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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

     
þ
  QUARTERLY REPORT PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
    For the quarterly period ended August 3, 2002
 
or
 
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
    For the transition period from           to

Commission file no. 1-31228

GameStop Corp.

(Exact name of registrant as specified in its Charter)
     
Delaware
(State or other jurisdiction of
incorporation or organization)
  75-2951347
(I.R.S. Employer
Identification No.)
 
2250 William D. Tate Avenue,
Grapevine, Texas
(Address of principal executive offices)
  76051
(Zip Code)

Registrant’s telephone number, including area code:

(817) 424-2000

      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

      Number of shares of $.001 par value Class A Common Stock outstanding as of August 30, 2002: 20,931,415

      Number of shares of $.001 par value Class B Common Stock outstanding as of August 30, 2002: 36,009,000




 

TABLE OF CONTENTS

           
Page

PART I — FINANCIAL INFORMATION
       
Item 1. Financial Statements
       
 
Consolidated Balance Sheets — August 3, 2002 (unaudited), August 4, 2001 (unaudited) and February 2, 2002
    2  
 
Consolidated Statements of Operations (unaudited) — For the 13 weeks and 26 weeks ended August 3, 2002 and August 4, 2001
    3  
 
Consolidated Statement of Changes in Stockholders’ Equity (Deficit) (unaudited) — August 3, 2002
    4  
 
Consolidated Statements of Cash Flows (unaudited) — For the 26 weeks ended August 3, 2002 and August 4, 2001
    5  
 
Notes to Consolidated Financial Statements
    6-8  
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
    9-13  
Item 3. Quantitative and Qualitative Disclosures About Market Risk
    13  
 
PART II — OTHER INFORMATION
       
Item 1. Legal Proceedings
    14  
Item 2. Changes in Securities and Use of Proceeds
    14  
Item 6. Exhibits and Reports on Form 8-K
    14  
SIGNATURE
    15  
CERTIFICATIONS
    16-17  
Exhibit Index
    E-1  

1


 

PART I — FINANCIAL INFORMATION

Item 1.     Financial Statements
GAMESTOP CORP.

CONSOLIDATED BALANCE SHEETS

                             
August 3, August 4, February 2,
2002 2001 2002



(Unaudited) (Unaudited)
(In thousands, except per share data)
ASSETS
Current assets:
                       
 
Cash and cash equivalents
  $ 152,623     $ 7,261     $ 80,750  
 
Receivables, net
    4,762       3,865       5,930  
 
Merchandise inventories
    132,786       122,922       138,351  
 
Prepaid expenses and other current assets
    8,549       6,615       8,255  
 
Deferred taxes
    3,418       5,568       3,418  
     
     
     
 
   
Total current assets
    302,138       146,231       236,704  
     
     
     
 
Property and equipment:
                       
 
Leasehold improvements
    32,837       23,453       27,898  
 
Fixtures and equipment
    69,742       48,796       57,579  
     
     
     
 
      102,579       72,249       85,477  
 
Less accumulated depreciation and amortization
    44,293       23,859       33,854  
     
     
     
 
   
Net property and equipment
    58,286       48,390       51,623  
     
     
     
 
Goodwill, net
    317,957       313,855       317,957  
Other noncurrent assets
    1,196       548       559  
     
     
     
 
   
Total other assets
    319,153       314,403       318,516  
     
     
     
 
   
Total assets
  $ 679,577     $ 509,024     $ 606,843  
     
     
     
 
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
                       
 
Accounts payable
  $ 114,115     $ 105,865     $ 148,597  
 
Accrued liabilities
    55,062       38,349       57,000  
     
     
     
 
   
Total current liabilities
    169,177       144,214       205,597  
     
     
     
 
Payable to Barnes & Noble, Inc. 
          391,048       399,623  
Deferred taxes
    3,065       4,116       3,065  
Other long-term liabilities
    2,697       2,335       2,543  
     
     
     
 
      5,762       397,499       405,231  
     
     
     
 
   
Total liabilities
    174,939       541,713       610,828  
     
     
     
 
Stockholders’ equity (deficit):
                       
 
Preferred stock — authorized 5,000 shares; no shares issued or outstanding
                 
 
Class A common stock — $.001 par value; authorized 300,000 shares; 20,835 shares issued and outstanding
    21              
 
Class B common stock — $.001 par value; authorized 100,000 shares; 36,009 shares issued and outstanding
    36       36       36  
 
Additional paid-in-capital
    491,333       (15,902 )     (6,237 )
 
Retained earnings (deficit)
    13,248       (16,823 )     2,216  
     
     
     
 
   
Total stockholders’ equity (deficit)
    504,638       (32,689 )     (3,985 )
     
     
     
 
   
Total liabilities and stockholders’ equity (deficit)
  $ 679,577     $ 509,024     $ 606,843  
     
     
     
 

See accompanying notes to consolidated financial statements.

2


 

GAMESTOP CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS

                                   
13 Weeks Ended 26 Weeks Ended


August 3, August 4, August 3 August 4,
2002 2001 2002 2001




(In thousands, except per share data)
(Unaudited)
Sales
  $ 274,262     $ 206,806     $ 545,667     $ 408,161  
Cost of sales
    200,817       153,095       403,131       306,442  
     
     
     
     
 
 
Gross profit
    73,445       53,711       142,536       101,719  
Selling, general and administrative expenses
    57,959       48,501       113,216       94,691  
Depreciation and amortization
    5,623       4,672       10,743       9,131  
Amortization of goodwill
          2,781             5,562  
     
     
     
     
 
 
Operating earnings (loss)
    9,863       (2,243 )     18,577       (7,665 )
Interest income
    (507 )           (965 )      
Interest expense
    139       4,998       1,090       10,801  
     
     
     
     
 
 
Earnings (loss) before income tax expense (benefit)
    10,231       (7,241 )     18,452       (18,466 )
Income tax expense (benefit)
    4,113       (2,392 )     7,420       (6,387 )
     
     
     
     
 
Net earnings (loss)
  $ 6,118     $ (4,849 )   $ 11,032     $ (12,079 )
     
     
     
     
 
Net earnings (loss) per common share — basic
  $ 0.11     $ (0.13 )   $ 0.20     $ (0.34 )
     
     
     
     
 
Weighted average shares of common stock — basic
    56,843       36,009       55,593       36,009  
     
     
     
     
 
Net earnings (loss) per common share — diluted
  $ 0.10     $ (0.13 )   $ 0.18     $ (0.34 )
     
     
     
     
 
Weighted average shares of common stock — diluted
    61,301       36,009       60,002       36,009  
     
     
     
     
 

See accompanying notes to consolidated financial statements.

3


 

GAMESTOP CORP.

 
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
                                                         
Common Stock Additional Retained

Paid in Earnings
Shares Class A Shares Class B Capital (Deficit) Total







(In thousands)
(Unaudited)
Balance at February 2, 2002
                36,009     $ 36     $ (6,237 )   $ 2,216     $ (3,985 )
Shares issued in public offering
    20,764       21                   347,318             347,339  
Exercise of employee stock options
    71                         252             252  
Capital contribution from Barnes & Noble, Inc. 
                            150,000             150,000  
Net earnings for the 26 weeks ended August 3, 2002
                                  11,032       11,032  
     
     
     
     
     
     
     
 
Balance at August 3, 2002
    20,835     $ 21       36,009     $ 36     $ 491,333     $ 13,248     $ 504,638  
     
     
     
     
     
     
     
 

See accompanying notes to consolidated financial statements.

4


 

GAMESTOP CORP.

 
CONSOLIDATED STATEMENTS OF CASH FLOWS
                       
26 Weeks 26 Weeks
Ended Ended
August 3, August 4,
2002 2001


(In thousands)
(Unaudited)
Cash flows from operating activities:
               
 
Net earnings (loss)
  $ 11,032     $ (12,079 )
 
Adjustments to reconcile net earnings (loss) to net cash flows used in operating activities:
               
   
Depreciation and amortization
    10,743       9,131  
   
Amortization of goodwill
          5,562  
   
Amortization of loan cost
    121        
   
Deferred taxes
          (780 )
   
Loss on disposal of property and equipment
    130       259  
   
Increase in other long-term liabilities for scheduled rent increases in long-term leases
    154       140  
   
Changes in operating assets and liabilities, net
               
     
Receivables, net
    1,168       (139 )
     
Merchandise inventories
    5,565       (14,069 )
     
Prepaid expenses and other current assets
    (294 )     7,067  
     
Accounts payable and accrued liabilities
    (36,420 )     4,052  
     
     
 
     
Net cash flows used in operating activities
    (7,801 )     (856 )
     
     
 
Cash flows from investing activities:
               
 
Purchase of property and equipment
    (17,536 )     (6,412 )
 
Net decrease in other noncurrent assets
    (758 )     (12 )
     
     
 
 
Net cash flows used in investing activities
    (18,294 )     (6,424 )
     
     
 
Cash flows from financing activities:
               
 
Issuance of 20,764 shares relating to the public offering, net of the related expenses
    347,339        
 
Issuance of shares relating to employee stock options
    252        
 
Repayment of debt due to Barnes & Noble, Inc. 
    (250,000 )      
 
Net increase in other payable to Barnes & Noble, Inc. 
    377       5,900  
     
     
 
 
Net cash flows provided by financing activities
    97,968       5,900  
     
     
 
Net increase (decrease) in cash and cash equivalents
    71,873       (1,380 )
Cash and cash equivalents at beginning of period
    80,750       8,641  
     
     
 
Cash and cash equivalents at end of period
  $ 152,623     $ 7,261  
     
     
 

See accompanying notes to consolidated financial statements.

5


 

GAMESTOP CORP.

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(Unaudited)

1.     Basis of Presentation

      The unaudited consolidated financial statements include the accounts of GameStop Corp (the “Company”). and its wholly-owned subsidiaries. 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.

      The unaudited consolidated financial statements included herein reflect all adjustments (consisting only of normal, recurring adjustments) which are, in the opinion of the Company’s management, necessary for a fair presentation of the information for the periods presented. These consolidated financial statements are condensed and therefore do not include all of the information and footnotes required by generally accepted accounting principles. These consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the 52 weeks ended February 2, 2002. The preparation of financial statements in conformity with generally accepted accounting principles 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 Company’s financial results. Actual results could differ from those estimates.

      Due to the seasonal nature of the business, the results of operations for the 26 weeks ended August 3, 2002 are not indicative of the results to be expected for the 52 weeks ending February 1, 2003.

2.     Public Offering

      In February 2002, the Company completed a public offering of 20,764 shares of Class A common stock at $18.00 per share (the “Offering”). The net proceeds of the Offering, after deducting applicable issuance costs and expenses, were $347,339. A portion of the net proceeds was used to repay $250,000 of intercompany debt owed to Barnes & Noble, Inc. (“Barnes & Noble”). Additionally, upon the effective date of the Offering, Barnes & Noble made a capital contribution of $150,000 for the remaining balance of the intercompany debt.

3.     Goodwill and Intangible Assets

      In February 2002, the Company adopted SFAS No. 141, “Business Combinations,” and No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 141 requires the use of the purchase method of accounting and prohibits the use of the pooling-of-interests method of accounting for business combinations initiated after June 30, 2001. SFAS No. 141 also requires that the Company recognize acquired intangible assets apart from goodwill if the acquired intangible assets meet certain criteria. SFAS No. 141 applies to all business combinations initiated after June 30, 2001 and for purchase business combinations completed on or after July 1, 2001. It also requires, upon adoption of SFAS No. 142, that the Company reclassify, if necessary, the carrying amounts of intangible assets and goodwill based on the criteria of SFAS No. 141.

      SFAS No. 142 requires, among other things, that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually. In addition, SFAS No. 142 requires that the Company identify reporting units for the purposes of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized intangible assets, and cease amortization of intangible assets with an indefinite useful life. SFAS No. 142 provides for a six-month transitional period from the effective date of adoption for the Company to perform an assessment of whether there is an indication that goodwill is impaired. The Company completed the transitional impairment test and no impairment exists.

6


 

GAMESTOP CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      At August 3, 2002, goodwill and the related amortization expense for the 26 weeks ended August 3, 2002 and August 4, 2001, consisted of the following:

                                         
Amortization Expense

August 3, 2002

26 Weeks Ended
Accumulated
Asset Amortization Net August 3, 2002 August 4, 2001





Goodwill
  $ 339,991     $ 22,034     $ 317,957     $     $ 5,562  

      Amortization of goodwill ceased effective February 3, 2002.

      The effects of the adoption of SFAS No. 142 on the reported net loss and loss per share for the 13 weeks and 26 weeks ended August 4, 2001 are as follows:

                   
13 Weeks 26 Weeks
Ended Ended
August 4, August 4,
2001 2001


Reported net loss
  $ (4,849 )   $ (12,079 )
Add Back: Goodwill amortization, net of taxes
    2,181       4,354  
     
     
 
Net loss, as adjusted
  $ (2,668 )   $ (7,725 )
     
     
 
Basic and diluted loss per share:
               
 
Reported net loss
  $ (0.13 )   $ (0.34 )
 
Goodwill amortization, net of taxes
    0.06       0.12  
     
     
 
 
Adjusted net loss
  $ (0.07 )   $ (0.22 )
     
     
 

4.     Debt

      Concurrent with the Offering, the Company entered into a $75,000 senior secured revolving credit facility which expires in February 2005. The revolving credit facility is governed by an eligible inventory borrowing base agreement, defined as 50% of non-defective inventory. Loans incurred under the credit facility will be maintained from time to time, at the Company’s option, as (1) base rate loans which bear interest at the base rate (defined in the 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) LIBOR loans bearing interest at the LIBOR rate for the applicable interest period, in each case plus an applicable interest margin. The applicable interest margin is initially 0.25% for base rate loans and 1.75% for LIBOR rate loans, based on the Company’s current fixed charge coverage ratio of 2.00 to 1.00, and in each case will thereafter vary from 0.00% to 0.50% for base rate loans and from 1.25% to 2.00% for LIBOR rate loans, depending on the Company’s fixed charge coverage ratio. The fixed charge coverage ratio is calculated as the ratio of earnings before interest, taxes, depreciation, amortization and rent expense less capital expenditures to the sum of interest expense, debt amortization and rent expense for the twelve-month period then ended. In addition, the Company is required to pay a commitment fee of 0.375% for any unused amounts of the revolving credit facility. Any borrowings under the revolving credit facility are secured by the assets of the Company. The revolving credit facility generally restricts our ability to pay dividends and requires the Company to maintain certain financial ratios. There have been no borrowings under the revolving credit facility.

5.     Income Taxes

      The tax provisions for the 26 weeks ended August 3, 2002 and August 4, 2001 are based upon management’s estimate of the Company’s annualized effective tax rate.

7


 

GAMESTOP CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

6.     Stock Option Plan

      Upon completion of the Offering on February 12, 2002, the Company granted 4,500 options under the 2001 Incentive Plan at an exercise price of $18.00 per share (the per share offering price). Generally, the options vest and become exercisable in equal annual installments over a three-year period and expire ten years from issuance.

7.     Certain Relationships and Related Transactions

      The Company operates departments within bookstores operated by Barnes & Noble, an affiliate of the Company. The Company pays a license fee to Barnes & Noble on the gross sales of such departments. Management considers the license fee to be reasonable and based upon terms equivalent to those that would prevail in an arm’s length transaction. These charges amounted to $255 and $222 for the 13 weeks ended August 3, 2002 and August 4, 2001, respectively, and $500 and $427 for the 26 weeks ended August 3, 2002 and August 4, 2001, respectively.

      The Company participates 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 considers the allocation methodology to be reasonable. These charges amounted to $429 and $364 for the 13 weeks ended August 3, 2002 and August 4, 2001, respectively, and $828 and $618 for the 26 weeks ended August 3, 2002 and August 4, 2001, respectively.

      On May 1, 2001, the Company entered into an agreement with barnesandnoble.com llc (“Barnes & Noble.com”), a company in which Barnes & Noble owns an approximate 36% interest, pursuant to which the Company sells video game products and PC entertainment software through Barnes & Noble.com’s web site. The Company pays Barnes & Noble.com a referral fee on the Company’s net sales from purchases made through Barnes & Noble.com’s web site. Management considers the referral fee to be reasonable and based upon terms equivalent to those that would prevail in an arm’s length transaction. These referral fees amounted to $3 and $6 for the 13 weeks ended August 3, 2002 and August 4, 2001, respectively, and $8 and $6 for the 26 weeks ended August 3, 2002 and August 4, 2001, respectively.

      Prior to the completion of the Offering, the Company utilized the management and strategic advisory services of Leonard Riggio, the Chairman of Barnes & Noble, during the normal course of its operations. The annual compensation paid by Barnes & Noble to Leonard Riggio was allocated to the Company based upon the amount of time Mr. Riggio devoted to the Company as well as his duties and responsibilities. Management considered the allocation methodology to be reasonable. During the 13 weeks ended and the 26 weeks ended August 4, 2001, this allocated compensation amounted to $81 and $163, respectively.

8.     Supplemental Cash Flow Information

                   
26 Weeks 26 Weeks
Ended Ended
August 3, August 4,
2002 2001


Cash paid during the period for:
               
 
Interest
  $ 47,040     $  
     
     
 
 
Income taxes
    9,795        
     
     
 

8


 

Item 2.     Managements’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, management’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 in the Company’s Annual Report on Form 10-K for the fiscal year ended February 2, 2002 filed with the Securities and Exchange Commission on May 1, 2002 (the “Form 10-K”).

General

      We are the largest specialty retailer of video game products and PC entertainment software in the United States. 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 August 3, 2002, we operated 1,128 stores, in 49 states, Puerto Rico and Guam, under the names GameStop, Babbage’s, Software Etc. and FuncoLand. We also operate an electronic commerce web site under the name gamestop.com and publish Game Informer, one of the industry’s largest circulation multi-platform video game magazines in the United States.

Results of Operations

      The following table sets forth certain income statement items as a percentage of sales for the periods indicated:

                                 
13 weeks Ended 26 weeks Ended


August 3, August 4, August 3, August 4,
2002 2001 2002 2001




Statement of Operations Data:
                               
Sales
    100.0 %     100.0 %     100.0 %     100.0 %
Cost of sales
    73.2       74.0       73.9       75.1  
     
     
     
     
 
Gross profit
    26.8       26.0       26.1       24.9  
Selling, general and administrative expenses
    21.1       23.5       20.7       23.2  
Depreciation and amortization
    2.1       2.3       2.0       2.2  
Amortization of goodwill
    0.0       1.3       0.0       1.4  
     
     
     
     
 
Operating earnings (loss)
    3.6       (1.1 )     3.4       (1.9 )
Interest expense, net
    (0.1 )     2.4       0.0       2.6  
     
     
     
     
 
Earnings (loss) before income taxes
    3.7       (3.5 )     3.4       (4.5 )
Income tax expense (benefit)
    1.5       (1.2 )     1.4       (1.5 )
     
     
     
     
 
Net earnings (loss)
    2.2 %     (2.3 )%     2.0 %     (3.0 )%
     
     
     
     
 
 
13 weeks ended August 3, 2002 compared with the 13 weeks ended August 4, 2001

      Sales increased by $67.5 million, or 32.6%, from $206.8 million in the 13 weeks ended August 4, 2001 to $274.3 million in the 13 weeks ended August 3, 2002. The increase in sales was primarily attributable to an increase in comparable store sales and the additional sales resulting from 138 net new stores opened since August 4, 2001. Stores are included in our comparable store sales base beginning in the thirteenth month of operation. The comparable store sales increase of 22.9% was primarily due to sales of PlayStation 2, Xbox and GameCube hardware, software and accessories, following the launch of these new video game platforms in October 2000 and November 2001, respectively, and the increase in sales of used video game products. The

9


 

sales of these new hardware platforms and related products and used video game products were partially offset by sales declines in PlayStation, Nintendo 64 and Dreamcast from the corresponding period a year ago.

      Cost of sales increased by $47.7 million, or 31.2%, from $153.1 million in the 13 weeks ended August 4, 2001 to $200.8 million in the 13 weeks ended August 3, 2002. Cost of sales as a percentage of net sales decreased from 74.0% in the 13 weeks ended August 4, 2001 to 73.2% in the 13 weeks ended August 3, 2002. This decrease was the result of the shift in sales mix from lower margin video game hardware to higher margin PlayStation 2, Xbox and GameCube video game software and accessories and used video game products. Sales of new video game hardware generally increase as a percentage of sales in the first full year following the introduction of next generation platforms. 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.

      Selling, general and administrative expenses increased by $9.5 million, or 19.6%, from $48.5 million in the 13 weeks ended August 4, 2001 to $58.0 million in the 13 weeks ended August 3, 2002. 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. Selling, general and administrative expenses as a percentage of sales decreased from 23.5% in the 13 weeks ended August 4, 2001 to 21.1% in the 13 weeks ended August 3, 2002. The decrease in selling, general and administrative expenses as a percentage of sales was due to the economies achieved in distribution and corporate operating expenses and the store operating efficiencies gained as a result of the increase in comparable store sales.

      Depreciation and amortization expense increased from $4.7 million for the 13 weeks ended August 4, 2001 to $5.6 million in the 13 weeks ended August 3, 2002. This increase of $0.9 million was due to the capital expenditures for new stores, management information systems and distribution center enhancements.

      Amortization of goodwill was $2.8 million in the 13 weeks ended August 4, 2001. In accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangibles” (“SFAS No. 142”), the related goodwill was not amortized during the 13 weeks ended August 3, 2002. SFAS No. 142 requires, among other things, that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually. In addition, SFAS No. 142 requires that the Company identify reporting units for the purposes of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized intangible assets, and cease amortization of intangible assets with an indefinite useful life. SFAS No. 142 provides for a six-month transitional period from the effective date of adoption for the Company to perform an assessment of whether there is an indication that goodwill is impaired. The Company completed the impairment test and no impairment exists.

      Interest expense, net of interest income, decreased by $5.4 million from $5.0 million of net interest expense in the 13 weeks ended August 4, 2001 to $0.4 million of net interest income in the 13 weeks ended August 3, 2002. The decrease in interest expense was attributable to the repayment of $250.0 million in debt in February 2002 using the proceeds of the public offering and the contribution of the remaining $150.0 million in debt to paid-in-capital by Barnes & Noble. The interest income resulted from the investment of excess cash balances.

      Income tax benefit of $2.4 million was recorded during the 13 weeks ended August 4, 2001 compared to income tax expense of $4.1 million in the 13 weeks ended August 3, 2002. Tax expense for the 13 weeks ended August 3, 2002 was based upon management’s estimate of the Company’s annualized effective tax rate.

 
26 weeks ended August 3, 2002 compared with the 26 weeks ended August 4, 2001

      Sales increased by $137.5 million, or 33.7%, from $408.2 million in the 26 weeks ended August 4, 2001 to $545.7 million in the 26 weeks ended August 3, 2002. The increase in sales was primarily attributable to an increase in comparable store sales and the additional sales resulting from 138 net new stores opened since August 4, 2001. The comparable store sales increase of 25.8% was primarily due to sales of PlayStation 2, Xbox and GameCube hardware, software and accessories, following the launch of these new video game

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platforms in October 2000 and November 2001, respectively, and the increase in sales of used video game products. The sales of these new hardware platforms and related products and used video game products were partially offset by sales declines in PlayStation, Nintendo 64 and Dreamcast from the corresponding period a year ago.

      Cost of sales increased by $96.7 million, or 31.6%, from $306.4 million in the 26 weeks ended August 4, 2001 to $403.1 million in the 26 weeks ended August 3, 2002. Cost of sales as a percentage of net sales decreased from 75.1% in the 26 weeks ended August 4, 2001 to 73.9% in the 26 weeks ended August 3, 2002. This decrease was the result of 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 accessories and used video game products.

      Selling, general and administrative expenses increased by $18.5 million, or 19.5%, from $94.7 million in the 26 weeks ended August 4, 2001 to $113.2 million in the 26 weeks ended August 3, 2002. 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. Selling, general and administrative expenses as a percentage of sales decreased from 23.2% in the 26 weeks ended August 4, 2001 to 20.7% in the 26 weeks ended August 3, 2002. The decrease in selling, general and administrative expenses as a percentage of sales was due to the economies achieved in distribution and corporate operating expenses and the store operating efficiencies gained as a result of the increase in comparable store sales.

      Depreciation and amortization expense increased from $9.1 million for the 26 weeks ended August 4, 2001 to $10.7 million in the 26 weeks ended August 3, 2002. This increase of $1.6 million was due to the capital expenditures for new stores, management information systems and distribution center enhancements.

      Amortization of goodwill was $5.6 million in the 26 weeks ended August 4, 2001. In accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangibles” (“SFAS No. 142”), the related goodwill was not amortized during the 26 weeks ended August 3, 2002.

      Interest expense, net of interest income, decreased by $10.7 million, or 99.1%, from $10.8 million in the 26 weeks ended August 4, 2001 to $0.1 million in the 26 weeks ended August 3, 2002. The decrease was attributable to the repayment of $250.0 million in debt in February 2002 using the proceeds of the public offering and the contribution of the remaining $150.0 million in debt to paid-in-capital by Barnes & Noble.

      Income tax benefit of $6.4 million was recorded during the 26 weeks ended August 4, 2001 compared to income tax expense of $7.4 million in the 26 weeks ended August 3, 2002. Tax expense for the 26 weeks ended August 3, 2002 was based upon management’s estimate of the Company’s annualized effective tax rate.

Seasonality

      The Company’s business, like that of many retailers, is seasonal, with a significant portion of the sales and operating profit realized during the quarter which includes the holiday selling season.

Liquidity and Capital Resources

      During the 26 weeks ended August 3, 2002 and August 4, 2001, cash used by operations was $7.8 million and $0.8 million, respectively. In the 26 weeks ended August 3, 2002, cash used by operations was primarily due to decreases in accounts payable. Cash used in operations in the 26 weeks ended August 4, 2001 was primarily the result of an increase in merchandise inventories.

      Cash used in investing activities was $6.4 million and $18.3 million during the 26 weeks ended August 4, 2001 and August 3, 2002, respectively. During the 26 weeks ended August 4, 2001 and August 3, 2002, we had capital expenditures of $6.4 million and $17.5 million, respectively, to open new stores, remodel existing stores, and invest in distribution and information systems. 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 100 stores in the 26 weeks ended August 3, 2002 and expect to open between 75 and 100 stores in the remainder of fiscal 2002. Projected capital expenditures for fiscal 2002 are $35 million, to be used primarily to fund new store openings.

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      On February 13, 2002, we entered into a senior secured revolving credit facility with a syndicate of banks, with Fleet National Bank as administrative agent. The credit facility is a three-year revolving facility in an aggregate principal amount of $75.0 million. Drawings under the credit facility will be subject to satisfaction of customary conditions precedent, including absence of a default and continued accuracy of representations and warranties.

      Loans incurred under the credit facility will be maintained from time to time, at our option, as (1) base rate loans which bear interest at the base rate (defined in the 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) LIBOR loans bearing interest at the LIBOR rate for the applicable interest period, in each case plus an applicable interest margin. The applicable interest margin is initially 0.25% for base rate loans and 1.75% for LIBOR rate loans, based on the Company’s current fixed charge coverage ratio, and in each case will thereafter vary depending on the Company’s fixed charge coverage ratio. The fixed charge coverage ratio is calculated as the ratio of earnings before interest, taxes, depreciation, amortization and rent expense less capital expenditures to the sum of interest expense, debt amortization and rent expense for the twelve-month period then ended.

      We are required to reduce the outstanding amounts under the credit facility to zero for 30 consecutive days each year during the three-month period of December through February.

      We are subject to certain affirmative and negative covenants contained in the credit facility, including, but not limited to, covenants that restrict, subject to specified exceptions: the incurrence of additional indebtedness and other obligations and the granting of additional liens, mergers, acquisitions, investments and disposition of assets, dividends, engaging in certain transactions with affiliates, capital expenditures, and the use of proceeds of the credit facility. There are also covenants relating to compliance with certain laws, payment of taxes and rights and maintenance of insurance and financial reporting. In addition, the credit facility requires us to maintain compliance with certain specified financial ratios, including covenants relating to minimum fixed charge coverage and maximum leverage.

      Events of default under the credit facility include (subject to grace periods and notice provisions in certain circumstances) non-payment of principal, interest or fees, violation of covenants, inaccuracy of any representation or warranty in any material respect, default under or acceleration of certain other indebtedness, bankruptcy and insolvency events, certain judgments and other liabilities, certain environmental claims and a change of control. If an event of default occurs, the lenders under the credit facility will be entitled to take various actions, including the acceleration of amounts due under the credit facility and requiring that all such amounts be immediately paid in full.

      Our obligations under the credit facility are secured by all assets owned by us and our subsidiaries. Based on our current operating plans, we believe that cash generated from our operating activities, available borrowings under our credit facility and the cash proceeds from the initial public offering will be sufficient to fund our operations, store expansion and remodeling activities and corporate capital expenditure programs for at least the next 12 months. There have been no borrowings under the credit facility.

Disclosure Regarding Forward-looking Statements

      This report on Form 10-Q 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. 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:

  •  our reliance on suppliers and vendors for new product releases;
 
  •  economic conditions affecting the electronic game industry;

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  •  the competitive environment in the electronic game industry;
 
  •  our ability to open and operate new stores;
 
  •  our ability to attract and retain qualified personnel; and
 
  •  other factors described in the Form 10-K, including those set forth under the caption “Business — Risk Factors.”

      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 and involve known and unknown risks, uncertainties and other factors that may cause our or our industry’s 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-Q. In light of these risks and uncertainties, the forward-looking events and circumstances contained in this Form 10-Q may not occur, causing actual results to differ materially from those anticipated or implied by our forward-looking statements.

Item 3.     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 three months or less. We do not expect any material losses from our invested cash balances and we believe that our interest rate exposure is modest.

Foreign Exchange Exposure

      We do not have any foreign currency exposure as all of our business is transacted in United States currency.

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PART II — OTHER INFORMATION

Item 1.     Legal Proceedings

      In the ordinary course of our business, we are from time to time subject to various legal proceedings. We do not believe that any current legal proceedings, individually or in the aggregate, will have a material adverse effect on our operations or financial condition.

Item 2.     Changes in Securities and Use of Proceeds

      Pursuant to a registration statement on Form S-1 (the “Registration Statement”) filed with the SEC (File No. 333-68294), we registered and sold an aggregate of 20,763,888 shares of our Class A common stock at a price of $18.00 per share. The aggregate price of the offering amount registered and sold was approximately $373.7 million. Salomon Smith Barney acted as the managing underwriter for the offering.

      Our net proceeds from our initial public offering, after deduction of underwriting discounts and commissions of $24.3 million and expenses of $2.1 million, were $347.3 million. All of the expenses were paid directly to persons other than our directors, officers or affiliates, their associates or persons owning 10% or more of any class of our equity securities. A portion of the proceeds was used to repay $250.0 million of our indebtedness to Barnes & Noble, with Barnes & Noble contributing the remaining $150.0 million of indebtedness to the Company as additional paid-in-capital. To the date of this report, approximately $21.2 million of the balance of the proceeds (approximately $97.3 million) has been used for capital expenditures and approximately $56.6 million has been used for working capital and general corporate purposes. The remaining amount (approximately $19.5 million) has been invested in short-term, highly-liquid investments. Other than the repayment of indebtedness to Barnes & Noble and as otherwise described in the Registration Statement, none of the proceeds has been paid directly or indirectly to any of our directors, officers or affiliates, their associates or persons owning 10% or more of any class of our equity securities.

Item 6.     Exhibits and Reports on Form 8-K

      (a) Exhibits

             
Exhibit
Number Description


  99.1       Certificate of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  99.2       Certificate of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

      (b) Reports on Form 8-K

      The following reports on Form 8-K were filed during the Company’s quarter ended August 3, 2002:

      On May 31, 2002, the Company filed a Form 8-K under Item 5 reporting the appointment of three directors to the Board of Directors increasing the number of directors to six.

      On July 23, 2002, the Company filed a Form 8-K under Item 5 reporting the appointment of one director to the Board of Directors increasing the number of directors to seven.

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SIGNATURE

      Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

  GAMESTOP CORP.

  By:  /s/ DAVID W. CARLSON
 
  David W. Carlson
  Executive Vice President and
  Chief Financial Officer
  (Principal Accounting and Financial Officer)

Date: September 12, 2002

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CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

      I, R. Richard Fontaine, certify that:

        1. I have reviewed this quarterly report on Form 10-Q of GameStop Corp.
 
        2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report.
 
        3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report.

  /s/ R. RICHARD FONTAINE
 
  R. Richard Fontaine
  Chief Executive Officer

Date: September 12, 2002

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CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

      I, David W. Carlson, certify that:

        1. I have reviewed this quarterly report on Form 10-Q of GameStop Corp.
 
        2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report.
 
        3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report.

  /s/ DAVID W. CARLSON
 
  David W. Carlson
  Executive Vice President and
  Chief Financial Officer

Date: September 12, 2002

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GAMESTOP CORP.

EXHIBIT INDEX

             
Exhibit
Number Description


  99.1       Certificate of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  99.2       Certificate of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

E-1