GameStop 2006 Annual Report Download - page 59

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Exposure
We do not use derivative financial instruments to hedge interest rate exposure. We limit our interest rate risks
by investing our excess cash balances in short-term, highly-liquid instruments with a maturity of one year or less. In
addition, the Notes issued in connection with the mergers include both fixed rate and floating rate notes with the
intent to minimize exposure to changes in interest rates. A hypothetical increase (or decrease) of 10% of the
effective rate on the floating rate notes would result in a change in the annual interest expense of $2.3 million. The
effective rate on the floating rate notes was 9.2350% on February 3, 2007. We do not expect any material losses
from our invested cash balances, and we believe that our interest rate exposure is modest.
Foreign Currency Risk
The mergers significantly increased our exposure to foreign currency fluctuations because a larger amount of
our business is now transacted in foreign currencies. While Historical GameStop generally did not enter into
derivative instruments with respect to foreign currency risks, EB routinely used forward exchange contracts and
cross-currency swaps to manage currency risk and had a number of open positions designated as hedge transactions
as of the merger date. The Company discontinued hedge accounting treatment for all derivative instruments
acquired in connection with the mergers.
The Company follows the provisions of Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities, (“SFAS 133”) as amended by Statement of Financial Accounting
Standards No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities. SFAS 133
requires that all derivative instruments be recorded on the balance sheet at fair value. Changes in the fair value of
derivatives are recorded each period in current earnings or other comprehensive income, depending on whether the
derivative is designated as part of a hedge transaction, and if it is, depending on the type of hedge transaction.
The Company uses forward exchange contracts, foreign currency options and cross-currency swaps, (together,
the “Foreign Currency Contracts”) to manage currency risk primarily related to intercompany loans denominated in
non-functional currencies and certain foreign currency assets and liabilities. These Foreign Currency Contracts are
not designated as hedges and, therefore, changes in the fair values of these derivatives are recognized in earnings,
thereby offsetting the current earnings effect of the re-measurement of related intercompany loans and foreign
currency assets and liabilities. The aggregate fair value of the Foreign Currency Contracts at February 3, 2007 was a
liability of $1.9 million. A hypothetical strengthening or weakening of 10% in the foreign exchange rates
underlying the Foreign Currency Contracts from the market rate at February 3, 2007 would result in a gain or
(loss) in value of the forwards and swaps of $1.8 million or ($1.5 million), respectively. The Company had no
Foreign Currency Contracts prior to October 8, 2005.
Item 8. Consolidated Financial Statements and Supplementary Data
See Item 15(a)(1) and (2) of this Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, the Company’s management conducted an evaluation, under
the supervision and with the participation of the principal executive officer and principal financial officer, of the
Company’s 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 Company’s disclosure controls and procedures are effective.
Notwithstanding the foregoing, a control system, no matter how well designed and operated, can provide only
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