GameStop 2006 Annual Report Download - page 42

Item 7. Management’s 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, manage-
ment’s plans and objectives, and any statements concerning assumptions related to the foregoing contained in
Management’s Discussion and Analysis of Financial Condition and Results of Operations constitute forward-
looking statements. Certain factors, which may cause actual results to vary materially from these forward-looking
statements, accompany such statements or appear elsewhere in this Form 10-K, including the factors disclosed
under “Item 1A. — Risk Factors.”
General
GameStop Corp. (“GameStop” or the “Company”) is the world’s largest retailer of video game products and PC
entertainment software. We sell new and used video game hardware, video game software and accessories, as well as
PC entertainment software and related accessories and other merchandise. As of February 3, 2007, we operated 4,778
stores, in the United States, Australia, Canada and Europe, primarily under the names GameStop and EB Games. We
also operate electronic commerce websites under the names www.gamestop.com and www.ebgames.com and publish
Game Informer, the industry’s largest multi-platform video game magazine in the United States based on circulation.
Our fiscal year is composed of 52 or 53 weeks ending on the Saturday closest to January 31. The fiscal year
ended February 3, 2007 (“fiscal 2006”) consisted of 53 weeks. The fiscal years ended January 28, 2006 (“fiscal
2005”) and January 29, 2005 (“fiscal 2004”) consisted of 52 weeks.
On October 8, 2005, GameStop Holdings Corp. (“Historical GameStop”), formerly known as GameStop
Corp., and Electronics Boutique Holdings Corp. (“EB” or “Electronics Boutique”) completed their previously
announced mergers pursuant to the Agreement and Plan of Merger, dated as of April 17, 2005 (the “Merger
Agreement”). Upon the consummation of the mergers, Historical GameStop and EB became wholly-owned
subsidiaries of the Company, a Delaware corporation formed for the purpose of consummating the business
combination (the “mergers”). The mergers of Historical GameStop and EB have been treated as a purchase business
combination for accounting purposes, with Historical GameStop designated as the acquirer. Therefore, the
historical financial statements of Historical GameStop became the historical financial statements of the Company.
The accompanying consolidated financial statements and notes thereto include the results of operations of EB from
October 9, 2005 forward. Therefore, the Company’s operating results for the fiscal year ended January 28, 2006
include 16 weeks of EB’s results and 52 weeks, respectively, of Historical GameStop’s results. The Company’s
operating results for the fiscal year ended February 3, 2007 include 53 weeks for both Historical GameStop and EB.
As a result, sales mix, cost of sales, gross profit, selling general and administrative expenses, depreciation and
amortization and interest expense in fiscal 2006 was significantly impacted by including the operations of EB for a
full year, as opposed to 16 weeks in fiscal 2005, which included the holiday selling season. Growth in each of these
statement of operations line items came from each of the Company’s business segments.
Under the terms of the Merger Agreement, Historical GameStop’s stockholders received one share of the
Company’s common stock for each share of Historical GameStop’s common stock owned. Approximately
104.2 million shares of the Company’s 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 Company’s common stock for each share of EB common stock owned. In aggregate, 40.5 million shares
of the Company’s 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 GameStop’s 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 Company’s Class B common stockholders, all outstanding Class B common shares were converted
into Class A common shares on a one-for-one basis (the “Conversion”). In addition, on February 9, 2007, the Board
of Directors of the Company authorized a two-for-one stock split, effected by a one-for-one stock dividend to
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