GameStop 2005 Annual Report Download - page 51

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.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Exposure
We do not use derivative financial instruments to hedge interest rate exposure. We limit our interest rate risks
by investing our excess cash balances in short-term, highly-liquid instruments with an original maturity of one year
or less. In addition, the Notes issued in connection with the mergers include both fixed rate and floating rate notes
with the intent to minimize exposure to changes in interest rates. A hypothetical increase (or decrease) of 10% of the
effective rate on the floating rate notes would result in a change in the annual interest expense of $2.5 million. The
effective rate on the floating rate notes was 8.405% on January 28, 2006. We do not expect any material losses from
our invested cash balances, and we believe that our interest rate exposure is modest.
Foreign Currency Risk
The mergers significantly increase our exposure to foreign currency fluctuations because a larger amount of
our business is now transacted in foreign currencies. While Historical GameStop generally did not enter into
derivative instruments with respect to foreign currency risks, 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 No. 138”). SFAS No. 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 and cross-currency swaps to manage currency risk primarily
related to intercompany loans denominated in non-functional currencies and certain foreign currency assets and
liabilities. These forward exchange contracts and currency swaps 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 forwards and swaps at January 28, 2006 was a loss of $7.1 million. A hypothetical
increase (or decrease) of 10% in foreign currency exchange rates underlying these forwards and swaps from the
market rate at January 28, 2006 would result in a (loss) or gain in value of the forwards and swaps of ($7.2 million)
or $5.7 million, respectively. The Company had no forward exchange contracts and currency swaps prior to
October 8, 2005.
Item 8. Consolidated Financial Statements and Supplementary Data
See Item 15(a)(1) and (2) of this Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, the Company’s management conducted an evaluation, under
the supervision and with the participation of the principal executive officer and principal financial officer, of the
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