date in accordance
with SFAS 123(R).
In addition to requiring companies to recognize the estimated
fair value of share-based payments in earnings, SFAS 123(R)
modified the presentation of tax benefits received in excess of
amounts determined based on the compensation expense recognized.
Previously, such amounts were considered sources of cash in the
operating activities section of the Statement of Cash Flows. For
periods after adopting SFAS 123(R) under the modified
prospective method, such benefits are presented as a use of cash
in the operating section and a source of cash in the financing
section of the Statement of Cash Flows. Note 13 provides
additional information regarding the Companys stock option
plan.
The following table illustrates the effect on net earnings and
net earnings per common share if the Company had applied the
fair value recognition provisions of SFAS 123 to
stock-based employee compensation for the options granted under
its plans:
|
|
|
|
|
|
|
|
|
|
|
52 Weeks
|
|
|
52 Weeks
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
January 28,
|
|
|
January 29,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except per share data)
|
|
|
Net earnings, as reported
|
|
$
|
100,784
|
|
|
$
|
60,926
|
|
Deduct: Total stock-based employee
compensation expense determined under fair value based method
for all awards, net of related tax effects
|
|
|
6,666
|
|
|
|
9,405
|
|
|
|
|
|
|
|
|
|
|
Pro forma net earnings
|
|
$
|
94,118
|
|
|
$
|
51,521
|
|
|
|
|
|
|
|
|
|
|
Net earnings per common
share basic, as reported
|
|
$
|
0.87
|
|
|
$
|
0.56
|
|
|
|
|
|
|
|
|
|
|
Net earnings per common
share basic, pro forma
|
|
$
|
0.81
|
|
|
$
|
0.47
|
|
|
|
|
|
|
|
|
|
|
Net earnings per common
share diluted, as reported
|
|
$
|
0.81
|
|
|
$
|
0.53
|
|
|
|
|
|
|
|
|
|
|
Net earnings per common
share diluted, pro forma
|
|
$
|
0.75
|
|
|
$
|
0.45
|
|
|
|
|
|
|
|
|
|
|
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option pricing model. This
valuation model requires the use of subjective assumptions,
including expected option life and expected volatility. The
Company uses historical data to estimate the option life and the
employee forfeiture rate, and uses historical volatility when
estimating the stock price volatility. The weighted-average fair
values of the options granted during the 53 weeks ended
February 3, 2007 and the 52 weeks ended
January 28, 2006 and January 29, 2005 were estimated
at $8.42, $4.42 and $3.93, respectively, using the following
assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53 Weeks
|
|
|
52 Weeks
|
|
|
52 Weeks
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
February 3,
|
|
|
January 28,
|
|
|
January 29,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Volatility
|
|
|
54.5
|
%
|
|
|
57.3
|
%
|
|
|
60.1
|
%
|
Risk-free interest rate
|
|
|
4.6
|
%
|
|
|
4.2
|
%
|
|
|
3.3
|
%
|
Expected life (years)
|
|
|
3.0
|
|
|
|
6.0
|
|
|
|
6.0
|
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
F-12
GAMESTOP
CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Use of
Estimates
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period. In preparing these
financial statements, management has made its best estimates and
judgments of certain amounts included in the financial
statements, giving due consideration to materiality. Changes in
the estimates and assumptions used by management could have
significant impact on the Companys financial results.
Actual results could differ from those estimates.
Fair
Values of Financial Instruments
The carrying values of cash and cash equivalents, accounts
receivable, accounts payable and the note payable to
Barnes & Noble reported in the accompanying
consolidated balance sheets approximate fair value due to the
short-term maturities of these assets and liabilities. The fair
values of the Companys senior notes payable and senior
floating rate notes payable in the accompanying consolidated
balance sheets are estimated based on recent quotes from
brokers. As of February 3, 2007, the senior notes payable
and senior floating rate notes payable had a carrying value of
$593.3 million and $250.0 million, respectively, and a
fair value of $640.5 million and $260.6 million,
respectively. As of January 28, 2006, the carrying values
of the senior notes payable and the senior floating rate notes
payable approximated the fair values due to the recent issuance
of these notes in connection with the mergers. Foreign Currency
Contracts are recorded at fair market value.
Guarantees
The Company remains contingently liable for the BC Sports
Collectibles store leases assigned to Sports Collectibles
Acquisition Corporation (SCAC). SCAC is owned by the
family of James J. Kim, Chairman of EB at the time and currently
one of the Companys directors. If SCAC were to default on
these lease obligations, the Company would be liable to the
landlords for up to $133 in minimum rent and landlord charges as
of February 3, 2007. Mr. Kim has entered into an
indemnification agreement with EB with respect to these leases,
therefore no accrual was recorded for this contingent obligation.
The Company had bank guarantees relating to international store
leases totaling $4,142 as of February 3, 2007.
Vendor
Concentration
The Companys largest vendors worldwide are Microsoft
Corp., Sony Computer Entertainment of America, Nintendo of
America, Inc. and Electronic Arts, Inc., which accounted for
14%, 13%, 11% and 10%, respectively, of the Companys new
product purchases in fiscal 2006. In fiscal 2005, the
Companys largest vendors, as measured in the
U.S. only due to the timing of the mergers, were Sony,
Microsoft and Electronic Arts, which accounted for 18%, 13% and
11%, respectively, of the Companys new product purchases.
In fiscal 2004, Companys largest U.S. vendors were
Electronic Arts, Nintendo and Microsoft, which accounted for
14%, 13% and 12%, respectively, of the Companys new
product purchases.
Classifications
The Company includes purchasing, receiving and distribution
costs in selling, general and administrative expenses, rather
than cost of goods sold, in the statement of operations. For the
53 weeks ended February 3, 2007 and the 52 weeks
ended January 28, 2006 and January 29, 2005, these
purchasing, receiving and distribution costs amounted to
$22,284, $20,583 and $9,203, respectively.
The Company includes processing fees associated with purchases
made by check and credit cards in cost of sales, rather than
selling, general and administrative expenses, in the statement
of operations. For the 53 weeks ended February 3, 2007
and the 52 weeks ended January 28, 2006 and
January 29, 2005, these processing fees amounted to
$40,877, $20,905 and $12,014, respectively.
F-13
GAMESTOP
CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Reclassifications
Certain reclassifications have been made to conform the prior
period data to the current year presentation.
Stock
Conversion and Stock Split
On February 7, 2007, following approval by a majority of
the Class B common stockholders in a Special Meeting of the
Companys Class B common stockholders, all outstanding
Class B common shares were converted into Class A
common shares on a
one-for-one
basis (the Conversion). In addition, on
February 9, 2007, the Board of Directors of the Company
authorized a
two-for-one
stock split, effected by a
one-for-one
stock dividend to stockholders of record at the close of
business on February 20, 2007, paid on March 16, 2007
(the Stock Split). The effect of the Conversion and
the Stock Split has been retroactively applied to all periods
presented in the consolidated financial statements and notes
thereto.
New
Accounting Pronouncements
In July 2006, the FASB issued Interpretation No. 48
Accounting for Uncertainty in Income Taxes
(FIN 48). FIN 48 requires the use of a
two-step approach for recognizing and measuring tax benefits
taken or expected to be taken in a tax return and disclosures
regarding uncertainties in income tax positions. We were
required to adopt FIN 48 effective February 4, 2007.
The cumulative effect of initially adopting FIN 48 is to
record an adjustment to opening retained earnings in the year of
adoption. Only tax positions that meet the more likely than not
recognition threshold at the effective date may be recognized
upon adoption of FIN 48. The Company is evaluating the
impact of implementing the provisions of FIN 48 on its
financial position and future results of operations, but does
not expect that the impact will be material.
In September 2006, the FASB issued Statement of Financial
Accounting Standard No. 157, Fair Value Measurements
(SFAS No. 157). This statement defines
fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands
disclosures about fair value measurements. This statement
applies under other accounting pronouncements that require or
permit fair value measurements. SFAS No. 157 is
effective for fiscal years beginning after November 15,
2007. The Company is currently assessing the impact that the
adoption of SFAS No. 157 will have on its consolidated
financial statements.
In September 2006, the SEC issued Securities and Exchange
Commission Staff Accounting Bulletin No. 108
(SAB No. 108) in order to eliminate the
diversity of practice surrounding how public companies quantify
financial statement misstatements. In SAB No. 108, the
SEC staff established an approach that requires quantification
of financial statement misstatements based on the effects of the
misstatements on each of the Companys financial statements
and the related financial statement disclosures.
SAB No. 108 is effective for fiscal years ending after
November 15, 2006. The Company adopted
SAB No. 108 in fiscal 2006, which did not have a
material impact on its consolidated financial statements.
In June 2006, the Emerging Issues Task Force (EITF)
ratified its conclusion on EITF
No. 06-03,
How Taxes Collected From Customers and Remitted to
Governmental Authorities Should Be Presented in the Income
Statement (That Is, Gross Versus Net
Presentation)(EITF
06-03).
The EITF concluded that the presentation of taxes assessed by a
governmental authority that is directly imposed on a
revenue-producing transaction between a seller and a customer
such as sales, use, value added and certain excise taxes, is an
accounting policy decision that should be disclosed in a
companys financial statements. Additionally, companies
that record such taxes on a gross basis should disclose the
amounts of those taxes in interim and annual financial
statements for each period for which an income statement is
presented if those amounts are significant. EITF
06-03 is
effective for fiscal years beginning after December 15,
2006. The Company presents such taxes on a net basis for all
periods presented.
In February 2007, the FASB issued Statement of Financial
Accounting Standard No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities
(SFAS No. 159). This statement permits
entities to choose to measure many financial instruments and
certain other items at fair value. Companies should report
unrealized gains and losses on items for which the fair value
option has been elected in earnings at each subsequent reporting
date. This statement is effective as of the beginning of an
entitys first fiscal year that begins after
November 15,
F-14
GAMESTOP
CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2007. The Company is currently assessing the potential impact,
if any, of the adoption of SFAS No. 159 on its
consolidated financial statements.
On October 8, 2005, Historical GameStop and EB completed
their previously announced mergers pursuant to the Agreement and
Plan of Merger, dated as of April 17, 2005 (the
Merger Agreement). Upon the consummation of the
mergers, Historical GameStop and EB became wholly-owned
subsidiaries of the Company. Both management and the respective
Boards of Directors of EB and Historical Gamestop believed that
the merger of the companies would create significant synergies
in operations when the companies were integrated and would
enable the Company to increase profitability as a result of
combined market share.
Under the terms of the Merger Agreement, Historical
GameStops stockholders received one share of the
Companys common stock for each share of Historical
GameStops common stock owned. Approximately 104,135 shares
of the Companys common stock were issued in exchange for
all outstanding common stock of Historical GameStop based on the
one-for-one
ratio. EB stockholders received $19.08 in cash and .39398 of a
share of the Companys common stock for each EB share
owned. In aggregate, 40,458 shares of the Companys
Class A common stock were issued to EB stockholders at a
value of approximately $437,144 (based on the closing price of
$10.81 per share of Historical GameStops Class A
common stock on April 15, 2005, the last trading day before
the date the merger was announced). In addition, approximately
$993,254 in cash was paid in consideration for (i) all
outstanding common stock of EB, and (ii) all outstanding
stock options of EB. Including transaction costs of $13,558
incurred by Historical GameStop, the total consideration paid
was approximately $1,443,956.
The consolidated financial statements include the results of EB
from the date of acquisition. The purchase price has been
allocated based on estimated fair values as of the acquisition
date. The following represents the final allocation of the
purchase price (table in thousands):
|
|
|
|
|
|
|
October 8,
|
|
|
|
2005
|
|
|
Current assets
|
|
$
|
539,860
|
|
Property, plant &
equipment
|
|
|
229,256
|
|
Goodwill
|
|
|
1,074,937
|
|
Intangible assets:
|
|
|
|
|
Point-of-sale
software
|
|
|
3,150
|
|
Non-compete agreements
|
|
|
282
|
|
Leasehold interests
|
|
|
17,299
|
|
|
|
|
|
|
Total intangible assets
|
|
|
20,731
|
|
Other long-term assets
|
|
|
38,995
|
|
Current liabilities
|
|
|
(420,202
|
)
|
Long-term liabilities
|
|
|
(39,621
|
)
|
|
|
|
|
|
Total purchase price
|
|
$
|
1,443,956
|
|
|
|
|
|
|
In determining the purchase price allocation, management
considered, among other factors, the Companys intention to
use the acquired assets. The total weighted-average amortization
period for the intangible assets, excluding goodwill, is
approximately four years. The intangible assets are being
amortized based upon the pattern in which the economic benefits
of the intangible assets are being utilized, with no expected
residual value. None of the goodwill is deductible for income
tax purposes. Note 7 provides additional information
concerning goodwill and intangible assets.
F-15
GAMESTOP
CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The following table summarizes unaudited pro forma financial
information assuming the mergers had occurred on the first day
of each period presented. The unaudited pro forma financial
information does not necessarily represent what would have
occurred if the transaction had taken place on the date
presented and should not be taken as representative of our
future consolidated results of operations. At the time of the
mergers, management expected to realize operating synergies from
reduced costs in logistics, marketing, and administration. The
unaudited pro forma information does not reflect these potential
synergies or expenses associated with the mergers or integration
activities:
|
|
|
|
|
|
|
|
|
|
|
52 Weeks
|
|
|
52 Weeks
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
January 28,
|
|
|
January 29,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except per
|
|
|
|
share data)
|
|
|
Sales
|
|
$
|
4,393,890
|
|
|
$
|
3,827,685
|
|
Cost of sales
|
|
|
3,154,928
|
|
|
|
2,786,554
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
1,238,962
|
|
|
|
1,041,131
|
|
Selling, general and
administrative expenses
|
|
|
930,767
|
|
|
|
788,413
|
|
Depreciation and amortization
|
|
|
94,288
|
|
|
|
77,964
|
|
|
|
|
|
|
|
|
|
|
Operating earnings
|
|
|
213,907
|
|
|
|
174,754
|
|
Interest income
|
|
|
(6,717
|
)
|
|
|
(1,998
|
)
|
Interest expense
|
|
|
85,056
|
|
|
|
72,217
|
|
|
|
|
|
|
|
|
|
|
Earnings before income tax expense
|
|
|
135,568
|
|
|
|
104,535
|
|
Income tax expense
|
|
|
49,482
|
|
|
|
38,477
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
86,086
|
|
|
$
|
66,058
|
|
|
|
|
|
|
|
|
|
|
Net earnings per common
share basic
|
|
$
|
0.60
|
|
|
$
|
0.44
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common
stock basic
|
|
|
143,850
|
|
|
|
149,782
|
|
|
|
|
|
|
|
|
|
|
Net earnings per common
share diluted
|
|
$
|
0.56
|
|
|
$
|
0.42
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common
stock diluted
|
|
|
152,982
|
|
|
|
156,050
|
|
|
|
|
|
|
|
|
|
|
In connection with the mergers, the Company incurred
merger-related costs and integration activities which resulted
in involuntary employment terminations, lease terminations,
disposals of property and equipment and other costs and
expenses. The liability for involuntary termination benefits
covered severance amounts, payroll taxes and benefit costs for
approximately 680 employees, primarily in general and
administrative functions in EBs Pennsylvania corporate
office and distribution center and Nevada call center, which
were closed in fiscal 2006. Termination of these employees began
in October 2005 and was completed in fiscal 2006. The
Pennsylvania corporate office and distribution center were owned
facilities that were sold in June 2006. These assets were
classified in the January 28, 2006 balance sheet as
Assets held for sale.
The liability for lease terminations is associated with stores
to be closed. If the Company is unsuccessful in negotiating
lease terminations or sublease agreements, the lease liability
will be paid over the remaining lease terms, the majority of
which expire in the next 3 to 5 years, with the last of
such leases expiring in 2015. The Company intends to close these
stores in the next 9 to 12 months. The disposals of
property and equipment are related to assets which were either
impaired or have been either abandoned or disposed of due to the
mergers. Certain costs associated with the disposition of these
assets remained as accrued until the assets were disposed of and
the costs were paid. The disposition of property and equipment
was completed in fiscal 2006.
F-16
GAMESTOP
CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Merger-related costs include professional fees, financing costs
and other costs associated with the mergers and include certain
costs associated with integrating the operations of Historical
GameStop and EB, including relocation costs. The Company
completed all integration activities in fiscal 2006. Rebranding
of EB stores to the GameStop name is expected to be completed in
the next 12 to 18 months.
The following table represents the activity during the
52 weeks ended January 28, 2006 and the 53 weeks
ended February 3, 2007 associated with the mergers and
related liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Write-Offs
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Charged to
|
|
|
Charged to
|
|
|
and
|
|
|
|
|
|
Balance at
|
|
|
|
Beginning of
|
|
|
Acquisition
|
|
|
Costs and
|
|
|
Non-Cash
|
|
|
Cash
|
|
|
End of
|
|
|
|
Period
|
|
|
Costs
|
|
|
Expenses
|
|
|
Charges
|
|
|
Payments
|
|
|
Period
|
|
|
|
(In thousands)
|
|
|
Balance at January 29, 2005
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Severance and employee related
costs
|
|
|
|
|
|
|
17,889
|
|
|
|
|
|
|
|
|
|
|
|
4,984
|
|
|
|
12,905
|
|
Lease terminations
|
|
|
|
|
|
|
10,641
|
|
|
|
|
|
|
|
|
|
|
|
584
|
|
|
|
10,057
|
|
Disposal of property and equipment
|
|
|
|
|
|
|
2,494
|
|
|
|
10,649
|
|
|
|
10,649
|
|
|
|
|
|
|
|
2,494
|
|
Merger costs, bridge financing and
other
|
|
|
|
|
|
|
34,669
|
|
|
|
10,469
|
|
|
|
496
|
|
|
|
42,009
|
|
|
|
2,633
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 28, 2006
|
|
|
|
|
|
|
65,693
|
|
|
|
21,118
|
|
|
|
11,145
|
|
|
|
47,577
|
|
|
|
28,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and employee related
costs
|
|
|
12,905
|
|
|
|
(2,913
|
)
|
|
|
|
|
|
|
(385
|
)
|
|
|
9,735
|
|
|
|
642
|
|
Lease terminations
|
|
|
10,057
|
|
|
|
1,346
|
|
|
|
|
|
|
|
|
|
|
|
3,867
|
|
|
|
7,536
|
|
Disposal of property and equipment
|
|
|
2,494
|
|
|
|
|
|
|
|
|
|
|
|
815
|
|
|
|
1,679
|
|
|
|
|
|
Merger costs, bridge financing and
other
|
|
|
2,633
|
|
|
|
148
|
|
|
|
|
|
|
|
976
|
|
|
|
1,805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at February 3, 2007
|
|
$
|
28,089
|
|
|
$
|
(1,419
|
)
|
|
$
|
|
|
|
$
|
1,406
|
|
|
$
|
17,086
|
|
|
$
|
8,178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and employment related costs totaling $493 were
charged to acquisition costs and paid for the Europe segment and
merger costs totaling $77, $52 and $3 were charged to
acquisition costs and paid for the Europe, Canada and Australia
segments, respectively. All other merger costs and related
liabilities were incurred for the U.S. segment.
On January 13, 2007, the Company purchased Game Brands
Inc., a 72 store video game retailer operating under the name
Rhino Video Games, for $11,344. The acquisition was accounted
for using the purchase method of accounting and, accordingly,
the results of operations for the period subsequent to the
acquisition are included in the consolidated financial
statements. The excess of the purchase price over the net assets
acquired, in the amount of $8,083 has been recorded as goodwill.
In addition, merger-related costs and related liabilities of
$612 related to the Game Brands Inc. purchase have been accrued
for and are included in accrued liabilities in the
February 3, 2007 consolidated balance sheet. The pro forma
effect assuming the acquisition of Game Brands Inc. at the
beginning of fiscal 2006 and fiscal 2005 is not material.
The Company and approximately 75 of its vendors participate in
cooperative advertising programs and other vendor marketing
programs in which the vendors provide the Company with cash
consideration in exchange for marketing and advertising the
vendors products. Our accounting for cooperative
advertising arrangements and other vendor marketing programs, in
accordance with FASB Emerging Issues Task Force Issue
02-16 or
EITF
02-16,
results in a portion of the consideration received from our
vendors reducing the product costs in inventory rather than as
an offset to our marketing and advertising costs. The
consideration serving as a reduction in inventory is recognized
in cost of sales as inventory is sold. The amount of vendor
allowances to be recorded as a reduction of inventory was
determined by calculating the ratio of vendor allowances in
excess of specific, incremental and
F-17
GAMESTOP
CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
identifiable advertising and promotional costs to merchandise
purchases. The Company then applied this ratio to the value of
inventory in determining the amount of vendor reimbursements to
be recorded as a reduction to inventory reflected on the balance
sheet.
The cooperative advertising programs and other vendor marketing
programs generally cover a period from a few days up to a few
weeks and include items such as product catalog advertising,
in-store display promotions, internet advertising, co-op print
advertising, product training and promotion at the
Companys annual store managers conference. The allowance
for each event is negotiated with the vendor and requires
specific performance by the Company to be earned.
Vendor allowances received and netted against advertising
expenses were $49,585 in the 53 weeks ended
February 3, 2007 and $32,161 and $21,913 in the
52 weeks ended January 28, 2006 and January 29,
2005, respectively. Vendor allowances received in excess of
advertising expenses were recorded as a reduction of cost of
sales of $117,082 for the 53 weeks ended February 3,
2007 and $74,690 and $29,917 for the 52 weeks ended
January 28, 2006 and January 29, 2005, respectively,
less $1,377, $4,150 and $66, respectively, for the effect of the
amounts deferred as a reduction in inventory.
|
|
4.
|
Computation
of Net Earnings per Common Share
|
As of February 3, 2007 the Company had two classes of
common stock. Subsequent to February 3, 2007, the Company
completed the Conversion and the Stock Split and now has only
Class A common stock outstanding and computed earnings per
share in accordance with Statement of Financial Accounting
Standards No. 128, Earnings per Share. A
reconciliation of shares used in calculating basic and diluted
net earnings per common share follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53 Weeks
|
|
|
52 Weeks
|
|
|
52 Weeks
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
February 3,
|
|
|
January 28,
|
|
|
January 29,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except per share data)
|
|
|
Net earnings
|
|
$
|
158,250
|
|
|
$
|
100,784
|
|
|
$
|
60,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
outstanding
|
|
|
149,924
|
|
|
|
115,840
|
|
|
|
109,324
|
|
Dilutive effect of options and
warrants on common stock
|
|
|
8,360
|
|
|
|
9,132
|
|
|
|
6,268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares and dilutive
potential common shares
|
|
|
158,284
|
|
|
|
124,972
|
|
|
|
115,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.06
|
|
|
$
|
0.87
|
|
|
$
|
0.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
1.00
|
|
|
$
|
0.81
|
|
|
$
|
0.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table contains information on restricted shares
and options to purchase shares of Class A common stock
which were excluded from the computation of diluted earnings per
share because they were anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-
|
|
|
Range of
|
|
|
|
|
|
|
Dilutive
|
|
|
Exercise
|
|
|
Expiration
|
|
|
|
Shares
|
|
|
Prices
|
|
|
Dates
|
|
|
|
(In thousands, except per share data)
|
|
|
53 Weeks Ended February 3,
2007
|
|
|
16
|
|
|
|
|
|
|
|
2009
|
|
52 Weeks Ended January 28,
2006
|
|
|
240
|
|
|
$
|
17.94
|
|
|
|
2015
|
|
52 Weeks Ended January 29,
2005
|
|
|
60
|
|
|
$
|
10.63
|
|
|
|
2012
|
|
Receivables consist primarily of bankcard receivables and other
receivables. Other receivables include receivables from Game
Informer magazine advertising customers, receivables from
landlords for tenant allowances and receivables from vendors for
merchandise returns, vendor marketing allowances and various
other programs.
F-18
GAMESTOP
CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
An allowance for doubtful accounts has been recorded to reduce
receivables to an amount expected to be collectible. Receivables
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
February 3,
|
|
|
January 28,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Bankcard receivables
|
|
$
|
22,081
|
|
|
$
|
19,017
|
|
Other receivables
|
|
|
16,019
|
|
|
|
21,210
|
|
Allowance for doubtful accounts
|
|
|
(3,832
|
)
|
|
|
(1,489
|
)
|
|
|
|
|
|
|
|
|
|
Total receivables, net
|
|
$
|
34,268
|
|
|
$
|
38,738
|
|
|
|
|
|
|
|
|
|
|
Accrued liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
February 3,
|
|
|
January 28,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Customer liabilities
|
|
$
|
111,213
|
|
|
$
|
89,053
|
|
Deferred revenue
|
|
|
56,049
|
|
|
|
40,808
|
|
Accrued rent
|
|
|
16,074
|
|
|
|
13,501
|
|
Accrued interest
|
|
|
21,240
|
|
|
|
19,943
|
|
Employee compensation and related
taxes
|
|
|
47,448
|
|
|
|
36,543
|
|
Accrued merger costs and expenses
(Note 2)
|
|
|
8,790
|
|
|
|
28,089
|
|
Other taxes
|
|
|
34,851
|
|
|
|
20,917
|
|
Other accrued liabilities
|
|
|
61,348
|
|
|
|
83,005
|
|
|
|
|
|
|
|
|
|
|
Total accrued liabilities
|
|
$
|
357,013
|
|
|
$
|
331,859
|
|
|
|
|
|
|
|
|
|
|
|
|
7.
|
Goodwill,
Intangible Assets and Deferred Financing Fees
|
The changes in the carrying amount of goodwill for the
Companys business segments for the 52 weeks ended
January 28, 2006 and the 53 weeks ended
February 3, 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
Canada
|
|
|
Australia
|
|
|
Europe
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Balance at January 29, 2005
|
|
$
|
317,957
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2,931
|
|
|
$
|
320,888
|
|
Cost relating to the acquisition
of Electronics Boutique
|
|
|
773,100
|
|
|
|
116,818
|
|
|
|
146,419
|
|
|
|
35,127
|
|
|
|
1,071,464
|
|
Impairment for the 52 weeks
ended January 28, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 28, 2006
|
|
|
1,091,057
|
|
|
|
116,818
|
|
|
|
146,419
|
|
|
|
38,058
|
|
|
|
1,392,352
|
|
Additional cost relating to the
acquisition of Electronics Boutique
|
|
|
(1,051
|
)
|
|
|
|
|
|
|
805
|
|
|
|
3,718
|
|
|
|
3,472
|
|
Cost relating to the acquisition
of Game Brands Inc.
|
|
|
8,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,083
|
|
Impairment for the 53 weeks
ended February 3, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at February 3, 2007
|
|
$
|
1,098,089
|
|
|
$
|
116,818
|
|
|
$
|
147,224
|
|
|
$
|
41,776
|
|
|
$
|
1,403,907
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets consist of non-compete agreements,
point-of-sale
software and amounts attributed to favorable leasehold interests
acquired in the mergers and are included in other non-current
assets in the consolidated
F-19
GAMESTOP
CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
balance sheet. The total weighted-average amortization period
for the intangible assets, excluding goodwill, is approximately
four years. The intangible assets are being amortized based upon
the pattern in which the economic benefits of the intangible
assets are being utilized, with no expected residual value.
Note 2 provides additional information regarding intangible
assets.
The deferred financing fees associated with the Companys
revolving credit facility and the senior floating rate notes and
senior notes issued in connection with the financing of the
mergers are separately shown in the consolidated balance sheet.
The deferred financing fees are being amortized over five, six
and seven years to match the terms of the revolving credit
facility, the senior floating rate notes and the senior notes,
respectively. The changes in the carrying amount of deferred
financing fees and intangible assets for the 52 weeks ended
January 28, 2006 and the 53 weeks ended
February 3, 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
Intangible
|
|
|
|
Financing Fees
|
|
|
Assets
|
|
|
|
(In thousands)
|
|
|
Balance at January 29, 2005
|
|
$
|
566
|
|
|
$
|
|
|
Addition for the acquisition of
Electronics Boutique, including senior notes payable and senior
floating rate notes payable issued and revolving credit facility
entered into in October 2005
|
|
|
19,617
|
|
|
|
20,731
|
|
Write-off of deferred financing
fees remaining on June 2004 revolving credit facility
|
|
|
(393
|
)
|
|
|
|
|
Amortization for the 52 weeks
ended January 28, 2006
|
|
|
(1,229
|
)
|
|
|
(1,212
|
)
|
|
|
|
|
|
|
|
|
|
Balance at January 28, 2006
|
|
|
18,561
|
|
|
|
19,519
|
|
Addition for the exchange offer in
May 2006
|
|
|
409
|
|
|
|
|
|
Write-off of deferred financing
fees remaining on repurchased senior notes and senior floating
rate notes (see Note 8)
|
|
|
(1,445
|
)
|
|
|
|
|
Amortization for the 53 weeks
ended February 3, 2007
|
|
|
(3,150
|
)
|
|
|
(4,974
|
)
|
|
|
|
|
|
|
|
|
|
Balance at February 3, 2007
|
|
$
|
14,375
|
|
|
$
|
14,545
|
|
|
|
|
|
|
|
|
|
|
The gross carrying value and accumulated amortization of
deferred financing fees as of February 3, 2007 were $20,061
and $5,686, respectively. The estimated aggregate amortization
expenses for deferred financing fees and other intangible assets
for the next five fiscal years are approximately:
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
Amortization of
|
|
|
|
of Deferred
|
|
|
Intangible
|
|
Year Ended
|
|
Financing Fees
|
|
|
Assets
|
|
|
|
(In thousands)
|
|
|
January 2008
|
|
$
|
2,959
|
|
|
$
|
4,494
|
|
January 2009
|
|
|
2,959
|
|
|
|
3,582
|
|
January 2010
|
|
|
2,956
|
|
|
|
2,689
|
|
January 2011
|
|
|
2,699
|
|
|
|
2,019
|
|
January 2012
|
|
|
1,959
|
|
|
|
820
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
13,532
|
|
|
$
|
13,604
|
|
|
|
|
|
|
|
|
|
|
In October 2005, in connection with the mergers, the Company
entered into a five-year, $400,000 Credit Agreement (the
Revolver), including a $50,000 letter of credit
sub-limit,
secured by the assets of the Company and its
U.S. subsidiaries. The Revolver places certain restrictions
on the Company and the borrower subsidiaries, including
limitations on asset sales, additional liens, and the incurrence
of additional indebtedness.
F-20
GAMESTOP
CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The availability under the Revolver is limited to a borrowing
base which allows the Company to borrow up to the lesser of
(x) approximately 70% of eligible inventory and
(y) 90% of the appraisal value of the inventory, in each
case plus 85% of eligible credit card receivables, net of
certain reserves. Letters of credit reduce the amount available
to borrow by their face value. The Companys ability to pay
cash dividends, redeem options, and repurchase shares is
generally prohibited, except that if availability under the
Revolver is or will be after any such payment equal to or
greater than 25% of the borrowing base the Company may
repurchase its capital stock and pay cash dividends. In
addition, in the event that credit extensions under the Revolver
at any time exceed 80% of the lesser of the total commitment or
the borrowing base, the Company will be subject to a fixed
charge coverage ratio covenant of 1.5:1.0.
The interest rate on the Revolver is variable and, at the
Companys option, is calculated by applying a margin of
(1) 0.0% to 0.25% above the higher of the prime rate of the
administrative agent or the federal funds effective rate plus
0.50% or (2) 1.25% to 1.75% above the LIBO rate. The
applicable margin is determined quarterly as a function of the
Companys consolidated leverage ratio. As of
February 3, 2007 the applicable margin was 0.0% for prime
rate loans and 1.50% for LIBO rate loans. In addition, the
Company is required to pay a commitment fee, currently 0.375% as
of February 3, 2007, for any unused portion of the total
commitment under the Revolver.
As of February 3, 2007, there were no borrowings
outstanding under the Revolver and letters of credit outstanding
totaled $4,251.
On September 28, 2005, the Company, along with GameStop,
Inc. (which was then a direct wholly-owned subsidiary of
Historical GameStop and is now, as a result of the mergers, an
indirect wholly-owned subsidiary of the Company) as co-issuer
(together with the Company, the Issuers), completed
the offering of U.S. $300,000 aggregate principal amount of
Senior Floating Rate Notes due 2011 (the Senior Floating
Rate Notes) and U.S. $650,000 aggregate principal
amount of Senior Notes due 2012 (the Senior Notes
and, together with the Senior Floating Rate Notes, the
Notes). The Notes were issued under an indenture
(the Indenture), dated September 28, 2005, by
and among the Issuers, the subsidiary guarantors party thereto,
and Citibank, N.A., as trustee (the Trustee).
Concurrently with the consummation of the merger on
October 8, 2005, EB and its direct and indirect domestic
wholly-owned subsidiaries (together, the EB
Guarantors) became subsidiaries of the Company and entered
into a first supplemental indenture, dated October 8, 2005,
by and among the Issuers, the EB Guarantors and the Trustee,
pursuant to which the EB Guarantors assumed all the obligations
of a subsidiary guarantor under the Notes and the Indenture. The
net proceeds of the offering were used to pay the cash portion
of the merger consideration paid to the stockholders of EB in
connection with the mergers.
The Senior Floating Rate Notes bear interest at LIBOR plus
3.875%, mature on October 1, 2011 and were priced at 100%.
The rate of interest on the Senior Floating Rate Notes as of
February 3, 2007 was 9.235% per annum. The Senior
Notes bear interest at 8.0% per annum, mature on
October 1, 2012 and were priced at 98.688%, resulting in a
discount at the time of issue of $8,528. The discount is being
amortized using the effective interest method. As of
February 3, 2007, the unamortized original issue discount
was $6,689.
The Issuers pay interest on the Senior Floating Rate Notes
quarterly, in arrears, every January 1, April 1,
July 1 and October 1, to holders of record on the
immediately preceding December 15, March 15, June 15
and September 15, and at maturity. The Issuers pay interest
on the Senior Notes semi-annually, in arrears, every
April 1 and October 1, to holders of record on the
immediately preceding March 15 and September 15, and at
maturity.
The Indenture contains affirmative and negative covenants
customary for such financings, including, among other things,
limitations on (1) the incurrence of additional debt,
(2) restricted payments, (3) liens, (4) sale and
leaseback transactions and (5) asset sales. Events of
default provided for in the Indenture include, among other
things, failure to pay interest or principal on the Notes, other
breaches of covenants in the Indenture, and certain events of
bankruptcy and insolvency.
As of February 3, 2007, the Company was in compliance with
all covenants associated with the Revolver and the Indenture.
F-21
GAMESTOP
CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The offering of the Notes was conducted in a private transaction
under Rule 144A under the United States Securities Act of
1933, as amended (the Securities Act), and in
transactions outside the United States in reliance upon
Regulation S under the Securities Act. In connection with
the closing of the offering, the Issuers also entered into a
registration rights agreement, dated September 28, 2005, by
and among the Issuers, the subsidiary guarantors listed on
Schedule I-A
thereto, and Citigroup Global Markets Inc., for themselves and
as representatives of the several initial purchasers listed on
Schedule II thereto (the Registration Rights
Agreement). The Registration Rights Agreement required the
Issuers to, among other things, (1) file a registration
statement with the SEC to be used in connection with the
exchange of the Notes for publicly registered notes with
substantially identical terms, (2) use their reasonable
best efforts to cause the registration statement to be declared
effective within 210 days from the date the Notes were
issued, and (3) use their commercially reasonable efforts
to consummate the exchange offer with respect to the Notes
within 270 days from the date the Notes were issued. In
April 2006, the Company filed a registration statement on
Form S-4
in order to register new notes (the New Notes) with
the same terms and conditions as the Notes in order to
facilitate an exchange of the New Notes for the Notes. This
registration statement on
Form S-4
was declared effective by the SEC on May 10, 2006 and the
Company commenced an exchange offer to exchange the New Notes
for the Notes. This exchange offer was completed in June 2006
with 100% participation.
In November 2006, Citibank, N.A. resigned as Trustee for the
Notes and Wilmington Trust Company was appointed as the new
Trustee for the Notes.
Under certain conditions, the Issuers may on any one or more
occasions prior to maturity redeem up to 100% of the aggregate
principal amount of Senior Floating Rate Notes
and/or
Senior Notes issued under the Indenture at redemption prices at
or in excess of 100% of the principal amount thereof plus
accrued and unpaid interest, if any, to the redemption date. The
circumstances which would limit the percentage of the Notes
which may be redeemed or which would require the Company to pay
a premium in excess of 100% of the principal amount are defined
in the Indenture. Upon a Change of Control (as defined in the
Indenture), the Issuers are required to offer to purchase all of
the Notes then outstanding at 101% of the principal amount
thereof plus accrued and unpaid interest, if any, to the date of
purchase.
The Issuers may acquire Senior Floating Rate Notes and Senior
Notes by means other than redemption, whether by tender offer,
open market purchases, negotiated transactions or otherwise, in
accordance with applicable securities laws, so long as such
acquisitions do not otherwise violate the terms of the Indenture.
In May 2006, the Company announced that its Board of Directors
authorized the buyback of up to an aggregate of $100,000 of its
Senior Floating Rate Notes and Senior Notes. As of
February 3, 2007, the Company had repurchased the maximum
authorized amount, having acquired $50,000 of its Senior Notes
and $50,000 of its Senior Floating Rate Notes, and delivered the
Notes to the Trustee for cancellation. The associated loss on
retirement of debt is $6,059, which consists of the premium paid
to retire the Notes and the write-off of the deferred financing
fees and the original issue discount on the Notes.
Subsequently, on February 9, 2007, the Company announced
that its Board of Directors authorized the buyback of up to an
aggregate of an additional $150,000 of its Senior Floating Rate
Notes and Senior Notes. The timing and amount of the repurchases
will be determined by the Companys management based on
their evaluation of market conditions and other factors. In
addition, the repurchases may be suspended or discontinued at
any time. At the time of filing, the Company had repurchased
$14,925 of its Senior Notes and $64,620 of its Senior Floating
Rate Notes pursuant to this new authorization and delivered the
Notes to the Trustee for cancellation. The associated loss on
retirement of debt is $5,114.
In October 2004, Historical GameStop issued a promissory note in
favor of Barnes & Noble in the principal amount of
$74,020 in connection with the repurchase of Historical
GameStops common shares held by Barnes & Noble.
Payments of $37,500, $12,173 and $12,173 were made in January
2005, October 2005 and October 2006, respectively, as required
by the promissory note, which also requires a final payment of
$12,173 in October 2007. The note is unsecured and bears
interest at 5.5% per annum, payable when principal
installments are due.
F-22
GAMESTOP
CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
On May 25, 2005, a subsidiary of EB closed on a
10-year,
$9,450 mortgage agreement collateralized by a new
315,000 square foot distribution facility located in
Sadsbury Township, Pennsylvania. In June 2006, the outstanding
principal balance under the mortgage of approximately $9,200 was
paid in full in conjunction with the sale of the distribution
facility.
Maturities on debt, gross of the unamortized original issue
discount of $6,689 on the Senior Notes, are as follows:
|
|
|
|
|
Year Ended
|
|
Amount
|
|
|
|
(In thousands)
|
|
|
January 2008
|
|
$
|
12,176
|
|
January 2009
|
|
|
86
|
|
January 2010
|
|
|
326
|
|
January 2011
|
|
|
|
|
January 2012
|
|
|
250,000
|
|
Thereafter
|
|
|
600,000
|
|
|
|
|
|
|
|
|
$
|
862,588
|
|
|
|
|
|
|
Comprehensive income is net earnings, plus certain other items
that are recorded directly to stockholders equity and
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53 Weeks
|
|
|
52 Weeks
|
|
|
52 Weeks
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
February 3,
|
|
|
January 28,
|
|
|
January 29,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Net earnings
|
|
$
|
158,250
|
|
|
$
|
100,784
|
|
|
$
|
60,926
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
adjustments
|
|
|
2,341
|
|
|
|
319
|
|
|
|
271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
$
|
160,591
|
|
|
$
|
101,103
|
|
|
$
|
61,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company leases retail stores, warehouse facilities, office
space and equipment. These are generally leased under
noncancelable agreements that expire at various dates through
2034 with various renewal options for additional periods. The
agreements, which have been classified as operating leases,
generally provide for minimum and, in some cases, percentage
rentals and require the Company to pay all insurance, taxes and
other maintenance costs. Leases with step rent provisions,
escalation clauses or other lease concessions are accounted for
on a straight-line basis over the lease term, which includes
renewal option periods when the Company is reasonably assured of
exercising the renewal options and includes rent
holidays (periods in which the Company is not obligated to
pay rent). The Company does not have leases with capital
improvement funding. Percentage rentals are based on sales
performance in excess of specified minimums at various stores.
F-23