UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No.  )

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GameStop Corp.

(Name of Registrant as Specified In Its Charter)

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

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GameStop Corp.

625 Westport Parkway

Grapevine, Texas 76051

 

May 29, 2007

 

Dear Stockholder:

 

You are cordially invited to attend the 2007 Annual Meeting of Stockholders of GameStop Corp. The meeting will be held at 12:00 p.m., Central Standard Time, on Thursday, June 28, 2007 at the Hilton Anatole Hotel, 2201 Stemmons Freeway, Dallas, Texas.

 

Information about the meeting and the various matters on which the stockholders will act is included in the Notice of Annual Meeting of Stockholders and Proxy Statement which follow. Also included are a Proxy Card and a postage paid return envelope.

 

Whether or not you plan to attend the meeting, we hope you will have your shares represented at the meeting by completing, signing and returning your Proxy Card in the enclosed postage paid return envelope promptly.

 

Sincerely,

 

SCOTT W. SHAVER

Secretary

 

GameStop Corp.

625 Westport Parkway

Grapevine, Texas 76051

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

TO BE HELD JUNE 28, 2007

 

The Annual Meeting of Stockholders of GameStop Corp. (the “Company”) will be held at the Hilton Anatole Hotel, 2201 Stemmons Freeway, Dallas, Texas, at 12:00 p.m., Central Standard Time, on Thursday, June 28, 2007 for the following purposes:

 

1. To elect four directors to serve until the 2010 annual meeting of stockholders and until their respective successors are duly elected and qualified;

 

2. To approve the amendment and restatement of the Amended and Restated GameStop Corp. 2001 Incentive Plan;

 

3. To ratify the appointment of BDO Seidman, LLP as the independent registered public accounting firm for the Company’s fiscal year ending February 2, 2008; and

 

4. To transact such other business as may be properly brought before the meeting and any adjournment or postponement thereof.

 

Only holders of record of Class A Common Stock as of the close of business on May 4, 2007 are entitled to notice of and to vote at the meeting and at any adjournment or postponement thereof.

 

SCOTT W. SHAVER

Secretary

 

Grapevine, Texas

May 29, 2007

 

 

 

 

GameStop Corp.

625 Westport Parkway

Grapevine, Texas 76051

 

PROXY STATEMENT FOR ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON JUNE 28, 2007

 

INTRODUCTION

 

This Proxy Statement and enclosed Proxy Card are being furnished commencing on or about May 29, 2007 in connection with the solicitation by the board of directors of GameStop Corp., a Delaware corporation (the “Company” or “GameStop”), of proxies for use at the Annual Meeting of Stockholders to be held on June 28, 2007 (the “Meeting”) for the purposes set forth in the accompanying Notice of Annual Meeting of Stockholders. Any proxy given pursuant to such solicitation and received in time for the Meeting will be voted as specified in such proxy. If no instructions are given, proxies will be voted FOR the election of the nominees listed below under the caption “Election of Directors — Information Concerning the Directors and Nominees — Nominees for Election as Director,” FOR the approval of the amendment and restatement of the Amended and Restated GameStop Corp. 2001 Incentive Plan (the “Incentive Plan”), FOR the ratification of the appointment of BDO Seidman, LLP as the independent registered public accounting firm for the Company’s fiscal year ending February 2, 2008, and in the discretion of the proxies named on the Proxy Card with respect to any other matters properly brought before the Meeting and any adjournments thereof. Any proxy may be revoked by written notice received by the Secretary of the Company at any time prior to the voting thereof by submitting a subsequent proxy or by attending the Meeting and voting in person.

 

Only holders of record of the Company’s Class A Common Stock as of the close of business on May 4, 2007 are entitled to notice of and to vote at the Meeting. As of the record date, 157,413,766 shares of Class A Common Stock, par value $.001 per share (“Common Stock”), were outstanding. Each share of Common Stock entitles the record holder thereof to one vote on each of the Proposals and on all other matters properly brought before the Meeting. The presence of a majority by vote of the outstanding shares of the Common Stock represented in person or by proxy at the Meeting will constitute a quorum.

 

Until February 7, 2007, the Company had two classes of common stock outstanding: Class A Common Stock and Class B Common Stock. The two classes of common stock generally had identical rights, with the exception that the holders of Class A Common Stock were entitled to one vote per share, whereas holders of Class B Common Stock were entitled to ten votes per share. On February 7, 2007, following approval by a majority of the Class B common stockholders at 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 stockholders of record on the close of business on February 20, 2007, paid on March 16, 2007 (the “Stock Split”). Unless otherwise indicated, all numbers in this Proxy Statement have been restated to reflect the Conversion and the Stock Split.

 

The four nominees for director receiving the highest vote totals will be elected as directors of the Company to serve until the 2010 annual meeting of stockholders. The proposal to amend and restate the Incentive Plan will be decided by the affirmative vote of a majority (by vote) of the shares of Common Stock voting on the proposal in person or by proxy at the Meeting. Abstentions will be treated as being present and entitled to vote on the matter and, therefore, will have the effect of votes against the proposal. Broker “non-votes” will be treated as not being entitled to vote on the matter and, therefore, will not be counted for purposes of determining whether the proposal has been approved. The proposal to ratify the appointment of the Company’s independent registered public accounting firm, and all other matters that may be voted on at the Meeting, will be decided by the affirmative vote of a majority (by vote) of the shares of Common Stock voting on the proposal in person or by proxy at the Meeting. Abstentions and broker non-votes will not be included in vote totals with respect to such proposals and will have no effect on the outcome of the votes with respect thereto.

A Proxy Card is enclosed for your use. YOU ARE SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS TO COMPLETE, SIGN, DATE AND RETURN THE PROXY CARD IN THE ACCOMPANYING ENVELOPE, which is postage paid if mailed in the United States.

 

NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROXY STATEMENT, AND, IF GIVEN OR MADE, SUCH INFORMATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THE DELIVERY OF THIS PROXY STATEMENT SHALL, UNDER NO CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE OF THIS PROXY STATEMENT.

 

ELECTION OF DIRECTORS

 

PROPOSAL 1

 

Information Concerning the Directors and Nominees

 

The Company was formed in 2005 for the purpose of consummating the business combination (the “mergers”) of GameStop Holdings Corp., formerly known as GameStop Corp. (“Historical GameStop”), and Electronics Boutique Holdings Corp. (“EB”), which was completed on October 8, 2005. Our board of directors consists of eleven directors. Our certificate of incorporation divides our board of directors into three classes: Class 1, whose terms will expire at the annual meeting of stockholders to be held in 2009, Class 2, whose terms will expire at the Meeting, and Class 3, whose terms will expire at the annual meeting of stockholders to be held in 2008. Daniel A. DeMatteo, Michael N. Rosen and Edward A. Volkwein are in Class 1; R. Richard Fontaine, Jerome L. Davis, James J. Kim and Stephanie M. Shern are in Class 2; and Leonard Riggio, Stanley (Mickey) Steinberg, Gerald R. Szczepanski and Lawrence S. Zilavy are in Class 3. James J. Kim has decided not to stand for re-election upon expiration of his term at the Meeting. At each annual meeting of stockholders, the successors to directors whose terms will then expire will be elected to serve from the time of election and qualification until the third annual meeting following election.

 

In addition, our certificate of incorporation provides that the authorized number of directors may be changed only by resolution of the board of directors. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of the total number of directors.

 

Background information with respect to our board of directors and nominees for election as directors, all but one of whom are incumbent directors and Mr. Steven R. Koonin who is not currently a director, appears below. See “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” for information regarding such persons’ holdings of equity securities of the Company.

 

The following table sets forth the names and ages of our current directors, the year they first became a director and the positions they hold with the Company:

 

 

 

 

Nominees for Election as Director

 

The following individuals are nominees for director at the Meeting:

 

R. Richard Fontaine has been our Chairman of the Board and Chief Executive Officer since Historical GameStop’s initial public offering in February 2002. Mr. Fontaine is also a member of the Executive Committee. Mr. Fontaine has served as the Chief Executive Officer of our predecessor companies since November 1996. He has been an executive officer or director in the video game industry since 1988.

 

Jerome L. Davis is a director and a member of the Compensation Committee and the Nominating and Corporate Governance Committee. Mr. Davis has served as a director since October 2005. Mr. Davis is Chief Executive Officer of Jerome L. Davis & Associates, LLC, a consulting firm focusing on executive leadership, coaching and training. Prior to founding Jerome L. Davis & Associates, LLC in 2005, Mr. Davis was Global Vice President, Service Excellence for Electronic Data Systems, a business and technology services company, from July 2003 until October 2005. From May 2001 to July 2003, he served in various capacities at Electronic Data Systems, including Chief Client Executive Officer and President, Americas for Business Process Management. Prior to joining Electronic Data Systems, Mr. Davis served as President and Executive Officer of the Commercial Solutions Division of Maytag Corporation, a home and commercial appliance company, from October 1999 until May 2001. Mr. Davis served as Senior Vice President of Sales and Corporate Officer for Maytag Appliances Division from March 1998 to September 1999. From March 1992 to February 1998, Mr. Davis was Vice President of National Accounts and Area Vice President for Frito Lay. Mr. Davis also held senior executive positions in Sales and

Marketing with Procter & Gamble from 1977 to 1992. Mr. Davis is currently a director and Chair of the Finance and Enterprise Risks Committee and a member of the Nominating and Corporate Governance Committee of Apogee Enterprises, Inc., where he has been a director since 2004.

 

Stephanie M. Shern is a director and Chair of the Audit Committee. Mrs. Shern formed Shern Associates LLC in February 2002 to provide business advisory and board services, primarily to publicly-held companies. From May 2001 until February 2002, Mrs. Shern served as Senior Vice President and Global Managing Director of Retail and Consumer Products for Kurt Salmon Associates. From 1995 until April 2001, Mrs. Shern was the Vice Chair and Global Director of Retail and Consumer Products for Ernst & Young LLP and a member of Ernst & Young’s Management Committee. Mrs. Shern is currently a director and Chair of the Audit Committee of The Scotts/Miracle Gro Company, a director, Chair of the Audit Committee and member of the Compensation Committee of Embarq Corporation, and a director and member of the Audit and Remuneration Committees of Royal Ahold.

 

Steven R. Koonin, 49, is a nominee for director. Mr. Koonin is the President of Turner Entertainment Networks, a position he has held since October 2006. Mr. Koonin joined the Turner Entertainment Group in February 2000 and served as Executive Vice President and Chief Operating Officer of the TNT and TBS networks until October 2006, where he was responsible for the rebranding of both networks and the development of some of the most successful series and mini-series in cable television history. Prior to February 2000, Mr. Koonin spent 14 years with The Coca-Cola Company, serving most recently as Vice President of Consumer Marketing. Mr. Koonin is also a director of the Georgia Aquarium and the Fox Theatre.

 

Mr. Koonin was recommended to the Nominating and Corporate Governance Committee by Stanley (Mickey) Steinberg and Edward A. Volkwein, both of whom are directors of the Company.

 

THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR THE ELECTION OF EACH NOMINEE FOR DIRECTOR NAMED ABOVE. PROXIES SOLICITED BY THIS PROXY STATEMENT WILL BE VOTED FOR EACH NOMINEE NAMED ABOVE UNLESS A VOTE AGAINST A NOMINEE OR AN ABSTENTION IS SPECIFICALLY INDICATED.

 

Other Directors whose Terms of Office Continue after the Meeting

 

Daniel A. DeMatteo has been our Vice Chairman and Chief Operating Officer since March 2005. Prior to March 2005, Mr. DeMatteo served as President and Chief Operating Officer of the Company or our predecessor companies since November 1996. He has served on our board since 2002 and has been an executive officer in the video game industry since 1988.

 

Leonard Riggio is a director and Chair of the Executive Committee. Mr. Riggio was the Chairman of the Board of Historical GameStop or its predecessor companies from November 1996 until Historical GameStop’s initial public offering in February 2002. He has served as an executive officer or director in the video game industry since 1987. Mr. Riggio has been Chairman of the Board and a principal stockholder of Barnes & Noble, Inc. (“Barnes & Noble”) since its inception in 1986 and served as Chief Executive Officer from its inception in 1986 until February 2002. Since 1965, Mr. Riggio has been Chairman of the Board, Chief Executive Officer and the principal stockholder of Barnes & Noble College Booksellers, Inc., one of the largest operators of college bookstores in the country. Since 1985, Mr. Riggio has been Chairman of the Board and a principal beneficial owner of MBS Textbook Exchange, Inc., one of the nation’s largest wholesalers of college textbooks.

 

Michael N. Rosen is a director. Mr. Rosen has served as a director for us or our predecessor companies since October 1999. Mr. Rosen is also a member of the Executive Committee and served as the Secretary of the Company or our predecessor companies from October 1999 until May 2007. Mr. Rosen has been a partner at Bryan Cave LLP, counsel to the Company, since their July 2002 combination with Robinson Silverman. Prior to that, Mr. Rosen was Chairman of Robinson Silverman.

 

Stanley (Mickey) Steinberg is a director. Mr. Steinberg has served as a director since the mergers in October 2005. Prior to the mergers, Mr. Steinberg served as a director of EB since September 1998. Mr. Steinberg currently serves as a Senior Advisor to the mergers and acquisitions firm of Navigant Capital Advisors, LLC. From August 1994 to June 1998, Mr. Steinberg served as Chairman of Sony Retail Entertainment. From 1989 to 1994, Mr. Steinberg served as Executive Vice President and Chief Operating Officer of Walt Disney Imagineering.

Mr. Steinberg serves on the Board of Directors of Reckson Associates Realty Corp. and of two privately held companies — AMC, Inc., the owner and manager of the AmericasMart Atlanta trade show center, and ECI Group, an apartment developer, construction and management company.

 

Gerald R. Szczepanski is a director, Chair of the Compensation Committee and a member of the Audit Committee and the Nominating and Corporate Governance Committee. Mr. Szczepanski is currently retired. Mr. Szczepanski was the co-founder, and, from 1994 to 2005, the Chairman and Chief Executive Officer of Gadzooks, Inc., a publicly traded specialty retailer of casual clothing and accessories for teenagers. On February 3, 2004, Gadzooks, Inc. filed a voluntary petition under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Northern District of Texas, Dallas Division (Case No. 04-31486-11).

 

Edward A. Volkwein is a director and a member of the Audit Committee, the Compensation Committee and the Nominating and Corporate Governance Committee. Mr. Volkwein is President and Chief Marketing Officer of Hydro-Photon, Inc., a water purification technology company. Prior to joining Hydro-Photon, Mr. Volkwein had a broad marketing career beginning in brand management for General Foods and Chesebrough-Ponds, Inc. He served as Senior Vice President Global Advertising and Promotion for Philips Consumer Electronics and as Senior Vice President Marketing for Sega of America, where he was instrumental in developing Sega into a major video game brand. Mr. Volkwein has also held senior executive positions with Funk & Wagnalls and Prince Manufacturing.

 

Lawrence S. Zilavy is a director. Mr. Zilavy has served as a director since October 2005. Mr. Zilavy is Senior Vice President of Barnes & Noble College Booksellers, Inc. Mr. Zilavy was Executive Vice President, Corporate Finance and Strategic Planning for Barnes & Noble from May 2003 until November 2004 and was Chief Financial Officer of Barnes & Noble from June 2002 through April 2003. Prior to that, he was Executive Vice President of IBJ Whitehall Bank and Trust Company, where he worked since 1992. Mr. Zilavy is also a director of Barnes & Noble, a director of The Hain Celestial Group, Inc., a director of the non-profit Community Resource Exchange and a trustee of St. Francis College in New York City.

 

Directors Not Standing for Re-Election

 

James J. Kim is a director. Mr. Kim has served as a director since the mergers in October 2005. Prior to the mergers, Mr. Kim served as EB’s Chairman and as a director of EB since March 1998. Mr. Kim has chosen not to stand for re-election to the board of directors when his term expires at the Meeting.

 

Meetings and Committees of the Board

 

The board of directors met eight times during the fiscal year ended February 3, 2007 (“fiscal 2006”). All directors who were directors for the full fiscal year attended at least 75% of all of the meetings of the board of directors and the committees thereof on which they served during fiscal 2006 with the exception of Mr. Riggio and Mr. Kim.

 

The board of directors has four standing committees: an Audit Committee, a Compensation Committee, an Executive Committee and a Nominating and Corporate Governance Committee.

 

Audit Committee.  The Audit Committee has the principal function of, among other things, reviewing the adequacy of the Company’s internal system of accounting controls, the appointment, compensation, retention and oversight of the independent certified public accountants, conferring with the independent public accounting firm concerning the scope of their examination of the books and records of the Company, reviewing and approving related party transactions and considering other appropriate matters regarding the financial affairs of the Company. In addition, the Audit Committee has established procedures for the receipt, retention and treatment of confidential and anonymous complaints regarding the Company’s accounting, internal accounting controls and auditing matters. The board of directors has adopted a written charter setting out the functions of the Audit Committee, a copy of which is attached hereto as Appendix B and is also available on the Company’s website at www.gamestop.com and is available in print to any stockholder who requests it in writing to the Company’s Secretary, GameStop Corp., 625 Westport Parkway, Grapevine, Texas 76051. As required by the charter, the Audit Committee will continue to review and reassess the adequacy of the charter annually and recommend any changes to the board of directors for approval. The current members of the Audit Committee are Stephanie M. Shern (Chair), Edward A. Volkwein and

Gerald R. Szczepanski, all of whom are “independent” directors under the listing standards of the New York Stock Exchange (“NYSE”). In addition to meeting the independence standards of the NYSE, each member of the Audit Committee is financially literate and meets the independence standards established by the Securities and Exchange Commission (the “SEC”). The board of directors has also determined that Mrs. Shern has the requisite attributes of an “audit committee financial expert” as defined by regulations promulgated by the SEC and that such attributes were acquired through relevant education and/or experience. The board of directors further determined that Ms. Shern’s simultaneous service on the audit committees of three other listed companies does not impair the ability of Ms. Shern to effectively serve on the Company’s Audit Committee. The Audit Committee met 12 times during fiscal 2006.

 

Compensation Committee.  The principal function of the Compensation Committee is to, among other things, make recommendations to the board of directors with respect to matters regarding the approval of employment agreements, management and consultant hiring and executive compensation. The Compensation Committee is also responsible for administering our Amended and Restated 2001 Incentive Plan, as amended, and our Supplemental Compensation Plan (the “Supplemental Compensation Plan”). The current members of the Compensation Committee are Gerald R. Szczepanski (Chair), Jerome L. Davis and Edward A. Volkwein, all of whom meet the independence standards of the NYSE. The board of directors has adopted a written charter setting out the functions of the Compensation Committee, a copy of which is available on the Company’s website at www.gamestop.com and is available in print to any stockholder who requests it in writing to the Company’s Secretary, GameStop Corp., 625 Westport Parkway, Grapevine, Texas 76051. The Compensation Committee met three times during fiscal 2006.

 

Executive Committee.  The Executive Committee was formed in October 2005. The principal function of the Executive Committee is to, among other things, review issues, including strategic planning and other matters, which are appropriate for deliberation and decision by the board of directors, and make recommendations with respect thereto. The current members of the Executive Committee are Leonard Riggio (Chair), R. Richard Fontaine and Michael N. Rosen.

 

Nominating and Corporate Governance Committee.  The principal function of the Nominating and Corporate Governance Committee is to review and recommend to the board candidates for service on the board and its committees, including the renewal of existing directors, and to recommend to the board the corporate governance guidelines applicable to the Company. The current members of the Nominating and Corporate Governance Committee are Gerald R. Szczepanski, Jerome L. Davis and Edward A. Volkwein, all of whom meet the independence standards of the NYSE. Our board of directors has adopted a written charter setting out the functions of the Nominating and Corporate Governance Committee, a copy of which can be found on our website at www.gamestop.com and is available in print to any stockholder who requests it in writing to the Company’s Secretary, GameStop Corp., 625 Westport Parkway, Grapevine, Texas 76051. The Nominating and Corporate Governance Committee met once during fiscal 2006.

 

Minimum Qualifications

 

The Nominating and Corporate Governance Committee does not set specific minimum qualifications for directors except to the extent required to meet applicable legal, regulatory and stock exchange requirements, including, but not limited to, the independence requirements of the NYSE and the SEC, as applicable. Nominees for director will be selected on the basis of outstanding achievement in their personal careers; board experience; wisdom; integrity; ability to make independent, analytical inquiries; understanding of the business environment; and willingness to devote adequate time to board of directors’ duties. While the selection of qualified directors is a complex and subjective process that requires consideration of many intangible factors, the Nominating and Corporate Governance Committee believes that each director should have a basic understanding of (i) the principal operational and financial objectives and plans and strategies of the Company, (ii) the results of operations and financial condition of the Company and of any of its significant subsidiaries or business segments, and (iii) the relative standing of the Company and its business segments in relation to their competitors.

 

Nominating Process

 

Consideration of new board of director nominee candidates, if any, typically involves a series of internal discussions, review of information concerning candidates and interviews with selected candidates. The Nominating and Corporate Governance Committee is willing to consider candidates submitted by a variety of sources (including incumbent directors, stockholders (in accordance with the process described below), Company management and third-party search firms) when reviewing candidates to fill vacancies and/or expand the board of directors. When nominating a sitting director for re-election at an annual meeting, the Nominating and Corporate Governance Committee will consider the director’s performance on the board of directors and the director’s qualifications in respect of the foregoing.

 

Consideration of Stockholder-Nominated Directors

 

Stockholders have the right to submit nominations for persons to be elected to the board of directors as described below. If such a nomination occurs and if a vacancy arises or if the board of directors decides to expand its membership, and at such other times as the board of directors deems necessary or appropriate, the Nominating and Corporate Governance Committee will consider potential nominees submitted by stockholders. The Company’s Bylaws provide that, in order for a stockholder to nominate a person for election to the board of directors at an annual meeting of stockholders, such stockholder must give written notice to the Company’s Secretary, GameStop Corp., 625 Westport Parkway, Grapevine, Texas 76051, not less than 30 days nor more than 60 days prior to the meeting; provided, however, that in the event that less than 40 days notice or prior public disclosure of the date of the meeting is given to stockholders, notice by the stockholder must be given not later than the close of business on the tenth day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made. Such notice must contain the proposing stockholder’s record name and address, and the class and number of shares of the Company which are beneficially owned by such stockholder. Such notice must also contain all information relating to such nominee that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, including such person’s written consent to being a nominee and to serving as a director if elected.

 

Corporate Governance

 

Code of Business Conduct and Ethics

 

The board of directors has adopted a Code of Business Conduct and Ethics that is applicable to all executive officers, directors and members of senior management. The Code of Business Conduct and Ethics is available on the Company’s website at www.gamestop.com and is available in print to any stockholder who requests it in writing to the Company’s Secretary, GameStop Corp., 625 Westport Parkway, Grapevine, Texas 76051.

 

Code of Ethics for Senior Financial Officers

 

The Company has adopted a Code of Ethics that is applicable to the Chairman of the Board and Chief Executive Officer, Vice Chairman and Chief Operating Officer, President, Chief Financial Officer, Chief Accounting Officer and any Executive Vice President of the Company. This Code of Ethics is available on the Company’s website at www.gamestop.com and is available in print to any stockholder who requests it in writing to the Company’s Secretary, GameStop Corp., 625 Westport Parkway, Grapevine, Texas 76051. In accordance with SEC rules, the Company intends to disclose any amendment (other than any technical, administrative or other non-substantive amendment) to, or any waiver from, a provision of the Code of Ethics on the Company’s website at www.gamestop.com within five business days following such amendment or waiver.

 

Corporate Governance Guidelines

 

The board of directors has adopted Corporate Governance Guidelines. The Corporate Governance Guidelines are available on the Company’s website at www.gamestop.com and are available in print to any stockholder who requests them in writing to the Company’s Secretary, GameStop Corp., 625 Westport Parkway, Texas 76051.

 

Communications Between Stockholders and Interested Parties and the Board of Directors

 

Stockholders and other interested persons seeking to communicate with the board of directors should submit any communications in writing to the Company’s Secretary, GameStop Corp., 625 Westport Parkway, Grapevine, Texas 76051. Any such communication must state the number of shares beneficially owned by the stockholder making the communication. The Company’s Secretary will forward such communication to the full board of directors or to any individual director or directors (including the presiding director of the executive sessions of the non-management directors or the non-management directors as a group) to whom the communication is directed.

 

Attendance at Annual Meetings

 

All members of the board of directors are expected to attend in person the Company’s annual meetings of stockholders and be available to address questions or concerns raised by stockholders. Nine of the Company’s directors attended the 2006 GameStop annual meeting of stockholders.

 

Director Independence

 

The current members of the board of directors who are “independent” directors under the listing standards of the NYSE are Jerome L. Davis, James J. Kim, Stephanie M. Shern, Stanley Steinberg, Gerald R. Szczepanski and Edward A. Volkwein. In addition to meeting the independence standards of the NYSE, each of these directors meets the independence standards established by the SEC. Steven R. Koonin, who is a nominee for director to replace Mr. Kim, also meets the independence standards of the NYSE and the SEC. The independent non-management directors of the Company hold regularly scheduled executive sessions without management present at least once annually. The presiding director for each non-management executive session is Ms. Shern.

 

Executive Officers

 

The following table sets forth the names and ages of our executive officers and the positions they hold:

 

 

Information with respect to executive officers of the Company who also are directors is set forth in “Information Concerning the Directors and Nominees” above.

 

Steven R. Morgan has been our President since December 2005. Mr. Morgan joined the Company upon completion of the mergers in October 2005 in his position as EB’s President of Stores — North America and President of Electronics Boutique Canada Inc. He had served in that capacity since April 2002. From June 2001 to April 2002, Mr. Morgan served as EB’s Senior Vice President of Stores and Canadian Operations. Mr. Morgan joined EB in January 2001 as Senior Vice President of Stores. Prior to January 2001, Mr. Morgan held various positions within the Federated and May Department Stores organizations.

 

David W. Carlson has been Executive Vice President and Chief Financial Officer of GameStop or our predecessor companies since November 1996. From 1989 to November 1996, Mr. Carlson held various positions with Barnes & Noble, including Director of Finance, Director of Accounting and Manager of Financial Reporting. Prior to 1989, Mr. Carlson held various positions with the public accounting firm of KPMG Peat Marwick.

 

Ronald Freeman has been our Executive Vice President of Distribution since January 2004. From March 2000 to January 2004, Mr. Freeman was our Vice President of Distribution and Logistics. Mr. Freeman was Vice

President of Distribution/Configuration for CompUSA from July 1997 until March 2000. Mr. Freeman was Vice President of Distribution and Logistics of Babbage’s, a predecessor company of ours, from November 1996 until July 1997.

 

Tony D. Bartel has been the Executive Vice President of Merchandising and Marketing since March 2007. Prior to that, Mr. Bartel was the Senior Vice President of International Finance, a role he has held since joining GameStop in 2005. Mr. Bartel joined GameStop from NCH Corporation where he was the Chief Administrative Officer from May 2003 to May 2005. From 1989 to May 2003, Mr. Bartel held various positions with PepsiCo and Yum Brands, Inc. including Operational Finance, Strategic Planning, Controller and eventually the Chief Financial Officer of Pizza Hut. Prior to 1989, Mr. Bartel held various positions with the public accounting firm of KPMG Peat Marwick.

 

Robert A. Lloyd has been our Senior Vice President and Chief Accounting Officer since October 2005. Prior to that, Mr. Lloyd was the Vice President — Finance of GameStop or its predecessor companies from October 2000 and was the Controller of GameStop’s predecessor companies from December 1996 to October 2000. From May 1988 to December 1996, Mr. Lloyd held various financial management positions as Controller or Chief Financial Officer, primarily in the telecommunications industry. Prior to May 1988, Mr. Lloyd held various positions with the public accounting firm of Ernst & Young. Mr. Lloyd is a Certified Public Accountant.

 

Our executive officers are elected by our board of directors on an annual basis and serve until the next annual meeting of our board of directors or until their successors have been duly elected and qualified.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

The following table sets forth the number of shares of our Common Stock and exercisable options to purchase such stock beneficially owned on May 4, 2007 by each director and each of the executive officers named in the Summary Compensation Table, each holder of 5% or more of our Common Stock and all of our directors and executive officers as a group. Except as otherwise noted, the individual director or executive officer or his or her family members had sole voting and investment power with respect to the identified securities. The total number of shares of our Common Stock outstanding as of May 4, 2007 was 157,413,766.

 

 

 

Compensation Committee Interlocks and Insider Participation

 

The members of the Compensation Committee are Gerald R. Szczepanski (Chair), Jerome L. Davis and Edward A. Volkwein, none of whom has ever been an employee of the Company. No member of the committee had a relationship requiring disclosure in this Proxy Statement under Items 404 or 407 of SEC Regulation S-K.

 

Executive Compensation

 

The following table (the “Summary Compensation Table”) sets forth the compensation earned during the year indicated by our chief executive officer, chief financial officer and our three other most highly compensated executive officers.

 

 

 

 

 

 

Grants of Plan-Based Awards in Last Fiscal Year

 

The following table shows all grants of plan-based awards, including grants of restricted shares of our Common Stock and grants of options to acquire shares of our Common Stock granted to the executive officers named in the Summary Compensation Table for fiscal 2006. The grant of share-based awards on February 10, 2006 was based on performance for the fiscal year ended January 28, 2006 (“fiscal 2005”).

 

 

 

 

Additional Material Factors

 

The Company has historically granted stock options to its executive officers and other eligible full-time employees. In February 2006, the Chief Executive Officer recommended to the Compensation Committee that the

Company issue restricted stock to the executive officers and stock options to other eligible employees in order to reduce the amount of shares granted in the awards and preserve the available pool of un-issued awards for the future. A larger number of shares are needed when granting options because a holder only realizes value on those options from an increase in the share price from the exercise price, while a smaller number of shares are needed for grants of restricted stock because the holder realizes value for the entire share price and any subsequent increases. Mr. Fontaine, Mr. DeMatteo, Mr. Carlson and Mr. Freeman received awards of restricted stock while Mr. Morgan and other eligible employees received awards of stock options. Mr. Morgan received an award of stock options, as opposed to restricted stock, in accordance with the terms of the employment agreement signed in December 2005 when he was hired as the Company’s President.

 

The Company has entered into employment agreements with R. Richard Fontaine, Daniel A. DeMatteo, Steven R. Morgan and David W. Carlson. The terms of the employment agreements for each of these executive officers extend through the fiscal year ended February 2, 2008 and provide for minimum annual salaries as follows:

 

 

Annual bonus compensation will be based on the formula and targets established under and in accordance with the Company’s Supplemental Compensation Plan. The Target specified in the “Non-Equity Incentive Plan” column of the Grants of Plan-Based Awards table above was achieved and is reflected in the “Non-Equity Incentive Plan Compensation” column of the Summary Compensation Table.

 

Under the terms of their employment agreements, each executive shall be entitled to all benefits afforded to key management personnel or as determined by the board of directors of the Company, including, but not limited to, restricted stock and stock option benefits, insurance programs, pension plans, vacation, sick leave, expense accounts and retirement benefits.

 

Under the terms of his employment agreement, Mr. Morgan is also entitled to certain benefits associated with his transition from employment by EB to his employment as the Company’s President. Mr. Morgan is entitled to the reimbursement of expenses incurred in relocating to the Company’s headquarters in Grapevine, Texas from his residence in Pennsylvania, including one relocation to a temporary residence in Texas and one relocation to a permanent residence in Texas at such time as Mr. Morgan’s spouse relocates to Texas. The relocation to the temporary residence took place in fiscal 2006 and the Company incurred costs totaling $66,545 in fiscal 2006 in connection with this relocation. The relocation to the permanent residence is expected to take place in fiscal 2008. Mr. Morgan is also entitled to two round-trip first class airfares per month between Pennsylvania and Texas until the later of December 31, 2007 or such time as his spouse relocates to Texas. The Company incurred costs totaling $5,738 in fiscal 2006 in connection with this entitlement.

 

Outstanding Equity Awards at Fiscal Year End

 

The following table provides information for the executive officers named in the Summary Compensation Table regarding outstanding equity awards held as of February 3, 2007 by those executive officers. The year-end values in the table for the market value of shares that have not vested have been calculated based on the $26.95 per share closing price of our Common Stock on February 2, 2007 (the last trading date of the fiscal year).

 

 

 

 

The options to purchase shares of our Common Stock granted in 2003 or later and the restricted stock awards reflected in the table above were subject to compensation expense under SFAS 123(R). The compensation expense incurred in fiscal 2006 for each executive officer associated with these options and restricted stock grants has been reflected in the Summary Compensation Table for each executive officer. In addition, those grants which occurred in fiscal 2006 have been reflected in either the “All Other Stock Awards” or “All Other Option Awards” columns of the Grants of Plan-Based Awards table above.

 

Option Exercises and Stock Vested

 

The following table provides information for the executive officers named in the Summary Compensation Table regarding exercises of options to purchase shares of our Common Stock and shares acquired upon vesting of stock awards during fiscal 2006 by those executive officers. The values realized upon exercise or vesting in the table have been calculated using the stock price at the time of exercise or vesting.

 

 

Pension Plans

 

The Company does not provide pension plans for the benefit of its employees; therefore, we have omitted the Pension Benefits Table.

 

Nonqualified Deferred Compensation

 

The Company assumed the sponsorship of EB’s nonqualified deferred compensation plan (the “EB Plan”) upon the mergers. Participation in the EB Plan was restricted upon the mergers to those employees already participating in the EB Plan. Steven R. Morgan is the only executive officer that participates in the EB Plan, as he was employed by EB prior to the mergers. The following table presents the activity for fiscal 2006 for the executive officers named in the Summary Compensation Table.

 

 

The EB Plan provides for the deferral of salary and bonus only by participating employees without limitation. The Company matches 100% of the participating employee’s deferral up to 5% of the participating employee’s salary. Withdrawals only occur in lump-sum form upon separation of employment from the Company. The EB Plan is administered by a third-party and each participant directs the investment of any amounts deferred among various mutual fund choices. Amounts contributed by the Company on behalf of participants are invested in Company-owned life insurance policies with investment returns tied to published 30-year bond rates. The investment of funds in widely available mutual funds does not result in above-market or preferential earnings. Amounts shown above for executive contributions are included in amounts listed in the “Salary” column of the Summary Compensation Table and amounts shown above for registrant contributions are included in amounts listed in the “All Other Compensation” column of the Summary Compensation Table.

 

Employment Agreements and Potential Payments upon Change in Control or Termination

 

GameStop has entered into employment agreements with R. Richard Fontaine, Daniel A. DeMatteo, Steven R. Morgan and David W. Carlson. See “Compensation Discussion and Analysis — Employment Agreements” below for a description of the terms of these employment agreements. Ronald Freeman does not have a formal

employment or severance agreement with the Company. Any severance payments in the form of salary or bonus to Mr. Freeman would be provided at the discretion of the board of directors.

 

Pursuant to the employment agreements, each executive’s employment may be terminated upon death, disability, by GameStop with or without cause or by the executive within twelve months of a good reason event. If an executive’s employment is terminated due to death or disability, by the Company with cause or by the executive without good reason, the executive is entitled to payment of base salary through the date of death, disability or termination of employment. A good reason event is defined as a change of control, a reduction in compensation or a material reduction in benefits or responsibilities, or a relocation of at least 50 miles. Among other things, the employment agreement includes a severance arrangement if the executive is terminated by GameStop without cause or by the executive for good reason which provides each executive with the greater of his base salary through the term of the agreement or one year, plus the average of the last three annual bonuses, plus the continuation of medical benefits for 18 months and the release of all stock option restrictions. Amounts owed to the executive officers upon termination or a change of control assuming a triggering event took place on February 2, 2007, the last business day of the Company’s last completed fiscal year, are presented below:

 

 

 

Director Compensation

 

The following table provides information regarding compensation earned by the non-employee directors during fiscal 2006:

 

 

 

 

Directors who are not employees of the Company receive compensation of $50,000 per annum and $1,000 per in-person board or committee meeting. In addition, we reimburse our directors for expenses in connection with attendance at board and committee meetings. Other than with respect to reimbursement of expenses, directors who are our employees do not receive additional compensation for their services as directors.

 

In both February 2007 and February 2006, each of the directors at those times who were not employees of our Company (Jerome L. Davis, James J. Kim, Leonard Riggio, Michael N. Rosen, Stephanie M. Shern, Stanley Steinberg, Gerald R. Szczepanski, Edward A. Volkwein and Lawrence S. Zilavy) were granted 19,200 restricted shares of our Common Stock. Each grant of these restricted shares vests in equal annual increments over a three-year period.

 

In September 2005, each of the directors at that time who were not employees of our Company (Leonard Riggio, Michael N. Rosen, Stephanie M. Shern, Gerald R. Szczepanski and Edward A. Volkwein) were granted 20,000 restricted shares of our Common Stock and were granted options to acquire 48,000 shares of our Common Stock. Each grant of these restricted shares vests in equal annual increments over a two-year period. Each of these options was granted at an exercise price equal to the average of the high and low stock prices of our Common Stock on the date prior to the date of grant ($17.94 per share), as specified in the Incentive Plan, and each option vests in equal annual increments over a three-year period and expires ten years from the grant date.

 

In June 2004, each of the directors at that time who were not employees or affiliates of our Company (Michael N. Rosen, Stephanie M. Shern, Gerald R. Szczepanski and Edward A. Volkwein) were granted options to acquire 42,000 shares of our Common Stock. Each of these options was granted at an exercise price equal to the average of the high and low stock prices of our Common Stock on the date prior to the date of grant ($7.55 per share), as specified in the Incentive Plan, and each option vests in equal annual increments over a three-year period and expires ten years from the grant date.

 

COMPENSATION DISCUSSION AND ANALYSIS

 

General

 

The Company’s executive officer compensation program is administered by the Compensation Committee of the Board of Directors. The program is based upon the following guiding principles:

 

1. The pay and benefits provided by the Company to its executive officers should be competitive and allow the Company to attract and retain individuals whose skills are critical to the long-term success of the Company.

 

2. The compensation offered by the Company should reward and motivate individual and team performance in attaining business objectives and maximizing stockholder value.

 

3. Compensation awards should be based on the fundamental principle of aligning the long-term interests of GameStop’s employees with those of GameStop’s stockholders. Therefore, a meaningful portion of most management employees’ compensation will be in the form of equity compensation and may include situational bonuses, as appropriate, in recognition of meeting unique, time-sensitive performance challenges that may arise.

 

4. The overall value of the incentive and total compensation opportunities will be designed to be consistent with the level of the Company’s operational performance over time and in the level of returns provided to stockholders.

 

The Compensation Committee believes that the organization’s directors and senior executives should be compensated commensurate with their success in maintaining the growth and high level of performance necessary for GameStop to produce ongoing and sustained value for our stockholders. The Compensation Committee will develop and recommend compensation programs to support these critical objectives. The board of directors will continue to have sole approval rights over the Compensation Committee’s recommendations.

 

The compensation program is designed to reward the executive officers for the dedication of their time, efforts, skills and business experience to the business of the Company. The compensation program is designed to reward both annual and long-term performance. Annual performance is rewarded through salary and annual bonus and is measured by the Company’s operating earnings, net income and growth, among other factors. Long-term performance is rewarded through stock options or restricted stock awards and is measured in the performance of the Company’s stock price, which is tied to earnings, growth and other factors.

 

Role of Compensation Consultants

 

For assistance in developing effective recommendations, the Compensation Committee believes that an independent compensation consultant can and should provide independent recommendations and points of view, a role that is essential to the process of impartial compensation evaluation. Therefore, when appropriate, the Committee will utilize an independent compensation consultant who will report to and take direction from the Compensation Committee. The consultant’s research and viewpoints will provide one of several necessary data points that will be used to determine the Compensation Committee’s specific compensation recommendations to the board of directors.

 

During the fiscal years ended January 31, 2004 and January 29, 2005, the Company retained Mercer Human Resource Consulting (“Mercer”) to evaluate its compensation programs for all levels of office and store operations management, from the district manager level up to and including senior management, and make recommendations to ensure that GameStop’s compensation was market competitive, while maintaining internal equity.

 

In fiscal 2006, the Compensation Committee engaged Mercer to review the compensation programs in place for the Company’s executive officers. Mercer was engaged to evaluate each key element of the compensation program and the total compensation program relative to the Company’s peers. The key elements (base salary, annual bonus and stock option and/or restricted stock awards) were analyzed against the peer group both independently and collectively in order to determine in which percentile of the peer group the Company’s executive officers fell. The purpose of this engagement was to determine whether the Company’s total compensation plan and allocation of compensation between base salary, annual bonus and long-term incentives (primarily stock-based) was reasonable considering the Company’s peers.

 

Current compensation for each executive, consisting of base salary and annual bonus, was targeted by the Compensation Committee to rank in the 55^th percentile of the peer group, with total compensation, including the value of long-term awards, targeted to rank in the 75^th percentile of peers. The results of the Mercer study showed that the Company’s executive officers were generally in the appropriate percentiles of both current and total compensation. Where the Compensation Committee determined that there were instances of one or more elements of an individual’s compensation ranking outside the targeted percentile range, considerations were made to compensation, bonus and awards for the fiscal year ending February 2, 2008 (“fiscal 2007”) in order to balance the individual elements of compensation, where possible, and the total compensation in line with the targets. The only changes made by the Compensation Committee to current compensation for the surveyed positions, after considering Mercer’s recommendations, were to increase the base salary of Steven R. Morgan, the Company’s President by 11% to $500,000, to increase the base salary of David W. Carlson, the Company’s Executive Vice President and Chief Financial Officer by 14% to $400,000, to increase the annual bonus target of Mr. Morgan from 50% of base salary to 75% of base salary and to increase the annual bonus target of Mr. Carlson from 70% of base salary to 75% of base salary.

 

A great deal of research and effort was devoted to establishing the Company’s peer group. The peer group used to benchmark compensation was established by Mercer from the universe of other specialty retailers, constituting a combination of similar revenue size, number of stores, international scope, demographics, growth rate or market value. Companies in the peer group include Limited Brands, OfficeMax, Bed Bath & Beyond, Foot Locker, American Eagle Outfitters, Barnes & Noble, Borders Group, Michaels Stores, Quicksilver, Radio Shack, Petsmart, Abercrombie & Fitch, Payless Shoesource and Pacific Sunwear (the “Original Peer Group”). Consideration was also given to an additional peer group of high-growth retail companies, including Dick’s Sporting Goods, Advanced Auto Parts, Pantry, Williams-Sonoma, Ann Taylor Stores, Tractor Supply and O’Reilly Automotive. The Company ranked in the 67^th percentile of revenues of this peer group of 21 companies and in the 52^nd percentile of market value.

 

In performing their assessment of the Company’s executive compensation packages versus the peer group, Mercer considered the 2005 proxy data available for each peer, annual report and press release data, Mercer’s executive compensation surveys and surveys prepared by Towers Perrin and Watson Wyatt. Proxy and survey data was aged by 4% to compare to the Company’s 2006 compensation rates. Positions within the Company for each of the executives were matched to the peer group based upon title, level of pay, organization charts and survey data. Elements of compensation which were analyzed included base salary, annual incentive bonus, targeted total annual cash compensation, long-term incentives and total compensation (cash and long-term incentives). Total annual cash compensation for the surveyed executive positions averaged at approximately the 39^th percentile of the Original Peer Group. Average long-term incentive compensation compared at the 71^st percentile of the Original Peer Group, and average total compensation matched the 68^th percentile.

 

Key Elements of Compensation

 

The Company has entered into employment agreements with its Chief Executive Officer, Chief Operating Officer, President and Chief Financial Officer. These employment contracts cover the key elements of the Company’s executive compensation package, which consist of base salary, annual bonus and stock options or restricted stock, and cover severance and termination benefits. These employment agreements and the Company’s policies with respect to each of the key elements of its executive compensation package are discussed below. In addition, while the elements of compensation described below are considered separately, the Compensation Committee also considers and reviews the full compensation package afforded by the Company to its executive officers, including insurance and other benefits. The Compensation Committee makes its determinations after receiving and considering the recommendations of the Company’s Chief Executive Officer and after considering Mercer’s recommendations and research. The Compensation Committee makes recommendations to the board of directors, which ultimately approves the executive compensation package for each year.

 

In the years prior to fiscal 2006, the Compensation Committee operated from the general principle observed by GameStop since its inception that compensation would be heavily weighted toward short and long-term performance based incentives, while maintaining base salary rates at the competitive middle. As long as the organization continued to perform at a high level, participants had the potential to earn commensurately larger incentives. Therefore, decisions regarding any current-year incentive award targets were based on performance forecasts for that year. The amount of incentive amounts awarded in prior years was not factored into any current-year decision process for that reason.

 

Base Salaries

 

An executive officer’s base salary is determined by evaluating the responsibilities of the position held, the individual’s experience and the competitive marketplace for executive talent. The base salary is intended to be competitive with base salaries paid to executive officers with comparable qualifications, experience and responsibilities at other companies of comparable size, growth and operations. Base salaries for the surveyed executive positions averaged at the 45th percentile of the Original Peer Group.

 

The base salaries of the executive officers are established by the Compensation Committee at or near the beginning of each fiscal year. The Compensation Committee met on February 10, 2006 to establish the base salaries for fiscal 2006 for R. Richard Fontaine, Chairman and Chief Executive Officer, and Daniel A. DeMatteo, Vice Chairman and Chief Operating Officer. Messrs. Fontaine and DeMatteo are entitled to minimum base salaries set forth in their employment agreements (see “Employment Agreements” below). In setting the salaries for Mr. Fontaine and Mr. DeMatteo for fiscal 2006, the Compensation Committee considered that the employment agreements with those individuals were entered into before the merger with EB and did not take into account the increase in the size and scope of the Company’s operations following the merger with EB. Prior to the mergers, the Company operated approximately 2,000 stores in three countries. Following the mergers, the Company operated in excess of 4,500 stores in 15 countries around the world. The Company’s revenues increased from $1.8 billion in fiscal 2004 to over $5 billion in fiscal 2006. The Compensation Committee recognized that the growth in the Company in excess of 100% warranted additional base salary and annual bonus potential for Mr. Fontaine and Mr. DeMatteo. Consideration was also given to the minimum base salaries specified in the employment contracts for each of these executive officers.

 

The Compensation Committee did not review the base salaries for fiscal 2006 for Steven R. Morgan, President, and David W. Carlson, Executive Vice President and Chief Financial Officer, as they were the minimum base salaries established in their employment contracts, which were executed following the mergers in December 2005 and April 2006, respectively, and took into account the increased size of the Company’s operations (see “Employment Agreements” below). The base salary for fiscal 2006 for Ronald Freeman, Executive Vice President of Distribution, was set by Daniel A. DeMatteo, to whom Mr. Freeman reports, with input from Mercer. In setting Mr. Freeman’s base salary, Mr. DeMatteo considered the scope of his responsibilities, the use of multiple distribution centers and changes in the volume and complexity of other operational areas under Mr. Freeman’s direction following the mergers. The Compensation Committee concurred with Mr. Freeman’s salary for fiscal 2006. In accordance with the Company’s policy on the timing of annual salary reviews, the base salaries for the executive officers for fiscal 2006 were effective from March 2006 to March 2007.

 

The Compensation Committee met on February 9, 2007 to establish the base salaries for fiscal 2007 for Messrs. Fontaine, DeMatteo, Morgan and Carlson. In setting the base salaries of these executive officers for fiscal 2007, the Compensation Committee considered the recommendations of Mercer and the Company’s Vice President of Human Resources, the Company’s growth in fiscal 2006 and projections for fiscal 2007. The Compensation Committee also considered the recommendations of Mr. Fontaine and Mr. DeMatteo in setting the base salaries for Mr. Morgan and Mr. Carlson. Mr. Freeman’s base salary for fiscal 2007 was set by Mr. DeMatteo as described above. In setting Mr. Freeman’s base salary, Mr. DeMatteo considered Mr. Freeman’s performance in fiscal 2006 and the planned changes from fiscal 2006 to fiscal 2007 in the volume and complexity of the areas under Mr. Freeman’s direction. The Compensation Committee concurred with Mr. Freeman’s salary for fiscal 2007.

 

The board of directors has set salaries for fiscal 2007 as follows:

 

 

Mr. Freeman’s base salary was set at $300,000.

 

Annual Bonuses

 

In addition to a base salary, each executive officer is eligible for a performance-based annual cash bonus. The Company has chosen to include performance-based annual bonuses as an element in the current compensation plan as they are an accepted and expected part of most compensation plans for executives and serve to motivate individual and team performance in attaining business objectives and maximizing stockholder value. Annual bonuses for the surveyed executive positions averaged at the 49th percentile for the Original Peer Group.

 

Bonuses for most of the executive officers of the Company are based upon the criteria used in, and are calculated in accordance with, the Supplemental Compensation Plan. R. Richard Fontaine, Daniel A. DeMatteo, Steven R. Morgan and David W. Carlson are the executive officers of the Company currently participating in the Supplemental Compensation Plan.

 

The Supplemental Compensation Plan provides that participating executive officers are entitled to a cash bonus in an amount equal to a percentage of their base salary which is pre-determined for each participating executive officer by the Compensation Committee, with input from the Chief Executive Officer, for each fiscal year. The purpose of the Supplemental Compensation Plan is to permit the Company, through awards of annual incentive compensation that satisfy the requirements for performance-based compensation under Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”), to attract and retain management who, because of the extent of their responsibilities, can and do make significant contributions to the success of the Company by their ability, industry, loyalty and exceptional service.

 

The bonus amount is calculated after each fiscal year in accordance with a sliding scale formula based on the extent to which a pre-established performance target is attained. In general, not later than 90 days after the start of

each fiscal year of the Company (and before 25% of the relevant period of service has elapsed), the Compensation Committee establishes in writing a performance target for each participating executive officer (the “Target”). Targets are typically based on budgeted operating earnings for the fiscal year. Operating earnings are budgeted to increase each year from the actual operating earnings achieved during the previous year in order to challenge the executive officers of the Company to increase revenues, control costs and find operating efficiencies and to demonstrate the earnings growth expected of a growth company. Because the Target is higher than the results attained in the previous year and because the Target is established in the first 90 days of the year, the attainment of the Target is substantially uncertain at the time the Target is established. The establishment of the Target as a measure of operating earnings for the four executive officers who participate in the Supplemental Compensation Plan considers the importance of their individual roles in the overall performance and results of the Company. Individual objectives and performance are considered in the establishment of the individual pre-determined percentage of base salary for which each of the four executive officers is eligible (as discussed further below). Stock price performance has not been a factor in determining Targets because the price of the Company’s stock is subject to a variety of factors outside of the Company’s control.

 

Each participating executive officer is entitled to receive a cash bonus in the amount of their pre-determined percentage of base salary (the “Target Bonus”) as follows:

 

 

The Supplemental Compensation Plan limits the maximum cash bonus payable to any participating executive officer to $2,500,000 with respect to any fiscal year. No bonuses are paid until the Compensation Committee certifies the extent to which the Target has been attained. Under the terms of the Supplemental Compensation Plan, the Compensation Committee has no authority to increase the amount of a bonus that would be due upon the attainment of the Target.

 

Ronald Freeman does not participate in the Supplemental Compensation Plan, but is paid an annual bonus targeted at 50% of base salary. Payment of Mr. Freeman’s annual bonus is dependent upon both the achievement of the Company’s budgeted operating earnings and Mr. Freeman’s achievement of individualized performance objectives, which are generally tied to the completion of new initiatives, major projects and other activities considered beyond the normal course of his duties. Mr. Freeman’s annual bonus objectives are defined by Mr. DeMatteo not later than 90 days after the start of each fiscal year. Payment of Mr. Freeman’s annual bonus is dependent upon Mr. DeMatteo’s verification of the achievement of both the Company’s earnings target and Mr. Freeman’s individual performance objectives.

 

Fiscal 2006 Bonuses

 

Target Bonuses for fiscal 2006 for the executive officers listed in the Summary Compensation Table above (the “named executive officers”) were as follows:

 

The bonus targets for fiscal 2006 were met and 100% of the individual target was paid to each named executive officer in March 2007. The following bonuses were paid for fiscal 2006:

 

 

Bonus Targets

 

Target Bonuses for fiscal 2007 for the named executive officers were as follows:

 

 

Discretionary Awards

 

From time to time the Compensation Committee may approve discretionary awards for executive officers and other employees in recognition of efforts that are beyond the normal requirements of their assigned duties. In determining bonuses for fiscal 2005, the Compensation Committee considered the remarkable effort of the Company’s senior management in accomplishing the mergers between GameStop and EB in 2005 and successfully integrating the operations of GameStop and EB and awarded special bonuses as a result, as follows:

 

 

Stock Options and Restricted Stock

 

The Company chooses to grant long-term awards, currently in the form of stock options or restricted stock, to align the interests of the executive officers with the interests of the Company’s stockholders. Additionally, long-term awards offer executive officers an incentive for the achievement of superior performance over time and foster the retention of key management personnel. Grants of long-term awards are made to executive officers, members of the board of directors and all other eligible full-time employees under the provisions of the Incentive Plan, which provides for the grant of options to purchase shares of the Company’s Common Stock, the grant of share appreciation rights, the grant of Stock Purchase Awards and the grant of Restricted Share Awards. Executive officers and directors of the Company are not eligible to receive grants of Stock Purchase Awards because of the provisions within those awards of a loan to the grantee to purchase the shares. To date, only options and restricted shares have been granted under the Incentive Plan.

 

Role of Compensation Committee in Grants.  The Compensation Committee of the board of directors has the responsibility to administer the Incentive Plan and is therefore responsible for authorizing all grants of options or restricted shares. In determining annual stock option or restricted stock grants to executive officers, the Compensation Committee, along with executive management, bases its decision on the individual’s performance and potential to improve stockholder value.

 

The Compensation Committee considers the recommendations of the Chief Executive Officer in granting awards to executive officers and employees other than the Chief Executive Officer and the Chief Operating Officer. The Compensation Committee relies upon the Chief Financial Officer for the day-to-day administration and recordkeeping of the Incentive Plan.

 

Role of Executive Officers in Grants.  The Chief Executive Officer is responsible for recommending the grant of options or restricted stock to all executive officers and all other eligible full-time employees except himself and the Chief Operating Officer. The Chief Financial Officer assists the Chief Executive Officer in this process by preparing a list of eligible employees and recommended awards for all eligible employees other than himself. Consideration is given to each individual’s employment standing and those employees subject to possible termination are not deemed to be eligible. Recommended amounts are based on previous grants, individual performance and responsibilities and the individual’s contributions toward increasing stockholder value. As mentioned above, the Chief Financial Officer is also responsible, under the direction of the Compensation Committee, for the day-to-day administration of the outstanding awards and the related recordkeeping.

 

The Company has historically granted stock options to its executive officers and other eligible full-time employees. In February 2006, the Chief Executive Officer recommended to the Compensation Committee that the Company issue restricted stock to the executive officers and stock options to other eligible employees in order to reduce the amount of shares granted in the awards and preserve the available pool of unissued awards for the future. A larger number of shares are needed when granting options because a holder only realizes value on those options from an increase in the share price from the exercise price, while a smaller number of shares are needed for grants of restricted stock because the holder realizes value for the entire share price and any subsequent increases. In February 2006, Mr. Fontaine, Mr. DeMatteo, Mr. Carlson and Mr. Freeman received awards of restricted stock while Mr. Morgan and other eligible employees received awards of stock options. Mr. Morgan received an award of stock options, as opposed to restricted stock, in accordance with the terms of his employment agreement signed in December 2005 when he was hired as the Company’s President. Upon the Chief Executive Officer’s recommendation, the February 2007 annual award grant included awards of restricted stock instead of stock options to executive officers and more members of the Company’s management in order to preserve the available pool of unissued awards for the future.

 

Timing of Grants.  Awards have historically been granted to executive officers and eligible full-time employees once per year. The Compensation Committee has typically met annually within the first 90 days after the start of the new fiscal year to approve the annual grant of options and restricted stock. The Compensation Committee meets on the same date as the regularly scheduled meeting of the board of directors for the first quarter. The date of these Compensation Committee and board of directors meetings is set in the fourth quarter of the previous fiscal year. In 2006, the board of directors and Compensation Committee formalized the historical practice in a policy whereby the annual awards to directors, executive officers and eligible full-time employees under the Incentive Plan will be approved at the first quarter’s meeting of the Compensation Committee.

 

Prior to fiscal 2006, grants occasionally occurred at other times during a fiscal year to directors, based on actions by the board of directors. As stated above, grants to directors will now occur in conjunction with the first quarter’s meeting of the Compensation Committee. Grants also occasionally occur to newly hired executives. When a grant is made for a newly hired executive, it is approved by the Compensation Committee with a grant date on the date on which the executive starts his or her employment with the Company.

 

There is no effort to time the meeting and the related approval of awards with the release of material non-public information. The board of directors and Compensation Committee typically hold their first quarter meetings in February or early March. There are typically no releases of material non-public information by the Company until the latter half of March when the announcement of the earnings for the previous fiscal year is completed. The timing of grants for newly hired executives is not timed in coordination with the release of material non-public information. The Company does not grant awards based on the pending release of material non-public information and the Company does not release material non-public information for the purpose of affecting the value of executive compensation.

 

Pricing of Grants.  Under the terms of the Incentive Plan, options are granted with an exercise price equal to the average of the high and low prices of the Company’s Common Stock reported on the New York Stock Exchange (NYSE) for the trading day prior to the approval of the grant by the Compensation Committee.

 

2007 Grants.  The Compensation Committee met on February 9, 2007 and granted either restricted stock or options for fiscal 2007 to the named executive officers and other eligible employees. The named executive officers were granted restricted stock, as follows:

 

 

In addition, each non-employee member of the board of directors was awarded a restricted stock grant of 19,200 shares. Each of the above referenced grants vests in equal annual installments over three years.

 

Change of Control/Severance Benefits

 

Each of Messrs. Fontaine, DeMatteo, Morgan and Carlson has employment agreements as described in “Employment Agreements” below. Pursuant to these agreements, each executive’s employment may be terminated upon death, disability, by GameStop with or without cause or by the executive within twelve months of a good reason event. If an executive’s employment is terminated due to death or disability, by the Company with cause or by the executive without good reason, the executive is entitled to payment of base salary through the date of death, disability or termination of employment.

 

A good reason event is defined as a change of control, a reduction in compensation or a material reduction in benefits or responsibilities, or a relocation of at least 50 miles. Among other things, the employment agreement includes a severance arrangement if the executive is terminated by GameStop without cause or by the executive for good reason, which provides each executive with his base salary through the term of the agreement, plus the average of the last three annual bonuses, with a one year minimum, plus the continuation of medical benefits for up to 18 months and the release of all stock option restrictions, including vesting provisions.

 

The triggering events which would result in the payment of the severance amounts described above were selected because they provide employees with a guaranteed level of financial protection upon loss of employment and were considered competitive with severance provisions being offered at that time.

 

The estimated minimum payments upon a change in control or termination for each of the named executive officers are detailed in the table of Potential Payments upon Change in Control or Termination above. Severance payments due to a named executive officer may be due either in installments or in a lump sum, to be negotiated between the Company and the executive.

 

Employment Agreements

 

GameStop has entered into employment agreements with R. Richard Fontaine, Daniel A. DeMatteo, Steven R. Morgan and David W. Carlson. The terms of the employment agreements for Mr. Fontaine and Mr. DeMatteo commenced on April 11, 2005 and continue for a period of three years thereafter, with automatic annual renewals thereafter unless either party gives notice of non-renewal at least six months prior to automatic renewal. The term of the employment agreement for Mr. Morgan commenced on December 9, 2005 and continues through February 12, 2008, with automatic annual renewals thereafter unless either party gives notice of non-renewal at least six months prior to automatic renewal. The term of the employment agreement for Mr. Carlson commenced on April 3, 2006 and continues for a period of two years thereafter, with automatic annual renewals thereafter unless either party gives notice of non-renewal at least six months prior to automatic renewal.

 

Mr. Fontaine’s minimum annual salary during the term of his employment under the employment agreement shall be no less than $650,000. Mr. DeMatteo’s minimum annual salary during the term of his employment under the employment agreement shall be no less than $535,000. Mr. Morgan’s minimum annual salary during the term of his employment under the employment agreement shall be no less than $450,000. Mr. Carlson’s minimum annual salary during the term of his employment under the employment agreement shall be no less than $350,000. Annual bonus compensation will be based on the formula and targets established under and in accordance with the Supplemental Compensation Plan.

 

Each executive shall be entitled to all benefits afforded to key management personnel or as determined by the board of directors of GameStop, including, but not limited to, restricted stock and stock option benefits, insurance programs, pension plans, vacation, sick leave, expense accounts and retirement benefits.

 

Each executive is also restricted from competing with GameStop for the later of the expiration of the term of the agreement or one year after termination of employment, unless the contract is terminated by GameStop without cause or the executive for good reason.

 

Under the terms of his employment agreement, Mr. Morgan is also entitled to certain benefits associated with his transition from employment by EB to his employment as the Company’s President. Mr. Morgan is entitled to the reimbursement of expenses incurred in relocating to the Company’s headquarters in Grapevine, Texas from his residence in Pennsylvania, including one relocation to a temporary residence in Texas and one relocation to a permanent residence in Texas at such time as Mr. Morgan’s spouse relocates to Texas. The relocation to the temporary residence took place in fiscal 2006 and the relocation to the permanent residence is expected to take place in fiscal 2008. The Company incurred costs totaling $66,545 for the temporary relocation. Mr. Morgan is also entitled to two round-trip first class airfares per month between Pennsylvania and Texas until the later of December 31, 2007 or such time as his spouse relocates to Texas.

 

For a description of change of control and severance benefits included in the employment agreements, see “Change of Control/Severance Benefits” above.

 

Other Considerations

 

Relationship Among the Different Components of Compensation

 

In order to ensure that the named executive officers are held accountable for the Company’s performance and changes in stockholder value, management and the Compensation Committee generally allocate total compensation such that the portion of compensation attributable to fixed elements, such as salary and benefits, decreases with increasingly higher levels of responsibility, and the portion attributable to variable, performance-based elements increases.

 

Stock Ownership

 

The Company does not require its executive officers to be stockholders in the Company. The Compensation Committee believes that the grant of stock options and restricted stock to the Company’s executive officers that vest over a period of time is sufficient to provide the required incentive to such officers and align their interests with the interests of the Company’s stockholders.

 

Recovery of Awards

 

The Company does not have a formal policy to recover past compensation awards from executive officers in the event of a restatement or an adjustment of results or performance measures that would have reduced the size of an award. The Company has not historically had any restatements or adjustments of this nature. Should such an incident occur, the board of directors would consider appropriate action at that time.

 

Retirement Benefits

 

Each of the Company’s executive officers is entitled to participate in the Company’s defined contribution 401K plan on the same basis as all other eligible employees. The Company matches the contributions of participants,

subject to certain criteria. Under the terms of the 401K plan, as prescribed by the Internal Revenue Service, the contribution of any participating employee is limited to a maximum percentage of annual pay or a maximum dollar amount ($15,000 for 2006). Our executive officers are subject to these limitations and therefore the Company does not consider its retirement benefits to be a material portion of the compensation program for our executive officers.

 

Perquisites

 

The Company does not have a formal program providing perquisites to its executive officers. Messrs. Fontaine, DeMatteo, Morgan and Carlson are eligible to use the Company plane for personal use. Mr. Carlson has chosen not to make personal use of the Company plane. Messrs. Fontaine, DeMatteo and Morgan occasionally use the plane for personal use and reimburse the Company for costs in accordance with IRS guidelines. Amounts disclosed in the perquisites column of the Summary Compensation Table for the personal use of the Company plane represent actual incremental costs to operate the plane in excess of the amounts reimbursed in accordance with IRS guidelines. In fiscal 2006, these amounts totaled $50,655, $60,716 and $21,934 for Messrs. Fontaine, DeMatteo and Morgan, respectively.

 

In addition, under the terms of his employment contract with EB, Mr. Morgan had the use of a car that was leased for him by EB. Mr. Morgan had the use of this car through April 2007. The operating costs associated with this car in fiscal 2006 were $22,068 and were included in the amount disclosed for Mr. Morgan in the perquisites column of the Summary Compensation Table. In addition, as discussed above, until the time that his spouse relocates to Texas, Mr. Morgan is entitled to receive two round-trip first class airfares per month for flights between Texas and Pennsylvania. These airfare costs amounted to $5,738 in fiscal 2006 and were included in the amount disclosed for Mr. Morgan in the perquisites column of the Summary Compensation Table.

 

None of the named executive officers receives any other compensation or benefits which would be defined as perquisites.

 

Tax and Accounting Implications

 

Impact of Section 162(m) of the Internal Revenue Code.  The Compensation Committee has considered the potential impact of Section 162(m) of the Code, adopted under the Revenue Reconciliation Act of 1993. This section disallows a tax deduction for any publicly held corporation, for individual compensation exceeding $1,000,000 in any taxable year paid to its chief executive officer or any of its four other highest paid officers unless (i) the compensation is payable solely on account of the attainment of performance goals, (ii) the performance goals are determined by a committee of two or more outside directors, (iii) the material terms under which compensation is to be paid are disclosed to and approved by stockholders and (iv) the determining committee certifies that the performance goals were met. Because it is in the best interests of the Company to qualify to the maximum extent possible the compensation of its executives for deductibility under applicable tax laws, the Company obtained stockholder approval in June 2006 for the Supplemental Compensation Plan, which provides for the payment of compensation in compliance with the above guidelines.

 

Accounting for Stock-Based Compensation.  In December 2004, the Financial Accounting Standards Board issued SFAS 123(R). This Statement requires companies to expense the estimated fair value of stock options and similar equity instruments issued to employees in its financial statements. The Company adopted the provisions of SFAS 123(R) beginning on the first day of fiscal 2006. Under SFAS 123(R), the Company records stock-based compensation expense based on the grant-date fair value estimated in accordance with the original provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, and previously presented in the pro forma footnote disclosures, for all options granted prior to, but not vested as of, the adoption date. In addition, the Company records compensation expense for the share-based awards issued after the adoption date in accordance with SFAS 123(R). In fiscal 2006, the Company incurred the following stock-based compensation costs for the named executive officers:

 

 

COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION

 

The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis contained in this Proxy Statement with members of the Company’s management. Based on such review and discussions and relying thereon, we have recommended to the Company’s board of directors that the Compensation Discussion and Analysis set forth above be included in the Company’s Annual Report on Form 10-K for the fiscal year ended February 3, 2007 and in this Proxy Statement.

 

Compensation Committee

 

Gerald R. Szczepanski, Chair

Jerome L. Davis

Edward A. Volkwein

 

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

 

The Audit Committee has the responsibility for reviewing and approving transactions with related parties or persons. All of the transactions and relationships described below took place or were in place prior to fiscal 2006.

 

Agreements With Barnes & Noble

 

In connection with the consummation of Historical GameStop’s initial public offering in February 2002, Historical GameStop entered into various agreements with Barnes & Noble relating to its relationship with Barnes & Noble following the completion of its initial public offering. The terms of these agreements remain binding on the Company following the mergers.

 

Separation Agreement

 

Historical GameStop entered into a “separation agreement” with Barnes & Noble, which governs our respective rights and duties with respect to Historical GameStop’s initial public offering and the distribution by Barnes & Noble to its stockholders of Barnes & Noble’s shares of GameStop Class B Common Stock (which is referred to as the “spin-off”), completed November 12, 2004. The separation agreement contains covenants designed to protect the intended tax-free nature of the spin-off.

 

Under the separation agreement, Historical GameStop agreed not to take certain actions without the approval of Barnes & Noble or the satisfaction of certain procedures. These actions include:

 

 

Historical GameStop generally agreed to indemnify Barnes & Noble and its affiliates against any and all tax-related losses incurred by Barnes & Noble in connection with any proposed tax assessment or tax controversy with respect to the spin-off to the extent caused by any breach by Historical GameStop of any of its representations, warranties or covenants made in the separation agreement. The two-year period specified in the separation agreement has expired. The Company remains affiliated with Barnes & Noble through Mr. Riggio, one of our directors, who is Chairman of the Board of Directors of Barnes & Noble.

 

Insurance Agreement

 

Historical GameStop entered into an “insurance agreement” with Barnes & Noble, pursuant to which we participated in Barnes & Noble’s worker’s compensation, property and general liability and directors’ and officers’ liability insurance programs. We reimbursed Barnes & Noble for our pro rata share of the cost of providing these insurance programs.

 

The insurance agreement terminated in part on May 1, 2005 and in full on June 1, 2005, at which time Historical GameStop procured its own insurance. Although we now have our own insurance coverage, costs will likely continue to be incurred by Barnes & Noble on insurance claims which were incurred under its programs prior to June 2005 and any such costs applicable to insurance claims against us will be allocated to the Company. In fiscal 2006, Barnes & Noble charged us approximately $812,000 for such costs.

 

Operating Agreement

 

Historical GameStop entered into an “operating agreement” with Barnes & Noble, pursuant to which we operate the existing video game departments in ten Barnes & Noble stores. We pay Barnes & Noble a licensing fee equal to 7.0% of the aggregate gross sales of each such department. In fiscal 2006, Barnes & Noble charged us approximately $996,000 in connection with our operation of such departments in Barnes & Noble stores.

 

The operating agreement will remain in force unless terminated:

 

 

Tax Disaffiliation Agreement

 

Historical GameStop entered into a “tax disaffiliation agreement” with Barnes & Noble which governs the allocation of federal, state, local and foreign tax liabilities and contains agreements with respect to other tax matters arising prior to and after the date of Historical GameStop’s initial public offering. The tax disaffiliation agreement became effective at the time of the initial public offering and, among other things, sets forth the procedures for amending returns filed prior to the date of the initial public offering, tax audits and contests and record retention. In

general, we are responsible for filing and paying our separate taxes for periods after the initial public offering and Barnes & Noble is responsible for filing and paying its separate taxes for periods after the initial public offering. In general, with respect to consolidated or combined returns that include Barnes & Noble and Historical GameStop prior to our initial public offering, Barnes & Noble is responsible for filing and paying the related tax liabilities and will retain any related tax refunds.

 

Under the tax disaffiliation agreement, without the prior written consent of Barnes & Noble, we may not amend any tax return for a period in which we were a member of Barnes & Noble’s consolidated tax group. Barnes & Noble has the sole right to represent the interests of its consolidated tax group, including us, in any tax audits, litigation or appeals that involve, directly or indirectly, periods prior to the time that we ceased to be a member of their consolidated tax group (the date of the offering), unless we are solely liable for the taxes at issue and any redetermination of taxes would not result in any additional tax liability or detriment to any member of Barnes & Noble’s consolidated tax group. In addition, we and Barnes & Noble have agreed to provide each other with the cooperation and information reasonably requested by the other in connection with the preparation or filing of any amendment to any tax return, the determination and payment of any amounts owed relating to periods prior to the date of the offering and in the conduct of any tax audits, litigation or appeals.

 

We and Barnes & Noble have agreed to indemnify each other for tax or other liabilities resulting from the failure to pay any taxes required to be paid under the tax disaffiliation agreement, tax or other liabilities resulting from negligence in supplying inaccurate or incomplete information or the failure to cooperate with the preparation of any tax return or the conduct of any tax audits, litigation or appeals. The tax disaffiliation agreement requires us to retain records, documents and other information necessary for the audit of tax returns relating to periods prior to the date we ceased to be a member of Barnes & Noble’s consolidated tax group and to provide reasonable access to Barnes & Noble with respect to such records, documents and information.

 

Other Transactions and Relationships

 

In October 2004, Historical GameStop’s board of directors authorized a repurchase of Class B Common Stock held by Barnes & Noble. Historical GameStop repurchased 12,214,000 shares of its Class B Common Stock at a price equal to $9.13 per share for aggregate consideration of $111.5 million. The repurchase price per share was determined by using a discount of 3.5% on the last reported trade of Historical GameStop’s Class A Common Stock on the NYSE prior to the time of the transaction. Historical GameStop paid $37.5 million in cash and issued a promissory note in the principal amount of $74.0 million, payable in installments over three years and bearing interest at 5.5% per annum, payable when principal installments are due. The Company made principal payments of $37.5 million, $12.2 million and $12.2 million on the promissory note as scheduled in January 2005, October 2005 and October 2006, respectively. Interest expense on the promissory note for fiscal 2006 totaled $1.1 million.

 

In May 2005, we entered into an arrangement with Barnes & Noble under which www.gamestop.com is the exclusive specialty video game retailer listed on www.bn.com, Barnes & Noble’s e-commerce site. Under the terms of this agreement, the Company pays a fee to Barnes & Noble for sales of video game or PC entertainment products sold through www.bn.com. For fiscal 2006, the fee to Barnes & Noble totaled $348,000.

 

On November 2, 2002, EB sold its BC Sports Collectibles business to SCAC for cash and the assumption of lease related liabilities. The purchaser, SCAC, is owned by the family of James J. Kim, Chairman of EB at the time and currently one of the Company’s directors. The transaction was negotiated and approved by a committee of EB’s Board of Directors comprised solely of independent directors with the assistance of an investment banking firm engaged to solicit offers for the BC Sports Collectibles business. As EB remains contingently liable for the BC store leases, Mr. Kim has agreed to indemnify EB against any liabilities associated with these leases.

 

Michael N. Rosen, one of the Company’s directors, is a partner of Bryan Cave LLP, which is counsel to the Company.

 

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

The firm of BDO Seidman, LLP (“BDO Seidman”) has been selected as the independent registered public accounting firm for the Company.

 

The independent accountants examine annual financial statements and provide other permissible non-audit and tax-related services for the Company. The Company and the Audit Committee have considered whether the non-audit services provided by BDO Seidman are compatible with maintaining the independence of BDO Seidman in its audit of the Company and are not considered prohibited services under the Sarbanes-Oxley Act of 2002.

 

Audit Fees.  In fiscal 2006, the professional services of BDO Seidman totaled $2,230,229 for the audit of the Company’s annual financial statements, for reviews of the Company’s financial statements included in the Company’s quarterly reports on Form 10-Q filed with the SEC, audit-related consultation concerning financial accounting and reporting standards and for the audit of the Company’s internal control over financial reporting. Included in the fees above were $177,148 of non-recurring audit charges related to the merger. In fiscal 2005, the professional services of BDO Seidman totaled $2,025,066 for the audit of the Company’s annual financial statements, for reviews of the Company’s financial statements included in the Company’s quarterly reports on Form 10-Q filed with the SEC, consultation concerning financial accounting and reporting standards and for the audit of the Company’s internal control over financial reporting. Included in the fees above were merger-related fees of $410,386 for the audit of the merger date opening balance sheet of EB, $156,910 in connection with the issuance of the Senior Notes and Senior Floating Rate Notes used to finance the mergers and $253,462 in connection with the filing of the joint proxy statement — prospectus on Form S-4 and other filings in connection with the mergers.

 

Audit-Related Fees.  In both fiscal 2006 and fiscal 2005, the Company paid BDO Seidman $9,000 for services in respect of employee benefit plan audits.

 

Tax Fees.  In fiscal 2006, the Company paid BDO Seidman $387,544 for tax-related services. In fiscal 2005, the Company paid BDO Seidman $36,075 for tax-related services. Tax-related services included professional services rendered for tax compliance, tax advice and tax planning.

 

All Other Fees.  The Company did not pay BDO Seidman any other fees in fiscal 2006 or fiscal 2005.

 

Pre-approval Policies and Procedures.  The Audit Committee Charter adopted by the board of directors of the Company requires that, among other things, the Audit Committee pre-approve the rendering by the Company’s independent auditor of all audit and permissible non-audit services. Accordingly, as part of its policies and procedures, the Audit Committee considers and pre-approves any such audit and permissible non-audit services on a case-by-case basis. The Audit Committee approved all of the services provided by BDO Seidman referred to above.

 

AUDIT COMMITTEE REPORT ON THE FISCAL YEAR ENDED FEBRUARY 3, 2007

 

Management is responsible for the Company’s internal control and financial reporting process. The Company’s independent registered public accounting firm, BDO Seidman, reports to the Company’s Audit Committee, and is responsible for performing an independent audit of the Company’s consolidated financial statements in accordance with the auditing standards generally accepted in the United States. BDO Seidman also reports on management’s assessment of internal control over financial reporting based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. BDO Seidman has full access to the Audit Committee and meets with the Audit Committee at each of the Audit Committee’s regularly scheduled meetings, generally with and without management being present, to discuss appropriate matters. BDO Seidman discussed its audit of the Company’s financial statements and its report on management’s assessment of internal control over financial reporting with management and the Audit Committee.

 

The Audit Committee recommended to the board of directors that the audited consolidated financial statements for the fiscal year ended February 3, 2007 be included in the Company’s Annual Report on Form 10-K for such fiscal year, based on the following:

 

 

 

 

The Audit Committee also recommended to the board of directors that the independent registered public accounting firm of BDO Seidman be appointed as the Company’s auditors for the fiscal year ending February 2, 2008.

 

Audit Committee

 

Stephanie M. Shern, Chair

Gerald R. Szczepanski

Edward A. Volkwein

 

APPROVAL OF THE AMENDMENT AND RESTATEMENT OF THE AMENDED AND
RESTATED GAMESTOP CORP. 2001 INCENTIVE PLAN

 

PROPOSAL 2

 

The board of directors has approved, subject to the approval of the Company’s stockholders, the amendment and restatement of the Amended and Restated GameStop Corp. 2001 Incentive Plan (the “Incentive Plan”), that (i) increases the maximum number of shares that may be the subject of awards from 40,000,000 to 43,500,000 shares, with the additional 3,500,000 shares to be used only for the grant of options to purchase shares of our Common Stock, (ii) prohibits the reduction of the exercise price of outstanding options, prohibits the issuance of new awards in exchange for cancellations of outstanding awards and prohibits the buyout of outstanding underwater options for cash without stockholder approval and (iii) amends certain other provisions, including provisions relating to recent changes in law.

 

In order to facilitate approval of this proposal, the board of directors has committed that for fiscal years 2007, 2008, and 2009, GameStop’s prospective three-year average burn rate with respect to the Company’s equity awards will not exceed the greater of two percent of the Company’s shares outstanding or the mean of its Global Industry Classification Standards Peer Group (2550-Retailing). The burn rate will be calculated as (i) the number of shares

granted in each fiscal year by the Company and reported in our periodic reports filed with the SEC, including stock options and restricted stock, divided by (ii) the fiscal year end basic shares outstanding. For purposes of calculating the number of shares granted in a year, stock awards will count as equivalent to (1) 1.5 option shares, if our annual stock price volatility is 53% or higher, (2) two option shares if our annual stock price volatility is between 25% and 52%, and (3) four option shares if our annual stock price volatility is less than 25%.

 

The following is a summary of the Incentive Plan. This summary is qualified in all respects by reference to the full text of the Incentive Plan included herein as Appendix A.