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 2, 2008
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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
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20-2733559
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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625 Westport Parkway
Grapevine, Texas
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76051
(Zip Code)
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(Address of principal executive
offices)
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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
Rights to Purchase Series A Junior Participating
Preferred
Stock, $.001 par value per share
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New York Stock Exchange
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 o
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, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated
filer þ
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Accelerated filer
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Non-accelerated
filer o
(Do not check if a smaller reporting company)
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Smaller reporting
company o
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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
$6,288,000,000, based upon the closing market prices of $39.55
per share of Class A Common Stock on the New York Stock
Exchange as of August 3, 2007.
Number of shares of $.001 par value Class A Common
Stock outstanding as of March 24, 2008: 161,708,708
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 2008 Annual Meeting of
Stockholders are incorporated by reference into Part III.
PART I
General
GameStop Corp. (GameStop, we,
us, our, 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 2, 2008, we operated 5,264
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
industrys largest multi-platform video game magazine in
the United States based on circulation, with approximately
2.9 million subscribers.
In the fiscal year ended February 2, 2008, we operated our
business in the following segments: United States, Canada,
Australia and Europe. Of our 5,264 stores, 4,061 stores are
included in the United States segment and 287, 280 and 636
stores are included in the Canadian, Australian and European
segments, respectively. 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 which we
refer to as video game products and PC entertainment software
and related accessories. 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. These products are substantially the
same regardless of geographic location, with the primary
differences in merchandise carried being the timing of release
of new products in the various segments. Stores in all segments
are similar in size at an average of approximately
1,500 square feet each.
The Company began operations in November 1996. In October 1999,
the Company was acquired by, and became a wholly-owned
subsidiary of, Barnes & Noble, Inc.
(Barnes & Noble). In June 2000,
Barnes & Noble acquired Funco, Inc.
(Funco), a 400-store retailer of video game products
in the U.S. In February 2002, GameStop completed an initial
public offering of its Class A common stock and was a
majority-owned subsidiary of Barnes & Noble until
November 2004, when Barnes & Noble distributed its
holdings of outstanding GameStop Class B common stock to
its stockholders. In October 2005, GameStop acquired the
operations of Electronics Boutique Holdings Corp.
(EB or Electronics Boutique), a
2,300-store video game retailer in the U.S. and 12 other
countries, by merging its existing operations with EB under
GameStop Corp. (the mergers).
On February 7, 2007, all outstanding Class B common
stock of the Company was converted into Class A common
stock of the Company 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 (the Stock Split). As of
February 2, 2008, our Class A common stock traded on
the New York Stock Exchange (NYSE) under the symbol
GME.
Our corporate office and one of our distribution facilities are
housed in a 510,000 square foot facility in Grapevine,
Texas.
Recent
Developments
On February 7, 2008, the Board of Directors of the Company
authorized a buyback of the Companys senior notes in the
amount of $130 million. 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 $24.7 million of its senior notes pursuant to
this new authorization and delivered the senior notes to the
trustee for cancellation. The associated loss on the retirement
of debt is $1.9 million, which consists of the premium paid
to retire the senior notes and the write-off of the deferred
financing fees and the original issue discount on the senior
notes.
On March 28, 2008, the Company entered into a stock
purchase agreement with Free Record Shop Holding B.V., a Dutch
company, to purchase all of the outstanding stock of Free Record
Shop Norway AS, a Norwegian
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private limited liability company (FRS). FRS
operates approximately 50 record stores in Norway and also
operates office and warehouse facilities in Oslo, Norway. During
fiscal 2008, the Company intends to convert these stores into
video game stores with an inventory assortment similar to its
other stores in Norway. The Company will include the results of
operations of FRS, which are not expected to be material, in its
financial statements beginning on the closing date of the
acquisition, which is expected to be April 5, 2008.
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 and
the markets in which GameStop operates;
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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.
Industry
Background
Based upon estimates compiled by various market research firms,
management estimates that the combined market for video game
products and PC entertainment software exceeded $36 billion
in 2007 in the countries in which we operate. According to NPD
Group, Inc., a market research firm (the NPD Group),
the electronic game industry was an approximately
$18.6 billion market in the United States in 2007. Of this
$18.6 billion market, approximately $17.7 billion was
attributable to video game products, excluding sales of used
video game products, and approximately $910 million was
attributable to PC entertainment software. International
Development Group,
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a market research firm, estimates that retail sales of video
game hardware and software and PC entertainment software totaled
approximately $15.6 billion in Europe in 2007. The NPD
Group has reported that video game retail sales in Canada were
approximately $1.5 billion in 2007. According to the
independent market research group GfK, the Australian market for
video game products was approximately $1.1 billion in 2007.
New Video Game Products. The Entertainment
Software Association, or ESA, estimates that 67% 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 the Sony
PlayStation 3 launched in November 2006 in North America and the
first quarter of fiscal 2007 in Australia and Europe, the
Nintendo Wii launched in November 2006 worldwide, and Microsoft
Xbox 360, launched in the fourth quarter of 2005 in North
America and Europe and the first quarter of 2006 in Australia.
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 in North America and the
first quarter of 2005 in Australia and Europe, and the Sony
PlayStation Portable (the PSP), which was introduced
in March 2005 in North America and September 2005 in Australia
and Europe. 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 the 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, the Sony
PlayStation 3 and PSP, the Nintendo DS and Wii and Microsoft
Xbox 360 all provide internet connectivity and the Sony
PlayStation 3 plays Blu-ray discs.
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Backward Compatibility. The Sony PlayStation 2
and 3, the Nintendo DS and Wii and Microsoft Xbox 360 are, to
some extent, 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 during the initial
launch phase of next-generation platforms, 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.
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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. ESA also states that 36% of parents say they
play computer and video games and that 80% of gamer parents play
video games with their kids. According to ESA, the average game
player is 33 years old; however, the video game market also
includes approximately 24% of Americans over the age of 50. 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 Products. As the installed
base of video game hardware platforms has increased and new
hardware platforms are introduced, a considerable market for
used video game hardware and software has
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developed. Based on reports published by NPD Group, 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 150 million units of recent generation
technology, including approximately 3.2 million Sony
PlayStation 3 units, 7.3 million Nintendo Wii units,
9.1 million Microsoft Xbox 360 units,
10.5 million Sony PSP units, 41 million Sony
PlayStation 2 units, 14 million Microsoft Xbox units,
12 million Nintendo GameCube units, 17.5 million
Nintendo DS units and 36 million Game Boy Advance SP and
Game Boy Advance units. 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
1.2 billion units. According to the International
Development Group, the installed base of hardware systems in
Europe is approximately 101 million units. As the
substantial installed base of video game hardware and software
continues to grow, there is a growing demand for used video game
products.
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:
Continuing 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 stores in our domestic and international
target markets; 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.
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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 and gift givers 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 believe 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 provides 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.
Building the GameStop Brand. Substantially all
of GameStops U.S. and European stores are operated under
the GameStop name, including stores acquired from EB. Building
the GameStop brand has enabled us to leverage brand awareness
and to capture advertising and marketing efficiencies. Our
branding strategy is further supported
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by the GameStop Edge loyalty card and our website.
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
websites allow 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. In 2007, GameStop
introduced its new brand tagline Power to the
Players and launched a T.V., radio and newspaper
advertising campaign to increase brand awareness of the GameStop
brand.
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 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 website 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 4,500 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
Open New Stores. We intend to continue to open
new stores in our targeted markets. We opened 586 new stores in
the 52 weeks ended February 2, 2008 (fiscal
2007) and 421 new stores in the 53 weeks ended
February 3, 2007 (fiscal 2006). We plan to open
approximately 575 to 600 new stores in the 52 weeks ending
January 31, 2009 (fiscal 2008). 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 the opening
of new 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
brand.
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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 113%, 62% and 63%,
respectively, in fiscal 2006 primarily due to the merger with EB
and by 55%, 39% and 21%, respectively, in fiscal 2007, due
primarily to new store growth and the increase in comparable
store sales. In fiscal 2007, our comparable store sales
increased 24.7%, driven in large measure by the continued
popularity of the Nintendo Wii following its
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worldwide launch in November 2006, the launch of the Sony
PlayStation 3 in Australia and Europe in March 2007 and the
release of several strong software titles in the fall of 2007,
including Halo 3 by Microsoft, Guitar Hero III
and Call of Duty 4 by Activision, Inc. and Rock
Band by Electronic Arts, Inc. In addition, Microsoft Xbox
360 and Nintendo DS hardware, software and accessories continued
their strong sales trend. During fiscal 2006, despite 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 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 2008, we plan to continue to
increase media advertising to increase brand awareness over a
broader demographic area, to expand our GameStop loyalty card
program, to aggressively promote trade-ins of used video game
products in our stores and to leverage our websites at
www.gamestop.com and www.ebgames.com.
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Operating
Segments
We identified our four operating segments based on a combination
of geographic areas, the methods with which we analyze
performance and the division of management responsibility.
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 results for Australia include
retail operations in Australia and New Zealand. Segment results
for Europe include retail operations in 12 European countries.
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.
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 4,500 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
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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, Nintendo and Microsoft, as well as over 40 third-party
game publishers, such as Electronic Arts and Activision. 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 believe 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 3,000 SKUs) of used video game titles which have
an average price of $16 as compared to an average price of $42
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 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 the Sony
PlayStation 2 and 3 and PSP, Microsoft Xbox 360, the Nintendo
Wii and DS. 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. We also carry strategy guides and magazines, as well
as trading cards. We carry over 300 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 2, 2008, we operated 5,264 stores, primarily
under the GameStop name. Each of our stores typically carries
over 4,500 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, high-traffic shopping malls and pedestrian areas,
primarily in major metropolitan areas.
8
These locations provide easy access and high frequency of visits
and, in the case of strip centers and high-traffic pedestrian
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.
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 2, 2008:
|
|
|
|
|
|
|
Number
|
|
United States
|
|
of Stores
|
|
|
Alabama
|
|
|
75
|
|
Alaska
|
|
|
4
|
|
Arizona
|
|
|
77
|
|
Arkansas
|
|
|
28
|
|
California
|
|
|
439
|
|
Colorado
|
|
|
59
|
|
Connecticut
|
|
|
57
|
|
Delaware
|
|
|
19
|
|
District of Columbia
|
|
|
2
|
|
Florida
|
|
|
287
|
|
Georgia
|
|
|
130
|
|
Guam
|
|
|
2
|
|
Hawaii
|
|
|
20
|
|
Idaho
|
|
|
9
|
|
Illinois
|
|
|
179
|
|
Indiana
|
|
|
77
|
|
Iowa
|
|
|
31
|
|
Kansas
|
|
|
33
|
|
Kentucky
|
|
|
59
|
|
Louisiana
|
|
|
63
|
|
Maine
|
|
|
10
|
|
Maryland
|
|
|
99
|
|
Massachusetts
|
|
|
85
|
|
Michigan
|
|
|
120
|
|
Minnesota
|
|
|
54
|
|
Mississippi
|
|
|
38
|
|
Missouri
|
|
|
66
|
|
Montana
|
|
|
7
|
|
Nebraska
|
|
|
20
|
|
Nevada
|
|
|
37
|
|
New Hampshire
|
|
|
22
|
|
New Jersey
|
|
|
148
|
|
New Mexico
|
|
|
26
|
|
New York
|
|
|
217
|
|
North Carolina
|
|
|
125
|
|
9
|
|
|
|
|
|
|
Number
|
|
United States
|
|
of Stores
|
|
|
North Dakota
|
|
|
8
|
|
Ohio
|
|
|
175
|
|
Oklahoma
|
|
|
46
|
|
Oregon
|
|
|
30
|
|
Pennsylvania
|
|
|
199
|
|
Puerto Rico
|
|
|
45
|
|
Rhode Island
|
|
|
14
|
|
South Carolina
|
|
|
62
|
|
South Dakota
|
|
|
4
|
|
Tennessee
|
|
|
81
|
|
Texas
|
|
|
355
|
|
Utah
|
|
|
28
|
|
Vermont
|
|
|
7
|
|
Virginia
|
|
|
130
|
|
Washington
|
|
|
74
|
|
West Virginia
|
|
|
25
|
|
Wisconsin
|
|
|
47
|
|
Wyoming
|
|
|
7
|
|
|
|
|
|
|
Sub-total for United States
|
|
|
4,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
International
|
|
of Stores
|
|
|
Canada
|
|
|
287
|
|
Australia
|
|
|
250
|
|
New Zealand
|
|
|
30
|
|
|
|
|
|
|
Sub-total for Australia
|
|
|
280
|
|
|
|
|
|
|
Austria
|
|
|
11
|
|
Denmark
|
|
|
31
|
|
Finland
|
|
|
13
|
|
Germany
|
|
|
137
|
|
Ireland
|
|
|
44
|
|
Italy
|
|
|
218
|
|
Norway
|
|
|
16
|
|
Portugal
|
|
|
10
|
|
Spain
|
|
|
93
|
|
Sweden
|
|
|
47
|
|
Switzerland
|
|
|
10
|
|
United Kingdom
|
|
|
6
|
|
|
|
|
|
|
Sub-total for Europe
|
|
|
636
|
|
|
|
|
|
|
Sub-total for International
|
|
|
1,203
|
|
|
|
|
|
|
Total stores
|
|
|
5,264
|
|
|
|
|
|
|
10
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, Canada
and Ireland stores. For its February 2008 issue, the magazine
had approximately 2.9 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. Game
Informer operations are included in the United States
segment where the majority of subscriptions and sales are
generated.
E-Commerce
We operate electronic commerce websites 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.
E-commerce
results are included in the United States segment where the
majority of the sales originate.
Advertising
Our 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. 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
television and radio advertising in certain markets to promote
brand awareness and store openings.
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 410,000 square
foot distribution center in Grapevine, Texas and a
260,000 square foot distribution center in Louisville,
Kentucky. We 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
11
and improve speed of fulfillment in both facilities. The
technology used in the distribution centers allows 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 distribute merchandise to our Canadian segment from two
distribution centers in Brampton, 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 in Milan, Italy; Memmingen, Germany; Arlov,
Sweden; Valencia, Spain and Dublin, Ireland. All of our
international distribution facilities support both new title
distribution and replenishment, which are sometimes supported by
third-party distribution networks. These facilities are designed
to support the first-to-market distribution network and enable
our stores to meet peak demand and replenish stores at least
twice a week. Our international distribution facilities also
support refurbishment of used products to be redistributed to
stores.
Management Information Systems. Our
proprietary inventory management system and point-of-sale
technology show daily sales and in-store stock by title by
store. Our systems 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 reallocate
our used video game products as necessary.
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 27 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 290 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.
12
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, to 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 80% of our new product
purchases in fiscal 2007. Only Nintendo, Sony, Microsoft, and
Electronic Arts (which accounted for 21%, 17%, 16%, and 11%,
respectively) individually accounted for more than 10% of our
new product purchases during fiscal 2007. 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 few purchase contracts with trade vendors and
generally 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.
(Wal-Mart) and Target Corporation
(Target); computer product and consumer electronics
stores, including Best Buy Co., Inc. (Best Buy) and
Circuit City Stores, Inc. (Circuit City); other
video game and PC software specialty stores located in malls and
other locations; toy retail chains; 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. (Movie Gallery) and
Blockbuster, Inc. (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. 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 (Game
Group) and its subsidiaries, which operates in the United
Kingdom, Ireland, Scandinavia, France, 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 Game Group, K-Mart,
Target and JB HiFi 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 2007, we generated approximately 40% of
our sales and approximately 58% of our operating earnings during
the fourth quarter. During
13
fiscal 2006, we generated approximately 43% of our sales and
approximately 67% 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 and Power to
the Players, 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 13,000 full-time salaried and hourly
employees and between 14,000 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 U.S. employees
is represented by a labor union or is a member of a collective
bargaining unit. Some of our international employees are covered
by collective bargaining agreements.
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 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;
David W. Carlson, our Executive Vice President and Chief
Financial Officer; and Tony D. Bartel, our Executive Vice
President of Merchandising and Marketing. The loss of services
of any of our key personnel could have a negative impact on our
business.
14
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 Nintendo, Sony,
Microsoft and Electronic Arts, which accounted for 21%, 17%, 16%
and 11%, respectively, of our new product purchases in fiscal
2007. 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 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 and Media Markt; toy retail chains;
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
15
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 and 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.
|
There
may be 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 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
adverse 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.
16
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 2007, we generated approximately 40% of
our sales and approximately 58% 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 586 stores in fiscal
2007 and expect to open approximately 575 to 600 new stores in
fiscal 2008. Our ability to open 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
17
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 operations.
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.
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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18
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our dependence upon software publishers to develop popular game
and entertainment titles for video game systems and PCs.
|
If our financial condition or operating results materially
deteriorate, our relations with our creditors, including holders
of our senior 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 significant 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 $950 million in debt as a result of the mergers
in 2005. As of February 2, 2008, we had approximately
$574 million of indebtedness. Our debt service obligations
with respect to this indebtedness could have an adverse impact
on our earnings and cash flows for as long as the indebtedness
is outstanding.
Our 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 may use a portion of our cash flow from operations to make
debt service payments on the senior 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 may be 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
senior notes. These alternative measures may not be successful
and may not permit us to meet our scheduled debt service
obligations. Our senior credit facility and the indenture
governing the senior 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.
Because
of our floating rate credit facilities, we may be adversely
affected by interest rate changes.
Our financial position may be affected by fluctuations in
interest rates, as our senior credit facility is subject to
floating interest rates.
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. If we were to borrow against our senior credit
facility, a significant increase in interest rates could have an
adverse effect on our financial position and results of
operations.
Our
operations are substantially restricted by the indenture
governing the senior notes and the terms of our senior credit
facility.
The indenture for the senior 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 ability of the issuers of the senior notes and 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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19
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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 senior 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 senior notes and our senior credit
facility restrict the issuers of the senior 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 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 5,264 leased stores open
as of February 2, 2008 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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52
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2009
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881
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2010
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1,022
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2011
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909
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2012
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616
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2013 and later
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1,784
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5,264
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The Company owns a 510,000 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
20
119,000 square foot distribution facility in Brampton,
Ontario, Canada; a 120,000 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 59,000 square foot distribution and office
facility in Brampton, Ontario, Canada under a lease which
expires in December 2016; 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 June 2009.
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Item 3.
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Legal
Proceedings
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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, 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. Moore was found guilty
of capital murder in a criminal trial and was sentenced to death
in August 2005.
The Defendants filed a motion to dismiss the case on various
grounds, which was heard in November 2005 and was denied. The
Alabama Supreme Court denied the Defendants request to
appeal and discovery was ordered to proceed. The Courts
scheduling order anticipated a Frye hearing on April 6,
2007, at which plaintiffs causation theory and
experts credentials were to be challenged. However, that
hearing did not take place and plaintiffs Alabama and
Florida counsel withdrew. New Alabama counsel has entered their
appearance for plaintiffs and a new scheduling order is expected
to be entered by the Court, which we believe will set a new Frye
hearing date, a new close of discovery date and a new trial
date. We do not believe there is sufficient information to
estimate the amount of the possible loss, if any, resulting from
the lawsuit.
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 financial
condition or results of operations.
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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 13 weeks ended February 2, 2008.
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
|
Price
Range of Common Stock
The Companys Class A common stock is traded on the
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.
21
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 2007
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High
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Low
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Fourth Quarter
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$
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63.77
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$
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44.76
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Third Quarter
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$
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60.80
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$
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37.40
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Second Quarter
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$
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44.00
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$
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32.31
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First Quarter
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$
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35.85
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$
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24.95
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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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$
|
18.63
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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 2007
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High
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Low
|
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First Quarter
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$
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53.96
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$
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52.25
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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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$
|
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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$
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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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The high and low sales prices of the Class B shares do not
include the effects of the February 7, 2007 conversion of
all outstanding Class B common shares into Class A
common shares on a
one-for-one
basis (the Conversion) or the Stock Split.
Approximate
Number of Holders of Common Equity
As of March 10, 2008, there were approximately 1,254 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 and the terms of the Indenture governing
the senior 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.
22
Securities
Authorized for Issuance under Equity Compensation
Plans
Information for our equity compensation plans in effect as of
February 2, 2008 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
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Securities Reflected in
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Warrants and Rights
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and Rights
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Column(a))
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Plan Category
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(a)
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(b)
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(c)
|
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Equity compensation plans approved by security holders
|
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12,166,000
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$
|
10.60
|
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5,590,000
|
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Equity compensation plans not approved by security holders
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not applicable
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Total
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12,166,000
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$
|
10.60
|
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5,590,000
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Subsequent to February 2, 2008, an additional 1,361,850
options to purchase our Class A common stock at an exercise
price of $49.95 per share and 534,300 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, 2018.
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 2007. As of
February 2, 2008, the Company had no amount available for
purchases under any repurchase program.
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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 February 2, 2008, January 28,
2006, January 29, 2005 and January 31, 2004 consisted
of 52 weeks. The Statement of Operations Data
for the fiscal years ended February 2, 2008,
February 3, 2007 and January 28, 2006 and the
Balance Sheet Data as of February 2, 2008 and
February 3, 2007 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 29, 2005 and January 31, 2004 and the
Balance Sheet Data as of January 28, 2006,
January 29, 2005 and January 31, 2004 are derived from
our audited financial statements which are not included
elsewhere in this
Form 10-K.
23
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.
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52 Weeks
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|
|
53 Weeks
|
|
|
52 Weeks
|
|
|
52 Weeks
|
|
|
52 Weeks
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
February 2,
|
|
|
February 3,
|
|
|
January 28,
|
|
|
January 29,
|
|
|
January 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006(1)
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except per share data and statistical data)
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
7,093,962
|
|
|
$
|
5,318,900
|
|
|
$
|
3,091,783
|
|
|
$
|
1,842,806
|
|
|
$
|
1,578,838
|
|
Cost of sales
|
|
|
5,280,255
|
|
|
|
3,847,458
|
|
|
|
2,219,753
|
|
|
|
1,333,506
|
|
|
|
1,145,893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
1,813,707
|
|
|
|
1,471,442
|
|
|
|
872,030
|
|
|
|
509,300
|
|
|
|
432,945
|
|
Selling, general and administrative expenses(2)(3)
|
|
|
1,182,016
|
|
|
|
1,021,113
|
|
|
|
599,343
|
|
|
|
373,364
|
|
|
|
299,193
|
|
Depreciation and amortization(2)
|
|
|
130,270
|
|
|
|
109,862
|
|
|
|
66,355
|
|
|
|
36,789
|
|
|
|
29,368
|
|
Merger-related expenses(4)
|
|
|
|
|
|
|
6,788
|
|
|
|
13,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings
|
|
|
501,421
|
|
|
|
333,679
|
|
|
|
192,732
|
|
|
|
99,147
|
|
|
|
104,384
|
|
Interest expense (income), net
|
|
|
47,774
|
|
|
|
73,324
|
|
|
|
25,292
|
|
|
|
236
|
|
|
|
(804
|
)
|
Merger-related interest expense(4)
|
|
|
|
|
|
|
|
|
|
|
7,518
|
|
|
|
|
|
|
|
|
|
Debt extinguishment expense
|
|
|
12,591
|
|
|
|
6,059
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes
|
|
|
441,056
|
|
|
|
254,296
|
|
|
|
159,922
|
|
|
|
98,911
|
|
|
|
105,188
|
|
Income tax expense
|
|
|
152,765
|
|
|
|
96,046
|
|
|
|
59,138
|
|
|
|
37,985
|
|
|
|
41,721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
288,291
|
|
|
$
|
158,250
|
|
|
$
|
100,784
|
|
|
$
|
60,926
|
|
|
$
|
63,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per common share basic(5)
|
|
$
|
1.82
|
|
|
$
|
1.06
|
|
|
$
|
0.87
|
|
|
$
|
0.56
|
|
|
$
|
0.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding basic(5)
|
|
|
158,226
|
|
|
|
149,924
|
|
|
|
115,840
|
|
|
|
109,324
|
|
|
|
112,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per common share diluted(5)
|
|
$
|
1.75
|
|
|
$
|
1.00
|
|
|
$
|
0.81
|
|
|
$
|
0.53
|
|
|
$
|
0.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding diluted(5)
|
|
|
164,844
|
|
|
|
158,284
|
|
|
|
124,972
|
|
|
|
115,592
|
|
|
|
119,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Store Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of stores by segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
4,061
|
|
|
|
3,799
|
|
|
|
3,624
|
|
|
|
1,801
|
|
|
|
1,498
|
|
Canada
|
|
|
287
|
|
|
|
267
|
|
|
|
261
|
|
|
|
|
|
|
|
|
|
Australia
|
|
|
280
|
|
|
|
219
|
|
|
|
177
|
|
|
|
|
|
|
|
|
|
Europe
|
|
|
636
|
|
|
|
493
|
|
|
|
428
|
|
|
|
25
|
|
|
|
16
|
|
Total
|
|
|
5,264
|
|
|
|
4,778
|
|
|
|
4,490
|
|
|
|
1,826
|
|
|
|
1,514
|
|
Comparable store sales increase (decrease)(6)
|
|
|
24.7
|
%
|
|
|
11.9
|
%
|
|
|
(1.4
|
)%
|
|
|
1.7
|
%
|
|
|
0.8
|
%
|
Inventory turnover
|
|
|
6.0
|
|
|
|
5.2
|
|
|
|
5.0
|
|
|
|
5.4
|
|
|
|
4.9
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
$
|
534,160
|
|
|
$
|
353,284
|
|
|
$
|
234,293
|
|
|
$
|
111,093
|
|
|
$
|
188,378
|
|
Total assets(2)
|
|
|
3,775,891
|
|
|
|
3,349,584
|
|
|
|
3,015,821
|
|
|
|
915,983
|
|
|
|
902,189
|
|
Total debt
|
|
|
574,473
|
|
|
|
855,484
|
|
|
|
975,990
|
|
|
|
36,520
|
|
|
|
|
|
Total liabilities(2)
|
|
|
1,913,445
|
|
|
|
1,973,706
|
|
|
|
1,901,108
|
|
|
|
372,972
|
|
|
|
308,156
|
|
Stockholders equity
|
|
|
1,862,446
|
|
|
|
1,375,878
|
|
|
|
1,114,713
|
|
|
|
543,011
|
|
|
|
594,033
|
|
24
|
|
|
(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) |
|
On the first day of fiscal 2006, the Company adopted the
provisions of Statement of Financial Accounting Standards
No. 123 (Revised 2004), Share-Based Payment,
(SFAS 123(R)) which requires companies to
expense the estimated fair value of stock options and similar
equity instruments issued to employees in its financial
statements. The implementation of SFAS 123(R) affects the
comparability of amounts from fiscal periods before fiscal 2006.
The amount of stock-based compensation included was
$26.9 million, $21.0 million and $0.3 million for
the fiscal years 2007, 2006 and 2005, respectively. |
|
(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 expense. 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 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. |
|
(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. |
|
|
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, we,
us, our, 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 2, 2008, we operated 5,264
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.
25
Our fiscal year is composed of 52 or 53 weeks ending on the
Saturday closest to January 31. The fiscal years ended
February 2, 2008 (fiscal 2007) and
January 28, 2006 (fiscal 2005) consisted of
52 weeks. The fiscal year ended February 3, 2007
(fiscal 2006) consisted of 53 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 years ended
February 2, 2008 and February 3, 2007 include
52 weeks and 53 weeks, respectively, 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 were 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. 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 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 March of fiscal 2005 in the North American
markets and September of fiscal 2005 in the Australian and
European markets, Sony introduced the PlayStation Portable (the
PSP) and Microsoft introduced the Xbox 360 in
November of fiscal 2005 in North America and Europe and the
first quarter of fiscal 2006 in Australia. In November 2006,
Nintendo introduced the Wii hardware platform worldwide and Sony
introduced the PlayStation 3 hardware platform in the North
American markets. Sony introduced the PlayStation 3 platform in
the Australian and European markets in March 2007. Typically, in
the first full year following the introduction of new video game
platforms, sales of new video game hardware increase as a
percentage of sales. 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
26
related software and accessories will increase in the future.
The Companys gross margin in fiscal 2007 and fiscal 2006
was adversely impacted by the recent launches of these new
products and subsequent manufacturer-funded retail price
decreases for some of these 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 2, 2008, the unrecognized
compensation expense related to the unvested portion of our
stock options and restricted stock was $13.7 million and
$18.8 million, respectively, which is expected to be
recognized over a weighted average period of 0.8 and
1.9 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. Under the average cost method, as new
product is received from vendors, its current cost is added to
the existing cost of product on-hand and this amount is
re-averaged over the cumulative units. 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. Our ability to
gauge these factors is dependent upon our ability to forecast
customer demand and to provide a well-balanced merchandise
assortment. Any inability to forecast customer demand properly
could lead to increased costs associated with inventory
markdowns. We also adjust inventory based on anticipated
physical inventory losses or shrinkage. Physical inventory
counts are taken on a regular basis to ensure the reported
inventory is accurate. During interim periods, estimates of
shrinkage are recorded based on historical losses in the context
of current period circumstances.
27
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 2,
2008 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 expenses of approximately $6.8 million and
$21.1 million, which were charged to costs in the
accompanying consolidated statement of operations for the years
ended February 3, 2007 and January 28, 2006,
respectively. The Company completed all integration activities
in fiscal 2006. Rebranding of EB stores to the GameStop name is
substantially complete.
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
(SEC) Staff Accounting Bulletin No. 54
(SAB 54) in connection with the acquisition of
Babbages, Etc. LLC 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 connection with the mergers. Goodwill in the
amount of $6.6 million was recorded in connection with 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). 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
completed its annual impairment test of goodwill as of the first
day of the fourth quarter of fiscal 2005, fiscal 2006 and fiscal
2007 and concluded that none of its goodwill was impaired.
Note 7 of Notes to Consolidated Financial
Statements provides additional information concerning
goodwill.
Intangible Assets and Other Noncurrent
Assets. Intangible assets consist of
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 issued in
connection with the financing of the mergers are separately
shown in the consolidated balance sheet.
28
The deferred financing fees are being amortized over five and
seven years to match the terms of the revolving credit facility
and the senior notes, respectively. Deferred financing fees
incurred in connection with the issuance of the senior floating
rate notes were included in deferred financing fees in the
balance sheet and were being amortized over six years to match
the term of the senior floating rate notes. The remaining
balance of the deferred financing fees on the senior floating
rate notes was written off to debt extinguishment expense during
fiscal 2007 when the notes were redeemed.
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,
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. The Companys 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) is in conformance with GAAP, as
clarified by the Chief Accountant of the SEC in a February 2005
letter to the American Institute of Certified Public
Accountants. For leases that contain predetermined fixed
escalations of the minimum rent, we recognize the related rent
expense on a straight-line basis and include the impact of
escalating rents for periods in which we are reasonably assured
of exercising lease options and we include in the lease term any
period during which the Company is not obligated to pay rent
while the store is being constructed, or rent
holiday.
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.
29
In July 2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes
(FIN 48), which clarifies the accounting
for uncertainty in income taxes recognized under SFAS 109.
FIN 48 addresses the recognition and measurement of tax
positions taken or expected to be taken, and also provides
guidance on derecognition, classification, interest and
penalties, accounting in interim periods and disclosure. The
Company adopted and applied FIN 48 under the transition
provisions to all of its income tax positions at the required
effective date of February 4, 2007, resulting in a
$16.7 million cumulative effect decrease to retained
earnings and a $7.9 million increase in prepaid taxes. For
additional information related to the Companys adoption of
FIN 48, see Note 12 of Notes to Consolidated
Financial Statements.
Consolidated
Results of Operations
The following table sets forth certain income statement items as
a percentage of sales for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52 Weeks Ended
|
|
|
53 Weeks Ended
|
|
|
52 Weeks Ended
|
|
|
|
February 2,
|
|
|
February 3,
|
|
|
January 28,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of sales
|
|
|
74.4
|
|
|
|
72.3
|
|
|
|
71.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
25.6
|
|
|
|
27.7
|
|
|
|
28.2
|
|
Selling, general and administrative expenses
|
|
|
16.7
|
|
|
|
19.2
|
|
|
|
19.4
|
|
Depreciation and amortization
|
|
|
1.8
|
|
|
|
2.1
|
|
|
|
2.2
|
|
Merger-related expenses
|
|
|
|
|
|
|
0.1
|
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings
|
|
|
7.1
|
|
|
|
6.3
|
|
|
|
6.2
|
|
Interest expense, net
|
|
|
0.7
|
|
|
|
1.4
|
|
|
|
0.8
|
|
Merger-related interest expense
|
|
|
|
|
|
|
|
|
|
|
0.2
|
|
Debt extinguishment expense
|
|
|
0.2
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes
|
|
|
6.2
|
|
|
|
4.8
|
|
|
|
5.2
|
|
Income tax expense
|
|
|
2.1
|
|
|
|
1.8
|
|
|
|
1.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
|
4.1
|
%
|
|
|
3.0
|
%
|
|
|
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 2, 2008, February 3, 2007
and January 28, 2006, these purchasing, receiving and
distribution costs amounted to $43.9 million,
$35.9 million and $20.8 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 2, 2008,
February 3, 2007 and January 28, 2006, these
processing fees amounted to $55.2 million,
$40.9 million and $20.9 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
0.2%, 0.1% and 0.0% for the fiscal years ended February 2,
2008, February 3, 2007 and January 28, 2006,
respectively.
30
The following table sets forth sales (in millions) by
significant product category for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52 Weeks
|
|
|
53 Weeks
|
|
|
52 Weeks
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
February 2,
|
|
|
February 3,
|
|
|
January 28,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
Percent
|
|
|
|
|
|
Percent
|
|
|
|
Sales
|
|
|
of Total
|
|
|
Sales
|
|
|
of Total
|
|
|
Sales
|
|
|
of Total
|
|
|
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New video game hardware
|
|
$
|
1,668.9
|
|
|
|
23.5
|
%
|
|
$
|
1,073.7
|
|
|
|
20.2
|
%
|
|
$
|
503.2
|
|
|
|
16.3
|
%
|
New video game software
|
|
|
2,800.7
|
|
|
|
39.5
|
%
|
|
|
2,012.5
|
|
|
|
37.8
|
%
|
|
|
1,244.9
|
|
|
|
40.3
|
%
|
Used video game products
|
|
|
1,586.7
|
|
|
|
22.4
|
%
|
|
|
1,316.0
|
|
|
|
24.8
|
%
|
|
|
808.0
|
|
|
|
26.1
|
%
|
Other
|
|
|
1,037.7
|
|
|
|
14.6
|
%
|
|
|
916.7
|
|
|
|
17.2
|
%
|
|
|
535.7
|
|
|
|
17.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,094.0
|
|
|
|
100.0
|
%
|
|
$
|
5,318.9
|
|
|
|
100.0
|
%
|
|
$
|
3,091.8
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other products include PC entertainment and other software and
accessories, magazines and character-related merchandise.
The following table sets forth gross profit (in millions) and
gross profit percentages by significant product category for the
periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52 Weeks
|
|
|
53 Weeks
|
|
|
52 Weeks
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
February 2,
|
|
|
February 3,
|
|
|
January 28,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
Gross
|
|
|
Profit
|
|
|
Gross
|
|
|
Profit
|
|
|
Gross
|
|
|
Profit
|
|
|
|
Profit
|
|
|
Percent
|
|
|
Profit
|
|
|
Percent
|
|
|
Profit
|
|
|
Percent
|
|
|
Gross Profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New video game hardware
|
|
$
|
108.2
|
|
|
|
6.5
|
%
|
|
$
|
77.0
|
|
|
|
7.2
|
%
|
|
$
|
30.9
|
|
|
|
6.1
|
%
|
New video game software
|
|
|
581.7
|
|
|
|
20.8
|
%
|
|
|
427.3
|
|
|
|
21.2
|
%
|
|
|
266.5
|
|
|
|
21.4
|
%
|
Used video game products
|
|
|
772.2
|
|
|
|
48.7
|
%
|
|
|
651.9
|
|
|
|
49.5
|
%
|
|
|
383.0
|
|
|
|
47.4
|
%
|
Other
|
|
|
351.6
|
|
|
|
33.9
|
%
|
|
|
315.2
|
|
|
|
34.4
|
%
|
|
|
191.6
|
|
|
|
35.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,813.7
|
|
|
|
25.6
|
%
|
|
$
|
1,471.4
|
|
|
|
27.7
|
%
|
|
$
|
872.0
|
|
|
|
28.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
2007 Compared to Fiscal 2006
Sales increased by $1,775.1 million, or 33.4%, to
$7,094.0 million in the 52 weeks of fiscal 2007
compared to $5,318.9 million in the 53 weeks of fiscal
2006. The increase in sales was attributable to the comparable
store sales increase of 24.7% for fiscal 2007 when compared to
fiscal 2006, the addition of non-comparable store sales from the
1,007 stores opened since January 29, 2006 of approximately
$496.2 million and increases related to changes in foreign
exchange rates of $109.4 million, offset by sales of
$99.1 million for the 53rd week included in fiscal
2006. The comparable store sales increase was driven by
continued strong sales of the Nintendo Wii, Microsofts
Xbox 360 and the Sony PlayStation 3, which completed its
worldwide launch during this fiscal year, and their related
software and accessories, including several strong video game
titles, such as Halo 3 and Guitar Hero III. Stores
are included in our comparable store sales base beginning in the
thirteenth month of operation. The comparable store sales
increase of 24.7% was calculated by using the 52 weeks of
fiscal 2007 compared to the most closely comparable
52 weeks of fiscal 2006 with consideration given to the
timing of holidays to ensure comparability.
New video game hardware sales increased $595.2 million or
55.4%, from fiscal 2006 to fiscal 2007, primarily due to the
sales of hardware units mentioned above, as well as the increase
in store count since January 2007, offset by the 53rd week
of sales included in fiscal 2006. New video game hardware sales
increased as a percentage of sales from 20.2% in fiscal 2006 to
23.5% in fiscal 2007, primarily due to the first full year since
the Nintendo Wii and the Sony PlayStation 3 launch as well as
increasing sales of Microsoft Xbox 360 and the Nintendo DS.
31
New video game software sales increased $788.2 million, or
39.2%, from fiscal 2006 to fiscal 2007, primarily due to new
stores added in fiscal 2007, sales related to the new hardware
platforms and a strong lineup of new video game titles released
during the 52 weeks ended February 2, 2008. New video
game software sales as a percentage of total sales increased
from 37.8% in fiscal 2006 to 39.5% in fiscal 2007 due to
increased sales related to the new hardware platforms and the
availability of several strong titles in fiscal 2007.
Used video game product sales increased $270.7 million, or
20.6%, from fiscal 2006 to fiscal 2007, primarily due to the
increase in new store count, an increase in overall demand for
video game products following the launch of new hardware
platforms and the strong growth of used video game product sales
internationally, offset by the 53rd week of sales in fiscal
2006. As a percentage of sales, used video game product sales
decreased from 24.8% to 22.4% primarily due to the strong sales
of new video game hardware and software. Sales of other product
categories, including PC entertainment and other software and
accessories, magazines and trading cards, grew 13.2%, or
$121.0 million, from fiscal 2006 to fiscal 2007, primarily
due to the increase in store count and the increase in new
hardware platform accessories sales, offset by the
53rd week of sales in fiscal 2006.
Cost of sales increased by $1,432.8 million, or 37.2%, from
$3,847.5 million in fiscal 2006 to $5,280.3 million in
fiscal 2007 as a result of the increase in sales and the changes
in gross profit discussed below, offset by the 53rd week of
sales in fiscal 2006.
Gross profit increased by $342.3 million, or 23.3%, from
$1,471.4 million in fiscal 2006 to $1,813.7 million in
fiscal 2007. Gross profit as a percentage of sales decreased
from 27.7% in fiscal 2006 to 25.6% in fiscal 2007. The gross
profit percentage decrease was caused primarily by the increase
in sales of new video game hardware as a percentage of total
sales in fiscal 2007. New video game hardware typically carries
a much lower margin than sales in the other product categories.
Gross profit as a percentage of sales was also impacted by a
decrease in the excess of vendor allowances received over
marketing and advertising expenses. Vendor allowances received
during fiscal 2006 were abnormally high due to the launches of
the Nintendo Wii and the Sony PlayStation 3 and returned to
normal levels in fiscal 2007. In addition, net vendor allowances
decreased due to higher expenditures on marketing and
advertising from fiscal 2006 to fiscal 2007 in support of the
Companys branding campaign. These factors led to a
decrease in gross profit as a percentage of sales on new video
game hardware, new video game software and other products from
7.2%, 21.2% and 34.4% of sales, respectively, in fiscal 2006 to
6.5%, 20.8% and 33.9% of sales, respectively, in fiscal 2007.
Gross profit as a percentage of sales on used video game
products decreased from 49.5% in fiscal 2006 to 48.7% in fiscal
2007 due to increased promotional expenses and higher
refurbishment costs associated with an increase in production of
refurbished hardware platforms during fiscal 2007.
Selling, general and administrative expenses increased by
$160.9 million, or 15.8%, from $1,021.1 million in
fiscal 2006 to $1,182.0 million in fiscal 2007. The
increase was primarily attributable to the increase in the
number of stores in operation, and the related increases in
store, distribution and corporate office operating expenses,
offset by expenses from the 53rd week included in fiscal
2006. Selling, general and administrative expenses as a
percentage of sales decreased from 19.2% in fiscal 2006 to 16.7%
in fiscal 2007. The decrease in selling, general and
administrative expenses as a percentage of sales was primarily
due to leveraging as a result of the higher sales associated
with the introduction of the new video game systems and
synergies associated with the acquisition of EB. Selling,
general and administrative expenses include $26.9 and
$21.0 million in stock-based compensation expense for
fiscal 2007 and fiscal 2006, respectively, in accordance with
SFAS 123(R). Foreign currency transaction gains and
(losses) are included in selling, general and administrative
expenses and amounted to $8.6 million in fiscal 2007,
compared to ($1.0) million in fiscal 2006.
Depreciation and amortization expense increased from
$109.9 million in fiscal 2006 to $130.3 million in
fiscal 2007. This increase of $20.4 million was due
primarily to capital expenditures for 586 new GameStop stores.
Depreciation and amortization expense will increase from fiscal
2007 to fiscal 2008 due to continued capital expenditures for
new stores and management information systems.
Interest income resulting from the investment of excess cash
balances increased from $11.3 million in fiscal 2006 to
$13.8 million in fiscal 2007 due to interest earned on
invested assets. Interest expense decreased from
$84.7 million in fiscal 2006 to $61.6 million in
fiscal 2007, primarily due to the retirement of
$20.0 million of the Companys senior notes and
$250.0 million of the Companys senior floating rate
notes since February 3, 2007. Debt extinguishment expense
of $12.6 million was recognized in fiscal 2007 as a result
of the premiums paid related
32
to debt retirement and the recognition of deferred financing
fees and unamortized original issue discount. 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.
Income tax expense increased by $56.8 million, from
$96.0 million in fiscal 2006 to $152.8 million in
fiscal 2007. The Companys effective tax rate decreased
from 37.8% in fiscal 2006 to 34.6% in fiscal 2007 due to the
release of foreign valuation allowances on net operating losses
and the recognition of foreign tax credits not previously
benefited. See Note 12 of Notes to Consolidated
Financial Statements for additional information regarding
income taxes.
The factors described above led to an increase in operating
earnings of $167.7 million, or 50.3%, from
$333.7 million in fiscal 2006 to $501.4 million in
fiscal 2007 and an increase in net earnings of
$130.0 million, or 82.1%, from $158.3 million in
fiscal 2006 to $288.3 million in fiscal 2007.
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 the 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 the Sony
Playstation 3 and the 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.
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
33
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
$421.8 million, or 70.4%, from $599.3 million in
fiscal 2005 to $1,021.1 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 19.2%
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. These amounts were offset by
the changes related to the adoption of SFAS 123(R)
discussed below.
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 of stock-based compensation expense in
selling, general and administrative expenses for fiscal 2006. In
accordance with SFAS 123(R), prior periods have not been
restated.
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.
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 expense. 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.
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.
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 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.
Segment
Information
The Company operates its 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
34
operations, with all stores engaged in the sale of new and used
video game systems, software and accessories which we refer to
as video game products and PC entertainment software and related
accessories. These products are substantially the same
regardless of geographic location, with the primary differences
in merchandise carried being the timing of the release of new
products in the various segments. Stores in all segments are
similar in size at an average of approximately 1,500 square
feet each.
As we have expanded our presence in international markets, the
Company has increased its 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. The notes issued in
connection with the mergers are reflected in the United States
segment. See Note 20 of Notes to Consolidated
Financial Statements for more information.
Sales by operating segment in U.S. dollars were as follows
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52 Weeks
|
|
|
53 Weeks
|
|
|
52 Weeks
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
February 2,
|
|
|
February 3,
|
|
|
January 28,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
United States
|
|
$
|
5,438.8
|
|
|
$
|
4,269.5
|
|
|
$
|
2,709.8
|
|
Canada
|
|
|
473.0
|
|
|
|
319.7
|
|
|
|
111.4
|
|
Australia
|
|
|
420.8
|
|
|
|
288.1
|
|
|
|
94.4
|
|
Europe
|
|
|
761.4
|
|
|
|
441.6
|
|
|
|
176.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,094.0
|
|
|
$
|
5,318.9
|
|
|
$
|
3,091.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings by operating segment, defined as income from
continuing operations before intercompany royalty fees, net
interest expense and income taxes, in U.S. dollars were as
follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52 Weeks
|
|
|
53 Weeks
|
|
|
52 Weeks
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
February 2,
|
|
|
February 3,
|
|
|
January 28,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
United States
|
|
$
|
391.2
|
|
|
$
|
285.4
|
|
|
$
|
173.7
|
|
Canada
|
|
|
35.8
|
|
|
|
20.0
|
|
|
|
7.9
|
|
Australia
|
|
|
41.8
|
|
|
|
27.3
|
|
|
|
11.0
|
|
Europe
|
|
|
32.6
|
|
|
|
1.0
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
501.4
|
|
|
$
|
333.7
|
|
|
$
|
192.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets by operating segment in U.S. dollars were as
follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 2,
|
|
|
February 3,
|
|
|
January 28,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
United States
|
|
$
|
2,742.0
|
|
|
$
|
2,618.9
|
|
|
$
|
2,347.8
|
|
Canada
|
|
|
274.7
|
|
|
|
210.4
|
|
|
|
210.4
|
|
Australia
|
|
|
251.1
|
|
|
|
210.7
|
|
|
|
214.7
|
|
Europe
|
|
|
508.1
|
|
|
|
309.6
|
|
|
|
242.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,775.9
|
|
|
$
|
3,349.6
|
|
|
$
|
3,015.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
2007 Compared to Fiscal 2006
United
States
Segment results for the United States include retail operations
in 50 states, the District of Columbia, Puerto Rico and
Guam, the electronic commerce websites www.gamestop.com
and www.ebgames.com and Game Informer magazine. As
of February 2, 2008, the United States segment included
4,061 GameStop stores, compared to 3,799 stores on
February 3, 2007, and 3,624 stores on January 28,
2006. Sales for the 52 weeks ended February 2, 2008
increased 27.4% compared to the 53 weeks ended
February 3, 2007 as a result of increased sales at existing
35
stores and the opening of 604 new stores since January 28,
2006, including 328 stores in the 52 weeks ended
February 2, 2008. Sales at existing stores increased due to
strong sales of new hardware platform units, including the
Nintendo Wii and the Sony PlayStation 3 and their related
software and accessories, as well as Microsofts Xbox 360
hardware, software and accessories, particularly new sales of
Halo 3 and Guitar Hero III released during
fiscal 2007. Segment operating income for the 52 weeks
ended February 2, 2008 increased by 37.1% compared to the
53 weeks ended February 3, 2007, driven by strong
sales of the new hardware platforms and their related software
and accessories, leveraging of selling, general and
administrative expenses, and the recognition of synergies
related to the acquisition of EB, including the shut-down in
fiscal 2006 of EBs corporate headquarters and distribution
center.
Canada
Sales in the Canadian segment in the 52 weeks ended
February 2, 2008 increased 48.0% compared to the
53 weeks ended February 3, 2007. The increase in sales
was primarily attributable to increased sales at existing stores
and the additional sales at the 28 stores opened since
January 28, 2006. As of February 2, 2008, the Canadian
segment had 287 stores compared to 267 stores as of
February 3, 2007. The increase in sales at existing stores
was driven by strong sales of the new hardware platform units,
including the Nintendo Wii and the Sony PlayStation 3 and their
related software and accessories, as well as Microsofts
Xbox 360 hardware, software and accessories, particularly new
software sales of Halo 3 and Guitar Hero III
released in fiscal 2007. Segment operating income for the
52 weeks ended February 2, 2008 increased by 79.0%
compared to the 53 weeks ended February 3, 2007,
driven by the increased sales and the related margin dollars
discussed above, the leveraging of selling, general and
administrative expenses and the favorable impact of changes in
exchange rates since the prior year. For the 52 weeks ended
February 2, 2008, changes in exchange rates when compared
to the prior year had the effect of increasing operating
earnings by $1.9 million.
Australia
Segment results for Australia include retail operations in
Australia and New Zealand. As of February 2, 2008, the
Australian segment included 280 stores, compared to 219 as of
February 3, 2007. Sales for the 52 weeks ended
February 2, 2008 increased 46.1% compared to the
53 weeks ended February 3, 2007. The increase in sales
was due to higher sales at existing stores and the additional
sales at the 104 stores opened since January 28, 2006. The
increase in sales at existing stores was due to strong sales of
the Sony PlayStation 3, which launched in Australia and New
Zealand during the first quarter of fiscal 2007, as well as
strong sales of other video game hardware, including the
Nintendo Wii, and increased sales of handheld video game systems
during fiscal 2007 compared to fiscal 2006. The increased
hardware sales led to increases in sales in new video game
software, used video game products and accessories and other
products. Segment operating income in the 52 weeks ended
February 2, 2008 increased by 53.1% when compared to the
53 weeks ended February 3, 2007. The increase was
driven by the increased sales and related margin dollars
discussed above, the leveraging of selling, general and
administrative expenses and the favorable impact of changes in
exchange rates since the prior year. For the 52 weeks ended
February 2, 2008, changes in exchange rates when compared
to the prior year had the effect of increasing operating
earnings by $3.7 million.
Europe
Segment results for Europe include retail operations in 12
European countries including Portugal, which commenced
operations in the first quarter of fiscal 2007. As of
February 2, 2008, the European segment operated 636 stores,
compared to 493 stores as of February 3, 2007. For the
52 weeks ended February 2, 2008, European sales
increased 72.4% compared to the 53 weeks ended
February 3, 2007. The increase in sales was primarily due
to the increase in sales at existing stores and the additional
sales at the 271 stores opened since January 28, 2006. The
increase in store count was offset by store closings in the
first quarter of fiscal 2007, primarily in Spain, as part of the
implementation of the integration strategy of the acquisition of
EB. The increase in sales at existing stores was driven by
strong sales of the Sony PlayStation 3, which launched in Europe
during the first quarter of fiscal 2007, as well as strong sales
of other video game hardware, including the Nintendo Wii, and
increased sales of Microsofts Xbox 360 and handheld video
game systems during fiscal 2007 compared to fiscal 2006. The
increased hardware
36
sales led to increases in sales in new video game software, used
video game products and accessories and other products.
The segment operating income in Europe for the 52 weeks
ended February 2, 2008 increased to $32.6 million
compared to $1.0 million in the 53 weeks ended
February 3, 2007. The increase in the operating income was
driven by the increase in sales and related margin dollars
discussed above, the leveraging of selling, general and
administrative expenses, both of which reflect the continued
maturation of our operations in the European market, and the
favorable impact of changes in exchange rates since the prior
year. For the 52 weeks ended February 2, 2008, changes
in exchange rates when compared to fiscal 2006 had the effect of
increasing operating earnings by $2.7 million.
Fiscal
2006 Compared to Fiscal 2005
Segment results for the 53 weeks ended February 3,
2007 include the first full year of sales and operating earnings
for the 2,350 EB stores acquired in fiscal 2005. Segment results
for the 52 weeks ended January 28, 2006 only include
the results of operations of the EB stores from October 9,
2005 though January 28, 2006 due to the mergers and
therefore is not comparable. Prior to the mergers, the
Companys international operations only included Ireland
and the United Kingdom which were not material. 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 international segment results for fiscal
2006 to fiscal 2005 would be meaningful.
Liquidity
and Capital Resources
During fiscal 2007, cash provided by operations was
$502.7 million, compared to cash provided by operations of
$423.5 million in fiscal 2006. The increase in cash
provided by operations of $79.2 million from fiscal 2006 to
fiscal 2007 resulted from an increase in net income of
$130.0 million, as previously discussed, as well as a net
decrease in prepaid taxes and taxes payable of
$61.8 million and an increase in depreciation and
amortization of $21.1 million due primarily to new store
growth. These increases in cash provided by operations were
offset by an increase in merchandise inventories of
$59.1 million primarily due to new store growth; the
increase in the excess tax benefits realized from the exercise
of stock-based awards of $49.6 million; an increase in
receivables of $24.6 million due primarily to an increase
in sales and store growth and a decrease in accounts payable and
accrued liabilities of $23.6 million due to the timing of
payments associated with inventory.
During fiscal 2006, cash provided by operations was
$423.5 million, compared to cash provided by operations of
$291.4 million in fiscal 2005. 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
$56.1 million; and an increase in the non-cash adjustment
for stock-based compensation expense due to the implementation
of SFAS 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.
Cash used in investing activities was $174.5 million in
fiscal 2007 and $125.9 million during fiscal 2006 and
$996.8 million in fiscal 2005. During fiscal 2007,
$175.6 million of capital expenditures were primarily used
to open 586 stores in the United States and internationally and
to invest in information systems, which were offset by
$1.1 million of cash received related to the finalization
of the purchase price of Game Brands Inc. which was acquired
during the fourth quarter of fiscal 2006. 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, to open new stores in
the United States and for international expansion. Also, during
the fourth quarter of fiscal
37
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 GameStop.
Cash used in financing activities in fiscal 2007 was
$131.8 million and $46.6 million during fiscal 2006.
The cash used in financing activities in fiscal 2007 was due to
the repurchase of $20.0 million and $250.0 million of
principal value of the Companys senior notes and senior
floating rate notes, respectively, and the $12.2 million
principal payment in October 2007 on the Barnes &
Noble promissory note. The fiscal 2007 cash outflows were offset
by $64.9 million received for the issuance of shares
relating to stock option exercises and $93.3 million for
the realization of tax benefits relating to the stock option
exercises and vested restricted stock. The cash used in
financing activities in fiscal 2006 was due to the repurchase of
$50.0 million each of the senior notes and the senior
floating rate notes, the payment of the $12.2 million
principal due in October 2006 on the Barnes & Noble
promissory note and the repayment of the $9.2 million
mortgage on EBs Pennsylvania distribution center. The
fiscal 2006 cash outflows were offset by $33.9 million
received for the issuance of shares relating to stock option
exercises and $43.8 million for the realization of tax
benefits relating to the stock option exercises and vested
restricted stock. Cash flows provided by financing activities
were $935.7 million during fiscal 2005 which were 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 586 stores in fiscal 2007 and expect to
open approximately 575 to 600 stores in fiscal 2008. Capital
expenditures for fiscal 2008 are projected to be approximately
$170.0 million to $180.0 million, to be used primarily
to fund new store openings and invest in distribution and
information systems in support of operations.
In October 2005, in connection with the merger, 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 its U.S. subsidiaries, including
limitations on asset sales, additional liens and the incurrence
of additional indebtedness.
In April 2007, the Company amended the Revolver to extend the
maturity date from October 11, 2010 to April 25, 2012,
reduce the LIBO interest rate margin, reduce and fix the rate of
the unused commitment fee and modify or delete certain other
covenants.
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) 1.00% to 1.50% above the LIBO rate. The
applicable margin is determined quarterly as a function of the
Companys consolidated leverage ratio. As of
February 2, 2008, the applicable margin was 0.0% for prime
rate loans and 1.00% for LIBO rate loans. In addition, the
Company is required to pay a commitment fee of 0.25% for any
unused portion of the total commitment under the Revolver.
As of February 2, 2008, there were no borrowings
outstanding under the Revolver and letters of credit outstanding
totaled $6.8 million.
38
In September 2007, the Companys Luxembourg subsidiary
entered into a discretionary, $20.0 million Uncommitted
Line of Credit (the Line of Credit) with Bank of
America. There is no term associated with the Line of Credit and
Bank of America may withdraw the facility at any time without
notice. The Line of Credit will be made available to the
Companys foreign subsidiaries for use primarily as a bank
overdraft facility for short-term liquidity needs and for the
issuance of bank guarantees and letters of credit to support
operations.
As of February 2, 2008, there were no borrowings
outstanding under the Line of Credit and bank guarantees
outstanding were $2.8 million.
On September 28, 2005, the Company, along with GameStop,
Inc. 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
U.S. 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 offering of the Notes was conducted in a private transaction
under Rule 144A under the 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 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 in May 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.
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 2, 2008, the unamortized original issue discount
was $5.5 million. The rate of interest on the Senior
Floating Rate Notes prior to their redemption on October 1,
2007 was 9.2350% per annum.
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 2, 2008, the Company was in compliance with
all covenants associated with the Revolver and the Indenture.
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 the 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.
39
The Issuers may acquire the 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 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 was $6.1 million, 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.
On February 9, 2007, the Company announced that its Board
of Directors authorized the buyback of up to an aggregate of an
additional $150 million of its Senior Notes and Senior
Floating Rate Notes. The timing and amount of the repurchases
were determined by the Companys management based on their
evaluation of market conditions and other factors. As of
February 2, 2008, the Company had repurchased the
additional $150 million of the Notes, having acquired
$20.0 million of its Senior Notes and $130.0 million
of its Senior Floating Rate Notes, and delivered the Notes to
the Trustee for cancellation. The associated loss on retirement
of this debt was $8.8 million, 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.
On June 28, 2007, the Company announced that its Board of
Directors authorized the redemption of the remaining
$120 million of Senior Floating Rate Notes outstanding. The
Company redeemed the Senior Floating Rate Notes on
October 1, 2007 at the redemption price specified by the
Senior Floating Rate Notes of 102.0%, plus all accrued and
unpaid interest through the redemption date. The Company
incurred a one-time pre-tax charge of $3.8 million
associated with the redemption, which represents a
$2.4 million redemption premium and $1.4 million to
recognize unamortized deferred financing costs.
Subsequently, on February 7, 2008, the Company announced
that its Board of Directors authorized the buyback of up to an
aggregate of an additional $130 million of its 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 this filing, the Company had repurchased
$24.7 million of its Senior Notes pursuant to this new
authorization and delivered the Senior Notes to the Trustee for
cancellation. The associated loss on retirement of debt is
$1.9 million, which consists of the premium paid to retire
the Senior Notes and the write-off of the deferred financing
fees and the original issue discount on the Senior Notes.
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 stock held by
Barnes & Noble. The note was unsecured and bore
interest at 5.5% per annum, payable with each principal
installment. 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, as required
by the promissory note. The final payment of $12.2 million,
satisfying the promissory note in full, was made in October 2007.
Based on our current operating plans, we believe that available
cash balances, cash generated from our operating activities and
funds available under the Revolver will be sufficient to fund
our operations, required interest payments on the Senior Notes,
store expansion and remodeling activities and corporate capital
expenditure programs for at least the next 12 months.
40
Contractual
Obligations
The following table sets forth our contractual obligations as of
February 2, 2008:
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Payments Due by Period
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Less Than
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More Than
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Contractual Obligations
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Total
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1 Year
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1-3 Years
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3-5 Years
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5 Years
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(In millions)
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Long-Term Debt(1)
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$
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812.0
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$
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46.4
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$
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92.8
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$
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672.8
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$
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Operating Leases
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1,018.3
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261.5
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394.0
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226.4
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136.4
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Purchase Obligations(2)
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609.0
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609.0
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Total
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$
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2,439.3
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$
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916.9
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$
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486.8
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$
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899.2
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$
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136.4
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(1) |
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The long-term debt consists of $580.0 million (principal
value), which bears interest at 8.0% per annum. Amounts include
contractual interest payments. |
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(2) |
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Purchase obligations represent outstanding purchase orders for
merchandise from vendors. These purchase orders are generally
cancelable until shipment of the products. |
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
continued 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. Each of these employment agreements
will automatically renew for a period of one year as no notice
of non-renewals were given. 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 2008 at $1,200,000,
$960,000, $575,000 and $440,000, respectively.
As of February 2, 2008, we had standby letters of credit
outstanding in the amount of $6.8 million and had bank
guarantees outstanding in the amount of $10.7 million,
$7.9 million of which are cash collateralized.
As of February 2, 2008, the Company had $24.2 million
of income tax liability, including accrued interest and
penalties related to unrecognized tax benefits in other
long-term liabilities in its consolidated balance sheet. At the
time of this filing, the settlement period for the noncurrent
portion of our income tax liability cannot be determined. In
addition, any payments related to unrecognized tax benefits
would be partially offset by reductions in payments in other
jurisdictions.
In 2003, the Company purchased a 51% controlling interest in
GameStop Group Limited. Under the terms of the purchase
agreement, the individual owners of the remaining 49% interest
have the ability to require the Company to purchase their
remaining shares in incremental percentages at a price to be
determined based partially on the Companys price to
earnings ratio and GameStop Group Limiteds earnings. No
additional shares have been
41
purchased by the Company to date. The Company already
consolidates the results of GameStop Group Limited; therefore,
any additional amounts acquired will not have a material effect
on the Companys financial statements.
Off-Balance
Sheet Arrangements
As of February 2, 2008, the Company had no off-balance
sheet arrangements as defined in Item 303 of
Regulation S-K.
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 nine bookstores operated
by Barnes & Noble, an affiliate through a common
stockholder who is chairman of the board of directors of
Barnes & Noble and a member of the Companys
Board of Directors. 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
52 weeks ended February 2, 2008, the 53 weeks
ended February 3, 2007 and the 52 weeks ended
January 28, 2006, these charges amounted to
$1.2 million, $1.0 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 the Company 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 52 weeks ended
February 2, 2008, the 53 weeks ended February 3,
2007 and the 52 weeks ended January 28, 2006, these
allocated charges amounted to $0.3 million,
$0.8 million and $1.7 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. Historical GameStop paid $37.5 million
in cash and issued a promissory note in the principal amount of
$74.0 million, which has been repaid as of October 2007.
Scheduled principal payments were made of $37.5 million in
January 2005 and $12.2 million in each of October 2005,
October 2006 and October 2007. Interest expense on the
promissory note for the 52 weeks ended February 2,
2008, the 53 weeks ended February 3, 2007 and the
52 weeks ended January 28, 2006 totaled
$0.4 million, $1.1 million and $1.8 million,
respectively.
In May 2005, the Company entered into an arrangement with
Barnes & Noble under which www.gamestop.com
became 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. The fee
paid to Barnes & Noble in connection with this
arrangement was $0.4 million, $0.3 million and
$0.3 million for the 52 weeks ended February 2,
2008, the 53 weeks ended February 3, 2007 and the
52 weeks ended January 28, 2006, respectively.
Recent
Accounting Standards and Pronouncements
In March 2008, the FASB issued Statement of Financial Accounting
Standards No. 161, Disclosures about Derivative
Instruments and Hedging Activities an amendment of
FASB Statement No. 133 (SFAS 161).
SFAS 161 requires enhanced disclosures about how and why an
entity uses derivative instruments, how derivative instruments
and related hedged items are accounted for and their effect on
an entitys financial position, financial performance, and
cash flows. SFAS 161 is effective for the Company on
February 1, 2009. The Company is currently evaluating the
impact that the adoption of SFAS 161 will have on its
consolidated financial statements.
42
In December 2007, the FASB issued Statement of Financial
Accounting Standards No. 141 (revised 2007), Business
Combinations, (SFAS 141(R)).
SFAS 141(R) amends the principles and requirements for how
an acquirer recognizes and measures in its financial statements
the identifiable assets acquired, the liabilities assumed, any
noncontrolling interest in the acquiree and the goodwill
acquired. SFAS 141(R) also establishes disclosure
requirements to enable the evaluation of the nature and
financial effects of the business combination. SFAS 141(R)
is effective for the Company on February 1, 2009, and the
Company will apply SFAS 141(R) prospectively to all
business combinations subsequent to the effective date.
In December 2007, the FASB issued Statement of Financial
Accounting Standards No. 160, Noncontrolling Interests
in Consolidated Financial Statements an amendment of
Accounting Research Bulletin No. 51
(SFAS 160). SFAS 160 establishes
accounting and reporting standards for the noncontrolling
interest in a subsidiary and for the deconsolidation of a
subsidiary. SFAS 160 also establishes disclosure
requirements that clearly identify and distinguish between the
controlling and noncontrolling interests and requires the
separate disclosure of income attributable to controlling and
noncontrolling interests. SFAS 160 is effective for fiscal
years beginning after December 15, 2008. The Company is
currently evaluating the impact that the adoption of
SFAS 160 will have on its consolidated financial statements.
In February 2007, the FASB issued Statement of Financial
Accounting Standards No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities
(SFAS 159). This statement permits entities
the option to measure many financial instruments and certain
other items at fair value at specific election dates. Unrealized
gains and losses on items for which the fair value option has
been elected are reported in earnings. SFAS 159 was
effective for our Company on February 3, 2008. The adoption
of SFAS 159 did not have a material impact on our
consolidated financial statements.
In September 2006, the FASB issued Statement of Financial
Accounting Standards No. 157, Fair Value Measurements
(SFAS 157), which defines fair value,
establishes a framework for measuring fair value, and expands
disclosures about fair value measurements. SFAS 157 applies
to other accounting pronouncements that require or permit fair
value measurements. The Company adopted SFAS 157 on
February 3, 2008 as required for its financial assets and
liabilities. However, in February 2008, the FASB released a FASB
Staff Position, FSP
FAS 157-2,
Effective Date of FASB Statement No. 157, which
delayed the effective date of SFAS 157 for all
non-financial assets and non-financial liabilities, except those
that are recognized or disclosed at fair value in the financial
statements on a recurring basis. The adoption of SFAS 157
for our financial assets and liabilities did not have a material
impact on the Companys financial condition and results of
operations. We do not believe the adoption of SFAS 157 for
our non-financial assets and liabilities, effective
February 1, 2009, will have a material impact on our
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.
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Item 7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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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 Senior
Notes outstanding issued in connection with the mergers carry a
fixed interest rate. We do not expect any material losses from
our invested cash balances, and we believe that our interest
rate exposure is modest.
43
Foreign
Currency Risk
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 2,
2008 was a liability of $7.6 million. A hypothetical
strengthening or weakening of 10% in the foreign exchange rates
underlying the Foreign Currency Contracts from the market rate
as of February 2, 2008 would result in a (loss) or gain in
value of the forwards, options and swaps of ($7.0 million)
or $5.7 million, respectively.
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Item 8.
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Consolidated
Financial Statements and Supplementary Data
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See Item 15(a)(1) and (2) of this
Form 10-K.
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Item 9.
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Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
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None.
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Item 9A.
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Controls
and Procedures
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(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 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)
and
15d-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 2, 2008. The effectiveness of our
internal control over financial reporting as of February 2,
2008 has been audited by BDO Seidman, LLP, an independent
registered public accounting firm, as stated in their report
which is included in this
Form 10-K.
(c) Changes in Internal Controls Over Financial Reporting
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.
44
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Item 9B.
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Other
Information
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None.
PART III
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Item 10.
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Directors,
Executive Officers and Corporate
Governance*
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Code of
Ethics
The Company has adopted a Code of Ethics for Senior Financial
Officers 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 filed 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.
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Item 11.
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Executive
Compensation*
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Item 12.
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Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder
Matters*
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Item 13.
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Certain
Relationships and Related Transactions, and Director
Independence*
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Item 14.
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Principal
Accountant Fees and
Services*
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* 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 2008 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.
45
PART IV
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Item 15.
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Exhibits
and Financial Statement Schedules
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(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-1
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
10-K:
The following financial statement schedule for the 52 weeks
ended February 2, 2008 and January 28, 2006 and the
53 weeks ended February 3, 2007 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 52 weeks ended February 2, 2008 and
January 28, 2006 and the 53 weeks ended
February 3, 2007:
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|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52 Weeks Ended February 2, 2008
|
|
$
|
53,816
|
|
|
$
|
51,879
|
|
|
$
|
28,262
|
|
|
$
|
74,259
|
|
|
$
|
59,698
|
|
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
|
|
|
|
|
* |
|
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)
|
46
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
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)
|
|
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
|
|
Second Amended and Restated 2001 Incentive Plan.(9)
|
|
10
|
.6
|
|
Amended and Restated Supplemental Compensation Plan.(10)
|
|
10
|
.7
|
|
Form of Option Agreement.(11)
|
|
10
|
.8
|
|
Form of Restricted Share Agreement.(12)
|
|
10
|
.9
|
|
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
|
.10
|
|
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
|
.11
|
|
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
|
.12
|
|
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
|
.13
|
|
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
|
.14
|
|
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
|
.15
|
|
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
|
.16
|
|
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
|
.17
|
|
Form of Securities Collateral Pledge Agreement, dated as of
October 11, 2005.(14)
|
|
10
|
.18
|
|
First Amendment, dated April 25, 2007, to 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 Amendment, 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.(15)
|
|
10
|
.19
|
|
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
|
.20
|
|
Executive Employment Agreement, dated as of April 11, 2005,
between GameStop Holdings Corp. (f/k/a GameStop Corp.) and R.
Richard Fontaine.(16)
|
47
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.21
|
|
Executive Employment Agreement, dated as of April 11, 2005,
between GameStop Holdings Corp. (f/k/a GameStop Corp.) and
Daniel A. DeMatteo.(16)
|
|
10
|
.22
|
|
Executive Employment Agreement, dated as of December 9,
2005, between GameStop Corp. and Steven R. Morgan.(17)
|
|
10
|
.23
|
|
Executive Employment Agreement, dated as of April 3, 2006,
between GameStop Corp. and David W. Carlson.(18)
|
|
12
|
.1
|
|
Computation of Ratio of Earnings to Fixed Charges.
|
|
14
|
.1
|
|
Code of Ethics for Senior Financial Officers.(19)
|
|
21
|
.1
|
|
Subsidiaries.
|
|
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 Appendix A to the
Registrants Proxy Statement for 2007 Annual Meeting of
Stockholders filed with the Securities and Exchange Commission
on May 29, 2007. |
|
(10) |
|
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. |
|
(11) |
|
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. |
|
(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. |
48
|
|
|
(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 the Registrants
Form 8-K
filed with the Securities and Exchange Commission on
April 26, 2007. |
|
(16) |
|
Incorporated by reference to GameStop Holdings Corp.s
Form 8-K
filed with the Securities and Exchange Commission on
April 15, 2005. |
|
(17) |
|
Incorporated by reference to the Registrants
Form 8-K
filed with the Securities and Exchange Commission on
December 13, 2005. |
|
(18) |
|
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. |
|
(19) |
|
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. |
49
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 2, 2008
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 2, 2008
|
|
|
|
|
|
/s/ David
W. Carlson
David
W. Carlson
|
|
Executive Vice President, Chief Financial Officer and Assistant
Secretary (Principal Financial Officer)
|
|
April 2, 2008
|
|
|
|
|
|
/s/ Robert
A. Lloyd
Robert
A. Lloyd
|
|
Senior Vice President, Chief Accounting Officer (Principal
Accounting Officer)
|
|
April 2, 2008
|
|
|
|
|
|
/s/ Daniel
A. DeMatteo
Daniel
A. DeMatteo
|
|
Vice Chairman and Chief Operating Officer and Director
|
|
April 2, 2008
|
|
|
|
|
|
/s/ Jerome
L. Davis
Jerome
L. Davis
|
|
Director
|
|
April 2, 2008
|
|
|
|
|
|
/s/ Steven
R. Koonin
Steven
R. Koonin
|
|
Director
|
|
April 2, 2008
|
|
|
|
|
|
/s/ Leonard
Riggio
Leonard
Riggio
|
|
Director
|
|
April 2, 2008
|
|
|
|
|
|
/s/ Michael
N. Rosen
Michael
N. Rosen
|
|
Director
|
|
April 2, 2008
|
|
|
|
|
|
/s/ Stephanie
M. Shern
Stephanie
M. Shern
|
|
Director
|
|
April 2, 2008
|
|
|
|
|
|
/s/ Stanley
P. Steinberg
Stanley
P. Steinberg
|
|
Director
|
|
April 2, 2008
|
50
|
|
|
|
|
|
|
Name
|
|
Capacity
|
|
Date
|
|
|
|
|
|
|
/s/ Gerald
R. Szczepanski
Gerald
R. Szczepanski
|
|
Director
|
|
April 2, 2008
|
|
|
|
|
|
/s/ Edward
A. Volkwein
Edward
A. Volkwein
|
|
Director
|
|
April 2, 2008
|
|
|
|
|
|
/s/ Lawrence
S. Zilavy
Lawrence
S. Zilavy
|
|
Director
|
|
April 2, 2008
|
51
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 2, 2008 and February 3,
2007 and the related consolidated statements of operations,
stockholders equity, and cash flows for the 52 week
period ended February 2, 2008, for the 53 week period
ended February 3, 2007 and for the 52 week period
ended January 28, 2006. In connection with our audits of
the financial statements, 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 are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements, 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. as of February 2, 2008 and
February 3, 2007, and the results of its operations and its
cash flows for the 52 week period ended February 2,
2008, for the 53 week period ended February 3, 2007
and for the 52 week period ended January 28, 2006, in
conformity with accounting principles generally accepted in the
United States of America.
Also, in our opinion, the financial statement schedule, when
considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
As discussed in Note 1 to the consolidated financial
statements, the Company changed its method of accounting for
uncertainty in income taxes recognized in accordance with the
provisions of FASB Interpretation No. 48 (As Amended),
Accounting for Uncertainty in Income Taxes (an interpretation
of FASB Statement No. 48), on February 4, 2007.
Also, as discussed in Note 1, in 2006 the Company adopted
Statement of Financial Accounting Standards (SFAS)
No. 123 (revised), Share-based Payment.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
GameStop Corp.s internal control over financial reporting
as of February 2, 2008, 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 March 31, 2008
expressed an unqualified opinion thereon.
BDO Seidman, LLP
Dallas, Texas
March 31, 2008
F-2
Report of
Independent Registered Public Accounting Firm
Board of Directors and Stockholders
GameStop Corp.
Grapevine, Texas
We have audited GameStop Corp.s internal control over
financial reporting as of February 2, 2008, based on
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria).
GameStop Corp.s management is responsible for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over
financial reporting, included under Item 9A of the Annual
Report on
Form 10-K,
Managements Report on Internal Control over Financial
Reporting. Our responsibility is to express an opinion on the
Companys internal control over financial reporting 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, assessing the risk
that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk. Our audit also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our
opinion.
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, GameStop Corp. maintained, in all material
respects, effective internal control over financial reporting as
of February 2, 2008, based on the COSO criteria.
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 2, 2008 and February 3, 2007, and the related
consolidated statements of operations, stockholders
equity, and cash flows for the 52 week period ended
February 2, 2008, for the 53 week period ended
February 3, 2007 and for the 52 week period ended
January 28, 2006. We have also audited the schedule listed
in Item 15(a)(2) of this
Form 10-K.
Our report dated March 31, 2008 expressed an unqualified
opinion on those consolidated financial statements and schedule.
BDO Seidman, LLP
Dallas, Texas
March 31, 2008
F-3
GAMESTOP
CORP.
|
|
|
|
|
|
|
|
|
|
|
February 2,
|
|
|
February 3,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
857,414
|
|
|
$
|
652,403
|
|
Receivables, net
|
|
|
56,019
|
|
|
|
34,268
|
|
Merchandise inventories, net
|
|
|
801,025
|
|
|
|
675,385
|
|
Prepaid expenses and other current assets
|
|
|
52,778
|
|
|
|
37,882
|
|
Prepaid taxes
|
|
|
|
|
|
|
5,545
|
|
Deferred taxes
|
|
|
27,481
|
|
|
|
34,858
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,794,717
|
|
|
|
1,440,341
|
|
|
|
|
|
|
|
|
|
|
Property and equipment:
|
|
|
|
|
|
|
|
|
Land
|
|
|
11,870
|
|
|
|
10,712
|
|
Buildings and leasehold improvements
|
|
|
378,611
|
|
|
|
305,806
|
|
Fixtures and equipment
|
|
|
538,738
|
|
|
|
425,841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
929,219
|
|
|
|
742,359
|
|
Less accumulated depreciation and amortization
|
|
|
417,550
|
|
|
|
285,896
|
|
|
|
|
|
|
|
|
|
|
Net property and equipment
|
|
|
511,669
|
|
|
|
456,463
|
|
|
|
|
|
|
|
|
|
|
Goodwill, net
|
|
|
1,402,440
|
|
|
|
1,403,907
|
|
Deferred financing fees
|
|
|
8,963
|
|
|
|
14,375
|
|
Deferred taxes
|
|
|
26,332
|
|
|
|
5,804
|
|
Other noncurrent assets
|
|
|
31,770
|
|
|
|
28,694
|
|
|
|
|
|
|
|
|
|
|
Total other assets
|
|
|
1,469,505
|
|
|
|
1,452,780
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,775,891
|
|
|
$
|
3,349,584
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
844,376
|
|
|
$
|
717,868
|
|
Accrued liabilities
|
|
|
409,878
|
|
|
|
357,016
|
|
Note payable, current portion
|
|
|
|
|
|
|
12,173
|
|
Taxes payable
|
|
|
6,303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
1,260,557
|
|
|
|
1,087,057
|
|
|
|
|
|
|
|
|
|
|
Senior notes payable, long-term portion, net
|
|
|
574,473
|
|
|
|
593,311
|
|
Senior floating rate notes payable, long-term portion
|
|
|
|
|
|
|
250,000
|
|
Deferred rent and other long-term liabilities
|
|
|
78,415
|
|
|
|
43,338
|
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities
|
|
|
652,888
|
|
|
|
886,649
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,913,445
|
|
|
|
1,973,706
|
|
|
|
|
|
|
|
|
|
|
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; 161,007 and 152,305 shares
issued and outstanding, respectively
|
|
|
161
|
|
|
|
152
|
|
Additional
paid-in-capital
|
|
|
1,208,474
|
|
|
|
1,021,903
|
|
Accumulated other comprehensive income
|
|
|
31,603
|
|
|
|
3,227
|
|
Retained earnings
|
|
|
622,208
|
|
|
|
350,596
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
1,862,446
|
|
|
|
1,375,878
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
3,775,891
|
|
|
$
|
3,349,584
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-4
GAMESTOP
CORP.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52 Weeks
|
|
|
53 Weeks
|
|
|
52 Weeks
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
February 2,
|
|
|
February 3,
|
|
|
January 28,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except per share data)
|
|
|
Sales
|
|
$
|
7,093,962
|
|
|
$
|
5,318,900
|
|
|
$
|
3,091,783
|
|
Cost of sales
|
|
|
5,280,255
|
|
|
|
3,847,458
|
|
|
|
2,219,753
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
1,813,707
|
|
|
|
1,471,442
|
|
|
|
872,030
|
|
Selling, general and administrative expenses
|
|
|
1,182,016
|
|
|
|
1,021,113
|
|
|
|
599,343
|
|
Depreciation and amortization
|
|
|
130,270
|
|
|
|
109,862
|
|
|
|
66,355
|
|
Merger-related expenses
|
|
|
|
|
|
|
6,788
|
|
|
|
13,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings
|
|
|
501,421
|
|
|
|
333,679
|
|
|
|
192,732
|
|
Interest income
|
|
|
(13,779
|
)
|
|
|
(11,338
|
)
|
|
|
(5,135
|
)
|
Interest expense
|
|
|
61,553
|
|
|
|
84,662
|
|
|
|
30,427
|
|
Merger-related interest expense
|
|
|
|
|
|
|
|
|
|
|
7,518
|
|
Debt extinguishment expense
|
|
|
12,591
|
|
|
|
6,059
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income tax expense
|
|
|
441,056
|
|
|
|
254,296
|
|
|
|
159,922
|
|
Income tax expense
|
|
|
152,765
|
|
|
|
96,046
|
|
|
|
59,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
288,291
|
|
|
$
|
158,250
|
|
|
$
|
100,784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per common share basic
|
|
$
|
1.82
|
|
|
$
|
1.06
|
|
|
$
|
0.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock basic
|
|
|
158,226
|
|
|
|
149,924
|
|
|
|
115,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per common share diluted
|
|
$
|
1.75
|
|
|
$
|
1.00
|
|
|
$
|
0.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock diluted
|
|
|
164,844
|
|
|
|
158,284
|
|
|
|
124,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-5
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 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
|
|
Cumulative effect of change in accounting principle
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,679
|
)
|
|
|
|
|
|
|
(16,679
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at February 4, 2007, adjusted
|
|
|
152,305
|
|
|
|
152
|
|
|
|
1,021,903
|
|
|
|
3,227
|
|
|
|
333,917
|
|
|
|
|
|
|
|
1,359,199
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings for the 52 weeks ended February 2, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
288,291
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
316,667
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
26,911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,911
|
|
Exercise of employee stock options and issuance of shares upon
vesting of restricted stock grant (including tax benefit of
$94,786)
|
|
|
8,702
|
|
|
|
9
|
|
|
|
159,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
159,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at February 2, 2008
|
|
|
161,007
|
|
|
$
|
161
|
|
|
$
|
1,208,474
|
|
|
$
|
31,603
|
|
|
$
|
622,208
|
|
|
$
|
|
|
|
$
|
1,862,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-6
GAMESTOP
CORP.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52 Weeks
|
|
|
53 Weeks
|
|
|
52 Weeks
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
February 2,
|
|
|
February 3,
|
|
|
January 28,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
288,291
|
|
|
$
|
158,250
|
|
|
$
|
100,784
|
|
Adjustments to reconcile net earnings to net cash flows provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization (including amounts in cost of
sales)
|
|
|
131,277
|
|
|
|
110,176
|
|
|
|
66,659
|
|
Provision for inventory reserves
|
|
|
51,879
|
|
|
|
50,779
|
|
|
|
25,103
|
|
Amortization and retirement of deferred financing fees
|
|
|
5,669
|
|
|
|
4,595
|
|
|
|
1,229
|
|
Amortization and retirement of original issue discount on senior
notes
|
|
|
1,162
|
|
|
|
1,523
|
|
|
|
316
|
|
Stock-based compensation expense
|
|
|
26,911
|
|
|
|
20,978
|
|
|
|
347
|
|
Deferred taxes
|
|
|
(13,151
|
)
|
|
|
(3,080
|
)
|
|
|
(3,675
|
)
|
Excess tax benefits realized from exercise of stock-based awards
|
|
|
(93,322
|
)
|
|
|
(43,758
|
)
|
|
|
12,308
|
|
Loss on disposal of property and equipment
|
|
|
8,205
|
|
|
|
4,261
|
|
|
|
11,648
|
|
Increase in deferred rent and other long-term liabilities
|
|
|
8,501
|
|
|
|
9,702
|
|
|
|
3,669
|
|
Increase in liability to landlords for tenant allowances, net
|
|
|
5,208
|
|
|
|
1,602
|
|
|
|
202
|
|
Change in the value of foreign exchange contracts
|
|
|
5,735
|
|
|
|
(4,450
|
)
|
|
|
(2,421
|
)
|
Changes in operating assets and liabilities, net of business
acquired
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables, net
|
|
|
(21,751
|
)
|
|
|
2,866
|
|
|
|
(9,995
|
)
|
Merchandise inventories
|
|
|
(177,519
|
)
|
|
|
(118,417
|
)
|
|
|
(91,363
|
)
|
Prepaid expenses and other current assets
|
|
|
(12,535
|
)
|
|
|
(21,543
|
)
|
|
|
19,484
|
|
Prepaid taxes and taxes payable
|
|
|
114,498
|
|
|
|
52,663
|
|
|
|
9,069
|
|
Accounts payable and accrued liabilities
|
|
|
173,667
|
|
|
|
197,306
|
|
|
|
148,054
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows provided by operating activities
|
|
|
502,725
|
|
|
|
423,453
|
|
|
|
291,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(175,569
|
)
|
|
|
(133,930
|
)
|
|
|
(110,696
|
)
|
Merger with Electronics Boutique, net of cash acquired
|
|
|
|
|
|
|
|
|
|
|
(886,116
|
)
|
Acquisitions, net of cash acquired
|
|
|
1,061
|
|
|
|
(11,303
|
)
|
|
|
|
|
Sale of assets held for sale
|
|
|
|
|
|
|
19,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows used in investing activities
|
|
|
(174,508
|
)
|
|
|
(125,936
|
)
|
|
|
(996,812
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
(270,000
|
)
|
|
|
(100,000
|
)
|
|
|
|
|
Repayment of debt relating to the repurchase of common stock
from Barnes & Noble
|
|
|
(12,173
|
)
|
|
|
(12,173
|
)
|
|
|
(12,173
|
)
|
Repayment of other debt
|
|
|
|
|
|
|
(9,441
|
)
|
|
|
(956
|
)
|
Issuance of shares relating to stock options
|
|
|
64,883
|
|
|
|
33,861
|
|
|
|
20,800
|
|
Excess tax benefits realized from exercise of stock-based awards
|
|
|
93,322
|
|
|
|
43,758
|
|
|
|
|
|
Net increase in other noncurrent assets and deferred financing
fees
|
|
|
(7,870
|
)
|
|
|
(2,609
|
)
|
|
|
(13,466
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows provided by (used in) financing activities
|
|
|
(131,838
|
)
|
|
|
(46,604
|
)
|
|
|
935,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange rate effect on cash and cash equivalents
|
|
|
8,632
|
|
|
|
(103
|
)
|
|
|
318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
205,011
|
|
|
|
250,810
|
|
|
|
230,601
|
|
Cash and cash equivalents at beginning of period
|
|
|
652,403
|
|
|
|
401,593
|
|
|
|
170,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
857,414
|
|
|
$
|
652,403
|
|
|
$
|
401,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-7
GAMESTOP
CORP.
|
|
1.
|
Summary
of Significant Accounting Policies
|
Background
and Basis of Presentation
GameStop Corp., (the Company or
GameStop), 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 5,264 at February 2, 2008, 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 Company is a Delaware corporation, formerly known as GSC
Holdings Corp., formed for the purpose of consummating the
business combination (the merger or
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 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 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 years ended
February 2, 2008 and February 3, 2007 include
52 weeks and 53 weeks, respectively, for both
Historical GameStop and EB. Note 2 provides summary
unaudited pro forma information for the 52 weeks ended
January 28, 2006.
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. 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-8
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 2007 consisted of the 52 weeks ending on
February 2, 2008. Fiscal 2006 consisted of the
53 weeks ending on February 3, 2007. Fiscal 2005
consisted of the 52 weeks ending on January 28, 2006.
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 with highly rated
commercial banks and money market investment funds holding
direct U.S. Treasury obligations.
Merchandise
Inventories
The Companys merchandise inventories are carried at the
lower of cost or market using the average cost method. Under the
average cost method, as new product is received from vendors,
its current cost is added to the existing cost of product
on-hand and this amount is re-averaged over the cumulative
units. 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. The Companys
ability to gauge these factors is dependent upon the
Companys ability to forecast customer demand and to
provide a well-balanced merchandise assortment. Inventory is
adjusted based on anticipated physical inventory losses or
shrinkage and actual losses resulting from periodic physical
inventory counts. Inventory reserves as of February 2, 2008
and February 3, 2007 were $59,698 and $53,816, 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 2, 2008 which were not related to the mergers have
not been material.
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 (SEC) Staff Accounting
F-9
GAMESTOP
CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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
GameStop Group Limited in 2003. Goodwill in the amount of
$1,074,937 was recorded in connection with the mergers. Goodwill
in the amount of $6,616 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.
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 evaluate goodwill for impairment on
at least an annual basis. 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 the Company analyzes
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, in
accordance with the requirements of SFAS 142, the Company
completed its annual impairment test of goodwill on the first
day of the fourth quarter of fiscal 2005, fiscal 2006 and fiscal
2007 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).
Revenues do not include sales or other taxes collected from
customers.
Cost
of Sales and Selling, General and Administrative Expenses
Classification
The classification of cost of sales and selling, general and
administrative expenses varies across the retail industry. 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
52 weeks ended February 2, 2008, the 53 weeks
ended February 3, 2007 and the 52 weeks ended
January 28, 2006, these purchasing, receiving and
distribution costs amounted to $43,928, $35,903 and $20,826,
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 52 weeks ended February 2,
2008, the 53 weeks ended February 3, 2007 and the
52 weeks ended January 28, 2006, these processing fees
amounted to $55,215, $40,877 and $20,905, respectively.
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.
F-10
GAMESTOP
CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
Advertising
Expenses
The Company expenses advertising costs for newspapers and other
media when the advertising takes place. Advertising expenses for
television, newspapers and other media during the 52 weeks
ended February 2, 2008, the 53 weeks ended
February 3, 2007 and the 52 weeks ended
January 28, 2006 were $26,243, $16,043 and $12,448,
respectively. During fiscal 2007, the Company launched a new
marketing campaign for television, radio and print to promote
the GameStop brand and its brand tagline, Power to the
Players.
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. On February 4, 2007, the Company
adopted the provisions of FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, to account
for uncertainty in income taxes recognized in the Companys
financial statements (see Note 12).
U.S. income taxes have not been provided on $142,504 of
undistributed earnings of foreign subsidiaries as of
February 2, 2008. 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
The Companys 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) is in conformance with
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 leases that contain predetermined fixed
escalations of the minimum rent, the Company recognizes the
related rent expense on a straight-line basis and includes the
impact of escalating rents for periods in which it is reasonably
assured of exercising lease options and the Company includes in
the lease term any period during which the Company is not
obligated to pay rent while the store is being constructed.
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
F-11
GAMESTOP
CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 $8,575, ($962) and $2,606
for the 52 weeks ended February 2, 2008, the
53 weeks ended February 3, 2007 and the 52 weeks
ended January 28, 2006, respectively. The increase in
foreign currency gains in fiscal 2007 is primarily due to the
decrease in the value of the U.S. dollar compared to the
functional currencies in the countries the Company operates in
internationally, primarily the Euro, the Canadian dollar and the
Australian dollar.
The merger with Electronics Boutique has significantly increased
the Companys exposure to foreign currency fluctuations
because a larger amount of the Companys business is now
transacted in foreign currencies. While Historical GameStop
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 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 2, 2008 was a liability of $7,627, of which $8,649
is included in accrued liabilities, and $1,041 is included in
other long-term liabilities, with offsetting amounts of $2,052
included in prepaid expenses and other current assets and $11
included in other non-current assets in the accompanying
consolidated balance sheet. 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 noncurrent assets in the accompanying consolidated balance
sheet.
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. 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
F-12
GAMESTOP
CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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. The Company 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 Company adopted the provisions of
SFAS 123(R) using the modified prospective application
method, and accordingly, the Company has 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
|
|
|
|
Ended
|
|
|
|
January 28,
|
|
|
|
2006
|
|
|
|
(In thousands, except
|
|
|
|
per share data)
|
|
|
Net earnings, as reported
|
|
$
|
100,784
|
|
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards, net of
related tax effects
|
|
|
6,666
|
|
|
|
|
|
|
Pro forma net earnings
|
|
$
|
94,118
|
|
|
|
|
|
|
Net earnings per common share basic, as reported
|
|
$
|
0.87
|
|
|
|
|
|
|
Net earnings per common share basic, pro forma
|
|
$
|
0.81
|
|
|
|
|
|
|
Net earnings per common share diluted, as reported
|
|
$
|
0.81
|
|
|
|
|
|
|
Net earnings per common share diluted, pro forma
|
|
$
|
0.75
|
|
|
|
|
|
|
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
F-13
GAMESTOP
CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
options granted during the 52 weeks ended February 2,
2008, 53 weeks ended February 3, 2007 and the
52 weeks ended January 28, 2006 were estimated at
$10.16, $8.42 and $4.42, respectively, using the following
assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52 Weeks
|
|
|
53 Weeks
|
|
|
52 Weeks
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
February 2,
|
|
|
February 3,
|
|
|
January 28,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Volatility
|
|
|
40.5
|
%
|
|
|
54.5
|
%
|
|
|
57.3
|
%
|
Risk-free interest rate
|
|
|
4.8
|
%
|
|
|
4.6
|
%
|
|
|
4.2
|
%
|
Expected life (years)
|
|
|
4.0
|
|
|
|
3.0
|
|
|
|
6.0
|
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
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 accrued liabilities reported in
the accompanying consolidated balance sheets approximate fair
value due to the short-term maturities of these assets and
liabilities. The fair value of the Companys senior notes
payable in the accompanying consolidated balance sheets is
estimated based on recent quotes from brokers. As of
February 2, 2008, the senior notes payable had a carrying
value of $574,473 and a fair value of $591,600. As of
February 3, 2007, the senior notes payable and senior
floating rate notes payable had a carrying value of $593,311 and
$250,000, respectively, and a fair value of $640,500 and
$260,625, respectively.
Guarantees
The Company had bank guarantees relating to international store
leases totaling $10,670 as of February 2, 2008.
Vendor
Concentration
The Companys largest vendors worldwide are Nintendo, Sony
Computer Entertainment, Microsoft and Electronic Arts, Inc.,
which accounted for 21%, 17%, 16% and 11%, respectively, of the
Companys new product purchases in fiscal 2007 and 11%,
13%, 14% and 10%, respectively, 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, Inc. which accounted for 18%, 13%
and 11%, respectively, of the Companys new product
purchases.
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
F-14
GAMESTOP
CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 March 2008, the FASB issued Statement of Financial Accounting
Standards No. 161, Disclosures about Derivative
Instruments and Hedging Activities an amendment of
FASB Statement No. 133 (SFAS 161).
SFAS 161 requires enhanced disclosures about how and why an
entity uses derivative instruments, how derivative instruments
and related hedged items are accounted for and their effect on
an entitys financial position, financial performance, and
cash flows. SFAS 161 is effective for the Company on
February 1, 2009. The Company is currently evaluating the
impact that the adoption of SFAS 161 will have on its
consolidated financial statements.
In December 2007, the FASB issued Statement of Financial
Accounting Standards No. 141 (revised 2007), Business
Combinations, (SFAS 141(R)).
SFAS 141(R) amends the principles and requirements for how
an acquirer recognizes and measures in its financial statements
the identifiable assets acquired, the liabilities assumed, any
noncontrolling interest in the acquiree and the goodwill
acquired. SFAS 141(R) also establishes disclosure
requirements to enable the evaluation of the nature and
financial effects of the business combination. SFAS 141(R)
is effective for the Company on February 1, 2009, and the
Company will apply prospectively SFAS 141(R) to all
business combinations subsequent to the effective date.
In December 2007, the FASB issued Statement of Financial
Accounting Standards No. 160, Noncontrolling Interests
in Consolidated Financial Statements an amendment of
Accounting Research Bulletin No. 51
(SFAS 160). SFAS 160 establishes
accounting and reporting standards for the noncontrolling
interest in a subsidiary and for the deconsolidation of a
subsidiary. SFAS 160 also establishes disclosure
requirements that clearly identify and distinguish between the
controlling and noncontrolling interests and requires the
separate disclosure of income attributable to controlling and
noncontrolling interests. SFAS 160 is effective for fiscal
years beginning after December 15, 2008. The Company is
currently evaluating the impact that the adoption of
SFAS 160 will have on the Companys consolidated
financial statements.
In February 2007, the FASB issued Statement of Financial
Accounting Standards No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities
(SFAS 159). This statement permits entities
the option to measure many financial instruments and certain
other items at fair value at specific election dates. Unrealized
gains and losses on items for which the fair value option has
been elected are reported in earnings. SFAS 159 was
effective for the Company on February 3, 2008. The adoption
of SFAS 159 did not have a material impact on the
Companys consolidated financial statements.
In September 2006, the FASB issued Statement of Financial
Accounting Standards No. 157, Fair Value Measurements
(SFAS 157), which defines fair value,
establishes a framework for measuring fair value, and expands
disclosures about fair value measurements. SFAS 157 applies
to other accounting pronouncements that require or permit fair
value measurements. The Company adopted SFAS 157 on
February 3, 2008 as required for its financial assets and
liabilities. However, in February 2008, the FASB released a FASB
Staff Position, FSP
FAS 157-2,
Effective Date of FASB Statement No. 157, which
delayed the effective date of SFAS 157 for all
non-financial assets and non-financial liabilities, except those
that are recognized or disclosed at fair value in the financial
statements on a recurring basis. The adoption of SFAS 157
for the Companys financial assets and liabilities did not
have a material impact on the Companys financial condition
and results of operations. The Company does not believe the
adoption of SFAS 157 for its non-financial assets and
liabilities, effective February 1, 2009, will have a
material impact on its consolidated financial statements.
F-15
GAMESTOP
CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 following table summarizes unaudited pro forma financial
information assuming the mergers had occurred on the first day
of the 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 the
Companys 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
|
|
|
|
Ended
|
|
|
|
January 28,
|
|
|
|
2006
|
|
|
|
(In thousands, except
|
|
|
|
per share data)
|
|
|
Sales
|
|
$
|
4,393,890
|
|
Cost of sales
|
|
|
3,154,928
|
|
|
|
|
|
|
Gross profit
|
|
|
1,238,962
|
|
Selling, general and administrative expenses
|
|
|
930,767
|
|
Depreciation and amortization
|
|
|
94,288
|
|
|
|
|
|
|
Operating earnings
|
|
|
213,907
|
|
Interest income
|
|
|
(6,717
|
)
|
Interest expense
|
|
|
85,056
|
|
|
|
|
|
|
Earnings before income tax expense
|
|
|
135,568
|
|
Income tax expense
|
|
|
49,482
|
|
|
|
|
|
|
Net earnings
|
|
$
|
86,086
|
|
|
|
|
|
|
Net earnings per common share basic
|
|
$
|
0.60
|
|
|
|
|
|
|
Weighted average shares of common stock basic
|
|
|
143,850
|
|
|
|
|
|
|
Net earnings per common share diluted
|
|
$
|
0.56
|
|
|
|
|
|
|
Weighted average shares of common stock diluted
|
|
|
152,982
|
|
|
|
|
|
|
F-16
GAMESTOP
CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Merger-related expenses shown in the statement of operations
include costs believed to be of a one-time or short-term nature
associated with integrating the operations of Historical
GameStop and EB, including $6,788 and $13,600 for the
53 weeks ended February 3, 2007 and the 52 weeks
ended January 28, 2006, respectively, included in operating
earnings and $7,518 included in interest expense in the
52 weeks ended January 28, 2006. The Company completed
all integration activities in fiscal 2006.
On January 13, 2007, the Company purchased Game Brands Inc.
(Game Brands), 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 was
recorded as goodwill in fiscal 2006. In addition, merger-related
costs and liabilities of $612 related to the Game Brands
purchase were accrued for and included in accrued liabilities in
the February 3, 2007 consolidated balance sheet. As of
February 2, 2008, the cash payments made for the Game
Brands merger costs were $206 and the remaining merger accrual
balance of $406 was reversed as a purchase price adjustment to
reduce goodwill. Additional purchase price adjustments to reduce
goodwill for Game Brands were $1,061 during fiscal 2007. The pro
forma effect assuming the acquisition of Game Brands at the
beginning of fiscal 2006 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. The Companys accounting for
cooperative advertising arrangements and other vendor marketing
programs, in accordance with FASB Emerging Issues Task Force
Issue 02-16,
results in a portion of the consideration received from the
Companys vendors reducing the product costs in inventory
rather than as an offset to the Companys 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 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.
Specific, incremental and identifiable advertising and
promotional costs were $76,074 in the 52 weeks ended
February 2, 2008, $49,585 in the 53 weeks ended
February 3, 2007 and $32,161 in the 52 weeks ended
January 28, 2006, respectively. Vendor allowances received
in excess of advertising expenses were recorded as a reduction
of cost of sales of $92,425 for the 52 weeks ended
February 2, 2008, $117,082 for the 53 weeks ended
February 3, 2007 and $74,690 for the 52 weeks ended
January 28, 2006, respectively. The amount recognized as
income related to the capitalization of excess vendor allowances
was $6,113 for the 52 weeks ended February 2, 2008.
The amounts deferred as a reduction in inventory were $1,377 and
$4,150 for the 53 weeks ended February 3, 2007 and the
52 weeks ended January 28, 2006, respectively.
|
|
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
F-17
GAMESTOP
CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
per Share. A reconciliation of shares used in calculating
basic and diluted net earnings per common share is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52 Weeks
|
|
|
53 Weeks
|
|
|
52 Weeks
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
February 2,
|
|
|
February 3,
|
|
|
January 28,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except per share data)
|
|
|
Net earnings
|
|
$
|
288,291
|
|
|
$
|
158,250
|
|
|
$
|
100,784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
158,226
|
|
|
|
149,924
|
|
|
|
115,840
|
|
Dilutive effect of options and warrants on common stock
|
|
|
6,618
|
|
|
|
8,360
|
|
|
|
9,132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares and dilutive potential common shares
|
|
|
164,844
|
|
|
|
158,284
|
|
|
|
124,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.82
|
|
|
$
|
1.06
|
|
|
$
|
0.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
1.75
|
|
|
$
|
1.00
|
|
|
$
|
0.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
|
52 Weeks Ended February 2, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
53 Weeks Ended February 3, 2007
|
|
|
16
|
|
|
|
|
|
|
|
2009
|
|
52 Weeks Ended January 28, 2006
|
|
|
240
|
|
|
$
|
17.94
|
|
|
|
2015
|
|
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. An allowance for doubtful accounts has been
recorded to reduce receivables to an amount expected to be
collectible. Receivables consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
February 2,
|
|
|
February 3,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Bankcard receivables
|
|
$
|
33,667
|
|
|
$
|
22,081
|
|
Other receivables
|
|
|
25,465
|
|
|
|
16,019
|
|
Allowance for doubtful accounts
|
|
|
(3,113
|
)
|
|
|
(3,832
|
)
|
|
|
|
|
|
|
|
|
|
Total receivables, net
|
|
$
|
56,019
|
|
|
$
|
34,268
|
|
|
|
|
|
|
|
|
|
|
F-18
GAMESTOP
CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Accrued liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
February 2,
|
|
|
February 3,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Customer liabilities
|
|
$
|
145,626
|
|
|
$
|
111,213
|
|
Deferred revenue
|
|
|
47,423
|
|
|
|
56,049
|
|
Accrued rent
|
|
|
22,698
|
|
|
|
16,074
|
|
Accrued interest
|
|
|
19,181
|
|
|
|
21,240
|
|
Employee compensation and related taxes
|
|
|
58,445
|
|
|
|
47,371
|
|
Other taxes
|
|
|
34,004
|
|
|
|
34,851
|
|
Other accrued liabilities
|
|
|
82,501
|
|
|
|
70,218
|
|
|
|
|
|
|
|
|
|
|
Total accrued liabilities
|
|
$
|
409,878
|
|
|
$
|
357,016
|
|
|
|
|
|
|
|
|
|
|
|
|
7.
|
Goodwill,
Intangible Assets and Deferred Financing Fees
|
The changes in the carrying amount of goodwill for the
Companys business segments for the 53 weeks ended
February 3, 2007 and the 52 weeks ended
February 2, 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
Canada
|
|
|
Australia
|
|
|
Europe
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at February 3, 2007
|
|
$
|
1,098,089
|
|
|
$
|
116,818
|
|
|
$
|
147,224
|
|
|
$
|
41,776
|
|
|
$
|
1,403,907
|
|
Adjustment relating to the acquisition of Game Brands Inc.
|
|
|
(1,467
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,467
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at February 2, 2008
|
|
$
|
1,096,622
|
|
|
$
|
116,818
|
|
|
$
|
147,224
|
|
|
$
|
41,776
|
|
|
$
|
1,402,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no impairments to goodwill during the 52 weeks
ended February 2, 2008 and the 53 weeks ended
February 3, 2007.
Intangible assets consist of 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 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 and seven years to match the terms of
the revolving credit facility and the senior notes,
respectively. The deferred financing fees shown in the
consolidated balance sheet for February 3, 2007 included
deferred financing fees associated with the senior floating rate
notes payable which were repurchased or redeemed in the
52 weeks ended February 2, 2008. The deferred
financing fees associated with the senior floating rate notes
were being amortized over six years to match the term of the
underlying notes and any remaining deferred financing fees were
written-off as the underlying notes were repurchased or redeemed.
F-19
GAMESTOP
CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The changes in the carrying amount of deferred financing fees
and intangible assets for the 53 weeks ended
February 3, 2007 and the 52 weeks ended
February 2, 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
Intangible
|
|
|
|
Financing Fees
|
|
|
Assets
|
|
|
|
(In thousands)
|
|
|
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
|
|
Addition for revolving credit facility renewal and extension in
2007
|
|
|
263
|
|
|
|
|
|
Write-off of deferred financing fees remaining on repurchased
senior notes and senior floating rate notes (see Note 8)
|
|
|
(3,416
|
)
|
|
|
|
|
Amortization for the 52 weeks ended February 2, 2008
|
|
|
(2,259
|
)
|
|
|
(4,646
|
)
|
|
|
|
|
|
|
|
|
|
Balance at February 2, 2008
|
|
$
|
8,963
|
|
|
$
|
9,899
|
|
|
|
|
|
|
|
|
|
|
The gross carrying value and accumulated amortization of
deferred financing fees as of February 2, 2008 were $20,318
and $11,355, 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 2009
|
|
$
|
1,957
|
|
|
$
|
3,599
|
|
January 2010
|
|
|
1,948
|
|
|
|
2,705
|
|
January 2011
|
|
|
1,946
|
|
|
|
1,891
|
|
January 2012
|
|
|
1,946
|
|
|
|
832
|
|
January 2013
|
|
|
894
|
|
|
|
396
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,691
|
|
|
$
|
9,423
|
|
|
|
|
|
|
|
|
|
|
In October 2005, in connection with the merger with EB, 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 its U.S. subsidiaries, including
limitations on asset sales, additional liens and the incurrence
of additional indebtedness.
In April 2007, the Company amended the Revolver to extend the
maturity date from October 11, 2010 to April 25, 2012,
reduce the LIBO interest rate margin, reduce and fix the rate of
the unused commitment fee and modify or delete certain other
covenants.
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
F-20
GAMESTOP
CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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) 1.00% to 1.50% above the LIBO rate. The
applicable margin is determined quarterly as a function of the
Companys consolidated leverage ratio. As of
February 2, 2008, the applicable margin was 0.0% for prime
rate loans and 1.00% for LIBO rate loans. In addition, the
Company is required to pay a commitment fee of 0.25% for any
unused portion of the total commitment under the Revolver.
As of February 2, 2008, there were no borrowings
outstanding under the Revolver and letters of credit outstanding
totaled $6,796.
In September 2007, the Companys Luxembourg subsidiary
entered into a discretionary, $20,000 Uncommitted Line of Credit
(the Line of Credit) with Bank of America. There is
no term associated with the Line of Credit and Bank of America
may withdraw the facility at any time without notice. The Line
of Credit will be made available to the Companys foreign
subsidiaries for use primarily as a bank overdraft facility for
short-term liquidity needs and for the issuance of bank
guarantees and letters of credit to support operations.
As of February 2, 2008, there were no borrowings
outstanding under the Line of Credit and bank guarantees
outstanding were $2,815.
On September 28, 2005, the Company, along with GameStop,
Inc. 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
U.S. 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 merger.
The offering of the Notes was conducted in a private transaction
under Rule 144A under the 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 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 in May 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.
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 2, 2008, the unamortized original issue discount
was $5,527. The rate of interest on the Senior Floating Rate
Notes prior to their redemption on October 1, 2007 was
9.2350% per annum.
F-21
GAMESTOP
CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 2, 2008, the Company was in compliance with
all covenants associated with the Revolver and the Indenture.
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 the 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 the 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 was $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.
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 Notes and Senior Floating Rate
Notes. The timing and amount of the repurchases were determined
by the Companys management based on their evaluation of
market conditions and other factors. As of February 2,
2008, the Company had repurchased the additional $150,000 of the
Notes, having acquired $20,000 of its Senior Notes and $130,000
of its Senior Floating Rate Notes, and delivered the Notes to
the Trustee for cancellation. The associated loss on retirement
of this debt was $8,751, 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.
On June 28, 2007, the Company announced that its Board of
Directors authorized the redemption of the remaining $120,000 of
Senior Floating Rate Notes outstanding. The Company redeemed the
Senior Floating Rate Notes on October 1, 2007 at the
redemption price specified by the Senior Floating Rate Notes of
102.0%, plus all accrued and unpaid interest through the
redemption date. The Company incurred a one-time pre-tax charge
of $3,840 associated with the redemption, which represents a
$2,400 redemption premium and $1,440 to recognize unamortized
deferred financing costs.
Subsequently, on February 7, 2008, the Company announced
that its Board of Directors authorized the buyback of up to an
aggregate of an additional $130,000 of its 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 $24,697 of its Senior Notes pursuant
to this new authorization and delivered the Senior Notes to the
Trustee for cancellation. The associated loss on retirement of
debt is $1,867, which consists of the
F-22
GAMESTOP
CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
premium paid to retire the Senior Notes and the write-off of the
deferred financing fees and the original issue discount on the
Senior Notes.
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 stock held by Barnes & Noble.
The note was unsecured and bore interest at 5.5% per annum,
payable with each principal installment. Scheduled principal
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. The final payment of $12,173, satisfying
the promissory note in full, was made in October 2007.
Maturities on debt, gross of the unamortized original issue
discount of $5,527 on the Senior Notes, are as follows:
|
|
|
|
|
Year Ended
|
|
Amount
|
|
|
|
(In thousands)
|
|
|
January 2009
|
|
$
|
|
|
January 2010
|
|
|
|
|
January 2011
|
|
|
|
|
January 2012
|
|
|
|
|
January 2013
|
|
|
580,000
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
$
|
580,000
|
|
|
|
|
|
|
Comprehensive income is net earnings, plus certain other items
that are recorded directly to stockholders equity and
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52 Weeks
|
|
|
53 Weeks
|
|
|
52 Weeks
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
February 2,
|
|
|
February 3,
|
|
|
January 28,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Net earnings
|
|
$
|
288,291
|
|
|
$
|
158,250
|
|
|
$
|
100,784
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
28,376
|
|
|
|
2,341
|
|
|
|
319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
$
|
316,667
|
|
|
$
|
160,591
|
|
|
$
|
101,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
GAMESTOP
CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Approximate rental expenses under operating leases were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52 Weeks
|
|
|
53 Weeks
|
|
|
52 Weeks
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
February 2,
|
|
|
February 3,
|
|
|
January 28,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Minimum
|
|
$
|
255,259
|
|
|
$
|
226,974
|
|
|
$
|
126,562
|
|
Percentage rentals
|
|
|
19,968
|
|
|
|
13,819
|
|
|
|
8,620
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
275,227
|
|
|
$
|
240,793
|
|
|
$
|
135,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future minimum annual rentals, excluding percentage rentals,
required under leases that had initial, noncancelable lease
terms greater than one year, as of February 2, 2008 are
approximately:
|
|
|
|
|
Year Ended
|
|
Amount
|
|
|
|
(In thousands)
|
|
|
January 2009
|
|
$
|
261,433
|
|
January 2010
|
|
|
221,360
|
|
January 2011
|
|
|
172,656
|
|
January 2012
|
|
|
132,407
|
|
January 2013
|
|
|
94,014
|
|
Thereafter
|
|
|
136,402
|
|
|
|
|
|
|
|
|
$
|
1,018,272
|
|
|
|
|
|
|
|
|
11.
|
Commitments
and Contingencies
|
Contingencies
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, 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. Moore was found guilty
of capital murder in a criminal trial and was sentenced to death
in August 2005.
The Defendants filed a motion to dismiss the case on various
grounds, which was heard in November 2005 and was denied. The
Alabama Supreme Court denied the Defendants request to
appeal and discovery was ordered to proceed. The Courts
scheduling order anticipated a Frye hearing on April 6,
2007, at which plaintiffs causation theory and
experts credentials were to be challenged. However, that
hearing did not take place and plaintiffs Alabama and
Florida counsel withdrew. New Alabama counsel has entered their
appearance for plaintiffs and a new scheduling order is expected
to be entered by the Court, which we believe will set a new Frye
hearing date, a new close of discovery date and a new trial
date. The Company does not believe there is sufficient
information to estimate the amount of the possible loss, if any,
resulting from the lawsuit.
In the ordinary course of the Companys 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 financial
condition or results of operations.
In 2003, the Company purchased a 51% controlling interest in
GameStop Group Limited. Under the terms of the purchase
agreement, the individual owners of the remaining 49% interest
have the ability to require the
F-24
GAMESTOP
CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Company to purchase their remaining shares in incremental
percentages at a price to be determined based partially on the
Companys price to earnings ratio and GameStop Group
Limiteds earnings. No additional shares have been
purchased by the Company to date. The Company already
consolidates the results of GameStop Group Limited; therefore,
any additional amounts acquired will not have a material effect
on the Companys financial statements.
The provision for income tax consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52 Weeks
|
|
|
53 Weeks
|
|
|
52 Weeks
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
February 2,
|
|
|
February 3,
|
|
|
January 28,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Current tax expense (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
34,107
|
|
|
$
|
32,127
|
|
|
$
|
40,251
|
|
State
|
|
|
5,149
|
|
|
|
2,370
|
|
|
|
2,300
|
|
Foreign
|
|
|
31,874
|
|
|
|
18,894
|
|
|
|
7,954
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71,130
|
|
|
|
53,391
|
|
|
|
50,505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax expense (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(2,582
|
)
|
|
|
571
|
|
|
|
(3,093
|
)
|
State
|
|
|
(1,805
|
)
|
|
|
(2,149
|
)
|
|
|
(894
|
)
|
Foreign
|
|
|
(8,764
|
)
|
|
|
(1,502
|
)
|
|
|
312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,151
|
)
|
|
|
(3,080
|
)
|
|
|
(3,675
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge in lieu of income taxes, relating to the tax effect of
stock-based awards tax deduction
|
|
|
94,786
|
|
|
|
45,735
|
|
|
|
12,308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense
|
|
$
|
152,765
|
|
|
$
|
96,046
|
|
|
$
|
59,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of earnings (loss) before income tax expense
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52 Weeks
|
|
|
53 Weeks
|
|
|
52 Weeks
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
February 2,
|
|
|
February 3,
|
|
|
January 28,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
United States
|
|
$
|
364,929
|
|
|
$
|
211,814
|
|
|
$
|
142,362
|
|
International
|
|
|
76,127
|
|
|
|
42,482
|
|
|
|
17,560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
441,056
|
|
|
$
|
254,296
|
|
|
$
|
159,922
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-25
GAMESTOP
CORP.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The difference in income tax provided and the amounts determined
by applying the statutory rate to income before income taxes
resulted from the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52 Weeks
|
|
|
53 Weeks
|
|
|
52 Weeks
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
February 2,
|
|
|
February 3,
|
|
|
January 28,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Federal statutory tax rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State income taxes, net of federal effect
|
|
|
0.5
|
|
|
|
2.0
|
|
|
|
1.1
|
|
Foreign income taxes
|
|
|
(0.8
|
)
|
|
|
0.7
|
|
|
|
1.4
|
|
Other (including permanent differences)
|
|
|
(0.1
|
)
|
|
|
0.1
|
|
|
|
(0.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34.6
|
%
|
|
|
37.8
|
%
|
|
|
37.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys effective tax rate decreased from 37.8% in
the 53 weeks ended February 3, 2007 to 34.6% in the
52 weeks ended February 2, 2008 primarily due to the
release of valuation allowances on foreign net operating losses
and the recognition of foreign tax credits not previously
benefited. Valuation allowances were recorded in earlier years
against foreign net operating losses generated in subsidiaries
for which profitability could not be reasonably foreseen. The
valuation allowances on foreign net operating losses were
released during the current year upon such subsidiaries
attaining profitability.
Differences between financial accounting principles and tax laws
cause differences between the bases of certain assets and
liabilities for financial reporting purposes and tax purposes.
The tax effects of these differences, to the extent they are
temporary, are recorded as deferred tax assets and liabilities
under SFAS 109 and consisted of the following components:
|
|
|
|
|
|
|
|
|
|
|
February 2,
|
|
|
February 3,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Deferred tax asset:
|
|
|
|
|
|
|
|
|
Fixed assets
|
|
$
|
21,395
|
|
|
$
|
12,202
|
|
Inventory obsolescence reserve
|
|
|
16,823
|
|
|
|
14,573
|
|
Deferred rents
|
|
|
11,585
|
|
|
|
8,131
|
|
Stock-based compensation
|
|
|
16,347
|
|
|
|
7,842
|
|
Net operating losses
|
|
|
17,801
|
|
|
|
12,243
|
|
Other
|
|
|
12,455
|
|
|
|
13,151
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
96,406
|
|
|
|
68,142
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
(30,280
|
)
|
|
|
(23,504
|
)
|
Prepaid expenses
|
|
|
(4,110
|
)
|
|
|
(2,664
|
)
|
Other
|
|
|
(8,203
|
)
|
|
|
(1,312
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(42,593
|
)
|
|
|
(27,480
|
)
|
|
|
|
|
|
|
|
|
|
Net
|
|
$
|
53,813
|
|
|
$
|
40,662
|
|
|
|
|
|
|
|
|
|
|
Financia |