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America’s Largest Video Game Retailer
GameStop Corp. Annual Report
2003

Table of contents

  • Page 1
    America's Largest Video Game Retailer 2003 GameStop Corp. Annual Report

  • Page 2
    ...GameStop฀name,฀enhancing฀our฀ability฀to฀more฀actively฀and฀efficiently฀market฀ourselves฀to฀the฀growing฀and฀diverse฀customer฀base฀for฀video฀game฀products. ฀ Both฀of฀our฀two฀non-retail฀divisions,฀GameStop.com฀and฀Game฀Informer฀Magazine...

  • Page 3
    ...market฀share฀every฀ quarter฀for฀the฀last฀24฀quarters,฀and฀these฀figures฀do฀not฀include฀our฀used฀sales.฀฀We฀are฀excited฀about฀the฀future฀for฀video฀game฀ growth฀and฀will฀continue฀to฀develop฀new฀approaches฀to฀increase฀GameStop...

  • Page 4
    Top Selling Games of 2003 Madden NFL 2004 429,000 Units $21,400,000 Legend of Zelda: Wind Waker 239,000 Units $11,200,000 Need for Speed: Underground 208,000 Units $10,400,000 Mario฀Kart:฀Double฀Dash!!฀-฀GameCube

  • Page 5
    ... 50% of Americans over age 6 play video or computer games. Video Game Software Unit Sales 300,000 200,000 122,000 213,000 159,000 236,000 (In฀Thousands) 2002 2003 Final฀Fantasy฀X-2฀-฀PlayStation฀2 100,000 0 2000 2001 Note:฀Excludes฀used฀video฀games Source:฀International...

  • Page 6
    ... gamer spends 6.5 hours per week playing games GameStop Operating Margin 8% 6% 4% 2% 0% FY 2000 FY 2001 FY 2002 FY 2003 Note:฀Excludes฀goodwill฀amortization฀in฀all฀years฀presented฀and฀reï¬,ects฀pro฀forma฀effect฀of฀EITF฀02-16 cash฀considerations฀received฀from...

  • Page 7
    Form 10-K GAMESTOP CORP - GME Filed: April 14, 2004 (period: January 31, 2004) Annual report which provides a comprehensive overview of the company for the past year

  • Page 8
    ... Market Risk Consolidated Financial Statements and Supplementary Data Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Controls and Procedures PART IV Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K SIGNATURES EX-14.1 (Code of Ethics...

  • Page 9
    ... (Zip Code) The aggregate market value of the voting and non-voting stock held by non-affiliates of the registrant was approximately $277,762,620 based upon the closing market price of $13.53 per share of Class A Common Stock on the New York Stock Exchange as of August 1, 2003. Number of shares...

  • Page 10
    ...14.1: CODE OF ETHICS EX-21...Procedures PART III Directors and Executive Officers of the Registrant Executive Compensation Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Certain Relationships and Related Transactions Principal Accountant Fees and Services...

  • Page 11
    ... the largest assortments of new and used video game hardware, video game software and accessories, PC entertainment software, and related products, including action figures, trading cards and strategy guides. As of January 31, 2004, we operated 1,514 stores in the United States, Puerto Rico, Ireland...

  • Page 12
    ...a decline in the trading price of our Class A common stock and the value of your investment. Risks Related to Our Business We depend upon the timely delivery of products. We depend on major hardware manufacturers to deliver new and existing video game platforms on a timely basis and in anticipated...

  • Page 13
    ... of our new product purchases in fiscal 2003 (the 52-week period ended January 31, 2004). 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. The video game system and software product industries are cyclical...

  • Page 14
    ... off-site third-party operated distribution centers with which we work. The third-party distribution centers pick up products from our suppliers, repackage the products for each of our stores and ship those products to our stores by package carriers. We use an inventory replenishment system to track...

  • Page 15
    ... and download or playing on the Internet. If advances in technology continue to expand our customers' ability to access software through these and other sources, our customers may no longer choose to purchase video games or PC entertainment software in our stores. As a result, our sales and earnings...

  • Page 16
    ... to pay in the future for shares of our Class A common stock. If Barnes & Noble distributes our shares of Class B common stock in a tax-free distribution, the Class A common stock may trade at a lower price than the Class B common stock. If Barnes & Noble distributes our Class B common stock to its...

  • Page 17
    ... value of the Class A common stock to the extent that investors or any potential future purchasers of our Class A common stock ascribe value to the superior voting rights of the Class B common stock. Our ability to issue common stock may be hampered because of our relationship with Barnes & Noble...

  • Page 18
    ...-purpose entertainment centers by doubling as a player for DVD movies and compact discs. In addition, in 2002, both Sony PlayStation 2 and Microsoft Xbox introduced accessories which provide internet connectivity. • Backward Compatibility.Sony PlayStation 2 and Nintendo Game Boy Advance SP are...

  • Page 19
    ... strip center stores also serve the electronic game enthusiast, but focus on serving the value-oriented customer by offering a wide selection of value-priced used video game products and the opportunity to trade in used video game products in exchange for store credits applicable to future purchases...

  • Page 20
    ... 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, including Nintendo Game Boy Color, Nintendo 64 and Sony...

  • Page 21
    ... our web site at www.gamestop.com. Merchandise Our product offerings consist of new and used video game products, PC entertainment software, and related products, such as action figures, trading cards and strategy guides. We also market selected PC productivity and educational software titles...

  • Page 22
    ... 1,200 square feet, carry primarily new video game products and PC entertainment software, as well as used video game products. As of January 31, 2004, we operated 532 mall stores in high traffic shopping malls in targeted locations throughout the United States, Puerto Rico and Guam. Site Selection...

  • Page 23
    ... stores located in each state, the District of Columbia, Ireland, Puerto Rico and Guam as of January 31, 2004: Number of Stores 15 3 27 5 185 23 20 7 1 68 35 1 11 2 79 19 12 16 7 17 13 2 43 32 60 30 7 28 4 3 17 7 68 7 83 24 5 70 12 10 77 14 State Alabama Alaska Arizona Arkansas California Colorado...

  • Page 24
    ... commerce web site at www.gamestop.com that allows our customers to buy video game products and other merchandise on-line. The site also offers customers information and content about available games, release dates for upcoming games, and access to store information, such as location and product...

  • Page 25
    ... stores at least twice a week. We have purchased a new 420,000 square foot headquarters and distribution center in Grapevine, Texas and we intend to move our distribution center operations to that facility by early 2005. Management Information Systems.Our proprietary inventory management system...

  • Page 26
    ...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...

  • Page 27
    ...'s operations in Ireland. This lease expires in January 2013. Item 3. Legal Proceedings On May 29, 2003, former Store Manager Carlos Moreira ("Plaintiff") filed a class action lawsuit against the Company and its wholly-owned subsidiary Gamestop, Inc. (collectively "GameStop") in Los Angeles 18

  • Page 28
    ... on the New York Stock Exchange ("NYSE") under the symbol "GME" on February 13, 2002. As such, there was no public trading market for the Company's Class A common stock prior to that time. The Company's Class B common stock is not publicly traded and is held entirely by Barnes & Noble. The following...

  • Page 29
    ... In March 2003, the Board of Directors authorized a common stock repurchase program for the purchase of up to $50.0 million of the Company's Class A common shares. The Company may repurchase shares from time to time in the open market or through privately negotiated transactions, depending on...

  • Page 30
    ...the "successor company." In June 2000, Barnes & Noble acquired Funco, Inc. ("Funco") and thereafter, Babbage's became a wholly-owned subsidiary of Funco. The acquisition of Funco has been accounted for under the purchase method of accounting. In December 2000, Funco changed its name to GameStop, Inc...

  • Page 31
    ... 10-K, including the factors disclosed under "Business - Risk Factors." General We are the largest specialty retailer of video game products and PC entertainment software in the United States, based on the number of U.S. retail stores we operate and our total U.S. revenues. We sell new and used 22

  • Page 32
    ... 1,514 stores, in 49 states, the District of Columbia, Ireland, Puerto Rico and Guam, primarily under the name GameStop. We also operate an electronic commerce web site under the name gamestop.com and publish Game Informer, the industry's largest circulation multi-platform video game magazine in the...

  • Page 33
    ...underlying leases. 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...

  • Page 34
    ...), requiring certain vendor allowances to be deducted from cost of sales, and the shift in sales mix from lower margin video game hardware to higher margin PlayStation 2, Game Boy Advance, Xbox and GameCube video game software and used video game products. The implementation of EITF 02-16 led to...

  • Page 35
    ... the Company's February 2002 public offering and the contribution of the remaining $150.0 million in debt to paid-in-capital by Barnes & Noble. Income tax expense increased by $6.4 million, from $35.3 million in fiscal 2002 to $41.7 million in fiscal 2003. The Company's effective tax rate decreased...

  • Page 36
    ... to fund new store openings, acquire a new headquarters and distribution center and invest in distribution and information systems. The projected capital expenditures for fiscal 2004 of approximately $85 million include approximately $21 million to purchase, improve and equip the 420,000 square foot...

  • Page 37
    ...that time. In March 2003, the Board of Directors authorized a common stock repurchase program for the purchase of up to $50.0 million of the Company's Class A common shares. The Company may repurchase shares from time to time in the open market or through privately negotiated transactions, depending...

  • Page 38
    ... in Barnes & Noble's worker's compensation, property and general liability insurance programs. The costs incurred by Barnes & Noble under these programs are allocated to the Company based upon the Company's total payroll expense, property and equipment, and insurance claim history. Management deems...

  • Page 39
    ... Code of Ethics on the Company's website (www.gamestop.com) within five business days following such amendment or waiver. Item 11. Executive Compensation(*) Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters(*) Item 13. Certain Relationships...

  • Page 40
    ... are omitted because they are not applicable. (b) Reports on Form 8-K On November 19, 2003, the Company furnished a Form 8-K pursuant to Items 7 and 12 of such form regarding a press release issued with earnings information for the quarter ended November 1, 2003. Subsequent to the end of fiscal...

  • Page 41
    ..., between RREEF Mid-Cities Industrial L.P. and Babbage's Etc. LLC.(1) Registration Rights Agreement, dated as of January 1, 2002, between Barnes & Noble and GameStop Corp.(1) Revolving Credit Agreement, dated as of February 19, 2002, among GameStop Corp., Fleet National Bank, as Administrative Agent...

  • Page 42
    ... Chairman of the Board, Chief Executive Officer and Director (Principal Executive Officer) April 14, 2004 Executive Vice President, Chief Financial Officer and Assistant Secretary (Principal Accounting and Financial Officer) President and Chief Operating Officer and Director April 14, 2004...

  • Page 43
    Table of Contents INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page GameStop Corp. Consolidated Financial Statements: Report of Independent Certified Public Accountants Consolidated Financial Statements: Balance Sheets Statements of Operations Statements of Stockholders' Equity (Deficit) Statements ...

  • Page 44
    ... of Contents REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors and the Stockholders of GameStop Corp. Grapevine, Texas We have audited the accompanying consolidated balance sheets of GameStop Corp. as of January 31, 2004 and February 1, 2003 and the related consolidated...

  • Page 45
    ...; 22,993 and 21,050 shares issued, respectively Class B common stock - $.001 par value; authorized 100,000 shares; 36,009 shares issued and outstanding Additional paid-in-capital Accumulated other comprehensive income Retained earnings Treasury stock, at cost, 2,304 and 0 shares, respectively Total...

  • Page 46
    ...31, 2004 52 Weeks Ended February 1, 2003 52 Weeks Ended February 2, 2002 Sales Cost of sales Gross profit Selling, general and administrative expenses Depreciation and amortization Amortization of goodwill Operating earnings Interest income Interest expense Earnings before income tax expense Income...

  • Page 47
    ...2002 Shares issued in public offering Exercise of employee stock options (including tax benefit of $1,906) Capital contribution from Barnes & Noble, Inc. Net earnings for the 52 weeks ended February 1, 2003 Balance at February 1, 2003 Comprehensive income: Net earnings for the 52 weeks ended January...

  • Page 48
    ..., Inc. Repayment of debt of Gamesworld Group Limited Purchase of treasury shares through repurchase program Net increase in other payable to Barnes & Noble, Inc. Net cash flows (used in) provided by financing activities Exchange rate effect on cash and cash equivalents Net increase (decrease) in...

  • Page 49
    ... name, a web site (gamestop.com) and Game Informer magazine. The Company operates its business as a single segment. The Company's stores, which totaled 1,514 at January 31, 2004, are located in major regional shopping malls and strip centers in 49 states, the District of Columbia, Ireland, Puerto...

  • Page 50
    ...) Merchandise Inventories Our merchandise inventories are carried at the lower of cost or market using the average cost method. Used video game products traded in by customers are recorded as inventory at the amount of the store credit given to the customer. In valuing inventory, management is...

  • Page 51
    ...on the estimated future tax effect of differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates. For the periods prior to the Offering, GameStop was included in the consolidated federal tax return of Barnes & Noble. The income tax provisions recorded...

  • Page 52
    ... 2003 52 Weeks Ended February 2, 2002 Net earnings, as reported Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects* Pro forma net earnings (loss) Net earnings per common share - basic, as reported Net earnings...

  • Page 53
    ...consideration to materiality. Changes in the estimates and assumptions used by management could have significant impact on the Company's financial results. Actual results could differ from those estimates. Fair Values of Financial Instruments The carrying values of cash and cash equivalents reported...

  • Page 54
    ...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 impact of the new accounting method...

  • Page 55
    ... 3. Acquisitions On June 23, 2003, the Company acquired a controlling interest in Gamesworld Group Limited ("Gamesworld"), an Ireland-based electronic games retailer, for approximately $3,279. The acquisition was accounted for using the purchase method of accounting and, accordingly, the results of...

  • Page 56
    ... credit facility as the higher of (a) the administrative agent's announced base rate or (b) 1/2 of 1% in excess of the federal funds effective rate, each as in effect from time to time) or (2) London Interbank Office Rate ("LIBOR") loans bearing interest at the LIBOR rate for the applicable interest...

  • Page 57
    ...under the Revolving Credit Facility were used to fund the acquisitions of Funco and Babbage's described in Note 1, and Barnes & Noble has allocated such debt to the Company and charged the Company interest of $825 and $19,575 relating to this debt for the 52 weeks ended February 1, 2003 and February...

  • Page 58
    ... On May 29, 2003, former Store Manager Carlos Moreira ("Plaintiff") filed a class action lawsuit against the Company and its wholly-owned subsidiary Gamestop, Inc. (collectively "GameStop") in Los Angeles County Superior Court alleging that GameStop's salaried retail managers were misclassified as...

  • Page 59
    ...income taxes result from the following: 52 Weeks Ended January 31, 2004 Federal statutory tax rate State income taxes, net of federal effect Non-deductible goodwill amortization Foreign income taxes Other (including permanent differences) 35.0% 4.6 0.0 (0.1) 0.2 39.7% 52 Weeks Ended February 1, 2003...

  • Page 60
    ...31, 2004 February 1, 2003 (In thousands) Deferred tax asset: Allowance for doubtful accounts Inventory capitalization costs Inventory obsolescence reserve Accrued liabilities Gift certificate liability Deferred rents Accrued state taxes Total deferred tax benefits Deferred tax liabilities: Goodwill...

  • Page 61
    ... 350 shares of Barnes & Noble were issued to GameStop employees pursuant to the Barnes & Noble stock option plan. Such grants were made at the fair market value of Barnes & Noble common stock at the date of grant. 14. Employees' Defined Contribution Plan The Company sponsors a defined contribution...

  • Page 62
    ... in Barnes & Noble's worker's compensation, property and general liability insurance programs. The costs incurred by Barnes & Noble under these programs are allocated to the Company based upon the Company's total payroll expense, property and equipment, and insurance claim history. Management deems...

  • Page 63
    ... 2003, the Board of Directors authorized a common stock repurchase program for the purchase of up to $50,000 of the Company's Class A common shares. The Company may repurchase shares from time to time in the open market or through privately negotiated transactions, depending on prevailing market...

  • Page 64
    ..., between RREEF Mid-Cities Industrial L.P. and Babbage's Etc. LLC.(1) Registration Rights Agreement, dated as of January 1, 2002, between Barnes & Noble and GameStop Corp.(1) Revolving Credit Agreement, dated as of February 19, 2002, among GameStop Corp., Fleet National Bank, as Administrative Agent...

  • Page 65
    ... the Board of Directors is not required) to make investments with a total value of no more than ten percent (10%) of your annual compensation in competitors, customers/clients or suppliers that are listed on a national or international securities exchange. Business Arrangements with the Company and...

  • Page 66
    ... to any government-related position. Family Members Working In The Industry If your spouse or significant other, your children, parents, or in-laws, or someone else with whom you have a familial relationship is a competitor, supplier or customer/client of the Company or is employed by one, you...

  • Page 67
    ... know of or suspect a violation of applicable laws or regulations or the Code of Ethics, you must immediately report that information to the Chief Executive Officer (or, with respect to the Chief Executive Officer, the Audit Committee of the Board of Directors). No one will be subject to retaliation...

  • Page 68
    ... standards, policies and procedures contained in the Code of Ethics and the Company's related policies and procedures. I understand that I have an obligation to report to the Chief Executive Officer (or, with respect to the Chief Executive Officer, the Audit Committee of the Board of Directors) any...

  • Page 69
    ...owned subsidiary of GameStop Corp. Marketing Control Services, Inc., a Virginia corporation, is a wholly-owned subsidiary of GameStop Corp. Sunrise Publications, Inc., a Minnesota corporation, is a wholly-owned subsidiary of GameStop, Inc. Babbage's Etc. LLC, a Delaware limited liability company, is...

  • Page 70
    ...) pertaining to the GameStop Corp. 2001 Incentive Plan of our report dated March 12, 2004, with respect to the consolidated financial statements of GameStop Corp. appearing in the Company's Annual Report on Form 10-K for the year ended January 31, 2004. /s/ BDO SEIDMAN, LLP Dallas, Texas April 13...

  • Page 71
    ..., whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. By: /s/ R. RICHARD FONTAINE R. Richard Fontaine Chairman of the Board and Chief Executive Officer GameStop Corp. Date: April 14, 2004

  • Page 72
    ... information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. By: /s/ DAVID W. CARLSON David W. Carlson Executive Vice President and Chief Financial Officer GameStop...

  • Page 73
    ... with the annual report of GameStop Corp. (the "Company") on Form 10-K for the period ending January 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, R. Richard Fontaine, Chairman of the Board and Chief Executive Officer of the Company, certify, to...

  • Page 74
    ... with the annual report of GameStop Corp. (the "Company") on Form 10-K for the period ending January 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, David W. Carlson, Executive Vice President and Chief Financial Officer of the Company, certify, to...

  • Page 75
    Retail Locations + Distribution Center located in Grapevine, Texas Headquarters 1,514 Retail Locations Throughout the U.S., Puerto Rico and Ireland GameStop฀Stores:฀1,514฀Retail฀Locations฀&฀Growing! Game฀Informer฀Magazine฀-฀News,฀Reviews,฀Previews,฀Codes฀and฀More!

  • Page 76
    ...800 ฀฀฀400 0 FY 1997 FY 1998 FY 1999 FY 2000 FY 2001 FY 2002 FY 2003 458 473 526 978 1,038 1,231 1,514 GameStop Gift Card GameStop Holiday Guide Promotions:฀Mailed฀Inserts฀and฀Loyalty฀Programs! Game฀Informer฀Magazine฀-฀News,฀Reviews,฀Previews,฀Codes฀and฀More!

  • Page 77
    ... and video game magazine in the world, is a montly publication that covers PC, Sony PlayStation 2, Nintendo Game Cube, Microsoft Xbox, online and handheld games and peripherals across a number of departments including GI News, Etc., Classic GI and Secret Access. Game Informer Magazine Sunrise...

  • Page 78
    ...฀Summey Vice฀President Real฀Estate GameStop Board of Directors R.฀Richard฀Fontaine Chairman฀of฀the฀Board฀and Chief฀Executive฀Officer Leonard฀Riggio Chairman Barnes฀&฀Noble,฀Inc. Michael฀N.฀Rosen Chairman฀of฀the฀New฀York฀Office Bryan฀Cave฀LLP...

  • Page 79
    ... Corporate฀Offices 2250฀William฀D.฀Tate฀฀Avenue Grapevine,฀TX฀76051 817-424-2000 www.gamestop.com Stock฀Listing New฀York฀Stock฀Exchange Market฀Symbol฀GME Auditors BDO฀Seidman,฀LLP 700฀North฀Pearl฀Street Suite฀2000 Dallas,฀TX฀75201 Company...

  • Page 80
    ©฀GameStop,฀2004