**UNITEDSTATES SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

**FORM10-K/A**

 

**Amendment No. 1**

 

**FORANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

 

| ý                                         | ** ** | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**                               |
|------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------|
| **For the fiscal year ended January 29, 2005** |
| **Or**                                         |
|  ̈                                         | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**                           |
| ** **                                     | ** ** | **For the transition period from        to      ** |

 

**Commission File Number: 000-24603**

 

**ELECTRONICSBOUTIQUE HOLDINGS CORP.**

(Exact Name of Registrant as Specified in its Charter)

 

| **Delaware**                                             | ** ** | **51-0379406**                       |
|----------------------------------------------------------|------------|--------------------------------------|
| (State of Incorporation)                                 |       | (IRS Employer Identification Number) |
|                                                     |       |                                 |
| **931 South Matlack Street  West Chester, Pennsylvania** | ** ** | **19382**                            |
| (Address of principal executive offices)                 |       | (Zip Code)                           |

 

Registrant’s telephone number, including area code: **610/430-8100**

Securities registered pursuant to Section 12(b) of the Act:

 
| **Title  of Each Class** | ** ** | **Name  of Each Exchange on Which Registered** |
|--------------------------|------------|------------------------------------------------|
| N/A                      |       | N/A                                            |

 

Securitiesregistered pursuant to Section 12(g) of the Act: 

 

**Common Stock, $.01 par value**

(Title of Class)

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or such shorter period that the registrantwas required to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. YES ý  NO  ̈

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofregulation S-K is not contained herein, and will not be contained, to the bestof registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendment to theForm 10-K.  ̈

 

Indicateby check mark whether the registrant is an accelerated filer (as defined inExchange Act Rule 12b-2). YES ý  NO  ̈

 

Asof July 30, 2004 (the last trading day of the registrant’s second fiscalquarter), the aggregate market value of common stock held by non-affiliates ofthe registrant, based upon the closing sale price as reported on The NASDAQNational Market of $25.11 per share, was $306,250,600. Shares of the registrant’scommon stock owned by its executive officers and directors were excluded fromthis calculation; however, such exclusion does not represent a conclusion bythe registrant that the executive officers or directors are affiliates of theregistrant.  

 

AtMay 11, 2005, there were 24,785,164 shares of common stock issued andoutstanding.  

 

**Explanatory Note**

 

We arefiling this Amendment No. 1 to our Annual Report on Form 10-K for the fiscalyear ended January 29, 2005, as originally filed on April 7, 2005 (the “OriginalFiling”), to include the information required by Part III of Form 10-K.  

 

Forthe convenience of the reader, this Form 10-K/A sets forth the Original Filingin its entirety.  Except as describedabove, no other information in the Original Filing is amended hereby.  This Amendment No. 1 does not reflect eventsoccurring after the filing of the Original Filing or modify or update thosedisclosures affected by subsequent events. Accordingly, this Form 10-K/A should be read in conjunction with ourother filings made with the SEC subsequent to the filing of the OriginalFiling, including any amendments to those filings.  In addition, Item 15of Part IV of the Original Filing has been amended to contain an updated consent of our independent registered public accounting firm and,  pursuant to the Rules of the SEC, currently-dated certifications from ourChief Executive Officer and Chief Financial Officer, as required by Sections302 and 906 of the Sarbanes-Oxley Act of 2002. The consent of our independent registered public accounting firm and  certifications of our ChiefExecutive Officer and Chief Financial Officer are attached to this Form 10-K/Aas Exhibits 23.1, 31.1,31.2 and 32.1, respectively.  

 

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**FORM 10-K/A**

**FOR THE FISCAL YEAR ENDED JANUARY 29, 2005**

 

**INDEX**

 
| **PART I**     | ** ** | ** **                                                                                                              | Page |
|----------------|------------|-------------------------------------------------------------------------------------------------------------------------|------|
| Item 1—   |       | Business                                                                                                                | 1    |
| Item  1A— |       | Executive  Officers of the Company                                                                                      | 14   |
| Item 2—   |       | Properties                                                                                                              | 15   |
| Item 3—   |       | Legal Proceedings                                                                                                       | 16   |
| Item 4—   |       | Submission  of Matters to a Vote of Security Holders                                                                    | 16   |
| **PART II**    | ** ** | ** **                                                                                                              | 16   |
| Item 5—   |       | Market  for the Registrant’s Common Equity, Related Stockholder Matters and Issuer  Purchases of Equity Securities | 16   |
| Item 6—   |       | Selected  Financial Data                                                                                                | 17   |
| Item 7—   |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                             | 19   |
| Item  7A— |       | Quantitative  and Qualitative Disclosures About Market Risk                                                             | 28   |
| Item 8—   |       | Consolidated  Financial Statements and Financial Statement Schedule                                                     | 30   |
| Item 9—   |       | Changes in and Disagreements with  Accountants on Accounting and Financial Disclosure                                   | 51   |
| Item 9A—  |       | Controls and Procedures                                                                                                 | 51   |
| Item 9B—  |       | Other Information                                                                                                       | 53   |
| **PART III**   | ** ** | ** **                                                                                                              | 53   |
| Item 10—  |       | Directors and Executive Officers of the  Registrant                                                                     | 53   |
| Item 11—  |       | Executive Compensation                                                                                                  | 56   |
| Item 12—  |       | Security Ownership of Certain Beneficial  Owners and Management and Related Stockholder Matters                         | 58   |
| Item 13—  |       | Certain Relationships and Related  Transactions                                                                         | 60   |
| Item 14—  |       | Principal Accountant Fees and Services                                                                                  | 60   |
| **PART IV**    | ** ** | ** **                                                                                                              | 61   |
| Item 15—  |       | Exhibits and Financial Statement Schedules                                                                              | 61   |
| SIGNATURES     |       |                                                                                                                    | 64   |

 

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**PART I**

 

**Preliminary Note Regarding Forward-LookingStatements**

 

When used in this Annual Report on Form 10-K, the words “expect,” “estimate,”“anticipate,” “intend,” “predict,” “believe,” and similar expressions andvariations thereof are intended to identify forward-looking statements withinthe meaning of and subject to the safe harbor created by the Private SecuritiesLitigation Reform Act of 1995. Forward-looking statements appear in a number ofplaces in this Annual Report on Form 10-K and include statements regarding theintent, belief or current expectations of Electronics Boutique, its directorsor its officers with respect to, among other things: (i) trends affectingElectronics Boutique’s financial condition or results of operations; and (ii)Electronics Boutique’s business and growth strategies. Readers are cautionedthat these forward-looking statements are not guarantees of future performanceand involve risks and uncertainties, and that actual results or outcomes maydiffer materially from those projected in the forward-looking statements as aresult of various factors, including those set forth in Item 1. “Business—RiskFactors”.

 

**Item1****. Business**

 

**General**

 

We are the leading global specialty retailer of video game hardware andsoftware, PC entertainment software, pre-played video games and relatedaccessories and products. As of January 29, 2005, we operated 1,977 stores,primarily under the names EB Games and Electronics Boutique, in Australia,Canada, Denmark, Germany, Italy, New Zealand, Norway, Puerto Rico, Sweden andthe United States. We also operate a commercial website under the URL address *www.ebgames.com*. Our compound annual growth rates for netsales and pre-tax net income from fiscal 2000 through fiscal 2005 were 21.2%and 16.6%, respectively.

 

We operate in the interactive entertainmentindustry, which was a $10.8 billion business in the United States and a $600million business in Canada in 2004, as reported by The NPD Group (NPD).According to International Development Group (IDG), industry sales in theEuropean market grew to $8.5 billion during the year. The Australian marketalso grew in 2004 to $528 million according to GfK Australia. We have a leadingmarket share in both the Canadian and Australian markets and we continue to gainmarket share in the U.S. and European markets.

 

We serve the avid gamer who demands immediate accessto new release titles and who generally purchases more video game titles and PCentertainment software than the casual gamer. As a result, our tie ratio ofsoftware units sold to hardware units sold is consistently above the industryaverage. We also serve the casual, more value conscious gamer by offeringpre-played products at lower prices. We believe that we attract both types ofgamers due to our:

 

•              specialty storefocus in strip centers and malls;

 

•              ability to stocksought-after new releases;

 

•              wide variety ofpre-played titles;

 

•              acceptanceof trade-ins of pre-played products towards new purchases;

 

•              breadth of productselection; and

 

•              knowledgeable salesassociates.

 

We believe that our vendors recognize the importance of our customerbase and, consequently, often grant us disproportionately large allocations ofnew release titles and products. We support our stores through a highlyeffective and centralized inventory management system. This system enables usto execute our “*first-to-market*”new release

 

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strategy and efficiently manage overall inventory levels in order tomaximize the sale of new products during peak periods and avoid markdowns astitles mature.

 

We were incorporated under the laws of the State of Delaware in March1998 as a holding company for our operating activities. Our predecessor wasincorporated in the Commonwealth of Pennsylvania in 1977.

 

We maintain an informational website under the URL address *www.ebholdings.com*. The reports we filepursuant to the Exchange Act (Form 10-K, Form 10-Q, Form 8-K) may be accessedfree of charge through this website following our filings with the Securitiesand Exchange Commission (SEC). You may obtain any reports we file with the SECat the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington D.C.20549 or by calling the SEC at 1-800-SEC-0330. The SEC also maintains a websiteat *www.sec.gov* where you may access ourExchange Act reports, proxy statements and other information.

 

**Risk Factors**

 

**Risks Related to the InteractiveEntertainment Industry**

 

**Manufacturers may fail to introduce or delaythe introduction of new products, which could hurt our ability to attract andretain customers.**

 

We are highly dependent on the introduction of new and enhanced videogame hardware and software and PC entertainment software by manufacturers forour success. If manufacturers fail to introduce or delay the introduction ofnew products, we would have difficulty attracting and retaining customers tobuy the products we sell, which could adversely affect our business. Many ofthe factors that impact our ability to sell new products are beyond our control,including:

 

•              our dependence uponmanufacturers to introduce new or enhanced video game systems;

 

•              our reliance uponcontinued technological development;

 

•              ourdependence upon software publishers to develop popular game and entertainmenttitles for game systems or PCs;

 

•              the availability andtimeliness of new product releases; and

 

•              the willingness ofthe consumer to trade in hardware and software.

 

**The interactive entertainment industry iscyclical, which could cause significant fluctuations in our earnings.**

 

Demand for video game systems and software fluctuates in relation tothe introduction of next-generation hardware and related software titles.Manufacturers have historically introduced next-generation systems every fourto five years. Sales volumes of new video game systems and related softwaretitles are generally higher in the initial stages of the products’ life cycles.As a product reaches the end of its life cycle, demand for the product willgenerally decline as our customers anticipate the introduction of next-generationproducts. If leading video game system manufacturers fail to continue tointroduce next-generation systems, or fail to enhance existing systems on aperiodic basis, our sales of hardware systems and related software titles willdecrease, which would have an adverse effect on our results of operations andfinancial condition.

 

**If our vendors fail to provide marketing andmerchandising support at historical levels, our sales and earnings could benegatively impacted.**

 

The manufacturers of video game hardware and software and PCentertainment software have typically provided

 

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retailers with significant marketing and merchandising support fortheir products. As part of this support, we receive cooperative advertising andmarket development payments from these vendors. These cooperative advertisingand market development payments enable us to actively promote and merchandisethe products we sell and drive sales at our stores and on our website. Wecannot assure you that vendors will continue to provide this support athistorical levels. If they fail to do so, our sales and earnings could benegatively impacted.

 

**If we fail to keep pace with rapidly changingindustry technology, we will be at a competitive disadvantage.**

 

The interactive entertainment industry is characterized by swiftlychanging technology, evolving industry standards, frequent new and enhancedproduct introductions and rapid product obsolescence. These characteristicsrequire us to respond quickly to technological changes and to understand theimpact of these changes on our customers’ preferences. If we fail to keep pacewith these changes, our business may suffer. In addition, some of thesetechnological enhancements, such as the ability to download video games ontoPCs or play games over the Internet through consoles, could reduce retail salesof video games and PC entertainment software. If advances in technologycontinue to expand our customers’ ability to access software through othersources, our sales and earnings could be negatively impacted.

 

**Risks Related to Our Business**

 

**If we fail to manage new store openings orrenew existing locations as they expire, our operational and financial resultscould be negatively impacted.**

 

Our growth depends on our ability to open and operate new storesprofitably. In fiscal 2005, we opened 479 new stores. We currently intend toopen approximately 400 new stores in fiscal 2006. Our ability to open newstores in a timely and profitable manner depends upon many contingencies,including our ability to locate and lease suitable store sites, build out thesesites on a timely and cost-effective basis, hire and train new associates andintegrate these stores into our existing operations. We cannot assure you thatwe will be able to continue to achieve our planned expansion or that our newstores will achieve sales and profitability levels comparable to our existingstores.

 

As of January 29, 2005, approximately 6% of our stores (122 of our1,977 stores) were operated under leases with terms that expire in less thanone year. We cannot assure you that we will be able to maintain these existingstore locations as leases expire or that we will be able to locate suitablealternative sites with acceptable terms.

 

**If we do not compete effectively, we willlose customers and our earnings will decline.**

 

We face intense competition in the interactive entertainment industry.If we do not compete effectively, this could lead to reduced sales and profitmargins. We compete with:

 

•              video game and PCsoftware specialty stores;

 

•              mass merchants;

 

•              toy retail chains;

 

•              online retailers;

 

•              direct-to-consumersoftware publishers;

 

•              office supply,computer product and consumer electronics superstores; and

 

•              emerging alternativechannels of distribution such as wireless distribution.

 

Some of these competitors have longer operating histories andsignificantly greater financial, managerial,

 

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creative, sales and marketing and other resources than we have. Inaddition, the majority of our competitors currently do not buy or sellpre-played products. If more of our competitors choose to enter this category,it may have a negative impact on our business. We also compete with other formsof entertainment activities, including movies, television, theater, sportingevents and family entertainment centers.

 

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** Ouroperating results fluctuate from period to period, which could result in alower price for our common stock.**

 

Our business is affected by seasonal patterns. Wehistorically generate our highest net sales and operating income during ourfourth fiscal quarter, which includes the holiday selling season. During fiscal2005, we generated approximately 40.7% of our net sales and approximately 73.2%of our operating income during our fourth fiscal quarter. Accordingly, anyadverse trend in sales during the holiday selling season could adversely affectour results of operations for our fourth fiscal quarter and our entire year. Inaddition to our dependence on fourth quarter sales, our results from operationsfluctuate from quarter to quarter depending upon a variety of factors, most ofwhich we cannot control. These include:

 

•              the timing of newproduct introductions;

 

•              the timing of newstore openings;

 

•              general economicconditions;

 

•              price reductions onkey products;

 

•              weather;

 

•              shifts in the timingof certain holidays or promotions; and

 

•              changes in ourmerchandise mix.

 

These fluctuations make the prediction of our financial results on aquarterly basis difficult.

 

**If we fail to obtain products from ourdomestic and overseas suppliers, our sales and profits will be adverselyaffected.**

 

We rely heavily upon our suppliers to provide uswith new products as quickly as possible. We purchase a significant amount ofproducts from Electronic Arts, Inc., Nintendo Co., Ltd., Microsoft Corp., SonyCorporation and Take-Two Interactive Software, Inc., and often receiveshipments of new release products that are disproportionately large relative toour share of the overall consumer video game market. During fiscal 2005, ourpurchases from Electronic Arts, Nintendo, Microsoft, Sony and Take-Tworepresented 14.0%, 12.0%, 10.3%, 9.3% and 7.1%, respectively, of our grosspurchases. We believe that the loss of any of these suppliers could reduce ourproduct offerings, which would cause us to be at a competitive disadvantage. Inaddition, our financial performance largely depends upon the business terms weobtain from our suppliers, including competitive prices, unsold product returnpolicies, advertising and market development allowances, freight charges andpayment terms. If we fail to maintain favorable business terms with oursuppliers, our ability to offer products to consumers at competitive priceswould be adversely affected.

 

During fiscal 2005, approximately 32% of ourdomestic product purchases were of products manufactured outside of the UnitedStates, primarily in Asia. To the extent that our suppliers rely on overseassources for their products, any event causing a disruption of imports,including the imposition of import restrictions, could adversely affect ourbusiness. Trade restrictions in the form of tariffs or quotas, or both,applicable to the products we sell could also affect the importation of theseproducts and could increase the cost and reduce the supply of productsavailable to us.

 

**Ifour distribution facilities and systems are inadequate, our business couldsuffer.**

 

We own or lease distribution centers in Pennsylvaniaand Kentucky as well as Canada, Australia, Sweden, New Zealand, Italy andGermany. If operations in any of these distribution facilities were to shutdown for a prolonged period of time or if these facilities were unable toaccommodate the continued store growth in a particular region, our businesscould suffer.

 

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**If our management information systems fail toperform or are inadequate, our ability to manage our business could bedisrupted.**

 

We rely on a warehouse management system used in our domesticdistribution centers and an inventory replenishment system to track sales andinventory. Our systems allow us to execute our “*first-to-market*” new release strategy, to keep our stores instock at optimum levels and to move inventory efficiently from our distributioncenters to our stores. If our management information systems fail to adequatelyperform these functions, our business could be adversely affected.

 

**Our international operations expose us tonumerous risks.**

 

We have international retail operations inAustralia, Canada, Denmark, Germany, Italy, New Zealand, Norway and Sweden. Netsales in these foreign countries represented approximately 29% of our net salesin fiscal 2005. Because release schedules for hardware and softwareintroduction in these countries often differ from release schedules in theUnited States, the timing of increases and decreases in foreign sales maydiffer from the timing of increases or decreases in domestic sales. We are alsosubject to a number of other factors that may affect our current or futureinternational operations. These include:

 

•              economic downturns;

 

•              currency exchangerate fluctuations;

 

•              internationalincidents;

 

•              governmentinstability; and

 

•              an increasing numberof competitors entering our current and potential markets.

 

**We depend upon our key personnel and theywould be difficult to replace.**

 

Our success depends upon our ability to attract, motivate and retainkey management associates for our stores and skilled merchandising, marketingand administrative personnel at our headquarters. While we have been successfulin maintaining the continuity of our management team, including our executive officers,we cannot assure you that we will continue to be successful retaining suchpersonnel. If we fail to retain qualified key personnel, our business couldsuffer.

 

**If we fail to maintain an adequate system ofinternal controls, we may not be able to accurately report our financialresults, which could cause current and potential stockholders to loseconfidence in our financial reporting and in turn affect the trading price ofour common stock.**

 

**During fiscal 2004, we began a process to document and evaluate ourinternal controls over financial reporting in order to satisfy the requirementsof Section 404 of the Sarbanes-Oxley Act of 2002 and the related regulations,which require annual management assessments of the effectiveness of ourinternal controls over financial reporting and a report by our independentregistered public accounting firm addressing these assessments. We cannot becertain that the measures we have taken to assess, document, improve andvalidate through testing the adequacy of our internal control process overfinancial reporting will ensure that we maintain such adequate controls overour financial reporting process in the future. Failure to implement requirednew controls could cause us to fail to meet reporting obligations, which inturn could cause current and potential stockholders to lose confidence in ourfinancial reporting.**

 

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**If we fail to successfully complete and integrate future acquisitions,our business could be negatively impacted.**

 

As part of our efforts to grow and compete, we may engage inacquisitions, both domestically and internationally. Our pursuit of futureacquisitions is subject to our ability to negotiate favorable terms for theseacquisitions. Accordingly, we cannot assure you that future acquisitions willbe completed. In addition, to facilitate future acquisitions, we may takeactions that could dilute the equity interests of our stockholders, increaseour debt or cause us to assume contingent liabilities, all of which may have anegative effect on the price of our common stock. Finally, if any acquisitionsare not successfully integrated with our business, our ongoing operations andresults could be adversely affected.

 

On January 30, 2004, we terminated the services agreement with The GameGroup Plc (formerly The Electronics Boutique Plc), a specialty interactiveentertainment retailer based in the United Kingdom. The termination agreementplaces restrictions on our ability to compete with Game Group in the UnitedKingdom and Ireland until February 2006.

 

**Other Risks**

 

**The Kim family has significant control of ourcompany and can make decisions that could adversely affect our stock price andprevent a change of control.**

 

The Kim family beneficially owns approximately 48.3% of our commonstock. Accordingly, the Kim family effectively controls our company and allmatters requiring stockholder approval, including the election of directors andapproval of significant corporate transactions. This control may have theeffect of delaying, preventing or deterring a change in control of our companyand could deprive our stockholders of an opportunity to receive a premium fortheir common stock as part of any sale or acquisition.

 

**Our status as a holding company and our creditfacility restrict our ability to pay dividends on our common stock.**

 

We are a holding company and do not have any material assets other thanour ownership interests in our subsidiaries. Our common stock will be junior inright of payment to all of our existing and future liabilities and obligationsand, by virtue of the fact that we are a holding company, our common stock willbe structurally junior in right of payment to all existing and futureliabilities and obligations of each of our subsidiaries. We have not declaredor paid dividends on our common stock since our initial public offering in July1998. In addition, our credit facility with Fleet Retail Group restricts ourability to declare or pay dividends on our common stock.

 

**Our income taxes could increase in thefuture.**

 

Our corporate structure includes the use of Delaware holding companiesand subsidiaries that hold our intellectual property and facilitate financingfor our operations. Certain state taxing authorities have changed and others arestill reviewing their positions with respect to income tax deductions taken asa result of these structures. If these income tax deductions resulting from ourcorporate structure continue to be disallowed in the future, the income taxeswe pay could increase, which will negatively impact our earnings.

 

**Our certificate of incorporation and bylawscontain anti-takeover protections, which may discourage or prevent a takeoverof our company, even if an acquisition would be beneficial to our stockholders.**

 

Certain provisions of our certificate of incorporation and bylaws, aswell as provisions of Delaware law, could make it more difficult for a thirdparty to acquire us, even if a takeover would benefit our stockholders.

 

**Industry Overview**

 

The interactive entertainment industry is comprised of two primaryproduct categories, video games and PC entertainment software.

 

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*Video games.* In2004, domestic retail sales of video game software and hardware systems reachedapproximately $8.7 billion, down slightly from the prior year, according todata provided by NPD. The current generation of console hardware technology,including Sony’s PlayStation 2, Microsoft’s Xbox and Nintendo’s GameCube, hasbeen on the market approximately four years. The installed base of thesesystems grew to 47.9 million units in 2004 with corresponding software salesexceeding $5.1 billion, representing 11% growth over the prior year. Thisgrowth was lead by the release of the two largest title launches in the historyof the industry, “Grand Theft Auto: San Andreas” from Take-Two InteractiveSoftware, Inc. for the PlayStation 2 and “Halo 2” from Microsoft for the Xbox.In addition, accessory sales for the three consoles grew 2% in 2004 to $1.0 billion.

 

The current generation of handheld hardware technology is comprised ofNintendo’s GameBoy Advance, released in 2001, and Nintendo’s GameBoy AdvanceSP, released in March 2003. In 2004, the installed base of these handheldsystems reached 27.3 million units with corresponding industry software salesgrowing 12% to $949 million. The next generation of handheld technology waslaunched with the release of the Nintendo DS in November 2004. The new systemhad domestic sales of 1.2 million units of hardware and software sales of $46.7million. Sony entered the handheld market and released the PSP portable gamingsystem in March 2005.

 

Calendar year 2005 is expected to be the transition year in the currentvideo game cycle as the industry prepares for the launch of the next generationof technology. As customers wait in anticipation of the next generation ofconsoles, software and hardware sales of the current generation are expected todecline in 2005. With the two new portable systems on the market, sales ofhandheld software and hardware are expected to increase significantly over2004, helping to offset the declines expected in current generation consolesales. It is anticipated that Microsoft will release the next generation of theXbox in the fourth quarter of 2005. Sony and Nintendo are expected to releasetheir new consoles sometime in 2006.

 

*PC entertainment software.*  Domestic retail sales of PC entertainmentsoftware were approximately $925 million in calendar 2004, a 9.5% decrease fromthe prior year, according to NPD. We expect domestic PC entertainment softwaresales to continue to decline in 2005.

 

**Products**

 

Our product line consists of video game and PC entertainment software,video game hardware systems, pre-played software and hardware, accessories andrelated products. Our in-store inventory at any given time averages over 3,800stock keeping units (SKU’s).

 

*Video game and PC entertainment software.*We carry a large selection of video game and PC entertainment software. Wepurchase titles from over 60 vendors, including the leading consolemanufacturers, Nintendo Co., Ltd., Sony Corporation and Microsoft Corp., aswell as a variety of third-party software publishers, such as Electronic Arts,Inc., Take-Two Interactive Software, Inc., Activision, Inc., Atari Corp. andTHQ Inc. We are one of the largest domestic customers of video game productssold by these publishers.

 

*Pre-played software and pre-played video gamehardware.* As a result of the proliferation of newtitles and the tendency of gamers to seek new game challenges after mastering aparticular title, a growing market for pre-played software has evolved. Also,with changes in hardware technology and a growing desire to own multiple gamingsystems, a market for pre-played hardware has developed. We allow customers totrade in and purchase pre-played games and hardware in our stores. In returnfor a trade-in, customers can receive a store credit, which can be appliedtowards the purchase of new or pre-played products, or they can receive cash.

 

*Video game hardware.*We sell the video game hardware systems of all major manufacturers, includingSony’s PlayStation 2, Nintendo’s GameCube, GameBoy Advance SP and DS andMicrosoft’s Xbox. Our pre-played program affords customers the opportunity totrade in older video game hardware towards the purchase of one of the latestsystems. As a result, we also offer a wide range of the older video gamesystems. We also offer product replacement plans for the video game systems.

 

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*Accessories.*  The growing number of video game systems hasled to an increase in sales of accessory products, which generally have highergross margins than hardware and software products. We currently offerapproximately 350 accessory product SKU’s, including controllers, memory cards,instructional books and strategy guides for the most popular video game titles.

 

*Related products.*  We offer an assortment of collectible actionfigures that appeal to our core customers as well as other gaming relatedproducts. In addition, we offer a variety of PC and video gaming magazines.

 

**Our Customers**

 

Based on data from The NPD Group 2004 Consumer Panel, our typicalcustomer is a male between the ages of 18 and 34 with household income rangingfrom $25,000 to $75,000. We believe that our customers are often opinionleaders in the interactive entertainment industry, influencing the buyingdecisions of their friends and family.

 

# **Competitive Strengths**

 

We seek to enhance our position as the leading global specialtyretailer of interactive entertainment products by focusing on the following:

 

*Breadth of selection.*Through our stores and our website, we offer our customers an extensiveselection of video game software, compatible with all major video game hardwaresystems, which we also stock, as well as PC entertainment software. Our typicalstore offers over 1,500 SKU’s, excluding pre-played games, at any given timeacross a variety of genres, including Action, Strategy, Adventure/Role Playing,Simulation, Sports, Children’s Entertainment and Family Entertainment. Wecontinuously update our title selection in each store to reflect the tastes andbuying patterns of the store’s local market. In addition to software andhardware, we offer a complementary line of PC and video game accessories andperipheral products. By offering a wide range of products, we seek to establishour stores and website as the destination of choice for gamers.

 

*Immediate availability of new releases.*We strive to be the first in our markets to offer new video game and PCentertainment software titles upon their release. We will open our stores atmidnight in connection with the launch of highly anticipated titles and will,when appropriate, ship select new releases to our stores on the same day as thetitle launch. We believe that vendors recognize the importance of our customerbase and, consequently, often grant us disproportionately large allocations ofnew release products.

 

To ensure our customers have immediate access to new releases and thelatest hardware, we offer our customers the “EB Pre-Sell Program” throughwhich they can reserve video game and PC entertainment software and video gamehardware for delivery upon our receipt and release of the product. On average,we introduce 20 new software SKU’s in our stores and on our website each week.

 

*Pre-played products.*We believe that the opportunity to trade in games and hardware and theavailability for purchase of pre-played software and hardware in ourstores is attractive to the value conscious gamer and differentiates us frommost of our competition, which do not generally accept trade-ins or offerpre-played products.

 

To support our pre-played business, we operate a product reclamationcenter that tests, cleans, re-labels, re-packages and re-distributes traded-inproducts to our stores. These trade-ins are then sold in our stores at adiscount to the price of new products. Sales of pre-played games and hardwaregenerate significantly higher margins than new products.

 

The pre-played category has become our fastest growing product line, aswe now carry over 1,900 pre-played SKU’s in our typical store. We believe thegrowth of our pre-played business will be further enhanced as we continue tofocus on establishing stores in strip-center locations where sales ofpre-played products represent a larger percentage of the stores’ sales.

 

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*Competitive pricing.*Our pre-played program allows customers to save money by trading in their pre-playedgames and hardware for cash or credit towards any product sold in our stores.The trade-ins are then resold to other customers at lower prices than our newproducts, offering a broader range of price choices to our customers.

 

*Knowledgeable sales associates.*We believe that our knowledgeable sales associates, many of whom are gamers,and our higher level of customer service provide us with an important advantageover competitors such as mass merchants, retail toy chains, and office supply,computer product and consumer electronics superstores. We provide all of oursales associates with training and information on video game and PCentertainment products, system requirements and selling techniques throughvendor-sponsored seminars, which are held for store managers and fieldmanagers, and through periodic training seminars for our sales associates. Wealso encourage our sales associates to learn about customers’ game preferences.With this knowledge, sales associates are able to introduce customers to aselection of games and accessories that suit their preferences and are able toadvise them of new releases suited to their interests, thereby enhancing ourcustomers’ overall gaming experience.

 

*Disciplined store operations.*Our management team exercises significant control over all aspects of our storeoperations, including product research, purchasing, distribution, siteselection, store development, Point-of-Sale (“POS”) financial reporting andsales training. We believe that this commitment to operational control enablesus to identify opportunities to improve store productivity and to react quicklyto shifts in product pricing and consumer purchasing trends. We strive toincrease the productivity of our stores by actively managing our payroll expenseand operating our stores as efficiently as possible. We do this by utilizingour POS reporting systems to ensure the best possible match of sales associatefloor coverage to customer traffic.

 

*Leadership in online retailing.*The Internet represents a complementary channel to our store-based retailbusiness. We operate an e-commerce site at *www.ebgames.com*,where we provide product reviews, user-friendly online purchasing and theability to pre-order video game and PC entertainment software and video game hardware.Our website utilizes our merchandising expertise and strong vendorrelationships to provide online customers with over 6,600 new and pre-playedSKU’s that are available for immediate shipping. In 2004, we implementedseveral initiatives designed to leverage our online capabilities to enhance ourcustomers’ overall shopping experience. Some of the new conveniences that weoffer are the ability to pre-order a product online with in-store pick up, theability to see availability of a product at local stores and the ability toreturn products ordered online to one of our stores.

 

We believe that Internet broadband technology will play an importantrole in the future of our industry. We continue to explore different ways totake a leadership role in the online distribution of video games. Adoption ofthis new technology by consumers has been limited to date. However, as adoptionof this technology grows and other game delivery technologies emerge, we expectto actively pursue these opportunities.

 

*Highly effective inventory management.*We do extensive research prior to the release of new products and carefullymanage our inventory to minimize the risk associated with introducing newproducts. Our merchandising teams evaluate potential products and analyze the “EBPre-Sell Program” information and other data to estimate initial demand and theprojected life cycle for a new release. We then use this information to planour initial purchases and allocations among our stores and website.

 

We have a highly effective inventory management system which forecastsand actively manages our ongoing inventory requirements on an individual storebasis, aggregates our total requirements and manages the daily replenishmentfunction from our automated distribution centers to our stores. This results inimproved in-stock levels in our stores which enables us to maximize sales andavoid markdowns.

 

*State-of-the-art management informationsystems.* We use a combination of proprietary and “bestof breed” information systems technology. These tools enable us to analyzetotal, comparative and new store sales and inventory data at the company,region, district and store levels. We believe our approach to business systemsprovides a strategic advantage by allowing us to make enhancements to meetbusiness opportunities quickly and efficiently. Traffic counting

 

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technology is installed in a representative number of our stores,allowing us to evaluate store performance against traffic trends.

 

*Efficient distribution*.We currently operate two distribution centers in the United States. Our 315,000square foot facility in Sadsbury Township, Pennsylvania handles stapleproducts, online fulfillment, returns and product reclamation. A 200,000 squarefoot distribution center in Louisville, Kentucky supports flow-throughoperations on new releases, top selling products and online fulfillment. Wealso operate a 120,000 square foot facility in Canada, a 70,000 square footfacility in Australia, an 80,000 square foot facility in Sweden and threesmaller facilities in New Zealand, Italy and Germany. During fiscal 2006, weare planning to relocate our distribution centers in Italy and Germany tolarger facilities to accommodate our continued growth.

 

These distribution facilities allow us to replenish our stores on adaily basis supporting our “first-to-market” new-release strategy. Ourdistribution network also enables us to provide immediate delivery service toour online customers. Our rapid processing capability in our distributioncenters is facilitated by several advanced inventory management technologies,including paperless picking and radio frequency support. We also use awarehouse management system in our domestic distribution centers that enablesus to better manage labor and freight costs.

 

*Innovative marketing.*Our stores are located in high traffic, high visibility areas in regional stripcenters, shopping malls, urban areas and central business districts.Accordingly, our marketing efforts are designed to draw customers into ourstores through the use of window displays and other attractions visible toshoppers in the mall and from the street. Inside all of our stores, we featureselected products through the use of vendor displays, signs, flyers, point ofpurchase materials and end-cap displays. To enhance the shopping experience, weoffer our customers the opportunity to play the latest games and hardware atinteractive gaming stations and we offer complementary in-store programming via“EBtv”. A majority of these in-store efforts are funded through advertisingallowances and market development funds from manufacturers, distributors,software publishers and accessory suppliers. To provide additional value to ourcustomers, we launched a new customer loyalty program, the EB EDGE Card, inAugust. Members of this program are entitled to receive a discount onpre-played product at our EB Games stores and website.

 

We also actively publicize our stores through a variety of media,including print, web, radio and selected local television advertising. On anannual basis, we publish several full color vendor-funded freestanding insertsin top newspaper publications throughout the United States. Circulation forthese inserts ranges from 5 million to 18 million, depending on the time ofyear. We also publish several full color catalogs during the year. Each catalogincludes news, game reviews, event calendars and other related information, inaddition to products available for purchase. Our vendors fund the cost of thesepublications which are available in our stores and are mailed to thousands ofhouseholds from our proprietary customer lists.

 

We believe our online presence plays a key role in strengthening ourbrand identity. Our online marketing programs enable us to access the broadreach of the Internet at a low cost. These initiatives focus on partnering withcompanies that operate professional websites, such as GameSpot.com. We alsoreach online gaming communities through our affiliate marketing program, whichincludes thousands of gaming affinity and commerce sites.

 

**Growth Strategy**

 

Our growth strategy is based on leveraging our competitive strengthsand continuing our new store expansion. We believe that there are domestic andinternational opportunities for significant new store growth. Over the lastfive fiscal years, we have more than tripled our store base from 619 stores atthe end of fiscal 2000 to 1,977 stores at the end of fiscal 2005. We plan toopen approximately 400 new stores in fiscal 2006.

 

*Domestic opportunity.*We plan to open approximately 200 new stores in fiscal 2006 in the UnitedStates. We are continuing our expansion in strip and power shopping centers,central business districts and urban areas. We expect our stores in these locationsto require lower initial investments, generate higher gross margins on lowerrevenue and have a lower operating cost structure than our mall-based stores.These stores, which typically carry a wider assortment of pre-

 

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played video games than our mall-based stores, target the more valueconscious gamer.

 

*International opportunity.*  In fiscal 2002, we began a store expansionprogram in Europe that included both the opening of new stores and the acquisitionof regional chains. As of January 29, 2005, we operated a total of 520 storesin Australia, Canada, Denmark, Germany, Italy, New Zealand, Norway and Sweden.We plan to open approximately 200 new stores in fiscal 2006 in these markets.

 

According to IDG, the interactive entertainment industry in Europe isapproximately an $8.5 billion market with consumer demand characteristicssimilar to the U.S. market. We believe retail competition in the interactiveentertainment industry is weaker throughout continental Europe than in theUnited States. There are very few specialty retail chains dedicated tointeractive entertainment products in continental Europe and the existingspecialty chains are small and undercapitalized, with little or no investmentin distribution and information systems. Most video game software and hardwarein Europe is sold through general merchandise stores that offer less serviceand a smaller product selection than our stores. We believe that our storemodel, merchandising expertise and strong vendor relationships should enable usto gain significant market share in our targeted continental European marketsover the next several years.

 

**Retail Operations**

 

As of January29, 2005, we operated a total of 1,977 stores in the United States, Australia,Canada, Denmark, Germany, Italy, New Zealand, Norway, Puerto Rico and Sweden,primarily under the names EB Games and Electronics Boutique. In 2002, we begana program to re-brand all of our locations to EB Games. We have madesignificant progress towards this goal and we currently have over 87% of ourstores operating under the EB Games brand.

 

*Store formats.*  Many of our stores are located in hightraffic areas in regional shopping malls. As of January 29, 2005, we operated945 stores under this format. These stores average approximately 1,190 squarefeet.

 

In addition to our mall-based stores, we also operate many stores instrip and power centers, central business districts and urban areas. Thesestores are generally larger than our mall-based stores, averaging approximately1,620 square feet. We began our expansion into these other locations in fiscal2001, and as of January 29, 2005, we operated 1,032 stores under these formats.

 

*Store economics.* Theaverage cost, net of payables, of opening a new mall-based store in fiscal 2005was approximately $141,000. This included approximately $117,000 for furniture,fixtures, equipment and leasehold improvements.

 

The average cost, net of payables, of opening a new strip center storein fiscal 2005 was approximately $92,000. This included approximately $66,000for furniture, fixtures, equipment and leasehold improvements.

 

These average cost numbers do not include key money. Key moneyrepresents payments made to landlords, outgoing tenants or other third partiesto enter into certain European store leases. Key money is capitalized andamortized over a period of five years.

 

Typically, our new stores generate a positive cash contribution withinthe first 12 months of operations. We regularly review the profitability andprospects of each of our stores and evaluate whether any under-performingstores should be closed or relocated to more desirable locations.

 

Following the opening of a store, we utilize inventory management andcontrols and manage store payroll in an effort to maximize profitability. OurPOS and inventory management systems allow us to analyze merchandise mix andin-stock positions and reduce shrinkage. We also use various payroll managementand efficiency systems to improve sales conversions and store profitability.

 

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*Store operations.* Wedivide our North American store base (United States, Puerto Rico and Canada)into 13 geographic regions, which are supervised by our Senior Vice President,President of Stores—North America, our Vice President of Store Operations(Canada), Zone Vice Presidents, Regional Vice Presidents/Directors, DistrictManagers and store managers. Our Senior Vice President of InternationalOperations, who is based in Europe, supervises our international operationsother than in Canada. Managing Directors, District Managers and Area Managerssupervise our stores in Denmark, Germany, Italy, Norway and Sweden. A GeneralManager, Regional Director, District Managers and Area Managers supervise ourstores in Australia and New Zealand.

 

Each of our stores typically has a full-time manager and a full-timeassistant manager in addition to hourly sales associates, most of who workpart-time. The number of hourly sales associates in each store fluctuatesdepending on our seasonal needs. Our domestic stores are open seven days perweek and generally ten hours each day. We operate our international stores in amanner similar to our domestic stores.

 

**Vendors**

 

We purchase substantially all of our products directly frommanufacturers and software publishers. Our top 10 vendors accounted forapproximately 72% of our purchases in fiscal 2005. Our largest vendors infiscal 2005 were Electronics Arts, Nintendo, Microsoft, Sony and Take-Two, whichaccounted for 14.0%, 12.0%, 10.3%, 9.3% and 7.1%, respectively, of our grosspurchases. No other vendor accounted for more than 6.0% of our software oraccessory purchases during fiscal 2005. We believe that we have goodrelationships with our vendors. Maintaining and strengthening theserelationships is essential to our operations and continued expansion.

 

We participate in marketing programs with each of our key vendors.Under these programs, we are eligible to receive marketing allowances, providedwe perform certain specified marketing and merchandising events and activitiespursuant to the terms of written agreements we negotiate with our vendors foreach event or activity. Typical marketing events or activities for us includeprint advertising, television advertising, catalog advertising, in-storedisplay promotions, Internet advertising and product training and promotion atour national trade show.

 

**Competition**

 

The interactive entertainment industry is intensely competitive andsubject to rapid changes in consumer preferences and frequent new productintroductions. We compete with other specialty retailers of video games and PCsoftware, most notably GameStop. We also compete with mass merchants, such asWal-Mart and Target, toy retail chains, catalogs, direct sales by softwarepublishers, online retailers and office supply, computer product and consumerelectronics superstores such as Best Buy. In addition, video games areavailable for rental or purchase at many video stores. Further, other methodsof distribution may emerge in the future, resulting in increased competition.

 

**Employees**

 

As of January 29, 2005, we had approximately 11,800 non-seasonalemployees. Approximately 5,100 were employed on a part-time basis, and 1,400were employed on a temporary basis. In addition, during the calendar 2004 peakholiday shopping season, we hired approximately 1,700 temporary associates. Webelieve that our relationship with our employees is good. Except for a limitednumber of employees in Sweden, none of our employees are represented by a laborunion or are members of a collective bargaining unit.

 

**Game Group Services Agreement**

 

On January 30, 2004, we terminated the services agreement with GameGroup. As part of the agreement to terminate the services agreement, Game Grouppaid us $15.0 million in February 2004. The termination agreement placesrestrictions on our ability to compete with Game Group in the United Kingdomand Ireland until February 2006.

 

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**Seasonality**

 

Our business, like many retailers, is seasonal with significantpercentages of our sales and operating profit being generated in our fourthfiscal quarter and, in particular, the holiday selling season. During fiscal2005, we generated approximately 40.7% of our net sales and approximately 73.2%of our operating profit in our fourth quarter. If we were to experience anyadverse sales trends in our fourth quarter, our results of operations for thequarter and full fiscal year could be adversely affected.

 

**Environmental Matters**

 

Under various federal, state and local and foreign environmental lawsand regulations, a current or previous owner or occupant of real property maybecome liable for fines as well as the costs of removal or remediation of hazardoussubstances present or generated at the premises, at times without regard tofault. Although we have not been notified of, and are not aware of, any currentenvironmental liability, claim or non-compliance, it is possible that we mayincur fines or remediation costs in the future.

 

**Trademarks/Registrations**

 

We possess registered trademarks for Electronics Boutique®, EB® andEBX® as well as other registered trademarks and service marks, both in theUnited States and in certain foreign jurisdictions. We also have numeroustrademark applications pending to register other proprietary trademarks,including EB Games and*ebgames.com,*in the United States and in certain foreign jurisdictions.

 

We believe our trademarks are valid andvaluable and we intend to maintain our trademarks and their relatedregistrations. We do not know of any pending claims of infringement or otherchallenges to our right to use our marks in the United States or elsewhere. Wehave no patents, licenses, franchises or other intellectual property rightsthat are material to our operations.

 

**Code of Ethics**

 

We have adopted a code of ethics, the Code of Ethical Conduct forOfficers, Directors and Associates of Electronics Boutique, which applies toour Chief Executive Officer, Chief Financial Officer, Controller, all otheremployees of Electronics Boutique and each of the members of our Board ofDirectors. The Code of Ethical Conduct was approved by our Audit Committee inDecember 2003 and ratified by our Board of Directors in April 2004. Our Code ofEthical Conduct is included as an exhibit to our SEC filings and posted on ourwebsite, which is located at *www.ebholdings.com*.We will also disclose any amendments or waivers to our Code of Ethical Conducton our website.

 

**Item1A****. Executive Officersof the Company**

 

Set forth below is information regarding the executive officers of theCompany:

 
| **Name**             | ** ** | **Age**    | ** ** | **Position**                                                                                                     |
|----------------------|------------|------------|------------|------------------------------------------------------------------------------------------------------------------|
| ** **           | ** ** | ** ** | ** ** | ** **                                                                                                       |
| Jeffrey W. Griffiths |       | 54         |       | President, Chief Executive Officer and Director                                                                  |
| John R. Panichello   |       | 43         |       | Executive Vice President and Chief Operating Officer                                                             |
| James A. Smith       |       | 49         |       | Senior Vice President, Chief Financial Officer and Secretary                                                     |
| Seth P. Levy         |       | 47         |       | Senior Vice President, Logistics and Chief Information Officer;  President, EB Games Online                      |
| Steven R. Morgan     |       | 53         |       | Senior Vice President, President of Stores—North America and  President of Electronics Boutique Canada Inc. |

 

Mr. Griffiths has served as the President andChief Executive Officer of Electronics Boutique and as a Director

 

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since June 2001. Prior thereto, he served as Senior Vice President ofMerchandising and Distribution from March 1998 to June 2001. Mr. Griffithsserved as Senior Vice President of Merchandising and Distribution of EB, ourpredecessor, from March 1996 to March 1998. From March 1987 to February 1996,Mr. Griffiths served as Vice President of Merchandising of EB, and from April1984 to February 1987, he served as Merchandise Manager. Since October 2003,Mr. Griffiths has been a member of the Board of Trustees of Albright College.Mr. Griffiths also serves on the Board of Directors of Philadelphia Academies.

 

Mr. Panichello has served as Executive Vice President and ChiefOperating Officer since April 2002. Prior thereto, Mr. Panichello servedas Senior Vice President, Chief Operating Officer, President of EB GameWorldand BC Sports Collectibles (a former division of Electronics Boutique) andSecretary of Electronics Boutique from June 2001 to April 2002. Mr. Panichelloserved as Senior Vice President, Chief Financial Officer, President of EBGameWorld and BC Sports Collectibles and Secretary of Electronics Boutique fromJune 2000 to June 2001. Mr. Panichello served as Senior Vice President, ChiefFinancial Officer, President of BC Sports Collectibles and Secretary ofElectronics Boutique from March 1998 to June 2000. Mr. Panichello served as theSenior Vice President of Finance of EB and the President of the BC SportsCollectibles division from March 1997 to February 1998. Mr. Panichelloserved as EB’s Vice President of Finance and Treasurer from June 1994 toFebruary 1997. Mr. Panichello served as a director of Game Group from May 1995to November 1999. Mr. Panichello is a Certified Public Accountant. Mr.Panichello is the husband of Susan Y. Kim and the son-in-law of James J. Kim. 

 

Mr. Smith has served as Senior Vice President, Chief Financial Officerand Secretary since June 2001. Prior thereto, Mr. Smith served as SeniorVice President of Finance of Electronics Boutique from August 2000 to June2001. Mr. Smith served as Electronics Boutique’s Vice President-Finance fromMay 1998 to August 2000. From 1996 to 1998, Mr. Smith served as Vice Presidentand Controller of EB, our predecessor, and from 1993 to March 1996, he servedas Controller of EB.

 

Mr. Levy has served as Senior Vice President Logistics, Chief InformationOfficer and the President of EB Games Online since June 2001. From March 1999to June 2001, Mr. Levy served as Senior Vice President, Chief InformationOfficer and the President of EB Games Online. From February 1997 to March 1999,Mr. Levy served as the Vice President and Chief Information Officer. From 1991to February 1997, Mr. Levy served as the Director of System Development for theMay Merchandising and May Department Stores International divisions of MayDepartment Stores.

 

Mr. Morgan has served as Senior Vice President, President ofStores—North America and President of Electronics Boutique Canada Inc. sinceApril 2002. Prior thereto, Mr. Morgan served as Senior Vice President of Storesof Electronics Boutique and Canadian Operations from June 2001 to April 2002.Mr. Morgan served as Senior Vice President of Stores of Electronics Boutiquefrom January 2001 to June 2001. From May 1998 to January 2001, Mr. Morganserved as President and Chief Executive Officer of Millennium Futures, Inc., acommodity trading company. From July 1996 to May 1998, he served as Senior VicePresident, Director of Stores at Filene’s Department Stores. From May 1988 toJuly 1996, he served as Regional Vice President at Filene’s Department Stores.

 

**Item2****. Properties**

 

*Store leases.*  All of our stores are leased. As of January29, 2005, we had 1,977 stores. In general, our mall-based leases have terms offive to ten years. Our strip and power center locations typically have initialterms of five years with at least one or more renewal options.

 

*Headquarters and distribution centers.*  We own our 140,000 square foot home officefacility in West Chester, Pennsylvania. In September 2004, we purchased a new315,000 square foot distribution facility in Sadsbury Township, Pennsylvania.In November 2004, we sold our 80,000 square foot distribution facility in WestChester, Pennsylvania. We lease a 200,000 square foot distribution center inLouisville, Kentucky. This lease expires in April 2010. In Brampton, Ontario,Canada, we own a 120,000 square foot distribution and office facility. InPinkenba, Queensland, Australia, we own a 70,000 square foot distribution and officefacility. In May 2004, we acquired an 80,000 square foot office and

 

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distribution center in Arlov, Sweden. We also lease smallerdistribution facilities in New Zealand, Germany and Italy. In fiscal 2006, weare planning to relocate the distribution centers in Germany and Italy tolarger facilities to accommodate our continued growth in Europe.

 

*Customer service call center.*  We lease a 12,000 square foot customerservice telephone call center in Las Vegas, Nevada, from which we respond toinquiries regarding our products. The lease expires in June 2009.

 

**Item3****. LegalProceedings**

 

We are involved from time to time in legal proceedings arising in theordinary course of our business.

 

On December 3, 2003, a subsidiary of ours was served with a complaintin a proposed class action suit entitled “Chalmers v. Electronics Boutique ofAmerica Inc.” in the California Superior Court in Los Angeles County. The suitalleged that Electronics Boutique of America Inc. improperly classified storemanagement employees as exempt from the overtime provisions of Californiawage-and-hour laws and sought recovery of wages for overtime hours worked andrelated relief. In December 2004, the court approved a final settlement in theamount of $950,000. An accrual for settlement costs was recorded in fiscal2004. Consequently, this settlement had no material impact on our results ofoperations or financial condition for fiscal 2005.

 

On October 19, 2004, Milton Diaz filed a complaint against a subsidiaryof Electronics Boutique in the U.S. District Court for the Western District ofNew York. Mr. Diaz claims to represent a group of current and former employeesto whom Electronics Boutique of America Inc. allegedly failed to pay minimumwages and overtime compensation in violation of the Fair Labor Standards Act(FLSA) and New York law. The plaintiff moved to conditionally certify a groupof similarly situated individuals under the FLSA and in March 2005, there was ahearing on this motion. In March 2005, the plaintiff filed a motion on behalfof current and former store managers and assistant store managers in New Yorkto certify a class under New York wage and hour laws. Also, in March 2005, wefiled a motion to dismiss the New York state law claims. We intend tovigorously defend this action. At this stage of the matter, it is not possibleto predict the outcome of this matter.

 

In the opinion of management and except as described above, no pendingproceedings could have a material adverse effect on our results of operationsor financial condition.

 

**Item4****. Submission ofMatters to a Vote of Security Holders**

 

None.

 

**PART II**

 

**Item5****. Market forRegistrant’s Common Equity, Related Stockholder Matters and Issuer Purchases ofEquity Securities**

 

Our common stock was first traded publicly on July 28, 1998. The stockis quoted on the NASDAQ National Market under the symbol ELBO. The table belowrepresents the high and low bid prices of our common stock as reported byNASDAQ.

 
| ** **            | ** ** | **Fiscal 2005** | ** ** | **Fiscal 2004** | ** ** |
|-----------------------|------------|-----------------|------------|-----------------|------------|
| ** **            | ** ** | **Low**         | ** ** | **High**        | ** ** | **Low** | ** ** | **High** | ** ** |
|                  |       |            |       |            |       |   |   |   |   |
| First fiscal quarter  |       | $               | 24.87      |            | $          | 29.94 |   | $ | 11.96 |   | $ | 19.57 |   |
| Second fiscal quarter |       | 23.25           |       | 28.40           |       | 18.08 |   | 27.42 |   |
| Third fiscal quarter  |       | 23.50           |       | 35.37           |       | 24.77 |   | 34.80 |   |
| Fourth fiscal quarter |       | 33.74           |       | 43.75           |       | 19.60 |   | 28.07 |   |
|                       |            |                 |            |                 |            |  |  |  |  |  |  |  |  |

 

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Such quotations reflect inter-dealer prices, without retail mark-ups,mark-downs or commissions and may not necessarily reflect actual transactions.

 

As of April 4, 2005, we had 42 stockholders of record (including Cede& Co., the nominee for Depository Trust Company, a registered clearingagency) of the 24,759,785 issued and outstanding shares of our common stock. OnApril 4, 2005, the last reported sale price for our common stock as quoted byNASDAQ was $42.45 per share.

 

To date, we have not paid any dividends on our common stock and we haveno plans to do so in the future. Under certain circumstances, our creditfacility with Fleet Retail Group restricts us from paying dividends to ourstockholders.

 

In November 2003, our Board of Directors approved a program torepurchase up to 2.0 million shares of our common stock. Under this buy-backprogram, we may repurchase shares of our common stock from time to time incompliance with SEC regulations and subject to market conditions. We did notrepurchase any shares of our common stock during our fiscal fourth quarter. Asof January 29, 2005, 715,365 shares are available to be purchased under thisprogram. This program does not have an expiration date.

 

**Item6****. SelectedFinancial Data**

 

The following table sets forth for the periods indicated selectedfinancial and other data, which has been derived from our consolidatedfinancial statements. This information should be read in conjunction with “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” andthe Consolidated Financial Statements and Notes thereto included elsewhere inthis Form 10-K.

 
| ** **                                                                                | ** ** | **Year Ended**                                                       | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                                                                                | ** ** | **January 29,  2005**                                                | ** ** | **January 31,  2004** | ** ** | **February 1,  2003** | ** ** | **February 2,  2002** | ** ** | **February 3,  2001** | ** ** |
| ** **                                                                                | ** ** | **(Amounts in thousands, except per share data and operating data)** | ** ** |
|                                                                                      |       |                                                                 |       |   |   |   |   |   |   |   |   |
| **Statement of Income Data:**                                                             |       |                                                                 |       |   |   |   |   |   |   |   |   |
| Net sales                                                                                 |       | $                                                                    | 1,983,537  |   | $ | 1,588,406 |   | $ | 1,309,226 |   | $ | 1,059,338 |   | $ | 802,851 |   |
| Management fees (1)                                                                       |       | 5,845                                                                |       | 13,375 |   | 7,553 |   | 5,889 |   | 4,425 |   |
| Total revenues                                                                            |       | 1,989,382                                                            |       | 1,601,781 |   | 1,316,779 |   | 1,065,227 |   | 807,276 |   |
| Cost of goods sold                                                                        |       | 1,450,205                                                            |       | 1,174,429 |   | 971,204 |   | 826,599 |   | 626,939 |   |
| Gross profit                                                                              |       | 539,177                                                              |       | 427,352 |   | 345,575 |   | 238,628 |   | 180,337 |   |
| Selling, general and administrative expense  (2)                                          |       | 422,374                                                              |       | 327,260 |   | 266,729 |   | 178,928 |   | 144,082 |   |
| Restructuring and asset impairment  (reversal) charge (3)                                 |       | —                                                               |       | — |   | (2,611 | ) | 12,638 |   | — |   |
| Depreciation and amortization                                                             |       | 37,473                                                               |       | 29,211 |   | 23,361 |   | 20,286 |   | 16,239 |   |
| Operating income                                                                          |       | 79,330                                                               |       | 70,881 |   | 58,096 |   | 26,776 |   | 20,016 |   |
| Other income                                                                              |       | —                                                               |       | — |   | — |   | — |   | 1,550 |   |
| Interest income, net                                                                      |       | 2,350                                                                |       | 1,751 |   | 1,677 |   | 1,884 |   | 3,096 |   |
| Income before income tax expense and  cumulative effect of change in accounting principle |       | 81,680                                                               |       | 72,632 |   | 59,773 |   | 28,660 |   | 24,662 |   |
| Income tax expense                                                                        |       | 29,393                                                               |       | 26,903 |   | 22,373 |   | 10,948 |   | 9,791 |   |
| Income before cumulative effect of change  in accounting principle                        |       | 52,287                                                               |       | 45,729 |   | 37,400 |   | 17,712 |   | 14,871 |   |
| Cumulative effect of change in accounting  principle, net of tax (4)                      |       | —                                                               |       | — |   | (4,773 | ) | — |   | — |   |
|                                                                                      |       |                                                                 |       |   |   |   |   |   |   |   |   |
| Net income (2)                                                                            |       | $                                                                    | 52,287     |   | $ | 45,729 |   | $ | 32,627 |   | $ | 17,712 |   | $ | 14,871 |   |
|                                                                                      |       |                                                                 |       |   |   |   |   |   |   |   |   |
| Income per share before cumulative effect  of change in accounting principle:             |       |                                                                 |       |   |   |   |   |   |   |   |   |
| Basic                                                                                     |       | $                                                                    | 2.16       |   | $ | 1.82 |   | $ | 1.44 |   | $ | 0.74 |   | $ | 0.67 |   |
|                                                                                      |       |                                                                 |       |   |   |   |   |   |   |   |   |
| Diluted                                                                                   |       | $                                                                    | 2.13       |   | $ | 1.80 |   | $ | 1.42 |   | $ | 0.73 |   | $ | 0.66 |   |
| Per share cumulative effect of change in  accounting principle:                           |       |                                                                 |       |   |   |   |   |   |   |   |   |
| Basic                                                                                     |       |                                                                 |       |   |   | $ | (0.18 | ) |   |   |   |   |
|                                                                                      |       |                                                                 |       |   |   |   |   |   |   |   |   |
| Diluted                                                                                   |       |                                                                 |       |   |   | $ | (0.18 | ) |   |   |   |   |
|                                                                                      |       |                                                                 |       |   |   |   |   |   |   |   |   |
| Net income per share:                                                                     |       |                                                                 |       |   |   |   |   |   |   |   |   |
| Basic                                                                                     |       | $                                                                    | 2.16       |   | $ | 1.82 |   | $ | 1.26 |   | $ | 0.74 |   | $ | 0.67 |   |
| Diluted                                                                                   |       | $                                                                    | 2.13       |   | $ | 1.80 |   | $ | 1.24 |   | $ | 0.73 |   | $ | 0.66 |   |
| Weighted average shares outstanding:                                                      |       |                                                                 |       |   |   |   |   |   |   |   |   |
| Basic                                                                                     |       | 24,159                                                               |       | 25,114 |   | 25,833 |   | 23,868 |   | 22,254 |   |
| Diluted                                                                                   |       | 24,547                                                               |       | 25,415 |   | 26,247 |   | 24,230 |   | 22,466 |   |
|                                                                                      |       |                                                                 |       |   |   |   |   |   |   |   |   |
| **Operating Data:**(5) (unaudited)                                                        |       |                                                                 |       |   |   |   |   |   |   |   |   |
| Stores open at end of year                                                                |       | 1,977                                                                |       | 1,528 |   | 1,145 |   | 937 |   | 737 |   |
| Comparable store sales  increase (decrease) (6)                                           |       | 3.1                                                                  | %          | 0.0 | % | 8.3 | % | 20.8 | % | (4.5 | )% |

 

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| ** **                      | ** ** | **As of**             | ** ** |
|---------------------------------|------------|-----------------------|------------|
| ** **                      | ** ** | **January 29,  2005** | ** ** | **January 31,  2004** | ** ** | **February 1,  2003** | ** ** | **February 2,  2002** | ** ** | **February 3,  2001** | ** ** |
|                            |       |                  |       |   |   |   |   |   |   |   |   |
| **Balance Sheet Data:**         |       |                  |       |   |   |   |   |   |   |   |   |
| Working capital                 |       | $                     | 175,422    |   | $ | 163,422 |   | $ | 144,363 |   | $ | 121,446 |   | $ | 30,133 |   |
| Total assets                    |       | 724,200               |       | 643,932 |   | 527,305 |   | 429,649 |   | 270,493 |   |
| Long-term debt                  |       | —                |       | — |   | — |   | 143 |   | — |   |
| Total liabilities               |       | 372,732               |       | 339,952 |   | 252,805 |   | 192,489 |   | 139,273 |   |
| Total stockholders’ equity |       | 351,468               |       | 303,980 |   | 274,500 |   | 237,160 |   | 131,220 |   |
|                                 |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)           Infiscal 2004, management fees included $4.7 million of revenue earned as part ofour termination of the services agreement with Game Group.

 

(2)           InFebruary 2005, we initiated a review of our lease-related accounting methodsfor rent holidays (the period prior to the store opening when we pay reduced orno rent) and tenant improvement allowances. Based on this review, we recorded aone-time, cumulative, non-cash charge to rent expense of $4.2 million ($2.7million after-tax, or $0.11 per diluted share) in the fourth quarter of fiscal2005.

 

(3)           Infiscal 2002, the restructuring and asset impairment charge of $12.6 millionresulted from our adoption of a plan to close the operations of all 29 EB Kidsstores and sell the 22-store BC Sports Collectibles business. The chargerepresented a $3.5 million write down of store leasehold improvements, a $2.3 millionwrite down of store furniture, fixtures and equipment and $6.7 million in leasetermination costs. In fiscal 2003, the $2.6 million net reversal of therestructuring and asset impairment charge resulted primarily from store leaserelated accruals that were not necessary due to the terms of the sale of the BCSports Collectibles business.

 

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(4)           Wechanged our accounting policy with respect to the recording of vendoradvertising allowances effective retroactively as of the beginning of fiscal2003. As a result, we recorded a non-cash charge of $4.8 million, net of incometax, in the first quarter of fiscal 2003 for the cumulative effect of thechange in accounting principle on fiscal years prior to fiscal 2003. Prior tothis change, we recognized all vendor advertising allowances as an offset toselling, general and administrative expense. Vendor advertising allowances inexcess of advertising expense of $40.9 million and $35.8 million were reflectedas an offset to selling, general and administrative expense in fiscal 2002 andfiscal 2001, respectively.

 

(5)           Doesnot reflect stores operated by other retailers for which we have providedmanagement services.

 

(6)           Comparablestore sales are based on stores in operation for over one year. Comparablestore sales results for fiscal 2001 represents the 52 week period endingJanuary 27, 2001.

 

**Item 7****. Management’s Discussion and Analysis of FinancialCondition and Results of Operations**

 

**Overview**

 

We are the leading global specialty retailer of video game hardware andsoftware, PC entertainment software, pre-played video games and relatedaccessories and products. As of January 29, 2005, we operated a total of 1,977stores in 46 states, Australia, Canada, Denmark, Germany, Italy, New Zealand,Norway, Puerto Rico and Sweden—primarily under the names *EB Games* and *Electronics Boutique*. In addition, we operated a commercialwebsite under the URL address *www.ebgames.com*.We operate in the interactive entertainment industry and are headquartered inWest Chester, Pennsylvania. We are a holding company and do not have anysignificant assets or liabilities, other than all of the outstanding capitalstock of our subsidiaries. Our fiscal year ends on the Saturday nearest January31.

 

In fiscal 2005, our strong performance enabled us to outperform theindustry as a whole. We again established company records for revenues and netincome. We continued to increase our market share by increasing our number ofstrip center locations, developing our international presence, growing ourpre-played business and improving customer service. Our overall salesimprovement in fiscal 2005 was driven by the release of software titles *Halo 2,**GrandTheft Auto: San Andreas*, *Need forSpeed Underground 2, World of Warcraft* and *Metal Gear Solid 3*. Significantoperational achievements included the opening of a new distribution facility inSadsbury Township, Pennsylvania to consolidate our Pennsylvania distributionoperations and the purchase of a new**officeand distribution center in Arlov, Sweden to support our Nordic operations.Additionally, in fiscal 2005 we continued to strengthen our identity with there-branding of our stores, as approximately 87% of our store base now has the *EB Games*name. We also took action tointegrate our website with our retail store operations. Customers can now viewproduct availability in any of our retail stores online and can pre-order newreleases online with in-store pick up.

 

Our success has been, and will continue to be, contingent upon ourability to understand trends in our industry and to manage our business inresponse to these trends. For example, the interactive entertainment industryis cyclical as new technology is generally introduced every four to five years.We have historically achieved strong market share in the first few years ofthese cycles and then experienced subsequent declines as product prices felland mass market retailers attracted consumers at the latter part of the cycle.Our current strategy to retain market share throughout the cycle has been toexpand our business through the opening of strip-center stores, which webelieve attracts the value conscious consumers that previously shopped throughthe mass market retail channel. Additionally, to increase profitability in allof our locations, we are focused on expanding our pre-played business and newways to drive sales of new titles. Our success is dependent upon our ability tocontinue to grow the business in a profitable manner.

 

Management reviews several key indicators to evaluate our performancein achieving profit and sales growth. Sales growth is evaluated by measuringcontributions generated from new store expansion and changes in comparablestore sales. In addition, we measure our sales performance by analyzing changesin our market share relative to the overall industry. Gross margin is monitoredfor the impact of product mix as well as inventory obsolescence and losses.Product mix shifts throughout each industry cycle with lower margin hardwaresales declining as a percentage of total

 

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sales while higher margin software sales increase. A prime driver ofthis shift has been the continual growth of the overall installed hardwarebase, which increased in calendar 2004 by 33% to approximately 75 million unitsin the United States. We also review the growth of pre-played sales in relationto our total sales mix, as these pre-played sales are one of our higher margincategories.

 

We have a positive outlook for fiscal 2006. We are well positioned tocapitalize on both current and long-term prospects and to continue the growthof our strip center stores, pre-played business and international operations.We plan to open approximately 400 stores during the current fiscal year.Approximately 50% of these stores will be located internationally. The domesticstores to be opened during fiscal 2006 will be predominately based in stripcenter locations. We anticipate funding this store expansion with cash on handand cash generated from our operations.

 

**Critical Accounting Policies and Estimates**

 

The discussion and analysis of our financial condition and results ofoperations are based upon our consolidated financial statements, which havebeen prepared in accordance with U.S. generally accepted accounting principles.The preparation of these financial statements requires us to make estimates andassumptions that affect the reported amounts of assets, liabilities, revenuesand expenses. Our results may differ from those estimates. Our significantaccounting policies can be found in Note 1 to our consolidated financialstatements. We consider the following policies to be most critical to theportrayal of our financial condition and results of operations.

 

*Inventory Valuation*

 

Our merchandise inventory, which includes new and pre-played video gamehardware and software as well as PC entertainment software and relatedaccessories and products, is valued at the lower of cost or market. The cost isdetermined principally by a weighted-average method. The weighted-average costmethod attaches a cost to each stock keeping unit (“SKU”), and is a blendedaverage of the original purchase price and those of subsequent purchases orother cost adjustments throughout the life cycle of that SKU. We include anallocation of costs incurred to refurbish pre-played products in order toprepare them for resale in the cost of our merchandise inventory.

 

Inherent in the video game business is the risk of obsolete inventory.As each new generation of products is introduced, demand for the priorgeneration decreases, reducing the interest in and value of the older games.Some vendors offer us credit to reduce the cost of products that are sellingmore slowly allowing for a reduction in the selling price and reducing thepossibility that these items become obsolete. We monitor the aging of ourinventory by item and provide a reserve for products that are considered “slowmoving”, using an established formula based on current inventory and a trailingsales history. We also monitor the difference between the selling (“market”)price of each item and its cost and provide a reserve for any inventory sellingbelow cost.

 

We perform regular physical inventories and cycle counts in both ourstores and distribution centers to adjust inventory balances and account forshrink and damaged product. An accrual for estimated loss is recorded betweenthe timing of these counts.

 

Reserves of $4.3 million and $3.9 million were recorded againstinventory as of January 29, 2005 and January 31, 2004, respectively. Managementbelieves its inventory valuation system results in carrying inventory at thelower of cost or market.

 

*Revenue Recognition and Related Policies*

 

We have historically derived revenue primarily from two sources: (i)product revenue, which includes the retail sale of merchandise inventory,warranties, loyalty cards, subscriptions, and shipping and handling fees and(ii) management services revenue. Sales are recorded net of estimated amounts forsales returns and other allowances. On January 30, 2004, we terminated ourservices agreement with Game Group initially established in fiscal 1996.Management services revenue recorded in fiscal 2005 represents the amortizationof deferred revenue related to

 

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covenants established as part of the termination agreement.

 

Retail sales are recognized as revenue at the point of sale. Mail orderand Internet sales are recognized as revenue upon delivery to and acceptance bythe customer. Revenues from shipping and handling are recorded in revenue.Warranty revenue is amortized over the life of the warranty contract. Loyaltycard revenue is amortized over the life of the card. Magazine subscriptionrevenue is recognized over the life of the subscription.

 

We also engage in the sale, purchase and trading of pre-played videogame products. Effective in the second quarter of fiscal 2003, we changed ourstatement of income classification for pre-played merchandise trade-in activityto include it in cost of goods sold rather than offset it against net sales.This policy is more consistent with industry practice. Previously, we recordeda reduction to both revenue and cost of goods sold for the cost of thepre-played merchandise accepted for trade. There was no impact on operatingincome or net income for any period as a result of this reclassification.

 

Revenues for management services are recorded as earned. In fiscal2004, management fees were derived from service agreements with Game Group andSports Collectibles Acquisition Company (“SCAC”) as well as $4.7 million earnedas part of the termination of our services agreement with Game Group. Wereceived $15.0 million from Game Group as part of the settlement for terminatingthe agreement. Based on an independent analysis, the covenants not to competewith Game Group in the United Kingdom, Ireland, France and Spain weredetermined to have a value equal to $10.3 million, which was recorded asdeferred revenue. In fiscal 2005, we recognized $5.8 million of this deferredrevenue. The remaining $4.5 million will be recognized as income in fiscal2006.

 

*Income Taxes*

 

We are subject to federal, state and local income tax in manyjurisdictions in the United States as well as internationally. Income taxes arecalculated in accordance with SFAS No. 109, “Accounting for Income Taxes,”which requires the use of the asset and liability method. Deferred tax assetsand liabilities are recognized based on the difference between the financialstatement carrying amounts of existing assets and liabilities and theirrespective tax bases. Inherent in the measurement of deferred balances arecertain judgments and interpretations of enacted tax law and published guidancewith respect to applicability to our operations. Significant examples of thisconcept include capitalization policies for various tangible and intangiblecosts, income and expense recognition and inventory valuation methods. We mustalso assess the likelihood that our deferred tax assets will be recovered fromour future taxable income. To the extent we believe that recovery is unlikely,we are required to establish valuation allowances. We established valuationallowances of $755,000 and $352,000 as of January 29, 2005 and January 31,2004, respectively, due to uncertainties related to our ability to utilize thenet operating loss carryforwards of certain foreign subsidiaries. Future taxexpense may be impacted by this judgment. As of January 29, 2005, we haverecorded $4.5 million of deferred tax assets related to net operating losscarryforwards for which no valuation allowance is recorded.

 

*Valuation of Long-Lived and Intangible Assetsand Goodwill*

 

We assess the impairment of identifiable intangibles and long-livedassets to determine if any part of the carrying value may not be recoverable.Factors we consider important when assessing impairment include:

 

•              significantunderperformance relative to expected historical or projected future operatingresults;

 

•              significant changesin the manner of our use of the acquired assets or the strategy for our overallbusiness;

 

•              significant negativeindustry or economic trends;

 

•              significant declinein our stock price for a sustained period; and

 

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•              our marketcapitalization relative to net book value.

 

When we determine that the carrying value of an identifiable intangibleor long-lived asset may not be recoverable based on one or more of thesefactors, we test for impairment to determine if an impairment charge isrequired.

 

Goodwill is tested annually for impairment. We use a two-stepimpairment assessment to determine if an impairment charge is required. Thefirst step of the goodwill impairment test compares the fair value of a reportingunit with its carrying amount, including goodwill. If the fair value of thereporting unit exceeds its carrying amount, goodwill of the reporting unit isconsidered not impaired, and the second step of the impairment test is notnecessary. If the carrying amount of a reporting unit exceeds its fair value,the second step of the goodwill impairment test is performed to measure theamount of impairment loss if any. After completing our annual goodwillimpairment test for fiscal 2005, no impairment was required.

 

Net intangible assets, long-lived assets and goodwill amounted to$189.7 million and $151.7 million as of January 29, 2005 and January 31, 2004,respectively. See Note 14 to the consolidated financials statements for moredetails.

 

**Change in Accounting Principle**

 

In November 2002, the Emerging Issues Task Force (“EITF”) reachedconsensus on Issue 02-16, “Accounting by a Customer (Including a Reseller) forCash Consideration Received from a Vendor.” Issue 02-16 addresses theaccounting for cash consideration received from a vendor by a reseller forvarious vendor funded allowances, including cooperative advertising support.Issue 02-16 was effective for new arrangements or modifications to existingarrangements entered into after December 31, 2002, although early adoption waspermitted. We elected to adopt early, effective February 3, 2002, theprovisions of Issue 02-16. In accordance with the provisions of Issue 02-16,vendor advertising allowances which exceed specific, incremental andidentifiable costs incurred in relation to the advertising and promotionalevents we conduct for our vendors are to be classified as a reduction in thepurchase price of merchandise and recognized in income as the merchandise issold. The amount of vendor allowances to be recorded as a reduction ofinventory was determined by calculating the ratio of vendor allowances inexcess of specific, incremental and identifiable advertising and promotionalcosts to merchandise purchases. We then applied this ratio to the value ofinventory in determining the amount of the vendor reimbursements to be recordedas a reduction to inventory reflected on the balance sheet. This methodologyresulted in a $7.6 million reduction in inventory as of February 3, 2002, thedate of adoption of Issue 02-16. The $7.6 million, $4.8 million net of tax, wasrecorded as a cumulative effect of change in accounting principle in fiscal2003 for the impact of this adoption on prior fiscal years.

 

Prior to our adoption of Issue 02-16, we recognized all vendoradvertising allowances as an offset to selling, general and administrativeexpense. These allowances exceeded the specific, incremental costs of theadvertising and promotional events conducted by us. The portion of theallowances in excess of the specific, incremental costs was recorded as anoffset to other operating expenses within selling, general and administrativeexpense. These other operating expenses, which were incurred to supportadvertising and promotional expenses, included: marketing and merchandisingdepartment expenses to develop, promote and manage the events; direct store andstore supervisory payroll expenses to implement, manage and monitor the events;distribution expenses associated with receiving and shipping of materialsnecessary for the events; and corporate expenses related to the design,production and maintenance of Internet advertising events. In fiscal 2005,fiscal 2004 and fiscal 2003, the company recorded vendor advertising allowancesas a reduction of selling, general and administrative expense in the amount of$19.3 million, $13.7 million and $8.8 million, respectively.

 

As of January 29, 2005 and January 31, 2004, $10.2 million and $10.8million, respectively, of our vendor advertising allowances have been recordedas a reduction of inventory.

 

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**Results of Operations**

 

The following table sets forth certain statement of income items as apercentage of total revenues for the periods indicated:

 
| ** **                                                                                | ** ** | **Fiscal  2005** | ** ** | **Fiscal  2004** | ** ** | **Fiscal  2003** | ** ** |
|-------------------------------------------------------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
|                                                                                      |       |             |       |             |       |             |       |
| Net sales                                                                                 |       | 99.7             | %          | 99.2             | %          | 99.4             | %          |
| Management fees                                                                           |       | 0.3              |       | 0.8              |       | 0.6              |       |
| Total revenues                                                                            |       | 100.0            |       | 100.0            |       | 100.0            |       |
| Cost of goods sold                                                                        |       | 72.9             |       | 73.3             |       | 73.8             |       |
| Gross profit                                                                              |       | 27.1             |       | 26.7             |       | 26.2             |       |
| Selling, general and administrative expense                                               |       | 21.2             |       | 20.5             |       | 20.2             |       |
| Restructuring and asset impairment reversal                                               |       | —           |       | —           |       | (0.2             | )          |
| Depreciation and amortization                                                             |       | 1.9              |       | 1.8              |       | 1.8              |       |
| Operating income                                                                          |       | 4.0              |       | 4.4              |       | 4.4              |       |
| Interest income, net                                                                      |       | 0.1              |       | 0.1              |       | 0.1              |       |
| Income before income tax expense and cumulative  effect of change in accounting principle |       | 4.1              |       | 4.5              |       | 4.5              |       |
| Income tax expense                                                                        |       | 1.5              |       | 1.6              |       | 1.7              |       |
| Income before cumulative effect of change  in accounting principle                        |       | 2.6              |       | 2.9              |       | 2.8              |       |
| Cumulative effect of change in accounting  principle, net of tax                          |       | —           |       | —           |       | (0.3             | )          |
| Net income                                                                                |       | 2.6              | %          | 2.9              | %          | 2.5              | %          |

 

**Fiscal 2005 Compared to Fiscal 2004**

 

Net sales increased 24.9% from $1,588.4 million in fiscal 2004 to$1,983.5 million in fiscal 2005. The increase in net sales was primarilyattributable to the sales volume of approximately $288.4 million resulting from479 new stores opened during fiscal 2005, coupled with a 3.1%, or $49.3million, increase in comparable store sales, the additional sales volume ofapproximately $37.1 million for non-comparable stores opened during fiscal 2005and a favorable foreign currency exchange rate impact of $30.9 million oncomparable store sales in fiscal 2005. The increase in overall comparable storesales in fiscal 2005 was due to a stronger new release schedule of softwaretitles, including top-sellers *Halo 2*and *Grand Theft Auto: San Andreas*.

 

Management fees were $13.4 million in fiscal 2004 and $5.8 million infiscal 2005. The $13.4 million in fiscal 2004 consisted of $8.6 million in feesearned in accordance with our services agreement with Game Group, $4.7 millionearned in connection with our termination of the services agreement and$150,000 in fees earned in connection with the sale of the BC SportsCollectibles business in November 2002. The $5.8 million in fiscal 2005 consistedof the amortization of management fee income previously deferred as part of thetermination of our services agreement with Game Group.

 

Cost of goods sold increased 23.5% from $1,174.4 million in fiscal 2004to $1,450.2 million in fiscal 2005. As a percentage of net sales, cost of goodssold decreased from 73.9% in fiscal 2004 to 73.1% in fiscal 2005. Thisdecrease, as a percentage of net sales, was primarily due to the shift inbusiness from lower-margin hardware products to higher-margin software products,coupled with the continuing growth of our pre-played business, offset, in part,by a decrease, as a percentage of net sales, in vendor allowances recognized incost of goods sold. Cost of goods sold does not include

 

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purchasing and distribution center operating expenses of approximately$17.6 million in fiscal 2004 and $21.9 million in fiscal 2005, which areincluded in selling, general and administrative expense. Accordingly, our costof goods sold may not be comparable to the cost of goods sold of otherretailers.

 

Selling, general and administrative expense increased 29.1% from $327.3million in fiscal 2004 to $422.4 million in fiscal 2005. The increase isprimarily due to expenses associated with a larger domestic and internationalstore base and the associated increases in store expenses of $82.2 million andheadquarter expenses of $8.4 million. As a percentage of total revenues,selling, general and administrative expense increased from 20.5% in fiscal 2004to 21.2% in fiscal 2005. This increase was primarily due to expenses associatedwith opening 479 new stores in fiscal 2005 and a one-time, cumulative charge torent expense of $4.2 million as a result of our review of lease-related accountingmethods for recognizing rent expense prior to a store opening, offset byleveraging selling, general and administrative expense over the 3.1% increasein comparable store sales during the year.

 

Depreciation and amortization expense increased 28.3% from $29.2million in fiscal 2004 to $37.5 million in fiscal 2005. The increase wasprimarily due to capitalized expenditures for leasehold improvements andfurniture and fixtures for new store openings and the remodeling of existingstores.

 

Income tax expense increased 9.3% from $26.9 million in fiscal 2004 to$29.4 million in fiscal 2005. As a percentage of income before income taxexpense, income tax expense decreased from 37.0% in fiscal 2004 to 36.0% infiscal 2005. Our effective tax rate decreased from the prior year principallyas a result of an increase in operations in foreign jurisdictions that havelower tax rates than the United States.

 

**Fiscal 2004 Compared to Fiscal 2003**

 

Net sales increased 21.3% from $1,309.2 million in fiscal 2003 to$1,588.4 million in fiscal 2004. The increase in net sales was primarilyattributable to the sales volume of approximately $138.6 million resulting from399 new stores opened during fiscal 2004, coupled with a favorable foreigncurrency exchange rate impact of $42.5 million on comparable store sales infiscal 2004. Overall comparable store sales for fiscal 2004 were even to lastyear as increases in comparable store sales for our strip-center locationsoffset decreases in comparable store sales for our mall-based stores. Our netcomparable store sales results compared favorably to the United Statesinteractive entertainment industry, which experienced a decline of 2.1% infiscal 2004. Net sales from the BC Sports Collectibles and EB Kids stores forfiscal 2003 were $13.5 million.

 

Management fees increased 77.1% from $7.6 million in fiscal 2003 to$13.4 million in fiscal 2004. The increase was primarily due to $4.7 million offees earned in connection with our termination of the services agreement withGame Group. An increase in Game Group’s sales and a more favorable currencyexchange rate between the British pound and U.S. dollar in fiscal 2004accounted for the remainder of the increase.

 

Cost of goods sold increased 20.9% from $971.2 million in fiscal 2003to $1,174.4 million in fiscal 2004. As a percentage of net sales, cost of goodssold decreased from 74.2% in fiscal 2003 to 73.9% in fiscal 2004. Thisdecrease, as a percentage of net sales, was primarily due to a shift inbusiness from lower margin hardware products to higher margin softwareproducts, offset, in part, by a decrease in vendor allowances recognized incost of goods sold. Cost of goods sold does not include purchasing anddistribution center operating expenses of approximately $17.6 million in fiscal2004 and $15.3 million in fiscal 2003, which are included in selling, generaland administrative expense. Accordingly, our cost of goods sold may not becomparable to the cost of goods sold of other retailers. Cost of goods soldfrom the BC Sports Collectibles and EB Kids stores for fiscal 2003 was $9.6million.

 

Selling, general and administrative expense increased 22.7% from $266.7million in fiscal 2003 to $327.3 million in fiscal 2004. The increase isprimarily due to expenses associated with a larger domestic and internationalstore base and the associated increases in store expenses of $50.8 million andheadquarter expenses of $8.5 million. As a percentage of total revenues,selling, general and administrative expense increased from 20.2% in fiscal 2003to 20.5% in fiscal 2004. This increase was primarily due to expenses associatedwith opening 399 new stores in fiscal 2004. Selling, general

 

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and administrative expense from the BC Sports Collectibles and EB Kidsstores for fiscal 2003 was $6.9 million.

 

We had a net reversal of $2.6 million of the restructuring and assetimpairment charge in fiscal 2003 resulting from our adoption of a plan infiscal 2002 to close the operations of all 29 EB Kids stores and sell the22-store BC Sports Collectibles business. The reversal was primarily related tostore lease related accruals that were not necessary due to the terms of thesale of the BC Sports Collectibles business.

 

Depreciation and amortization expense increased 25.0% from $23.4million in fiscal 2003 to $29.2 million in fiscal 2004. The increase wasprimarily due to capitalized expenditures for leasehold improvements andfurniture and fixtures for new store openings and the remodeling of existingstores, and fixtures, equipment and computer software at corporate headquartersand existing distribution centers.

 

Operating income increased 22.0% from $58.1 million in fiscal 2003 to$70.9 million in fiscal 2004. As a percentage of total revenues, operating incomewas 4.4% in both fiscal 2004 and fiscal 2003. Excluding the $2.6 million netreversal of the restructuring and asset impairment charge in fiscal 2003,operating income would have been $55.5 million or 4.2% of total revenues infiscal 2003. Due to favorable foreign exchange rates and continued growth inour international operations, the percentage of the foreign contribution tooperating income increased from 14.7% in fiscal 2003 to 42.2% in fiscal 2004.Operating loss from the BC Sports Collectibles and EB Kids stores for fiscal2003 was $0.5 million.

 

Income tax expense increased 20.2% from $22.4 million in fiscal 2003 to$26.9 million in fiscal 2004. As a percentage of income before income taxexpense, income tax expense decreased from 37.4% in fiscal 2003 to 37.0% infiscal 2004. Our effective tax rate decreased from the prior year principallyas a result of an increase in operations in foreign jurisdictions that havelower tax rates than the United States.

 

**Liquidity and Capital Resources**

 

We have historically financed operations primarily through cashgenerated from operations and funds available under our credit facility. Weexpect capital expenditures to be approximately $71.0 million during fiscal2006. Expenditures will include the opening of 400 new stores, remodeling ofexisting stores, capital additions at our corporate headquarters and therelocation of our distribution centers in Italy and Germany to accommodate ourcontinued growth. During fiscal 2005, we acquired an office and distribution centerin Arlov, Sweden for $4.2 million with cash from operations. Additionally, wecommenced operations in our new 315,000 square foot distribution center inSadsbury Township, Pennsylvania. We acquired this facility for $13.2 millionwith cash from operations. In November 2004, we closed on the sale of one ofthe existing Pennsylvania distribution centers for $5.2 million.

 

We generated $102.4 million in cash from operationsin fiscal 2005 and $103.6 million in fiscal 2004. The $102.4 million of cashgenerated from operations in fiscal 2005 was primarily the result of $52.3million in net income, $31.2 million in non-cash charges to net income, anincrease in accrued expenses of $24.5 million and a decrease in accountsreceivable of $18.9 million, offset, in part, by an increase in merchandiseinventories, net of payables, of $28.5 million. The increase in accruedexpenses was due primarily to an increase in customer liabilities as well as anincreased store base. The decrease in accounts receivable was due primarily tothe receipt of $15.0 million in February 2004 as part of the termination of ourservices agreement with Game Group and normal seasonal fluctuations. Theincrease in merchandise inventories, net of payables, was due to maintainingappropriate levels of inventory for an increased store base. The $103.6 millionof cash generated from operations in fiscal 2004 was primarily the result of$45.7 million in net income, $27.2 million in non-cash charges to net income,an increase in accounts payable of $39.3 million and an increase in accruedexpenses of $25.1 million, offset, in part, by an increase in merchandiseinventory of $17.5 million and a $12.1 million increase in accounts receivable.The increase in accounts payable and accrued expenses was due in part to anincreased store base. The increase in merchandise inventory was due to anincreased store base, partially offset by prior year inventories being higherthan normal due to slower than expected holiday sales in fiscal 2003. Theincrease in accounts receivable was due in part to Game Group’s December 2003management fee payment for $2.2 million not being received until February 2004.

 

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We made capital expenditures of $75.1 million in fiscal 2005 primarilyto open new stores, re-brand 83 existing stores to the *EB Games* name, acquire a distributionfacility in Pennsylvania, purchase a home office and distribution center inSweden and to remodel, furnish and equip existing stores, our corporate headquartersand existing distribution centers. We made capital expenditures of $45.9million in fiscal 2004, primarily to open new stores, to remodel existingstores and to re-brand 158 existing stores to the *EB Games* name.

 

In May 2003,our Board of Directors approved a program to repurchase up to 1.5 millionshares of our outstanding common stock. During fiscal 2004, we completed theprogram and repurchased 1.5 million shares of common stock at a weightedaverage cost, including broker commissions, of $21.18 per share. Cashexpenditures to complete the stock buy-back totaled $31.8 million.

 

In November 2003, our Board of Directors approved aprogram to repurchase up to 2.0 million additional shares of our outstandingcommon stock. As of January 31, 2004, we repurchased 115,700 shares of commonstock at a weighted average cost, including broker commissions, of $23.21 pershare. Cash expenditures for these stock repurchases totaled $2.7 million.During fiscal 2005, we repurchased 1.2 million shares of common stock at aweighted average cost, including broker commissions, of $27.10 per share. Cashexpenditures for these stock repurchases totaled $31.7 million. As of January29, 2005, we had repurchased 1.3 million aggregate shares of common stock at aweighted average cost, including broker commissions, of $26.75 per share.Aggregate cash expenditures for these stock repurchases totaled $34.4 million.

 

In March 2005, we entered into a fourth amendment to our $50.0 millionasset based revolving credit facility with Fleet Retail Group, Inc., asuccessor to Fleet Capital Group. Pursuant to the amendment, Fleet agreed toeliminate certain covenant requirements in the credit facility, added acovenant requiring us to maintain a certain inventory coverage ratio and extendedthe credit facility through March 16, 2006. Interest accrues on borrowings at aper annum rate equal to either LIBOR plus 250 points or Fleet’s base rate ofinterest, at our option. The revolving credit agreement contains restrictivecovenants regarding transactions with affiliates, the payment of dividends, andother financial and non-financial matters and is secured by certain assets,including accounts receivable, inventory, fixtures and equipment. As of January29, 2005, we had no outstanding borrowings under our credit facility.

 

In March 2005, we executed a commitment to secure a mortgage for $9.5million on our new Sadsbury Township distribution center. We expect the closingto occur in May 2005 or earlier.

 

The followingtable represents our total contractual obligations as of January 29, 2005(amounts in thousands):

 
| ** **       | ** ** | ** ** | ** ** | **Payments due by period** | ** ** |
|------------------|------------|------------|------------|----------------------------|------------|
| ** **       | ** ** | **Total**  | ** ** | **Less than 1  year**      | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than 5 years** | ** ** |
| Operating Leases |       | $          | 523,324    |                       | $          | 103,713 |   | $ | 195,453 |   | $ | 134,175 |   | $ | 89,983 |   |
| Total            |       | $          | 523,324    |                       | $          | 103,713 |   | $ | 195,453 |   | $ | 134,175 |   | $ | 89,983 |   |

 

Letters of credit outstanding with various financial institutions were$1.4 million and $0.9 million at January 29, 2005 and January 31, 2004,respectively.

 

**Seasonality and Quarterly Results**

 

Our business, like that of most retailers, is highly seasonal. Asignificant portion of our net sales and profits are generated during ourfourth fiscal quarter, which includes the holiday selling season. Results forany quarter are not necessarily indicative of the results that may be achievedfor a full fiscal year. Quarterly results may fluctuate materially dependingupon, among other factors, the timing of new product introductions and newstore openings, net sales

 

26

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contributed by new stores, increases or decreases in comparable storesales, adverse weather conditions, shifts in the timing of certain holidays orpromotions and changes in our merchandise mix.

 

The following tables set forth certain unaudited quarterly statement ofincome information for fiscal 2005 and fiscal 2004. The unaudited quarterlyinformation includes all normal recurring adjustments that management considersnecessary for a fair presentation of the information shown (amounts in thousands,except income per share and number of stores).

 
| ** **                 | ** ** | **Fiscal 2005**            | ** ** |
|----------------------------|------------|----------------------------|------------|
| ** **                 | ** ** | **1****st********Quarter** | ** ** | **2****nd********Quarter** | ** ** | **3****rd********Quarter** | ** ** | **4****th********Quarter (1)** | ** ** |
|                       |       |                       |       |   |   |   |   |   |   |
| Total revenues             |       | $                          | 372,417    |   | $ | 361,953 |   | $ | 446,047 |   | $ | 808,965 |   |
| Gross profit               |       | 101,263                    |       | 107,651 |   | 123,259 |   | 207,004 |   |
| Operating income           |       | 4,385                      |       | 5,785 |   | 11,095 |   | 58,065 |   |
| Net income                 |       | 3,046                      |       | 3,884 |   | 7,289 |   | 38,068 |   |
| Net income per share:      |       |                       |       |   |   |   |   |   |   |
| —Basic                |       | 0.12                       |       | 0.16 |   | 0.31 |   | 1.56 |   |
| —Diluted              |       | 0.12                       |       | 0.16 |   | 0.30 |   | 1.53 |   |
| Stores open at quarter end |       | 1,623                      |       | 1,733 |   | 1,869 |   | 1,977 |   |
|                            |            |                            |            |  |  |  |  |  |  |  |  |  |  |

 
| ** **                 | ** ** | **Fiscal 2004**            | ** ** |
|----------------------------|------------|----------------------------|------------|
| ** **                 | ** ** | **1****st********Quarter** | ** ** | **2****nd********Quarter** | ** ** | **3****rd********Quarter** | ** ** | **4****th********Quarter (2)** | ** ** |
|                       |       |                       |       |   |   |   |   |   |   |
| Total revenues             |       | $                          | 303,464    |   | $ | 302,083 |   | $ | 324,716 |   | $ | 671,518 |   |
| Gross profit               |       | 80,195                     |       | 82,470 |   | 89,178 |   | 175,509 |   |
| Operating income           |       | 4,606                      |       | 2,295 |   | 2,092 |   | 61,888 |   |
| Net income                 |       | 3,172                      |       | 1,671 |   | 1,482 |   | 39,404 |   |
| Net income per share:      |       |                       |       |   |   |   |   |   |   |
| —Basic                |       | 0.12                       |       | 0.07 |   | 0.06 |   | 1.59 |   |
| —Diluted              |       | 0.12                       |       | 0.07 |   | 0.06 |   | 1.57 |   |
| Stores open at quarter end |       | 1,217                      |       | 1,303 |   | 1,436 |   | 1,528 |   |
|                            |            |                            |            |  |  |  |  |  |  |  |  |  |  |

 

----

(1)           InFebruary 2005, we initiated a review of our lease-related accounting methodsfor rent holidays (the period prior to the store opening when we pay reduced orno rent) and tenant improvement allowances. Based on this review, we recorded aone-time, cumulative, non-cash charge to rent expense of $4.2 million ($2.7million after-tax, or $0.11 per diluted share) in the fourth quarter of fiscal2005.

 

(2)           The$671.5 million of total revenues in the fourth quarter of fiscal 2004 includesmanagement fee revenue of $4.7 million pre-tax ($2.9 million after-tax, or$0.12 per diluted share) recorded in connection with the termination of theservices agreement with Game Group.

 

27

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**Recent Accounting Pronouncements**

 

In January 2003, the Financial AccountingStandards Board (FASB) issued Interpretation No. 46, “Consolidation of VariableInterest Entities.” In December 2003, FIN 46R, a modification to FIN 46, wasissued which delayed the effective date until no later than fiscal periodsending after March 15, 2004 and provided additional technical clarifications toimplementation issues. The adoption of this Interpretation in fiscal 2005 hadno effect on our consolidated results of operations and financial condition.

 

In December 2004, the FASBissued Statement of Financial Accounting Standards (SFAS) No. 123(R), “Share-BasedPayment,” a revision of SFAS No. 123, “Accounting for Stock-Based Compensation.”SFAS No. 123(R) supersedes APB Opinion No. 25, “Accounting for Stock Issued toEmployees” and amends SFAS No. 95, “Statement of Cash Flows.” SFAS No. 123(R)requires companies to expense the fair value of employee stock options andother forms of stock-based compensation. It applies to all stock-basedcompensation transactions in which a company acquires services from employeesby issuing share-based payments, to be recognized at their fair values on theconsolidated statement of income. The fair value of the stock-basedcompensation will be recognized over the employee’s service period.Additionally, SFAS No. 123(R) requires the benefit of tax deductions in excessof recognized compensation expense to be reported as a financing cash flowrather than as an operating cash flow as currently required. We will adopt theprovisions of SFAS No. 123(R) at the beginning of our fiscal quarter endedOctober 29, 2005. We estimate the impact of the adoption of SFAS No. 123(R),based on the fair value of our unvested options outstanding as of January 29,2005, and the number of shares expected to be purchased under our EmployeeStock Purchase Plan, to result in compensation expense of approximately $0.8million, after tax, on our consolidated statements of income for fiscal 2006.

 

**Impact of Inflation**

 

We do not believe that inflation has had a material effect on our netsales or results of operations.

 

**Item7A****. Quantitativeand Qualitative Disclosures About Market Risk**

 

We invest cash balances in excess of operating requirements inshort-term investment grade securities, with

 

28

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maturities of 90 days or less. In addition, our revolving creditfacility provides for borrowings which bear interest at variable rates based onthe bank’s base rate or LIBOR plus 250 basis points, at our option. We had noborrowings outstanding pursuant to the revolving credit facility as of January29, 2005. We believe that the effect, if any, of reasonably possible near-termchanges in interest rates on our financial position, results of operations andcash flows should not be material.

 

We have retail operations in various foreign countries includingAustralia, Canada, Denmark, Germany, Italy, New Zealand, Norway and Sweden. Weare subject to currency exchange rate and currency devaluation risks due tothese operations. With our continuing growth in these countries, we believethat currency exchange rate fluctuations may have a material effect on ourresults of operations and financial condition in future years. Had currencyexchange rates remained at fiscal 2004 levels, our total revenues and operatingincome would have decreased by approximately $42.0 million and $2.8 million,respectively. We routinely enter into forward and cross-currency swap exchangecontracts in the regular course of business to manage exposure against foreigncurrency fluctuations on intercompany loans, investments in subsidiaries, andaccounts payable. As of January 29, 2005, we have foreign currency forwardcontracts with a notional amount of $7.1 million and cross-currency swapcontracts with a notional amount of $52.8 million. The total fair market valueof all contracts is a deficit of approximately $12.9 million. Five contractswith a notional amount of $9.9 million expire during fiscal 2006 and theremaining contracts with a notional amount of $50.0 million expire in futureyears. We intend to monitor our exposure to these risks and re-evaluate ourhedging strategies as appropriate.

 

The table below provides information about the notional amount andmaturities of our derivative financial instruments and other financialinstruments. The notional amounts are generally used to calculate thecontractual payments to be exchanged under the contracts.

 
| ** **                        | ** ** | **Fiscal  2006**           | ** ** | **Fiscal  2007** | ** ** | **Fiscal  2008** | ** ** | **Fiscal  2009** | ** ** | **Fiscal  2010** | ** ** | **Thereafter** | ** ** | **Total** | ** ** | **FMV  2005  FYE** | ** ** |
|-----------------------------------|------------|----------------------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|----------------|------------|-----------|------------|--------------------|------------|
| ** **                        | ** ** | **(Amounts in thousands)** | ** ** |
|                              |       |                       |       |             |       |             |       |             |       |             |       |           |       |      |       |               |       |
| **Forward Exchange Contracts**    |       |                       |       |             |       |             |       |             |       |             |       |           |       |      |       |               |       |
| Notional Contract Amount          |       | $                          | 7,083      |             | $          | —           |       | $                | —     |             | $          | —         |       | $         | —     |               | $          | — |   | $ | 7,083 |   | $ | (45 | ) |
| **Cross Currency Swap Contracts** |       |                       |       |             |       |             |       |             |       |             |       |           |       |      |       |               |       |
| Notional Contract Amount          |       | 2,808                      |       | 29,160           |       | 1,785            |       | 2,976            |       | 7,473            |       | 8,644          |       | 52,845    |       | (12,812            | )          |
|                                   |            |                            |            |                  |            |                  |            |                  |            |                  |            |                |            |           |            |                    |            |  |  |  |  |  |  |  |  |

 

29

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**Item8****. ConsolidatedFinancial Statements and Financial Statement Schedule**

 

**INDEX TO CONSOLIDATED FINANCIAL STATEMENTSAND FINANCIAL STATEMENT**

**SCHEDULE**

 
| FINANCIAL STATEMENTS                                     |   |
|----------------------------------------------------------|--------|
| Report of Independent Registered Public  Accounting Firm |   |
| Consolidated Balance Sheets                              |   |
| Consolidated Statements of Income                        |   |
| Consolidated Statements of Stockholders’  Equity    |   |
| Consolidated Statements of Cash Flows                    |   |
| Notes to Consolidated Financial Statements               |   |
| FINANCIAL STATEMENT SCHEDULE                             |   |
| Schedule II—Valuation and Qualifying  Accounts      |   |

 

30

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**Report of Independent Registered****Public Accounting Firm**

 

The Board of Directors and Stockholders

Electronics Boutique Holdings Corp.:

 

We have audited the accompanying consolidatedbalance sheets of Electronics Boutique Holdings Corp. and subsidiaries as ofJanuary 29, 2005 and January 31, 2004, and the related consolidated statementsof income, stockholders’ equity, and cash flows for each of the years in thethree-year period ended January 29, 2005. In connection with our audits of theconsolidated financial statements, we also have audited the financial statementschedule as listed in the accompanying index. These consolidated financialstatements and financial statement schedule are the responsibility of theCompany’s management. Our responsibility is to express an opinion on theseconsolidated financial statements and financial statement schedule based on ouraudits.

 

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statementpresentation.  We believe that our auditsprovide a reasonable basis for our opinion.

 

In our opinion, the consolidated financialstatements referred to above present fairly, in all material respects, thefinancial position of Electronics Boutique Holdings Corp. and subsidiaries asof January 29, 2005 and January 31, 2004, and the results of their operationsand their cash flows for each of the years in the three-year period endedJanuary 29, 2005, in conformity with U.S. generally accepted accountingprinciples. Also in our opinion, the related financial statement schedule, whenconsidered in relation to the basic consolidated financial statements taken asa whole, presents fairly, in all material respects, the information set forththerein.

 

As discussed in note 2 to the consolidated financialstatements, the Company changed its method of accounting for considerationreceived from a vendor in the year ended February 1, 2003.

 

We also have audited, in accordance with thestandards of the Public Company Accounting Oversight Board (United States), theeffectiveness of Electronic Boutique Holding Corp.’s internal control overfinancial reporting as of January 29, 2005, based on criteria established inInternal Control—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO), and our report dated April 7,2005 expressed an unqualified opinion on management’s assessment of, and theeffective operation of, internal control over financial reporting.

 

KPMG LLP

 

Philadelphia, Pennsylvania

April 7, 2005

 

31

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**ELECTRONICS BOUTIQUE HOLDINGS CORP. ANDSUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

**(Amounts in thousands, except per shareamounts)**

 
| ** **                                                                                                                                                                                                     | ** ** | **January 29,  2005** | ** ** | **January 31,  2004** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| **Assets**                                                                                                                                                                                                     |       |                  |       |                  |       |
| Current assets:                                                                                                                                                                                                |       |                  |       |                  |       |
| Cash and cash equivalents                                                                                                                                                                                      |       | $                     | 175,295    |                  | $          | 157,968 |   |
| Accounts receivable:                                                                                                                                                                                           |       |                  |       |                  |       |
| Trade and vendors                                                                                                                                                                                              |       | 17,685                |       | 22,407                |       |
| Other                                                                                                                                                                                                          |       | 3,585                 |       | 17,405                |       |
| Merchandise inventories                                                                                                                                                                                        |       | 291,678               |       | 253,577               |       |
| Deferred tax asset                                                                                                                                                                                             |       | 9,438                 |       | 9,895                 |       |
| Prepaid expenses and other current assets                                                                                                                                                                      |       | 17,955                |       | 16,435                |       |
|                                                                                                                                                                                                           |       |                  |       |                  |       |
| Total current assets                                                                                                                                                                                           |       | 515,636               |       | 477,687               |       |
|                                                                                                                                                                                                           |       |                  |       |                  |       |
| Property and equipment:                                                                                                                                                                                        |       |                  |       |                  |       |
| Building and leasehold improvements                                                                                                                                                                            |       | 153,883               |       | 122,852               |       |
| Furniture, fixtures and equipment                                                                                                                                                                              |       | 154,896               |       | 123,265               |       |
| Land                                                                                                                                                                                                           |       | 8,120                 |       | 5,827                 |       |
| Construction in progress                                                                                                                                                                                       |       | 2,473                 |       | 2,826                 |       |
|                                                                                                                                                                                                           |       |                  |       |                  |       |
|                                                                                                                                                                                                           |       | 319,372               |       | 254,770               |       |
| Less accumulated depreciation and  amortization                                                                                                                                                                |       | 145,951               |       | 116,766               |       |
|                                                                                                                                                                                                           |       |                  |       |                  |       |
| Net property and equipment                                                                                                                                                                                     |       | 173,421               |       | 138,004               |       |
|                                                                                                                                                                                                           |       |                  |       |                  |       |
| Goodwill and other intangible assets, net  of accumulated amortization of $1,155 and $666                                                                                                                      |       | 16,308                |       | 13,662                |       |
| Deferred tax asset                                                                                                                                                                                             |       | 12,433                |       | 10,476                |       |
| Other non-current assets                                                                                                                                                                                       |       | 6,402                 |       | 4,103                 |       |
|                                                                                                                                                                                                           |       |                  |       |                  |       |
| Total assets                                                                                                                                                                                                   |       | $                     | 724,200    |                  | $          | 643,932 |   |
|                                                                                                                                                                                                           |       |                  |       |                  |       |
| **Liabilities and Stockholders’ Equity**                                                                                                                                                                  |       |                  |       |                  |       |
| Current liabilities:                                                                                                                                                                                           |       |                  |       |                  |       |
| Accounts payable                                                                                                                                                                                               |       | $                     | 228,825    |                  | $          | 220,481 |   |
| Accrued expenses                                                                                                                                                                                               |       | 99,939                |       | 75,922                |       |
| Income taxes payable                                                                                                                                                                                           |       | 11,450                |       | 17,862                |       |
|                                                                                                                                                                                                           |       |                  |       |                  |       |
| Total current liabilities                                                                                                                                                                                      |       | 340,214               |       | 314,265               |       |
|                                                                                                                                                                                                           |       |                  |       |                  |       |
| Deferred rent and other long-term  liabilities                                                                                                                                                                 |       | 32,518                |       | 25,687                |       |
|                                                                                                                                                                                                           |       |                  |       |                  |       |
| Total liabilities                                                                                                                                                                                              |       | 372,732               |       | 339,952               |       |
|                                                                                                                                                                                                           |       |                  |       |                  |       |
| Stockholders’ equity:                                                                                                                                                                                     |       |                  |       |                  |       |
| Preferred stock—authorized 25,000 shares;  $.01 par value; no shares issued and outstanding at January 29, 2005 and January  31, 2004                                                                     |       | —                |       | —                |       |
| Common stock—authorized 100,000 shares;  $.01 par value; 27,433 shares issued and 24,648 shares outstanding at January  29, 2005; 26,449 shares issued and 24,834 shares outstanding at January 31,  2004 |       | 274                   |       | 264                   |       |
| Treasury stock—2,785 and 1,615 shares at  January 29, 2005 and January 31, 2004, respectively, at cost                                                                                                    |       | (66,132               | )          | (34,455               | )          |
| Additional paid-in capital                                                                                                                                                                                     |       | 206,503               |       | 181,204               |       |
| Accumulated other comprehensive income                                                                                                                                                                         |       | 6,980                 |       | 5,411                 |       |
| Retained earnings                                                                                                                                                                                              |       | 203,843               |       | 151,556               |       |
|                                                                                                                                                                                                           |       |                  |       |                  |       |
| Total stockholders’ equity                                                                                                                                                                                |       | 351,468               |       | 303,980               |       |
|                                                                                                                                                                                                           |       |                  |       |                  |       |
| Total liabilities and stockholders’ equity                                                                                                                                                                |       | $                     | 724,200    |                  | $          | 643,932 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

32

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**ELECTRONICS BOUTIQUE HOLDINGS CORP. ANDSUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF INCOME**

**(Amounts in thousands, except per shareamounts)**

 
| ** **                                                                                | ** ** | **Years Ended**        | ** ** |
|-------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                | ** ** | **January  29,  2005** | ** ** | **January  31,  2004** | ** ** | **February  1,  2003** | ** ** |
|                                                                                      |       |                   |       |   |   |   |   |
| Net sales                                                                                 |       | $                      | 1,983,537  |   | $ | 1,588,406 |   | $ | 1,309,226 |   |
| Management fees                                                                           |       | 5,845                  |       | 13,375 |   | 7,553 |   |
| Total revenues                                                                            |       | 1,989,382              |       | 1,601,781 |   | 1,316,779 |   |
| Cost of goods sold                                                                        |       | 1,450,205              |       | 1,174,429 |   | 971,204 |   |
| Gross profit                                                                              |       | 539,177                |       | 427,352 |   | 345,575 |   |
| Costs and expenses:                                                                       |       |                   |       |   |   |   |   |
| Selling, general and administrative expense                                               |       | 422,374                |       | 327,260 |   | 266,729 |   |
| Restructuring and asset impairment reversal                                               |       | —                 |       | — |   | (2,611 | ) |
| Depreciation and amortization                                                             |       | 37,473                 |       | 29,211 |   | 23,361 |   |
| Operating income                                                                          |       | 79,330                 |       | 70,881 |   | 58,096 |   |
| Interest income, net                                                                      |       | 2,350                  |       | 1,751 |   | 1,677 |   |
| Income before income tax expense and  cumulative effect of change in accounting principle |       | 81,680                 |       | 72,632 |   | 59,773 |   |
| Income tax expense                                                                        |       | 29,393                 |       | 26,903 |   | 22,373 |   |
| Income before cumulative effect of change  in accounting principle                        |       | 52,287                 |       | 45,729 |   | 37,400 |   |
| Cumulative effect of change in accounting  principle, net of income tax expense           |       | —                 |       | — |   | (4,773 | ) |
| Net income                                                                                |       | $                      | 52,287     |   | $ | 45,729 |   | $ | 32,627 |   |
|                                                                                      |       |                   |       |   |   |   |   |
| Income per share before cumulative effect  of change in accounting principle:             |       |                   |       |   |   |   |   |
| Basic                                                                                     |       | $                      | 2.16       |   | $ | 1.82 |   | $ | 1.44 |   |
|                                                                                      |       |                   |       |   |   |   |   |
| Diluted                                                                                   |       | $                      | 2.13       |   | $ | 1.80 |   | $ | 1.42 |   |
|                                                                                      |       |                   |       |   |   |   |   |
| Per share cumulative effect of change in  accounting principle:                           |       |                   |       |   |   |   |   |
| Basic                                                                                     |       |                   |       |   |   | $ | (0.18 | ) |
|                                                                                      |       |                   |       |   |   |   |   |
| Diluted                                                                                   |       |                   |       |   |   | $ | (0.18 | ) |
|                                                                                      |       |                   |       |   |   |   |   |
| Net income per share:                                                                     |       |                   |       |   |   |   |   |
| Basic                                                                                     |       | $                      | 2.16       |   | $ | 1.82 |   | $ | 1.26 |   |
|                                                                                      |       |                   |       |   |   |   |   |
| Diluted                                                                                   |       | $                      | 2.13       |   | $ | 1.80 |   | $ | 1.24 |   |
|                                                                                      |       |                   |       |   |   |   |   |
| Weighted average shares outstanding:                                                      |       |                   |       |   |   |   |   |
| Basic                                                                                     |       | 24,159                 |       | 25,114 |   | 25,833 |   |
|                                                                                      |       |                   |       |   |   |   |   |
| Diluted                                                                                   |       | 24,547                 |       | 25,415 |   | 26,247 |   |

 

See accompanying notes to consolidated financial statements.

 

33

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**ELECTRONICS BOUTIQUE HOLDINGS CORP. ANDSUBSIDIARIES**

**Consolidated Statements of Stockholders’Equity**

**(Amounts in thousands)**

 
| ** **                                | ** ** | **Preferred  stock** | ** ** | **Common  stock** | ** ** | **Treasury  stock** | ** ** | **Additional  paid-in** | ** ** | **Accumulated  other  comprehensive** | ** ** | **Retained** | ** ** | **Total  stockholders’** | ** ** |
|-------------------------------------------|------------|----------------------|------------|-------------------|------------|---------------------|------------|-------------------------|------------|---------------------------------------|------------|--------------|------------|-------------------------------|------------|
| ** **                                | ** ** | **Shares**           | ** ** | **Amount**        | ** ** | **Shares**          | ** ** | **Amount**              | ** ** | **Shares**                            | ** ** | **Amount**   | ** ** | **capital**                   | ** ** | **(loss)  income** | ** ** | **earnings** | ** ** | **equity** | ** ** |
| Balance  Feb. 2, 2002                |       | —               |       | $                 | —     |                | 25,783     |                    | $          | 258                                   |       | —       |       | $                             | —     |   | $ | 166,312 |   | $ | (2,610 | ) | $ | 73,200 |   | $ | 237,160 |   |
|                                      |       |                 |       |              |       |                |       |                    |       |                                  |       |         |       |                          |       |   |   |   |   |   |   |
| Comprehensive  income:                    |       |                 |       |              |       |                |       |                    |       |                                  |       |         |       |                          |       |   |   |   |   |   |   |
| Net  income                               |       | —               |       | —            |       | —              |       | —                  |       | —                                |       | —       |       | —                        |       | — |   | 32,627 |   | 32,627 |   |
| Foreign  currency translations            |       | —               |       | —            |       | —              |       | —                  |       | —                                |       | —       |       | —                        |       | 6,574 |   | — |   | 6,574 |   |
| Hedging  activities                       |       | —               |       | —            |       | —              |       | —                  |       | —                                |       | —       |       | —                        |       | (5,077 | ) | — |   | (5,077 | ) |
| Total  comprehensive income               |       |                 |       |              |       |                |       |                    |       |                                  |       |         |       |                          |       |   |   |   |   | 34,124 |   |
|                                      |       |                 |       |              |       |                |       |                    |       |                                  |       |         |       |                          |       |   |   |   |   |   |   |
| Issuance  of common stock                 |       | —               |       | —            |       | 23                  |       | —                  |       | —                                |       | —       |       | 467                           |       | — |   | — |   | 467 |   |
| Exercise  of stock options                |       | —               |       | —            |       | 76                  |       | 1                       |       | —                                |       | —       |       | 1,190                         |       | — |   | — |   | 1,191 |   |
| Tax  benefit from stock options exercised |       | —               |       | —            |       | —              |       | —                  |       | —                                |       | —       |       | 1,558                         |       | — |   | — |   | 1,558 |   |
| Balance  Feb. 1, 2003                |       | —               |       | —            |       | 25,882              |       | 259                     |       | —                                |       | —       |       | 169,527                       |       | (1,113 | ) | 105,827 |   | 274,500 |   |
|                                      |       |                 |       |              |       |                |       |                    |       |                                  |       |         |       |                          |       |   |   |   |   |   |   |
| Comprehensive  income:                    |       |                 |       |              |       |                |       |                    |       |                                  |       |         |       |                          |       |   |   |   |   |   |   |
| Net  income                               |       | —               |       | —            |       | —              |       | —                  |       | —                                |       | —       |       | —                        |       | — |   | 45,729 |   | 45,729 |   |
| Foreign  currency translations            |       | —               |       | —            |       | —              |       | —                  |       | —                                |       | —       |       | —                        |       | 12,981 |   | — |   | 12,981 |   |
| Hedging  activities                       |       | —               |       | —            |       | —              |       | —                  |       | —                                |       | —       |       | —                        |       | (6,457 | ) | — |   | (6,457 | ) |
| Total  comprehensive income               |       |                 |       |              |       |                |       |                    |       |                                  |       |         |       |                          |       |   |   |   |   | 52,253 |   |
|                                      |       |                 |       |              |       |                |       |                    |       |                                  |       |         |       |                          |       |   |   |   |   |   |   |
| Issuance  of common stock                 |       | —               |       | —            |       | 32                  |       | —                  |       | —                                |       | —       |       | 531                           |       | — |   | — |   | 531 |   |
| Exercise  of stock options                |       | —               |       | —            |       | 535                 |       | 5                       |       | —                                |       | —       |       | 8,590                         |       | — |   | — |   | 8,595 |   |
| Repurchase  of common stock               |       | —               |       | —            |       | —              |       | —                  |       | (1,615                                | )          | (34,455      | )          | —                        |       | — |   | — |   | (34,455 | ) |
| Tax  benefit from stock options exercised |       | —               |       | —            |       | —              |       | —                  |       | —                                |       | —       |       | 2,556                         |       | — |   | — |   | 2,556 |   |
| Balance  Jan. 31, 2004               |       | —               |       | —            |       | 26,449              |       | 264                     |       | (1,615                                | )          | (34,455      | )          | 181,204                       |       | 5,411 |   | 151,556 |   | 303,980 |   |
|                                      |       |                 |       |              |       |                |       |                    |       |                                  |       |         |       |                          |       |   |   |   |   |   |   |
| Comprehensive  income:                    |       |                 |       |              |       |                |       |                    |       |                                  |       |         |       |                          |       |   |   |   |   |   |   |
| Net  income                               |       | —               |       | —            |       | —              |       | —                  |       | —                                |       | —       |       | —                        |       | — |   | 52,287 |   | 52,287 |   |
| Foreign  currency translations            |       | —               |       | —            |       | —              |       | —                  |       | —                                |       | —       |       | —                        |       | 4,849 |   | — |   | 4,849 |   |
| Hedging  activities                       |       | —               |       | —            |       | —              |       | —                  |       | —                                |       | —       |       | —                        |       | (3,280 | ) | — |   | (3,280 | ) |
| Total  comprehensive income               |       |                 |       |              |       |                |       |                    |       |                                  |       |         |       |                          |       |   |   |   |   | 53,856 |   |
|                                      |       |                 |       |              |       |                |       |                    |       |                                  |       |         |       |                          |       |   |   |   |   |   |   |
| Issuance  of common stock                 |       | —               |       | —            |       | 31                  |       | —                  |       | —                                |       | —       |       | 710                           |       | — |   | — |   | 710 |   |
| Exercise  of stock options                |       | —               |       | —            |       | 953                 |       | 10                      |       | —                                |       | —       |       | 18,281                        |       | — |   | — |   | 18,291 |   |
| Repurchase  of common stock               |       | —               |       | —            |       | —              |       | —                  |       | (1,170                                | )          | (31,677      | )          | —                        |       | — |   | — |   | (31,677 | ) |
| Other  financing activities               |       | —               |       | —            |       | —              |       | —                  |       | —                                |       | —       |       | 164                           |       | — |   | — |   | 164 |   |
| Tax  benefit from stock options exercised |       | —               |       | —            |       | —              |       | —                  |       | —                                |       | —       |       | 6,144                         |       | — |   | — |   | 6,144 |   |
| Balance  Jan. 29, 2005               |       | —               |       | $                 | —     |                | 27,433     |                    | $          | 274                                   |       | (2,785       | )          | $                             | (66,132    | ) | $ | 206,503 |   | $ | 6,980 |   | $ | 203,843 |   | $ | 351,468 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

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**ELECTRONICS BOUTIQUE HOLDINGS CORP. ANDSUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Amounts in thousands)**

 
| ** **                                                                         | ** ** | **Years Ended**            | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                         | ** ** | **January 29,  2005** | ** ** | **January 31,  2004** | ** ** | **February 1,  2003** | ** ** |
|                                                                               |       |                       |       |   |   |   |   |
| Cash flows from operating activities:                                              |       |                       |       |   |   |   |   |
| Net income                                                                         |       | $                          | 52,287     |   | $ | 45,729 |   | $ | 32,627 |   |
| Adjustments to reconcile net income to cash  provided by operating activities:     |       |                       |       |   |   |   |   |
| Depreciation of property and equipment                                             |       | 36,871                     |       | 28,769 |   | 23,046 |   |
| Amortization of other assets                                                       |       | 602                        |       | 442 |   | 315 |   |
| Loss on disposal of property and equipment                                         |       | 234                        |       | 313 |   | 649 |   |
| Deferred taxes                                                                     |       | (1,134                     | )          | 1,705 |   | 1,284 |   |
| Foreign currency transaction loss (gain)                                           |       | 509                        |       | 597 |   | (537 | ) |
| Management fee amortization from  termination agreement                            |       | (5,845                     | )          | (4,660 | ) | — |   |
| Changes in assets and liabilities:                                                 |       |                       |       |   |   |   |   |
| Accounts receivable                                                                |       | 18,858                     |       | (12,070 | ) | (2,133 | ) |
| Merchandise inventories                                                            |       | (33,482                    | )          | (17,537 | ) | (74,831 | ) |
| Prepaid expenses                                                                   |       | (1,247                     | )          | (6,635 | ) | (1,567 | ) |
| Other non-current assets                                                           |       | (4,682                     | )          | 1,188 |   | (1,594 | ) |
| Accounts payable                                                                   |       | 4,944                      |       | 39,266 |   | 36,335 |   |
| Accrued expenses                                                                   |       | 24,497                     |       | 25,087 |   | 8,298 |   |
| Income taxes payable                                                               |       | (1,191                     | )          | 1,451 |   | 6,087 |   |
| Deferred rent and other long-term  liabilities                                     |       | 11,174                     |       | (40 | ) | 1,859 |   |
| Net cash provided by operating activities                                          |       | 102,395                    |       | 103,605 |   | 29,838 |   |
| Cash flows from investing activities:                                              |       |                       |       |   |   |   |   |
| Purchases of property and equipment                                                |       | (75,119                    | )          | (45,905 | ) | (38,502 | ) |
| Proceeds from disposition of assets                                                |       | 5,539                      |       | 135 |   | 2,544 |   |
| Businesses acquired, net of cash                                                   |       | —                     |       | (111 | ) | (1,552 | ) |
| Net cash used in investing activities                                              |       | (69,580                    | )          | (45,881 | ) | (37,510 | ) |
| Cash flows from financing activities:                                              |       |                       |       |   |   |   |   |
| Proceeds from exercise of stock options                                            |       | 18,291                     |       | 8,595 |   | 1,191 |   |
| Repurchase of common stock                                                         |       | (31,677                    | )          | (34,455 | ) | — |   |
| Repayments of long-term debt                                                       |       | —                     |       | — |   | (506 | ) |
| Proceeds from issuance of common stock                                             |       | 710                        |       | 531 |   | 467 |   |
| Other financing activities                                                         |       | 164                        |       | — |   | — |   |
| Net cash (used in) provided by financing  activities                               |       | (12,512                    | )          | (25,329 | ) | 1,152 |   |
| Effects of exchange rates on cash                                                  |       | (2,976                     | )          | 3,700 |   | 1,870 |   |
| Net increase (decrease) in cash and cash  equivalents                              |       | 17,327                     |       | 36,095 |   | (4,650 | ) |
| Cash and cash equivalents, beginning of  year                                      |       | 157,968                    |       | 121,873 |   | 126,523 |   |
| Cash and cash equivalents, end of year                                             |       | $                          | 175,295    |   | $ | 157,968 |   | $ | 121,873 |   |
|                                                                               |       |                       |       |   |   |   |   |
| Supplemental disclosures of cash flow  information: Cash paid during the year for: |       |                       |       |   |   |   |   |
| Interest                                                                           |       | $                          | 52         |   | $ | 16 |   | $ | 31 |   |
| Income taxes                                                                       |       | 30,515                     |       | 23,301 |   | 13,469 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

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**ELECTRONICS BOUTIQUE HOLDINGS CORP. ANDSUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEME****NTS**

 

**(1)****           ORGANIZATIONAND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

*Description of Business*

 

Electronics Boutique Holdings Corp. (collectively with its subsidiaries,the “Company”) is the leading global specialty retailer of video game hardwareand software, PC entertainment software, pre-played video games and relatedaccessories and products. The Company operates in only one business segment, assubstantially all of its revenues, net income and assets are derived from theseprimary products.

 

The Company had 1,977, 1,528 and 1,145 operating retail storesthroughout the United States, Australia, Canada, Denmark, Germany, Italy, NewZealand, Norway, Puerto Rico, South Korea and Sweden at January 29, 2005, January 31,2004 and February 1, 2003, respectively. Total revenues from the Company’sUnited States, Canada and other foreign operations were 71%, 11% and 18%,respectively in fiscal 2005, 75%, 10% and 15%, respectively in fiscal 2004 and81%, 9% and 10%, respectively in fiscal 2003. Long-lived assets located in theUnited States, Canada and other foreign countries were 67%, 13% and 20%,respectively for the fiscal year ended January 29, 2005 and 71%, 14% and15%, respectively for the fiscal year ended January 31, 2004. The Companyis subject to the risks inherent in conducting business across nationalboundaries. The Company also operates a mail order business and sells itsproducts via the Internet. Approximately 36%, 38% and 39% of fiscal 2005,fiscal 2004 and fiscal 2003 gross purchases, respectively, were made from itsthree largest vendors. The Company is highly dependent on the introduction byits vendors of new and enhanced video game and PC hardware and software.

 

*Fiscal Year-End*

 

The Company’s fiscal year ends on the Saturday nearest January 31.

 

*Principles of Consolidation*

 

The consolidated financial statements include the financial positionand results of operations of Electronics Boutique Holding Corp. and itssubsidiaries. All significant intercompany transactions have been eliminated inconsolidation. Certain amounts have been reclassified to conform to the currentpresentation.

 

*Revenue Recognition*

 

Retail sales are recognized as revenue at the point of sale. Mail orderand Internet sales are recognized as revenue upon delivery to and acceptance bythe customer. Warranty revenue is amortized over the life of the warranty.Loyalty card revenue is amortized over the life of the card. Magazinesubscription revenue is recognized over the life of the subscription.Management fees are recognized in the period that related services areprovided. Sales are recorded net of estimated amounts for sales returns andother allowances. Shipping and handling fee income from the Company’s mailorder and Internet operations is recognized as net sales. The Company recordsshipping and handling costs in cost of goods sold.

 

*Cost of Goods Sold*

 

Cost of goods sold includes the following: cost of merchandisepurchased, freight expense, purchase discounts, vendor advertising allowancesin excess of incremental related advertising expenses, volume purchase rebatesand inventory shrinkage expense. The Company’s gross margins may not becomparable to those of other retailers or companies in general due to the itemsthe Company includes in cost of goods sold.

 

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*Selling, General and Administrative Expense*

 

Selling, general and administrative expense includes the following:retail store operating costs, distribution center operating costs, marketingand promotional expenses net of vendor reimbursements for these expenses andcorporate operating expenses.

 

*Vendor Programs*

 

The Company receives vendor allowances for certain events offered toits vendors. These events include items such as product catalog advertising,in-store display promotions, Internet advertising, co-op print advertising,product training and promotion at the Company’s trade show and inclusion in itsvendor-of-the-month program.

 

In fiscal 2003, the Company adopted Emerging Issues Task Force (EITF)Issue 02-16, “Accounting by a Customer (Including a Reseller) for CashConsideration Received from a Vendor,” effective as of the beginning of fiscal2003. In accordance with the provisions of Issue 02-16, vendoradvertising allowances which exceed specific, incremental and identifiablecosts incurred in relation to the advertising and promotional events offered bythe Company to its vendors are classified as a reduction in the purchase priceof merchandise. See Note 2 for further discussion.

 

The Company received vendor allowances totaling $70.7 million, $64.0million and $54.1 million in fiscal 2005, fiscal 2004 and fiscal 2003,respectively. Advertising expenses, excluding the vendor allowances, were $26.5million, $16.8 million and $11.3 million in fiscal 2005, fiscal 2004 and fiscal2003, respectively.

 

*Cash and Cash Equivalents*

 

The Company considers all highly liquid investments with originalmaturities of three months or less to be cash equivalents. As of January 29,2005, the Company had $3.3 million in short-term restricted cash that wasrecorded as other current assets and $1.4 million of long-term restricted cashthat was recorded as other non-current assets on the consolidated balancesheet. As of January 31, 2004, the Company had $4.3 million in restrictedcash that was recorded as other current assets on the consolidated balancesheet. Restricted cash represents funds held as security against certainEuropean vendor and landlord liabilities*.*

 

*Merchandise Inventories*

 

Merchandise is valued at the lower of cost or market. Cost isdetermined principally by a weighted-average method.

 

*Property and Equipment*

 

Property and equipment is recorded at cost and depreciated or amortizedover the estimated useful life of the asset using the straight-line method. Theestimated useful lives are as follows:

 
| Leasehold improvements |   | Lesser of 10 years or the lease term |   |
|------------------------|--------|--------------------------------------|--------|
| Furniture and fixtures |   | 5 years                              |   |
| Computer equipment     |   | 3 years                              |   |
| Buildings              |   | 30 years                             |   |

 

The Company capitalizes significant costs to acquire managementinformation systems software and significant costs of system improvements.Computer software costs are amortized over estimated useful lives of three tofive years.

 

37

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*Deferred Revenue*

 

Amounts received under the Company’s pre-sell program are recorded as aliability. Revenue is recognized when the customer receives the relatedproduct.

 

*Goodwill and Other Intangible Assets*

 

In July 2001, the Financial Accounting Standards Board (“FASB”)issued Statement of Financial Standards (SFAS) No. 141, “BusinessCombinations,” and SFAS No. 142, “Goodwill and Other Intangible Assets.”SFAS No. 141 requires that intangible assets acquired in a purchase methodbusiness combination must meet certain criteria to be recognized and reportedapart from goodwill and should be used for all business combinations initiatedafter June 30, 2001. SFAS No. 142 states that goodwill and intangibleassets with indefinite useful lives will no longer be amortized, but instead betested for impairment at least annually. See Note 14, “Goodwill and OtherIntangible Assets”, for disclosures required by SFAS No. 142.

 

*Other Assets*

 

Other assets consist principally of life insurance programs for certainkey executives, long-term restricted cash and security deposits.

 

*Guarantees*

 

The Company remains contingently liable for 21 of the BC SportsCollectibles store leases assigned to Sports Collectibles AcquisitionCorporation (“SCAC”) which are discussed further in Note 7. Mr. Kim hasentered into an indemnification agreement with the Company with respect tothese leases. If SCAC were to default on these lease obligations, the Companywould be liable to the landlords for up to $8 million in minimum rent andlandlord charges as of January 29, 2005. Due to Mr. Kim’s agreementto indemnify the Company for any costs arising from the BC Sports Collectiblesleases, no accrual was recorded for this potential liability. See Note 7, “RelatedParty Transactions,” for more details on the BC Sports Collectibles sale.

 

*Leasing Expense*

 

The Company recognizes lease expense on a straight-line basis startingon the date the Company takes possession of the location through the end of thelease commitment. The difference between lease expense recognized and actualpayments made is included in deferred rent on the consolidated balance sheet.

 

In February 2005, the Company initiated a review of itslease-related accounting methods for rent holidays (the period prior to thestore opening when the Company pays reduced or no rent) and for recognizingtenant improvement allowances. Previously, the Company started recording rentexpense at the time of a new store opening. The Company now records rentexpense at the time it takes possession of a location, which occurs up to twomonths prior to the store opening. The Company determined that correctionsresulting from this error were immaterial to prior period results. The Companyrecorded a one time, cumulative, non-cash charge to rent expense of $4.2million ($2.7 million after tax, or $0.11 per diluted share) in the fourthquarter of fiscal 2005.

 

The Company recognizes tenant improvement allowances as deferred rentto be amortized as a reduction in rent expense over the life of the relatedleases. Previously, the Company recognized such tenant improvement allowancesas a reduction of related leasehold improvements and amortized the allowancesover the shorter of the useful life of those assets or the initial lease term.The reclassification of tenant allowances resulted in a decrease to “Selling,general and administrative expense” and an increase to “Depreciation andamortization” of $1.3 million and $0.8 million on the Company’s consolidated statementsof income for fiscal 2004 and fiscal 2003, respectively. Additionally, thereclassification of tenant allowances resulted in an increase to “Net propertyand equipment” and “Deferred rent and other long-term liabilities” of $7.6million on the Company’s January 31, 2004 consolidated balance sheet. Onthe

 

38

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Company’s consolidated statement of cash flows, the reclassification oftenant allowances resulted in an increase to “Net cash provided by operatingactivities” and an increase to “Net cash used in investing activities” of $2.9million and $2.7 million for fiscal 2004 and fiscal 2003, respectively. Sincethe useful life of the assets was the same as the initial lease term, there wasno impact on operating income or net income for any period as a result of thesereclassifications.

 

*Pre-opening Costs and Advertising Expense*

 

Pre-opening and start-up costs for new stores are expensed as incurred.Costs of advertising and sales promotion programs are charged to operations,offset by direct vendor reimbursements, as incurred.

 

*Foreign Currency*

 

The accounts of the foreign subsidiaries are translated in accordancewith SFAS No. 52, “Foreign Currency Translation,” which requires thatassets and liabilities of international operations be translated using theexchange rate in effect at the balance sheet date. The results of theoperations are translated using an average exchange rate for the year. Theeffects of the rate fluctuations in translating assets and liabilities ofinternational operations into U.S. dollars are accumulated and reflected asaccumulated other comprehensive income in the statements of stockholders’equity. Transaction gains and losses are included in net income.

 

SFAS No. 133, “Accounting for Derivative Instruments and HedgingActivities,” as amended by Statement 137 and Statement 138 requires that anentity recognize all derivatives as either assets or liabilities in thestatement of financial position and measures those instruments at fair value.

 

Market risks relating to the Company’s foreign operations resultprimarily from changes in foreign exchange rates. The Company routinely entersinto forward and cross-currency swap exchange contracts in the regular courseof business to manage its exposure against foreign currency fluctuations onintercompany loans, investments in subsidiaries, and accounts payable. Thesecontracts vary in length of duration. On January 29, 2005, the Company hadtwo forward contracts and 40 cross-currency swap contracts. The forwardcontracts had a notional amount of $7.1 million and the cross-currency swapcontracts had a notional amount of $52.8 million. The total fair market valueof all contracts at January 29, 2005 was a deficit of approximately $12.9million, of which $0.7 million was recorded in accrued expenses and $12.2million was recorded in other long-term liabilities on the Company’sconsolidated balance sheet. On January 31, 2004, the Company had fourforward contracts and 34 cross-currency swap contracts. The forward contractshad a notional amount of $9.6 million and the cross-currency swap contracts hada notional amount of $35.4 million. The total fair market value of allcontracts at January 31, 2004 was a deficit of approximately $10.7million, of which $2.6 million was recorded in accrued expenses and $8.1million was recorded in other long-term liabilities on the Company’sconsolidated balance sheet. These contracts were purchased as fair value hedgesof intercompany loans and investments in subsidiaries, and cash flow hedges oftrade payables. The Company recorded an immaterial net loss related to hedgeineffectiveness in fiscal 2005, fiscal 2004 and fiscal 2003. Changes in thefair value of derivatives are recorded on the same statement of income line asthe change in value of the underlying hedged item. Five contracts with anotional amount of $9.9 million expire during fiscal 2006 and the remainingcontracts with a notional amount of $50.0 million expire in future years.

 

*Income Taxes*

 

The Company is subject to federal, state and foreign income taxes as aC Corporation. Income taxes are accounted for under the asset and liabilitymethod. Deferred tax assets and liabilities are recognized for the future taxconsequences attributable to differences between the financial statementcarrying amounts of existing assets and liabilities and their respective taxbases and operating loss and tax credit carryforwards. Deferred tax assets andliabilities are measured using enacted tax rates expected to apply to taxableincome in the years in which those temporary differences are expected to berecovered or settled. The effect on deferred tax assets and liabilities of achange in tax rates is recognized in income in the period that includes theenactment date.

 

39

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*Net Income Per Share*

 

Basic income per share is calculated by dividing net income by theweighted average number of shares of the Company’s common stock outstandingduring the period. Diluted income per share is calculated by adjusting theweighted average common shares outstanding for the dilutive effect of commonstock equivalents related to stock options.

 

The following is a reconciliation of the basic weighted average numberof shares outstanding to the diluted weighted average number of sharesoutstanding (amounts in thousands):

 

| ** **                                       | ** ** | **Fiscal 2005** | ** ** | **Fiscal 2004** | ** ** | **Fiscal 2003** | ** ** |
|--------------------------------------------------|------------|-----------------|------------|-----------------|------------|-----------------|------------|
|                                             |       |            |       |            |       |            |       |
| Weighted average shares outstanding—basic   |       | 24,159          |       | 25,114          |       | 25,833          |       |
| Dilutive effect of stock options                 |       | 388             |       | 301             |       | 414             |       |
| Weighted average shares outstanding—diluted |       | 24,547          |       | 25,415          |       | 26,247          |       |

 

*Use of Estimates*

 

The preparation of financial statements in conformity with U.S.generally accepted accounting principles requires management to make estimatesand assumptions that affect the reported amount of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period. Actual results could differ from those estimates.

 

*Fair Value of Financial Instruments*

 

The Company’s financial instruments are its accounts receivable,accounts payable, life insurance policies and foreign exchange contracts. Thecarrying value of accounts receivable and accounts payable approximates fairvalue due to the short maturity of these instruments. The carrying value oflife insurance policies included in other assets approximates fair value basedon estimates received from insurance companies. The foreign exchange contractsare recorded at fair market value.

 

*Stock-Based Employee Compensation*

 

The Company accounts for its employee stock options and employee stockpurchase plan under the intrinsic value recognition and measurement principlesof Accounting Principles Board Opinion No. 25, “Accounting for StockIssued to Employees,” and related Interpretations. The following tableillustrates the effect on net income if the Company had applied the fair valuerecognition provisions of SFAS No. 123, “Accounting for Stock-BasedCompensation,” as amended by SFAS No. 148, “Accounting for Stock-BasedCompensation - Transition and Disclosure,” to stock-based employeecompensation.

 

40

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| ** **                                     | ** ** | **Fiscal 2005**                                      | ** ** | **Fiscal 2004** | ** ** | **Fiscal 2003** | ** ** |
|------------------------------------------------|------------|------------------------------------------------------|------------|-----------------|------------|-----------------|------------|
| ** **                                     | ** ** | **(Amounts in thousands, except per share amounts)** | ** ** |
|                                           |       |                                                 |       |            |       |            |       |
| Net income, as reported                        |       | $                                                    | 52,287     |            | $          | 45,729          |       | $ | 32,627 |   |
| Less: total stock based employee  compensation |       | 3,294                                                |       | 4,350           |       | 4,796           |       |
| Pro forma net income                           |       | $                                                    | 48,993     |            | $          | 41,379          |       | $ | 27,831 |   |
| Net income per share:                          |       |                                                 |       |            |       |            |       |
| Basic—as reported                         |       | $                                                    | 2.16       |            | $          | 1.82            |       | $ | 1.26 |   |
|                                           |       |                                                 |       |            |       |            |       |
| Diluted—as reported                       |       | $                                                    | 2.13       |            | $          | 1.80            |       | $ | 1.24 |   |
|                                           |       |                                                 |       |            |       |            |       |
| Basic—pro forma                           |       | $                                                    | 2.03       |            | $          | 1.65            |       | $ | 1.08 |   |
|                                           |       |                                                 |       |            |       |            |       |
| Diluted—pro forma                         |       | $                                                    | 2.00       |            | $          | 1.63            |       | $ | 1.06 |   |

 

*New Accounting Pronouncements Adopted*

 

In January 2003, the FASB issued Interpretation No. 46, “Consolidationof Variable Interest Entities”(“FIN 46”). In December 2003, FIN 46R, amodification to FIN 46, was issued which delayed the effective date until nolater than fiscal periods ending after March 15, 2004 and providedadditional technical clarifications to implementation issues. The Companyadopted this statement effective for its fiscal year ended January 29,2005. The adoption of this Interpretation in fiscal 2005 had no effect on theCompany’s consolidated results of operations and financial condition.

 

**(2)****           CHANGEIN ACCOUNTING PRINCIPLE**

 

In November 2002, the EITF reached consensus onIssue 02-16, “Accounting by a Customer (Including a Reseller) for CashConsideration Received from a Vendor.” Issue 02-16 addresses theaccounting for cash consideration received from a vendor by a reseller forvarious vendor funded allowances, including cooperative advertising support.Issue 02-16 is effective for new arrangements or modifications toexisting arrangements entered into after December 31, 2002, although earlyadoption was permitted. The Company elected to adopt early, effective February 3,2002, the provisions of Issue 02-16. In accordance with the provisions ofIssue 02-16, vendor advertising allowances which exceed specific,incremental and identifiable costs incurred in relation to the advertising andpromotional events the Company conducts for its vendors are to be classified asa reduction in the purchase price of merchandise and recognized in income asthe merchandise is sold. The amount of vendor allowances to be recorded as areduction of inventory was determined by calculating the ratio of vendorallowances in excess of specific, incremental and identifiable advertising andpromotional costs to merchandise purchases. The Company then applied this ratioto the value of inventory in determining the amount of the vendorreimbursements to be recorded as a reduction to inventory reflected on thebalance sheet. This methodology resulted in a $7.6 million reduction ininventory as of February 3, 2002, the date of adoption of Issue 02-16.The $7.6 million, $4.8 million net of tax, was recorded as a cumulative effectof change in accounting principle in fiscal 2003 for the impact of thisadoption on prior fiscal years.

 

Prior to adoption of Issue 02-16, all vendor advertisingallowances were recognized as an offset to selling, general and administrativeexpense. These allowances exceeded the specific, incremental costs of theadvertising and promotional events conducted by the Company. The portion of theallowances in excess of the specific, incremental costs was recorded as anoffset to other operating expenses within selling, general and administrativeexpenses. These other operating expenses, which were incurred to supportadvertising and promotional expenses, included such items as: marketing andmerchandise department expenses to develop, promote and manage the events;direct store and store supervisory payroll expenses to implement, manage andmonitor the events; distribution expenses associated with receiving andshipping of materials necessary for the events; and corporate expenses relatedto the design, production and maintenance of Internet advertising events. Infiscal 2005, fiscal 2004 and fiscal 2003, the company recorded vendoradvertising allowances as a reduction of selling, general and administrativeexpense in the amount of $19.3 million, $13.7 million and $8.8 million,respectively.

 

As of January 29, 2005 and January 31, 2004, $10.2 millionand $10.8 million, respectively, of the Company’s vendor advertising allowanceshave been recorded as a reduction of inventory.

 

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**(3)****           COMMITMENTS**

 

*Lease Commitments*

 

At January 29, 2005, the future annual minimum lease paymentsunder operating leases for the following five fiscal years and thereafter wereas follows (amounts in thousands):

 

| ** **  | ** ** | **Retail  Store  Locations** | ** ** | **Distribution  Facilities and  Other** | ** ** | **Total Lease  Commitments** | ** ** |
|-------------|------------|------------------------------|------------|-----------------------------------------|------------|------------------------------|------------|
|        |       |                         |       |                                    |       |                         |       |
| Fiscal 2006 |       | $                            | 101,880    |                                    | $          | 1,833                        |       | $ | 103,713 |   |
| Fiscal 2007 |       | 99,395                       |       | 1,403                                   |       | 100,798                      |       |
| Fiscal 2008 |       | 93,451                       |       | 1,204                                   |       | 94,655                       |       |
| Fiscal 2009 |       | 77,009                       |       | 1,142                                   |       | 78,151                       |       |
| Fiscal 2010 |       | 55,001                       |       | 1,023                                   |       | 56,024                       |       |
| Thereafter  |       | 89,450                       |       | 533                                     |       | 89,983                       |       |
|        |       | $                            | 516,186    |                                    | $          | 7,138                        |       | $ | 523,324 |   |

 

The total future minimum lease payments include lease commitments fornew retail locations not in operation at January 29, 2005, and excludecontingent rentals based upon sales volume and owner expense reimbursements.The terms of the operating leases for the retail locations provide that, inaddition to the minimum lease payments, the Company is required to payadditional rent to the extent retail sales, as defined in the lease agreements,exceed thresholds set forth in the lease agreements and to reimburse thelandlord for the Company’s proportionate share of the landlord’s costs andexpenses incurred in the maintenance and operation of the real estate.Contingent rentals were approximately $8.8 million, $9.9 million and $12.2million in fiscal 2005, fiscal 2004 and fiscal 2003, respectively. Rentexpense, including contingent rental amounts, was approximately $130.9 million,$101.4 million and $84.3 million in fiscal 2005, fiscal 2004 and fiscal 2003,respectively.

 

Certain of the Company’s lease agreements provide for varying leasepayments over the life of the leases. For financial statement purposes, rentalexpense is recognized on a straight-line basis over the original term of theagreements. Actual lease payments are less than the rental expense reflected inthe statements of operations by approximately $7.3 million, $3.1 million and$2.5 million for fiscal 2005, fiscal 2004 and fiscal 2003, respectively.

 

**(4)****           ACCRUEDEXPENSES**

 

Accrued expenses consist of the following (amounts in thousands):

 

| ** **                              | ** ** | **January 29,  2005** | ** ** | **January 31,  2004** | ** ** |
|-----------------------------------------|------------|----------------------------|------------|----------------------------|------------|
|                                    |       |                       |       |                       |       |
| Employee compensation and related taxes |       | $                          | 23,504     |                       | $          | 18,779 |   |
| Gift certificates and customer deposits |       | 25,953                     |       | 16,424                     |       |
| Deferred revenue                        |       | 21,527                     |       | 17,205                     |       |
| Accrued rent                            |       | 6,207                      |       | 6,458                      |       |
| Other taxes                             |       | 6,505                      |       | 5,342                      |       |
| Other accrued liabilities               |       | 16,243                     |       | 11,714                     |       |
| Total                                   |       | $                          | 99,939     |                       | $          | 75,922 |   |
|                                         |            |                            |            |                            |            |  |  |  |  |

 

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**(5)****           DEBT**

 

In March 2005, the Company entered into a fourth amendment to its$50.0 million asset based revolving credit facility with Fleet Retail Group, Inc.,a successor to Fleet Capital Group. Pursuant to the amendment, Fleet agreed toeliminate certain covenant requirements in the credit facility, added acovenant requiring the Company to maintain a certain inventory coverage ratioand extended the facility through March 16, 2006. Interest accrues onborrowings at a per annum rate equal to either LIBOR plus 250 points or Fleet’sbase rate of interest, at the Company’s option. The revolving credit agreementcontains restrictive covenants regarding transactions with affiliates, thepayment of dividends, and other financial and non-financial matters and issecured by certain assets, including accounts receivable, inventory, fixturesand equipment. There was no outstanding balance at January 29, 2005 and January 31,2004 on this facility.

 

In March 2005, the Company executed a commitment to secure amortgage for $9.5 million on its new Sadsbury Township distribution center. TheCompany expects the closing to occur in May 2005 or earlier.

 

Letters of credit outstanding with various financial institutions were$1.4 million and $0.9 million at January 29, 2005 and January 31,2004, respectively.

 

**(6)****           GAMEGROUP SERVICES AGREEMENT**

 

On January 30, 2004, the Company terminated the services agreementwith Game Group initially established in fiscal 1996. Under the servicesagreement, Game Group was responsible for the payment of management fees equalto 1.0% of Game Group’s adjusted sales, plus a bonus calculated on the basis ofnet income in excess of a pre-established target set by Game Group. The Companyhad no management fee receivables as of January 29, 2005. The Company’smanagement fees receivable at January 31, 2004 was $2.7 million, which isincluded in Accounts receivable-Trade and vendors on the consolidated balancesheet. In fiscal 2005, the Company performed no management services for GameGroup. Management fees received from Game Group under the services agreementfor fiscal 2004 and fiscal 2003 were $8.6 million and $7.4 million,respectively. As part of the agreement to terminate the services agreement,Game Group agreed to pay the Company $15.0 million, which was recorded inAccounts receivable - Other on the Company’s consolidated balance sheet at January 31,2004. The $15.0 million was received by the Company on February 12, 2004.The Company recognized $4.7 million of this payment as revenue earned on itsconsolidated statement of income for fiscal 2004. The termination agreementplaces restrictions on the Company’s ability to compete with Game Group in theUnited Kingdom and Ireland until February 2006. Certain other covenantsnot to compete specified in the termination agreement expired as of January 31,2005. Based on an independent analysis performed in fiscal 2005, thesecovenants not to compete were determined to have a value of $10.3 million,which was recorded as deferred revenue at January 31, 2004. In fiscal2005, $5.8 million of this deferred revenue was recognized as management feeincome. As of January 29, 2005, $4.5 million is still recorded asshort-term deferred revenue (Accrued expenses) and will be recognized as incomein fiscal 2006.

 

**(7)****           RELATEDPARTY TRANSACTIONS**

 

The Kim family beneficially owns approximately 48.3% of the Company’scommon stock. Accordingly, the Kim family effectively controls the Company andall matters requiring stockholder approval, including the election of directorsand approval of significant corporate transactions.

 

On November 2, 2002, the Company sold its BC Sports Collectiblesbusiness to SCAC for $2.2 million in cash and the assumption of lease relatedliabilities in excess of $13 million. The purchaser, SCAC, is owned by thefamily of James Kim, the Chairman of the Board. The transaction included thesale of all assets of the business including inventory, intellectual propertyand furniture, fixtures and equipment, and transitional services which wereprovided by the

 

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Company to SCAC for a six-month period after the closing for anadditional $300,000. $150,000 of the fee received for transition services wasearned and recognized as income in fiscal 2003 and the remaining $150,000 infiscal 2004. The transaction was negotiated and approved by a committee of theCompany’s Board of Directors comprised solely of independent directors with theassistance of an investment banking firm engaged to solicit offers for the BCSports Collectibles business.

 

**(8)****           EMPLOYEES’RETIREMENT PLAN**

 

The Company provides its United States employees with retirementbenefits under a 401(k) salary reduction plan. Generally, employees areeligible to participate in the plan after reaching age 21 and completing oneyear of service to the Company. Eligible employees may contribute up to 60% oftheir compensation to the plan up to the IRS annual limit. Companycontributions are at the Company’s discretion. Company contributions to theplan are fully vested for eligible employees with five years or more ofservice. Contributions under this plan were approximately $834,000, $804,000and $624,000 in fiscal 2005, fiscal 2004 and fiscal 2003, respectively.

 

**(9)****           EQUITYPLANS**

 

*Equity Participation Plans*

 

The Company adopted equity participation plans (the “Equity ParticipationPlans”), pursuant to which 2.1 million and 2.0 million shares of common stockwere reserved in 1998 and 2000, respectively, for issuance upon the exercise ofstock options granted to employees, consultants and directors. The exerciseprice of options granted under the Equity Participation Plans may not be lessthan fair market value per share of common stock at the grant date; optionsbecome exercisable one to three years after the grant date and expire over aperiod of not more than ten years. Exercisability could be accelerated on achange in control of the Company as well as certain other events as defined inthe Equity Participation Plans.

 

*Employee Stock Purchase Plan*

 

Under the Company’s Employee Stock Purchase Plan (the “Purchase Plan”),associates meeting specific employment qualifications are eligible toparticipate and can purchase shares quarterly through payroll deductions at thelower of 85% of the fair market value of the stock at the commencement or endof the quarterly period. The Purchase Plan permits eligible associates topurchase common stock through payroll deductions for up to 10% of qualifiedcompensation. As of January 29, 2005, 873,000 shares remain available forissuance under the Purchase Plan. The weighted-average fair value, net of the15% discount, of the shares purchased by employees in fiscal 2005, fiscal 2004and fiscal 2003 was $23.09, $16.53 and $20.27, respectively.

 

Pro forma information regarding net income and income per share isrequired by SFAS No. 123, and has been determined as if the Company hadaccounted for its employee stock options and the purchase plan under the fairvalue method of SFAS No. 123, as amended by SFAS No. 148. The fairvalue was estimated at the date of grant using a Black-Scholes option-pricing modelwith the following weighted average assumptions:

 

| ** **                                 | ** ** | **Fiscal 2005** | ** ** | **Fiscal 2004** | ** ** | **Fiscal 2003** | ** ** |
|--------------------------------------------|------------|-----------------|------------|-----------------|------------|-----------------|------------|
|                                       |       |            |       |            |       |            |       |
| Expected volatility                        |       | 57.66           | %          | 60.89           | %          | 62.38           | %          |
| Risk-free interest rate                    |       | 3.68            | %          | 3.15            | %          | 2.98            | %          |
| Expected life of options in years          |       | 4.91            |       | 4.92            |       | 4.76            |       |
| Expected life of purchase rights in months |       | 3.0             |       | 3.0             |       | 3.0             |       |
| Dividend yield                             |       | —          | %          | —          | %          | —          | %          |

 

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The Black-Scholes option valuation model was developed for use inestimating the fair value of traded options, which have no vesting restrictionsand are fully transferable. In addition, option valuation models require theinput of highly subjective assumptions including the expected stock pricevolatility. The weighted-average grant-date fair value of options grantedduring fiscal 2005, fiscal 2004 and fiscal 2003 was $15.32, $9.19 and $17.07,respectively.

 

A summary of the Company’s stock option activity, and relatedinformation for the fiscal years ended January 29, 2005, January 31,2004 and February 1, 2003 follows (amounts in thousands, except per shareamounts):

 

| ** **                        | ** ** | **Fiscal 2005** | ** ** | **Fiscal 2004** | ** ** | **Fiscal 2003** | ** ** |
|-----------------------------------|------------|-----------------|------------|-----------------|------------|-----------------|------------|
|                              |       |            |       |            |       |            |       |
| Outstanding at beginning of year  |       | 2,126           |       | 2,388           |       | 2,093           |       |
| Granted                           |       | 272             |       | 431             |       | 433             |       |
| Exercised                         |       | (952            | )          | (535            | )          | (76             | )          |
| Forfeited                         |       | (45             | )          | (158            | )          | (62             | )          |
| Outstanding at end of year        |       | 1,401           |       | 2,126           |       | 2,388           |       |
|                              |       |            |       |            |       |            |       |
| Exercisable at end of year        |       | 744             |       | 1,200           |       | 1,215           |       |
| Weighted average price per share: |       |            |       |            |       |            |       |
| Granted                           |       | $               | 28.60      |            | $          | 16.95           |       | $ | 31.74 |   |
| Exercised                         |       | 19.20           |       | 16.04           |       | 16.72           |       |
| Forfeited                         |       | 24.65           |       | 28.32           |       | 22.59           |       |
|                                   |            |                 |            |                 |            |                 |            |  |  |  |

 

The weighted average exercise price for all options outstanding andexercisable as of January 29, 2005 and January 31, 2004 were $21.54and $19.32, respectively. The weighted average exercise price for all optionsoutstanding as of January 29, 2005 and January 31, 2004 were $22.92and $20.56, respectively.

 

The table below summarizes information about stock options outstandingas of January 29, 2005 (share amounts in thousands):

 
| ** **                   | ** ** | **Options outstanding**                               | ** ** | **Options exercisable**                            | ** ** |
|------------------------------|------------|-------------------------------------------------------|------------|----------------------------------------------------|------------|
| **Range of exercise prices** | ** ** | **Number  outstanding as  of January 29,  2005** | ** ** | **Weighted  average  remaining  contractual life** | ** ** | **Weighted average  exercise price** | ** ** | **Number  exercisable as  of January 29,  2005** | ** ** | **Weighted  average  exercise price** | ** ** |
|                         |       |                                                  |       |                                               |       |   |   |   |   |   |   |
| $9.50 - $17.37               |       | 421                                                   |       | 7.22                                               |       | $ | 15.77 |   | 177 |   | $ | 14.94 |   |
| $17.38 - $28.42              |       | 462                                                   |       | 6.73                                               |       | $ | 20.03 |   | 352 |   | $ | 18.21 |   |
| $28.43 - $41.65              |       | 518                                                   |       | 7.85                                               |       | $ | 31.29 |   | 215 |   | $ | 32.44 |   |
|                         |       |                                                  |       |                                               |       |   |   |   |   |   |   |
|                         |       | 1,401                                                 |       |                                               |       |   |   | 744 |   |   |   |

 

**(10)****         INCOMETAXES**

 

Income before income tax expense and cumulative effect of change inaccounting principle was as follows (amounts in thousands, except tax rates):

 

| ** ** | ** ** | **Fiscal 2005** | ** ** | **Fiscal 2004** | ** ** | **Fiscal 2003** | ** ** |
|------------|------------|-----------------|------------|-----------------|------------|-----------------|------------|
|       |       |            |       |            |       |            |       |
| Domestic   |       | $               | 43,415     |            | $          | 44,344          |       | $ | 52,989 |   |
| Foreign    |       | 38,265          |       | 28,288          |       | 6,784           |       |
| Total      |       | $               | 81,680     |            | $          | 72,632          |       | $ | 59,773 |   |

 

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The provision for income taxes for fiscal 2005, fiscal 2004 and fiscal2003 consisted of the following:

 

| ** **                                  | ** ** | **Fiscal 2005** | ** ** | **Fiscal 2004** | ** ** | **Fiscal 2003** | ** ** |
|---------------------------------------------|------------|-----------------|------------|-----------------|------------|-----------------|------------|
|                                        |       |            |       |            |       |            |       |
| Federal statutory tax rate                  |       | 35.00           | %          | 35.00           | %          | 35.00           | %          |
| State income taxes, net of federal benefit  |       | 1.06            |       | 2.88            |       | 3.17            |       |
| Permanent differences- domestic and foreign |       | 0.41            |       | (0.26           | )          | (0.30           | )          |
| Difference in foreign tax rates             |       | (0.93           | )          | (0.25           | )          | (0.33           | )          |
| Other                                       |       | (0.07           | )          | 0.17            |       | (0.14           | )          |
| Change in valuation allowance               |       | 0.52            |       | (0.50           | )          | 0.03            |       |
| Income tax expense                          |       | 35.99           | %          | 37.04           | %          | 37.43           | %          |
|                                        |       |            |       |            |       |            |       |
| Current:                                    |       |            |       |            |       |            |       |
| Domestic—Federal                       |       | $               | 14,484     |            | $          | 12,577          |       | $ | 11,191 |   |
| Domestic—State                         |       | 1,382           |       | 2,371           |       | 2,091           |       |
| Foreign                                     |       | 13,652          |       | 10,600          |       | 5,092           |       |
| Deferred:                                   |       |            |       |            |       |            |       |
| Domestic—Federal                       |       | 544             |       | 2,059           |       | 5,932           |       |
| Domestic—State                         |       | (45             | )          | 873             |       | 994             |       |
| Foreign                                     |       | (624            | )          | (1,577          | )          | (2,927          | )          |
| Income tax expense                          |       | $               | 29,393     |            | $          | 26,903          |       | $ | 22,373 |   |

 

The Company does not pay or record federal income taxes on the undistributedearnings of its foreign subsidiaries as long as those earnings are deemedpermanently reinvested in the companies that produced them. An estimated$968,000 in federal income and foreign withholding taxes would be due if suchpermanently reinvested earnings were remitted as dividends.

 

Deferred income taxes reflect the net tax effect of temporarydifferences between the carrying amounts of assets and liabilities forfinancial reporting purposes and the amounts used for income tax purposes. Thefollowing is a summary of the significant components of the Company’s deferredtax assets and liabilities as of January 29, 2005 and January 31,2004 (amounts in thousands):

 

| ** **                     | ** ** | **January 29,  2005** | ** ** | **January 31,  2004** | ** ** |
|--------------------------------|------------|----------------------------|------------|----------------------------|------------|
|                           |       |                       |       |                       |       |
| Deferred tax assets:           |       |                       |       |                       |       |
| Inventory                      |       | $                          | 1,283      |                       | $          | 6,327 |   |
| Accrued expenses               |       | 8,148                      |       | 3,010                      |       |
| State net operating loss       |       | 716                        |       | 558                        |       |
| Fixed assets                   |       | 672                        |       | 4,592                      |       |
| Deferred rent                  |       | 7,177                      |       | 2,128                      |       |
| Amortization of goodwill       |       | 67                         |       | 96                         |       |
| Foreign net operating loss     |       | 4,563                      |       | 4,012                      |       |
| Total gross deferred tax asset |       | 22,626                     |       | 20,723                     |       |
| Valuation allowance            |       | (755                       | )          | (352                       | )          |
| Net deferred tax asset         |       | $                          | 21,871     |                       | $          | 20,371 |   |

 

Management believes it is more likely than not that the results offuture operations will generate sufficient taxable income to realize deferredtax assets, except for certain net operating loss carryforwards for which theCompany

 

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has provided a valuation allowance. The increase in the valuationallowance of $403,000 in fiscal 2005 resulted primarily from the addition of avaluation allowance for a certain foreign subsidiary, offset in part by theutilization of net operating loss carryforwards of certain other foreignsubsidiaries. The Company has $4.0 million of foreign net operating losscarryforwards that do not expire. The remaining $0.6 million of foreign netoperating loss carryforwards start to expire in fiscal 2007 through fiscal2012.

 

**(11)****         RESTRUCTURINGCHARGE**

 

On February 1, 2002, the Board of Directors of the Company adopteda plan related to the closing of the Company’s 29 EB Kids stores and the saleof its 22 store BC Sports Collectibles business. A $14.9 million pre-tax charge($9.2 million after-tax or $0.35 per diluted share) was recorded in fiscal 2002related to this decision. The pre-tax charge was recorded as follows: $2.3million related to a write-down of inventory within cost of goods sold and$12.6 million as a restructuring and asset impairment charge. The $12.6 millioncharge consisted of a $3.5 million write-down of store leasehold improvements,a $2.3 million write down of store furniture, fixtures and equipment and $6.7million in lease termination expenses.

 

The following table summarizes activity in the restructuring accrualfor the fiscal years ended January 31, 2004 and January 29, 2005(amounts in thousands):

 
| ** **                       | ** ** | **Beginning  Balance** | ** ** | **Cash Payments** | ** ** | **Charges** | ** ** | **Reversals** | ** ** | **Other** | ** ** | **Ending  Balance** | ** ** |
|----------------------------------|------------|------------------------|------------|-------------------|------------|-------------|------------|---------------|------------|-----------|------------|---------------------|------------|
|                             |       |                   |       |              |       |        |       |          |       |      |       |                |       |
| Year ended January 31, 2004 |       | $                      | 240        |              | $          | (36         | )          | —        |       | —    |       | —              |       | $ | 204 |   |
| Year ended January 29, 2005 |       | $                      | 204        |              | —     |        | —     |          | —     |      | $          | (204                | )          | — |   |
|                                  |            |                        |            |                   |            |             |            |               |            |           |            |                     |            |  |  |  |  |

 

As of January 31, 2004, the restructuring accrual had a balance of$204,000 related to the costs associated with the potential assignment back tothe Company of two of the BC Sports Collectibles store leases.

 

The Company reached an agreement with SCAC under which SCAC agreed tonot assign back to the Company either of the two BC Sports Collectibles storeleases identified in the original agreement. As part of this new agreement, theCompany assumed the lease of a BC Sports Collectibles store not referenced inthe original agreement with SCAC. The Company has converted this location to anEB Games store and plans to operate in the location until the lease terminatesin fiscal 2008. Consequently, the balance of the restructuring accrual wasreversed as of January 29, 2005.

 

**(12)****         LEGALCONTINGENCIES**

 

On December 3, 2003, a subsidiary of the Company was served with acomplaint in a proposed class action suit entitled “Chalmers v. ElectronicsBoutique of America Inc.” in the California Superior Court in Los AngelesCounty. The suit alleged that Electronics Boutique of America Inc. improperlyclassified store management employees as exempt from the overtime provisions ofCalifornia wage-and-hour laws and sought recovery of wages for overtime hoursworked and related relief. In December 2004, the court approved a finalsettlement in the amount of $950,000. An accrual for settlement costs wasrecorded in fiscal 2004. Consequently, this settlement had no material impacton the Company’s results of operations or financial condition for fiscal 2005.

 

On October 19, 2004, Milton Diaz filed a complaint against asubsidiary of Electronics Boutique in the U.S. District Court for the WesternDistrict of New York. Mr. Diaz claims to represent a group of current andformer employees to whom Electronics Boutique of America Inc. allegedly failedto pay minimum wages and overtime compensation in violation of the Fair LaborStandards Act (FLSA) and New York law. The plaintiff moved to conditionally certifya group of similarly situated individuals under the FLSA and in March 2005,there was a hearing on

 

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this motion. In March 2005, the plaintiff filed a motion on behalfof current and former store managers and assistant store managers in New Yorkto certify a class under New York wage and hour laws. Also, in March 2005,the Company filed a motion to dismiss the New York state law claims. TheCompany intends to vigorously defend this action. At this stage of the matter,it is not possible to predict the outcome of this matter.

 

In the opinion of management and except as described above, no pendingproceedings could have a material adverse effect on the Company’s results ofoperations or financial condition.

 

**(13)****         COMPREHENSIVEINCOME**

 

Comprehensive income is computed as follows (amounts in thousands):

 
| ** **                    | ** ** | **Fiscal  2005** | ** ** | **Fiscal  2004** | ** ** | **Fiscal  2003** | ** ** |
|-------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
|                          |       |             |       |             |       |             |       |
| Net income                    |       | $                | 52,287     |             | $          | 45,729           |       | $ | 32,627 |   |
| Foreign currency translations |       | 4,849            |       | 12,981           |       | 6,574            |       |
| Hedging activities            |       | (3,280           | )          | (6,457           | )          | (5,077           | )          |
| Comprehensive income          |       | $                | 53,856     |             | $          | 52,253           |       | $ | 34,124 |   |
|                               |            |                  |            |                  |            |                  |            |  |  |  |  |

 

Gains on foreign currency translations are a result of the Company’sinvestment in its foreign subsidiaries in Australia, Canada, Denmark, Germany,Italy, New Zealand, Norway, South Korea and Sweden. Losses on hedgingactivities are primarily the result of foreign exchange forward contracts andcross currency swap agreements the Company has entered into to protect itsinvestments in its European subsidiaries from foreign currency fluctuations.The net gains on these activities are primarily the result of the Company’sinvestment in its Australia, Canada and South Korea subsidiaries that have notbeen hedged.

 

**(14)****         GOODWILLAND OTHER INTANGIBLE ASSETS**

 

The following tables show the intangible assets and goodwill as of January 29,2005 and January 31, 2004 (amounts in thousands):

 

# **Amortizable Intangible Assets**

 
| ** **              | ** ** | **January 29, 2005**   | ** ** | **January 31, 2004**    | ** ** |
|-------------------------|------------|-----------------------------|------------|------------------------------|------------|
| ** **              | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated Amortization** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated Amortization** | ** ** |
|                    |       |                        |       |                         |       |   |   |   |   |
| Key Money(1)            |       | $                           | 3,761      |                         | $          | 1,145 |   | $ | 1,791 |   | $ | 581 |   |
| Other                   |       | 10                          |       | 10                           |       | 85 |   | 85 |   |
| Total Intangible Assets |       | $                           | 3,771      |                         | $          | 1,155 |   | $ | 1,876 |   | $ | 666 |   |

 

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(1)           KeyMoney represents payments made to landlords, outgoing tenants or other thirdparties to enter into certain store leases.

 

Intangible assets are amortized over five years. Amortization expenseof amortizable intangible assets for fiscal

 

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2005, 2004 and 2003 was $602,000, $442,000 and $315,000, respectively.Amortization expense for amortizable intangible assets for the next five yearsis: $727,000 in fiscal 2006, $696,000 in fiscal 2007, $590,000 in fiscal 2008,$417,000 in fiscal 2009 and $185,000 in fiscal 2010.

 

**Goodwill**

 

The changes in carrying amount of goodwill for the years ended January 29,2005 and January 31, 2004 are as follows (amounts in thousands):

 
| Balance as of February 1, 2003     |   | $      | 10,938 |   |
|-----------------------------------------|--------|--------|--------|--------|
| Buyout of German partner (1)            |   | 111    |   |
| Foreign exchange fluctuations and other |   | 1,403  |   |
| Balance as of January 31, 2004     |   | $      | 12,452 |   |
|                                    |   |   |   |
| Foreign exchange fluctuations and other |   | 1,240  |   |
| Balance as of January 29, 2005     |   | $      | 13,692 |   |
|                                         |        |        |        |        |  |

 

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(1)           InJune 2003, the Company bought out the last of its partners in the Germansubsidiary. This resulted in an increase in ownership of .3125%. The Companynow owns 100% of its German subsidiary.

 

**(15)****         STOCKBUY-BACK PROGRAM**

 

In May 2003, the Company’s Board of Directors approved a programto repurchase up to 1.5 million shares of its outstanding common stock. Duringfiscal 2004, the Company completed the program and repurchased 1.5 millionshares of common stock at a weighted average cost, including brokercommissions, of $21.18 per share. Cash expenditures to complete the stockbuy-back totaled $31.8 million.

 

In November 2003, the Company’s Board ofDirectors approved a program to repurchase up to 2.0 million additional sharesof its outstanding common stock. As of January 31, 2004, the Companyrepurchased 115,700 shares of common stock at a weighted average cost,including broker commissions, of $23.21 per share. Cash expenditures for thesestock repurchases totaled $2.7 million.

 

During fiscal 2005, the Company repurchased anadditional 1.2 million shares of common stock at a weighted average cost,including broker commissions, of $27.10 per share. Cash expenditures for thesestock repurchases totaled $31.7 million. As of January 29, 2005, theCompany had repurchased 1.3 million aggregate shares of common stock at a weightedaverage cost, including broker commissions, of $26.75 per share. Aggregate cashexpenditures for these stock repurchases totaled $34.4 million.

 

49

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**Schedule II****—Valuation and Qualifying Accounts (amounts inthousands)**

 
| **Year  Ended**                              | ** ** | **Description**                        | ** ** | **Beginning  Balance** | ** ** | **Charged to  Costs and  Expenses** | ** ** | **Deductions** | ** ** | **Ending  Balance** | ** ** |
|----------------------------------------------|------------|----------------------------------------|------------|------------------------|------------|-------------------------------------|------------|----------------|------------|---------------------|------------|
|                                         |       |                                   |       |                   |       |                                |       |           |       |                |       |
| **Deferred Tax Valuation Allowance**         |       |                                   |       |                   |       |                                |       |           |       |                |       |
| February 1, 2003                        |       | Deferred tax valuation allowance       |       | $                      | 534        |                                | $          | 12             |       | $                   | —     |   | $ | 546 |   |
| January 31, 2004                        |       | Deferred tax valuation allowance       |       | 546                    |       | 31                                  |       | 225            |       | 352                 |       |
| January 29, 2005                        |       | Deferred tax valuation allowance       |       | 352                    |       | 755                                 |       | 352            |       | 755                 |       |
| **Inventory  Valuation Allowance**           |       |                                   |       |                   |       |                                |       |           |       |                |       |
| February 1, 2003                        |       | Inventory valuation allowance          |       | $                      | 2,696      |                                | $          | 6,794          |       | $                   | 6,605      |   | $ | 2,885 |   |
| January 31, 2004                        |       | Inventory valuation allowance          |       | 2,885                  |       | 12,786                              |       | 11,812         |       | 3,859               |       |
| January 29, 2005                        |       | Inventory valuation allowance          |       | 3,859                  |       | 9,830                               |       | 9,351          |       | 4,338               |       |
| **Accounts  Receivable  Bad Debt Allowance** |       |                                   |       |                   |       |                                |       |           |       |                |       |
| February 1, 2003                        |       | Accounts receivable bad debt allowance |       | $                      | 250        |                                | $          | —         |       | $                   | —     |   | $ | 250 |   |
| January 31, 2004                        |       | Accounts receivable bad debt allowance |       | 250                    |       | 213                                 |       | —         |       | 463                 |       |
| January 29, 2005                        |       | Accounts receivable bad debt allowance |       | 463                    |       | 246                                 |       | 32             |       | 677                 |       |

 

50

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**Item9****.****    Changes in and Disagreements with Accountants onAccounting and Financial Disclosure**

 

None.

 

**Item9A****. Controls andProcedures**

 

*Evaluation of Disclosure Controls andProcedures*

 

Under the supervision and with the participation of our management,including our chief executive officer and chief financial officer, we haveevaluated the effectiveness of the design and operation of our disclosurecontrols and procedures as of January 29, 2005 (the “Evaluation Date”),and, based on this evaluation, our chief executive officer and chief financialofficer have concluded that these controls and procedures were effective as ofthe Evaluation Date.

 

Disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Exchange Act) are our internal controls andother procedures that are designed to ensure that information we are requiredto disclose in the reports that we file or submit under the Exchange Act, isrecorded, processed, summarized and reported within the time periods specifiedin the SEC’s rules and forms. Disclosure controls and procedures includecontrols and procedures designed to ensure that information required to bedisclosed by us in our reports under the Exchange Act is accumulated andcommunicated to management, including our chief executive officer and chieffinancial officer, as appropriate to allow timely decisions regarding requireddisclosure.

 

*Management’s Report On Internal Control OverFinancial Reporting*

 

Our management is responsible for establishing and maintaining adequateinternal control over financial reporting, as defined in Exchange Act Rule 13a-15(f).Under the supervision and with the participation of our senior management,including our chief executive officer and chief financial officer, we assessedthe effectiveness of our internal control over financial reporting as of January 29,2005 based on the Internal Control - Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission (“COSO”).Based on this assessment, our management concluded that our internal controlover financial reporting was effective as of January 29, 2005. Ourmanagement’s assessment of the effectiveness of our internal control overfinancial reporting as of January 29, 2005 has been audited by KPMG LLP,an independent registered public accounting firm, as stated in their reportwhich is included herein.

 

Electronics Boutique Holdings Corp.

 

West Chester, Pennsylvania

April 7, 2005

 

*Changes in Internal Control Over FinancialReporting*

 

**Our management carried out anevaluation, with the participation of our principal executive officer andprincipal financial officer, of changes in our internal control over financialreporting, as defined in Exchange Act Rule 13a -15(f). Based on thisevaluation, our management determined that no change in our internal controlover financial reporting occurred during the fourth quarter of fiscal 2005 thathas materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting.**

 

51

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***Report ofIndependent Registered Public Accounting Firm***

** **

The Board of Directors and Stockholders

Electronics Boutique Holdings Corp.:

 

We have audited management’s assessment, included in the accompanyingManagement’s Report On Internal Control Over Financial Reporting, thatElectronics Boutique Holdings Corp. maintained effective internal control overfinancial reporting as of January 29, 2005, based on criteria establishedin Internal Control—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO). Electronics Boutique HoldingsCorp.’s management is responsible for maintaining effective internal controlover financial reporting and for its assessment of the effectiveness ofinternal control over financial reporting. Our responsibility is to express anopinion on management’s assessment and an opinion on the effectiveness of theCompany’s internal control over financial reporting based on our audit.

 

We conducted our audit in accordance with the standards of the PublicCompany Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whethereffective internal control over financial reporting was maintained in allmaterial respects. Our audit included obtaining an understanding of internalcontrol over financial reporting, evaluating management’s assessment, testing andevaluating the design and operating effectiveness of internal control, andperforming such other procedures as we considered necessary in thecircumstances. We believe that our audit provides a reasonable basis for ouropinion.

 

**A company’s internal control over financial reporting is a processdesigned to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles.  A company’s internal control over financialreporting includes those policies and procedures that (1) pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.**

 

Because of its inherent limitations, internal control over financialreporting may not prevent or detect misstatements.  Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

 

In our opinion, management’s assessment that Electronics BoutiqueHoldings Corp. maintained effective internal control over financial reportingas of January 29, 2005, is fairly stated, in all material respects, basedon criteria established in Internal Control—Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO).  Also, in our opinion, Electronics BoutiqueHoldings Corp. maintained, in all material respects, effective internal controlover financial reporting as of January 29, 2005, based on criteriaestablished in Internal Control—Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission (COSO).

 

We also have audited, in accordance with the standards of the PublicCompany Accounting Oversight Board (United States), the consolidated balancesheets of Electronics Boutique Holdings Corp. and subsidiaries as of January 29,2005 and January 31, 2004, and the related consolidated statements ofincome, stockholders’ equity, and cash flows for each of the years in thethree-year period ended January 29, 2005, and our report dated April 7,2005 expressed an unqualified opinion on those consolidated financialstatements.

 

KPMG LLP

 

Philadelphia, Pennsylvania

April 7, 2005

 

52

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**Item9B****. OtherInformation**

 

**Reports on Form 8-K**

 

During the Company’s fourth fiscal quarter, the following CurrentReports on Form 8-K were filed:

 

On November 8, 2004, the Company filed a Current Report on Form 8-K,reporting under Item 2.02 and announcing adjustments to its previous guidancefor the quarter ended October 30, 2004.

 

On November 18, 2004, the Company filed a Current Report on Form 8-K,reporting under Item 2.02 and announcing financial results for the Company’sthird quarter ended October 30, 2004.

 

On January 10, 2005, the Company filed a Current Report on Form 8-K,reporting under Item 2.02 and announcing financial results for the Company’snine-week holiday period ended January 1, 2005.

 

**Part III**

 

**Item10****.  Directors and Executive Officers of theRegistrant**

 

**Directors**

 

The following information sets forth the names ofthe Directors, the year from which each individual has served as a Director,the age of each Director and the principal occupation of each Director.  

 

**Dean S. Adler**, age 48, hasserved as a Director of Electronics Boutique since March 1998. In March 1997,Mr. Adler formed Lubert/Adler Partners, LP, a partnership investingprimarily in real estate and real estate related ventures. Prior thereto, Mr. Adlerwas a principal of CMS Companies. Mr. Adler was also an instructor at TheWharton School of the University of Pennsylvania. Mr. Adler serves on theBoards of Directors of Bed Bath & Beyond Inc. and DevelopersDiversified Realty Corporation. Mr. Adler is a member of the CompensationCommittee and the Nominating Committee.  

 

**Jeffrey W. Griffiths**, age 54, hasserved as the President and Chief Executive Officer of Electronics Boutique andas a Director since June 2001. Prior thereto, he served as Senior VicePresident of Merchandising and Distribution from March 1998 to June 2001.Mr. Griffiths served as Senior Vice President of Merchandising andDistribution of The Electronics Boutique, Inc. (“EB”), the predecessor toElectronics Boutique, from March 1996 to March 1998. From March 1987to February 1996, Mr. Griffiths served as Vice President ofMerchandising of EB, and from April 1984 to February 1987, he servedas Merchandise Manager. Since October 2003, Mr. Griffiths has been amember of the Board of Trustees of Albright College.  Mr. Griffiths also serves on the Boardof Directors of Philadelphia Academies.  

 

**James J. Kim**, age 69, hasserved as Electronics Boutique’s Chairman and as a Director since March 1998.Mr. Kim founded EB in 1977 and has served as its Chairman since itsinception. Mr. Kim also serves as the Chairman of Amkor Technology, Inc.,a semiconductor assembly, test, packaging and technology firm.  Mr. Kim is the father of Susan Y. Kim, aDirector, and the father-in-law of John R. Panichello, Electronics Boutique’sExecutive Vice President and Chief Operating Officer.  

 

**Susan Y. Kim**, age 42, hasserved as a Director of Electronics Boutique since March 1998. Ms. Kimserved as a Senior District Manager of EB from 1991 to 1992, as EB’s PersonnelManager from 1989 to 1991, as a Buyer for EB from 1986 to 1989, and as a FieldManager for EB from 1985 to 1986. Ms. Kim is a member of the Board ofDirectors of  

 

53

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the Philadelphia Orchestra Association and The Franklin Institute, andis a Trustee at The Shipley School andthe Gesu School. Ms. Kim is the daughter of James J. Kim, ElectronicsBoutique’s Chairman and a Director, and the wife of John R. Panichello,Electronics Boutique’s Executive Vice President and Chief Operating Officer.  

 

**Louis J. Siana**, age 73, hasserved as a Director of Electronics Boutique since March 1998. Mr. Sianais a certified public accountant and a senior partner in the accounting firm ofSiana, Carr & O’Connor LLP. Mr. Siana is Chairman of the AuditCommittee and a member of the Compensation Committee and the NominatingCommittee.  

 

**Alfred J. Stein**, age 72, hasserved as a Director of Electronics Boutique since March 2003. Mr. Steinserved on the Board of Directors of Applied Materials, Inc. from 1982through 1999 and RadioShack Corporation from 1982 through May 2003. Mr. Steinserved as Chairman of the Board and Chief Executive Officer of VLSI Technology, Inc.from its inception in 1982 until it was acquired by Philips Electronics in1999. Mr. Stein currently serves as a member of the Board of Directors ofAdvanced Power Technology, Inc., ESS Technology, Inc. and SimtekCorporation.  In addition, Mr. Steinhas served on the Board of Directors for several private companies.  Mr. Stein is a past Chairman of theBoard for the Semiconductor Industry Association and was on the Board ofTrustees for St. Mary’s University of Texas. Mr. Stein is a member of theAudit Committee.  

 

**Stanley (“Mickey”) Steinberg**, age 72, hasserved as a Director of Electronics Boutique since September 1998. Mr. Steinbergcurrently serves as a Senior Advisor to the mergers and acquisitions firm ofNavigant Capital Advisors, LLC.  From August 1994to June 1998, Mr. Steinberg served as Chairman of Sony RetailEntertainment. From 1989 to 1994, Mr. Steinberg served as Executive VicePresident and Chief Operating Officer of Walt Disney Imagineering. Mr. Steinbergserves on the Board of Directors of Reckson Associates Realty Corp. and of twoprivately held companies, AMC, Inc., the owner and manager of theAmericasMart Atlanta trade show center, and ECI Group, an apartment developer,construction and management company.  Mr. Steinbergis a member of the Audit Committee.  

 

**Executive Officers**

 

Information required by this Item with respect toexecutive officers may be found in Part I of this Form 10-K/A.  

 

**Committees of the Board of Directors**

 

The Board of Directors has established threestanding committees: the Audit Committee, the Compensation Committee and theNominating Committee.  

 

*Audit Committee.*    The Audit Committee oversees our processesof accounting and financial reporting and provides oversight with respect tothe audits and financial statements of Electronics Boutique.  In this role, the Audit Committee reviews theprofessional services provided by Electronics Boutique’s registered independentpublic accountants and the independence of the accounting firm from themanagement of Electronics Boutique. The Audit Committee also reviews the scopeof the audits by Electronics Boutique’s independent accountants, the annualfinancial statements of Electronics Boutique, its systems of internalaccounting controls and other matters with respect to the accounting, internalauditing and financial reporting practices and procedures as it findsappropriate or as may be brought to its attention, and meets from time to timewith members of Electronics Boutique’s finance and internal audit staff. TheAudit Committee is comprised of Messrs. Siana, Stein and Steinberg, eachof whom is independent as defined by the requirements of The NASDAQ StockMarket and the rules and regulations of the SEC.  The Board of Directors has determined thattwo of its three Audit Committee members, Messrs. Siana and Stein, qualifyas “audit committee financial experts” under the SEC’s rules. The AuditCommittee met eight times in fiscal 2005.  

 

The Audit Committee has adopted an amended andrestated charter, which was approved by the Board of Directors in April 2004.  A copy of Electronics Boutique’s AuditCommittee Charter is available on our website at *www.ebholdings.com*.  

 

*Compensation Committee.*    The Compensation Committee reviews andapproves the salaries, bonuses and other  

 

54

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benefits of our executive officers, administers the stock option planof Electronics Boutique and reviews and recommends compensation for the Boardof Directors and its committees. In addition, the Compensation Committeeadvises and consults with Electronics Boutique’s management regarding benefitplans and the compensation policies and practices of Electronics Boutique. TheCompensation Committee is comprised of Messrs. Adler and Siana, each ofwhom is independent as defined by the requirements of The NASDAQ StockMarket.  The Compensation Committee metonce during fiscal 2005.  A copy of theCompensation Committee Charter is available on our website at *www.ebholdings.com*.  

 

*Nominating Committee*.  The Board of Directors formed a NominatingCommittee in April 2004 and Messrs. Adler and Siana were appointed tothe Nominating Committee in February 2005. Each of Messrs. Adler and Siana are independent as identified bythe requirements of The NASDAQ Stock Market. The Nominating Committee identifies and recommends individuals to theBoard of Directors for nomination as members of the Board of Directors and itscommittees and assists the Board of Directors in the event of a vacancy on theBoard of Directors or any committee by identifying and recommending individualsqualified to fill the vacancy. The Nominating Committee considers candidatessuggested by our stockholders, provided that the recommendations are made inaccordance with the procedures set forth in our Bylaws.  Stockholder nominations that comply with theappropriate procedures will receive the same consideration that the NominatingCommittee’s nominees receive. A copy of the Nominating Committee Charter isalso available on our website at *www.ebholdings.com*.  

 

**Section 16(a) Beneficial OwnershipReporting Compliance**

 

Section 16(a) of the Exchange Act requiresElectronics Boutique’s Directors and executive officers, and certain personswho own more than 10% of the outstanding common stock, to file with the SEC andThe NASDAQ Stock Market initial reports of ownership and reports of changes inownership of common stock (“Section 16(a) Reports”). Additionally,executive officers, directors and greater than 10% stockholders are required bySEC regulations to furnish Electronics Boutique with copies of all Section 16(a) Reportsthey file. On April 13, 2004, Louis J. Siana, a member of the Board ofDirectors, filed a Section 16(a) Report with respect to purchases of20,000 shares of common stock in December 2003.  Except as set forth above, to ElectronicsBoutique’s knowledge, all Directors, executive officers and beneficial ownersof more than 10% of the common stock outstanding complied with all applicablefiling requirements under Section 16(a) of the Exchange Act withrespect to their beneficial ownership of common stock during fiscal 2005.  

 

**Code of Ethics**

 

Information required by this Item with respect toour code of ethics may be found in Part I of this Form 10-K/A.  

 

********

 

55

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**Item 11. Executive Compensation**

 

The following table summarizes for ElectronicsBoutique’s last three fiscal years the compensation of Electronics Boutique’sPresident and Chief Executive Officer and the other executive officers ofElectronics Boutique (the “Named Executive Officers”). 

 

**Summary Compensation Table**

 
| ** **                                            | ** ** | ** **      | ** ** | **Annual Compensation** | ** ** | **Long-Term  Compensation** | ** ** | ** **                              | ** ** |
|-------------------------------------------------------|------------|-----------------|------------|-------------------------|------------|-----------------------------|------------|-----------------------------------------|------------|
| **Name  and Title**                                   | ** ** | **Fiscal Year** | ** ** | **Salary**              | ** ** | **Bonus (1)**               | ** ** | **Securities  Underlying  Options (#)** | ** ** | **All Other  Compensation** | ** ** |
| Jeffrey W. Griffiths                                  |       | 2005            |       | $                       | 531,135    |                        | $          | 390,000                                 |       | 30,000 |   | $ | 28,808 | (2) |
| President, Chief Executive Officer and                |       | 2004            |       | $                       | 505,740    |                        | $          | 375,000                                 |       | 50,000 |   | $ | 26,519 | (2) |
| Director                                              |       | 2003            |       | $                       | 449,125    |                        | $          | 337,500                                 |       | 50,000 |   | $ | 24,019 | (2) |
|                                                  |       |            |       |                    |       |                        |       |                                    |       |   |   |   |   |   |
| Seth P. Levy                                          |       | 2005            |       | $                       | 265,769    |                        | $          | 130,000                                 |       | 8,400 |   | $ | 17,422 | (2) |
| Senior Vice President Logistics, Chief                |       | 2004            |       | $                       | 254,655    |                        | $          | 125,000                                 |       | 14,000 |   | $ | 14,193 | (2) |
| Information  Officer and President-EB Games Online    |       | 2003            |       | $                       | 231,572    |                        | $          | 115,000                                 |       | 14,000 |   | $ | 26,043 | (2) |
|                                                  |       |            |       |                    |       |                        |       |                                    |       |   |   |   |   |   |
| Steven R. Morgan                                      |       | 2005            |       | $                       | 305,089    |                        | $          | 150,800                                 |       | 8,400 |   | $ | 2,000 | (2) |
| Senior Vice President, President of                   |       | 2004            |       | $                       | 306,246    |                        | $          | 145,000                                 |       | 14,000 |   | $ | 2,000 | (2) |
| Stores-North  America and President of EB Canada Inc. |       | 2003            |       | $                       | 270,899    |                        | $          | 135,000                                 |       | 14,000 |   | $ | 147,555 | (3) |
|                                                  |       |            |       |                    |       |                        |       |                                    |       |   |   |   |   |   |
| John R. Panichello                                    |       | 2005            |       | $                       | 380,056    |                        | $          | 243,360                                 |       | 18,000 |   | $ | 29,152 | (2) |
| Executive Vice President and                          |       | 2004            |       | $                       | 363,110    |                        | $          | 234,000                                 |       | 30,000 |   | $ | 24,178 | (2) |
| Chief Operating Officer                               |       | 2003            |       | $                       | 330,739    |                        | $          | 214,500                                 |       | 30,000 |   | $ | 19,736 | (2) |
|                                                  |       |            |       |                    |       |                        |       |                                    |       |   |   |   |   |   |
| James A. Smith                                        |       | 2005            |       | $                       | 269,380    |                        | $          | 130,000                                 |       | 8,400 |   | $ | 20,524 | (2) |
| Senior Vice President, Chief                          |       | 2004            |       | $                       | 255,670    |                        | $          | 125,000                                 |       | 14,000 |   | $ | 17,076 | (2) |
| Financial Officer and Secretary                  |       | 2003            |       | $                       | 231,103    |                        | $          | 115,000                                 |       | 14,000 |   | $ | 14,014 | (2) |

 

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(1)           Amounts have beenlisted for the year earned although actually paid in the following fiscal yearor deferred at the executive’s election until a subsequent fiscal year.  

 

(2)           Consists of matchingcontribution pursuant to our executive salary deferral plan and 401(k) definedcontribution plan.  

 

(3)           Mr.Morgan was reimbursed for expenses related to his relocation to the WestChester, Pennsylvania area.  

 

**Fiscal2005 Stock Option Grants**

 

Thefollowing table sets forth certain information regarding grants of stockoptions made during fiscal 2005 to the Named Executive Officers pursuant to ourstock option plan.  

 

**Option Grants in Last Fiscal YearIndividual Grants**

 
| **Name**             | ** ** | **Number of  Securities  Underlying  Options Granted** | ** ** | **% of Total  Options  Granted to  Employees in  Fiscal Year** | ** ** | **Exercise  Price** | ** ** | **Expiration  Date** | ** ** | **Potential Realizable Value at  Assumed Annual Rates of  Stock Price Appreciation  for Option Term** | ** ** |
|----------------------|------------|--------------------------------------------------------|------------|----------------------------------------------------------------|------------|---------------------|------------|----------------------|------------|-------------------------------------------------------------------------------------------------------|------------|
| **5%**               | ** ** | **10%**                                                | ** ** |
| ** **           | ** ** | ** **                                             | ** ** | ** **                                                     | ****       | ** **          | ** ** | ** **           | ** ** | ** **                                                                                            | ** ** | ** ** | ** ** |
| Jeffrey W. Griffiths |       | 30,000                                                 |       |                                                           | 11.0%      |                |            | $                    | 29.20      |                                                                                                  | 4/09/14    |   | $ | 550,912 |   | $ | 1,396,118 |   |
| Seth P. Levy         |       | 8,400                                                  |       |                                                           | 3.1%       |                |            | $                    | 29.20      |                                                                                                  | 4/09/14    |   | $ | 154,255 |   | $ | 390,913 |   |
| Steven R. Morgan     |       | 8,400                                                  |       |                                                           | 3.1%       |                |            | $                    | 29.20      |                                                                                                  | 4/09/14    |   | $ | 154,255 |   | $ | 390,913 |   |
| John R. Panichello   |       | 18,000                                                 |       |                                                           | 6.6%       |                |            | $                    | 29.20      |                                                                                                  | 4/09/14    |   | $ | 330,547 |   | $ | 837,671 |   |
| James A. Smith  |       | 8,400                                                  |       |                                                           | 3.1%       |                |            | $                    | 29.20      |                                                                                                  | 4/09/14    |   | $ | 154,255 |   | $ | 390,913 |   |

 

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**Option Exercises and Fiscal Year-End OptionValues**

 

Thefollowing table sets forth information regarding the total number and aggregatevalue of options exercised by each of the Named Executive Officers duringfiscal 2005 and the total number and aggregate value of options held by each ofthe Named Executive Officers at January 28, 2005 (the last trading day offiscal 2005).  

 

**Aggregated Option Exercises in Last Fiscal Yearand Fiscal Year-End Option Values**

 
| **Name**             | ** ** | **Shares  Acquired  on Exercise (#)** | ** ** | **Value  Realized ($) (1)** | ** ** | **Number of Securities  Underlying Unexercised  Options at  Fiscal Year-End (#) Exercisable/Unexercisable** | ** **     | **Value of Unexercised  in-the-Money Options at  Fiscal Year-End($)  Exercisable/Unexercisable(2)** | ** **          |
|----------------------|------------|---------------------------------------|------------|-----------------------------|------------|-------------------------------------------------------------------------------------------------------------|----------------|-----------------------------------------------------------------------------------------------------|---------------------|
| Jeffrey W. Griffiths |       | 160,000                               |       | $                           | 3,277,196  |                                                                                                        | 126,574/80,000 |                                                                                                | $1,656,151/$807,300 |   |
| Seth P. Levy         |       | 88,810                                |       | $                           | 2,103,087  |                                                                                                        | 24,333/22,400  |                                                                                                | $242,105/$226,038   |   |
| Steven R. Morgan     |       | 74,001                                |       | $                           | 1,604,588  |                                                                                                        | 0/22,399       |                                                                                                | $0/$226,036         |   |
| John R. Panichello   |       | 160,000                               |       | $                           | 4,010,072  |                                                                                                        | 123,571/48,000 |                                                                                                | $1,774,054/$484,380 |   |
| James A. Smith  |       | 32,143                                |       | $                           | 713,124    |                                                                                                        | 46,500/22,400  |                                                                                                | $631,588/$226,044   |   |

 

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(1)           Values are reportedbefore the payment of any commissions or taxes associated with the exercise ofthe options or the subsequent sale of the underlying common stock.  

 

(2)           In-the-money optionsare options having a per share exercise price below the closing price of sharesof commonstock on The NASDAQ Stock Marketon January 28, 2005 (the last trading day of fiscal 2005).  

 

**Compensationof Board of Directors**

 

Non-employeeDirectorsreceive a $15,000 annual retainer for services provided to ElectronicsBoutique, which is paid in four quarterly installments, and a fee of $1,500 foreach Board of Directors or board committee meeting attended. Non-employee Directorsalso receive options to purchase 5,000 shares of common stock, which aretypically awarded at the Annual Meeting of Stockholders for each fiscalyear.  For fiscal 2005, Mr. Kim, theChairman of the Board, received a salary of $416,000, payable quarterly, and abonus of $812,000.  In April 2004, Mr.Kim also received options to purchase 30,000 shares of common stock.  Directors who are also full-time employees ofElectronics Boutique receive no additional compensation for service asDirectors.  

 

**EmploymentAgreements, Termination of Employment and Change in Control Arrangements**

 

InNovember 2002, Electronics Boutique entered into new employment agreements withMessrs. Griffiths, Panichello, Smith and Levy providing for their employment asPresident and Chief Executive Officer, Executive Vice President and ChiefOperating Officer, Senior Vice President, Chief Financial Officer and Secretaryand Senior Vice President Logistics, Chief Information Officer and President ofEB Games Online, respectively. Each of the agreements provides for a term ofthree years and may be extended automatically for an additional one-year term,unless terminated by the parties thereto in accordance with their terms. Thecurrent annual base salary for Messrs. Griffiths, Panichello, Smith and Levy is$546,000, $393,120, $273,000 and $273,000, respectively, and the agreements provide for certainfringe and other employee benefits that are made available to the seniorexecutive officers of Electronics Boutique.  

 

InSeptember 2003, Electronics Boutique entered into a new employment agreementwith Mr. Morgan providing for his continued employment as Senior VicePresident, President of Stores – North America and President of ElectronicsBoutique Canada, Inc. The agreement provides for a term ending on the same dateas the employment agreement for Electronics Boutique’s other senior executiveofficers. The employment agreement may be extended automatically for an  additionalone-year term,

 

57

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unlessterminated by either party in accordance with its terms. The current annual base salary for Mr. Morgan is $316,680 and the agreement provides for certainfringe and other employee benefits that are made available to the seniorexecutive officers of Electronics Boutique.  

 

Theemployment agreements with Messrs. Griffiths, Panichello, Smith, Levy andMorgan (each an “Executive”) provide that (i) in the event that employment isterminated for any reason other than death, disability or “cause” (as definedin their respective agreements), the Executive is entitled to receive his thencurrent total compensation for the greater of his remaining term under theemployment agreement or a one year period, (ii) certain severance payments arelimited to an amount equal to $100 less than the maximum that could be paid tothe Executive and deducted by Electronics Boutique under Section 280G of theCode, in the event of termination of employment for any reason other thandeath, disability or “cause,” or if the termination is related to a “change incontrol” (as defined in their respective agreements) and (iii) in the event ofdisability, Electronics Boutique will continue to pay 60% of the Executive’scompensation for the remaining term of his agreement.  

 

TheNamed Executive Officers and three other senior officers may elect to terminatetheir employment with us upon the closing of our proposed merger with GameStopCorp.  If these officers elect toterminate their employment, we will be required to make severance payments tothem in an amount equal to their current total compensation for a period equalto the greater of (i) the balance of their employment term under theiremployment agreements and (ii) twelve months, and to continue to provide themwith their current benefits for such period.  

 

**CompensationCommittee Interlocks And Insider Participation**

 

Themembers of the Compensation Committee during fiscal 2005 were Dean S. Adler andLouis J. Siana.  None of the  NamedExecutive Officers serves as a member of the board of directors or compensationcommittee of any entity that has one or more executive officers serving as amember of our Board of Directors or Compensation Committee.

 

**Item 12****.  SecurityOwnership of Certain Beneficial Owners and Management and Related StockholderMatters**

 

Thetable below sets forth, as of May 11, 2005, certain information regarding thebeneficial ownership of common stock by each stockholder known to ElectronicsBoutique to be the beneficial owner of more than 5% of the common stock, eachof Electronics Boutique’s Directors and Named Executive Officers, and allDirectors and executive officers as a group.  

 

 
| **Name  and Address of**                                                        | ** ** | **Shares Beneficially Owned (3)** | ** ** |
|---------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| **Beneficial  Owner (1) (2)**                                                   | ** ** | **Number**                        | ** ** | **Percentage** | ** ** |
| EB Nevada  Inc. (4)  2215-B Renaissance Drive, Suite 5  Las Vegas, Nevada 89119 |       | 11,569,100                        |       | 46.7 | % |
| Wellington  Management Company, LLP (5)  75 State Street  Boston, MA 02109      |       | 2,466,986                         |       | 10.0 | % |
| James J. and Agnes C. Kim (4)(6)                                                |       | 11,829,995                        |       | 47.2 | % |
| Dean S. Adler                                                                   |       | 30,001                            |       |   | *  |
| Susan Y. Kim (4)(6)                                                             |       | 11,733,685                        |       | 47.0 | % |
| Louis J. Siana                                                                  |       | 15,001                            |       |   | *  |
| Alfred J. Stein                                                                 |       | 3,334                             |       |   | *  |
| Stanley Steinberg                                                               |       | 32,001                            |       |   | *  |
| Jeffrey W. Griffiths                                                            |       | 173,276                           |       |   | *  |
| Seth P. Levy                                                                    |       | 37,467                            |       |   | *  |
| Steven R. Morgan                                                                |       | 12,134                            |       |   | *  |
| John R. Panichello (4)(6)                                                       |       | 11,733,685                        |       | 47.0 | % |
| James A. Smith                                                                  |       | 44,634                            |       |   | *  |
| All directors and executive officers as a  group (11 persons) (7)          |       | 773,328                           |       | 3.0 | % |

 

58

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* Less than 1.0%  

 

(1)           Unlessotherwise noted, Electronics Boutique believes that all persons named in theabove table have sole voting and investment power with respect to the sharesbeneficially owned by them.  

 

(2)           Unlessotherwise noted, the address for all beneficial owners is 931 South MatlackStreet, West Chester, Pennsylvania 19382.  

 

(3)           For purposes ofthis table, a person is deemed to be the “beneficial owner” of any shares that suchperson has the right to acquire within 60 days, including upon the exercise ofstock options. For purposes of computing the percentage of outstanding sharesheld by each person named above on a given date, any security that such personhas the right to acquire within 60 days is deemed to be outstanding, but is notdeemed to be outstanding for the purpose of computing the percentage ownershipof any other person.  

 

(4)           EB Nevada Inc.is a wholly-owned subsidiary of EB, all of the outstanding capital stock ofwhich is owned by James J. Kim, Agnes C. Kim, the David D. Kim Trust ofDecember 31, 1987, the John T. Kim Trust of December 31, 1987 and the Susan Y.Kim Trust of December 31, 1987. David D. Kim is the trustee of the David D. KimTrust, Susan Y. Kim is the trustee of the Susan Y. Kim Trust, and John T. Kimis the trustee of the John T. Kim Trust (the trustees of each trust may bedeemed to be the beneficial owners of the shares held by such trust). Inaddition, the trust agreement for each of these trusts encourages the trusteesof the trusts to vote the shares of common stock held by them, in theirdiscretion, in concert with James J. Kim’s family. Accordingly, the trusts,together with their respective trustee and James J. and Agnes C. Kim, may be considereda “group” under Section 13(d) of the Exchange Act. This group may be deemed tohave beneficial ownership of the shares owned by EB Nevada Inc.  

 

(5)           Based on aSchedule 13G filed with the SEC by Wellington Management Company, LLP (“Wellington”)on February 10, 2005, Wellington (i) shares voting power with respect to1,927,108 of the reported shares with certain of its clients and (ii) sharesdispositive power with respect to all of the reported shares with certain ofits clients.  

 

(6)           James J. Kimand Agnes C. Kim are the parents of Susan Y. Kim. John R. Panichello and SusanY. Kim are husband and wife.  

 

(7)           Excludes11,569,100 shares owned by EB Nevada Inc. that may be deemed to be beneficiallyowned by James J. Kim, Susan Y. Kim and John R. Panichello.  

 

**Equity Compensation Plan Information**

 
| **Plan  Category**                                              | ** ** | **Number of securities  to be issued  upon exercise of  outstanding options,  warrants and rights** | ** ** | **Weighted-average  exercise price of  outstanding options,  warrants and rights** | ** ** | **Number of securities  remaining available  for future issuance  under equity  compensation plans  (excluding securities  reflected in  column (a))** | ** ** |
|-----------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                      | ** ** | **(a)**                                                                                             | ** ** | **(b)**                                                                            | ** ** | **(c)**                                                                                                                                                | ** ** |
| **Equity compensation plans approved by  security holders**     |       | 1,401,115                                                                                           |       | $                                                                                  | 22.92      |                                                                                                                                                   | 1,812,875  |   |
| ** **                                                      |       |                                                                                                |       |                                                                               |       |                                                                                                                                                   |       |   |
| **Equity compensation plans not approved by  security holders** |       | —                                                                                              |       | —                                                                             |       | —                                                                                                                                                 |       |
| ** **                                                      |       |                                                                                                |       |                                                                               |       |                                                                                                                                                   |       |
| **Total **                                                 |       | 1,401,115                                                                                           |       | $                                                                                  | 22.92      |                                                                                                                                                   | 1,812,875  |   |

 

59

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**Item 13****.  CertainRelationships and Related Transactions**

 

OnJanuary 30, 2004, we terminated the services agreement with Game Group initially established infiscal 1996. Under the services agreement, Game Group was responsible for thepayment of management fees equal to 1.0% of Game Group’s adjusted sales, plus abonus calculated on the basis of net income in excess of a pre-establishedtarget set by Game Group.  We had nomanagement fee receivables as of January 29, 2005. Our management feereceivable at January 31, 2004 was $2.7 million and was included in Accountsreceivable-Trade and vendors on our consolidated balance sheet.  In fiscal 2005, we performed no managementservices for Game Group. Management fees received from Game Group under theservices agreement for fiscal 2004 and fiscal 2003 were $8.6 million and $7.4million, respectively. As part of the agreement to terminate the servicesagreement, Game Group paid us $15.0 million. We received this payment inFebruary 2004. We recognized $4.7 million of this payment as revenue earned onour consolidated statements of income for fiscal 2004. The terminationagreement places restrictions on our ability to compete with Game Group in theUnited Kingdom and Ireland until February 2006. Certain other covenants not tocompete specified in the termination agreement expired as of January 31, 2005.Based on an independent analysis performed in fiscal 2005, these covenants notto compete were determined to have a value of $10.3 million, which was recordedas deferred revenue as of January 31, 2004. In fiscal 2005, we amortized $5.8million of this deferred revenue into income and the remaining $4.5 millionwill be recognized as income in fiscal 2006. Game Group was prohibited fromentering the Italian and German markets until February 2005.  

 

OnNovember 2, 2002, we sold our BC Sports Collectibles business to SCAC for $2.2million in cash and the assumption of lease related liabilities in excess of$13 million. The purchaser, SCAC, is owned by the family of James J. Kim, ourChairman. The transaction included the sale of all assets of the business includinginventory, intellectual property and furniture, fixtures and equipment, andtransitional services which were provided by us to SCAC for a six-month periodafter the closing for an additional $300,000. $150,000 of the fee received fortransition services was earned and recognized as income in fiscal 2003 and theremaining $150,000 in fiscal 2004. The transaction was negotiated and approvedby a committee of our Board of Directors comprised solely of independentdirectors with the assistance of an investment banking firm engaged to solicitoffers for the BC Sports Collectibles business.  

 

We have agreed to pay the legal fees and expenses ofour Chairman of the Board, James J. Kim, in connection with the transactionscontemplated under the merger agreement with GameStop Corp., including Mr. Kim’slegal fees and expenses incurred in connection with the preparation and filingof Mr. Kim’s notification and report forms under the Hart-Scott RodinoAntitrust Improvements Act of 1976, as amended (the “HSR Act”) (including thefiling fee) and in connection with the negotiation of the Kim Group votingagreement, the non-competition agreement and the registration rightsagreement.  We estimate that the legalfees and expenses in connection with the preparation and filing of Mr. Kim’snotification and report forms under the HSR Act and in connection with thenegotiation of the Kim voting agreement, the non-competition agreement and theregistration rights agreement will be approximately $200,000.  

 

**Item 14****.  PrincipalAccountant Fees and Services**

 

**RegisteredIndependent Public Accounting Firm**

 

TheBoard of Directors, upon the recommendation of the Audit Committee, hasappointed the firm of KPMG LLP, registered independent public accountants, toaudit the books, records and accounts of Electronics Boutique and itssubsidiaries for the fiscal year ending January 28, 2006, subject toratification of this appointment by our stockholders.  KPMG LLP has served as independent accountantsfor Electronics Boutique and EB since fiscal 1995, and are considered wellqualified.  

 

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**AuditFees**

 

Duringour fiscal years 2005 and 2004, services rendered by KPMG LLP primarilyconsisted of auditing the consolidated financial statements, management’sassessment that we maintained effective internal control over financialreporting as of the fiscal year end and the effectiveness of our internalcontrol over financial reporting, as well as performing quarterly reviews ofthe nature described in Statement on Auditing Standards No. 100, “InterimFinancial Information.”  

 
| ** **                   | ** ** | **Fiscal 2005** | ** ** | **Fiscal 2004** | ** ** |
|------------------------------|------------|-----------------|------------|-----------------|------------|
|                         |       |            |       |            |       |
| Audit fees                   |       | $               | 1,133,000  |            | $          | 430,000 |   |
| Audit related fees (1)       |       | 124,000         |       | 55,000          |       |
|                         |       |            |       |            |       |
| Audit and audit related fees |       | 1,257,000       |       | 485,000         |       |
|                         |       |            |       |            |       |
| Tax fees (2)                 |       | 400,000         |       | 380,000         |       |
| All other fees               |       | —          |       | —          |       |
|                         |       |            |       |            |       |
| Total fees              |       | $               | 1,657,000  |            | $          | 865,000 |   |

 

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(1)           Audit related feesconsist primarily of employee benefit plan audits and assistance with foreignstatutory financial statements, financial accounting and reporting standardsand consultations relating to internal controls.  

 

(2)           Taxfees consist of tax compliance services and other consultations onmiscellaneous tax matters.  

 

Allaudit related services, tax services and other services were pre-approved bythe Audit Committee, which concluded that the provision of such services byKPMG LLP was compatible with the maintenance of that firm’s independence in theconduct of its auditing functions. The Audit Committee’s policy provides forpre-approval of audit, audit-related and tax services specifically prescribedby the Audit Committee on an annual basis and, in addition, individualengagements anticipated to exceed pre-established thresholds must be separatelyapproved. The policy authorizes the Audit Committee to delegate to one or moreof its members pre-approval authority with respect to permitted services. Anydecision must be reported to the full Audit Committee at its next scheduledmeeting.  

 

TheAudit Committee has determined that the rendering of services other than auditservices by KPMG LLP is compatible with maintaining KPMG LLP’s independence.  

 

**Part IV**

 

# **Item 15**.  Exhibits and Financial Statement Schedules

# ** **

**(a)**           **The Following Documents are filed as part of this Form10-K/A:**

 

The list ofconsolidated financial statements set forth in the Index to ConsolidatedFinancial Statements and Financial Statement Schedule on page 32 isincorporated herein by reference. Such consolidated financial statements arefiled as part of this report on Form 10-K/A.  

 

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**(b)****           DocumentsFiled as Part of Report:**

 

Exhibits:

 
| **Exhibit  No.** | ** ** | **Identification of Exhibit**                                                                                                                                                                                                                                                |
|------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **       | ** ** | ** **                                                                                                                                                                                                                                                                   |
| 3.1              |       | Certificate of Incorporation(1)                                                                                                                                                                                                                                              |
| 3.2              |       | Amendment to Certificate of Incorporation(2)                                                                                                                                                                                                                                 |
| 3.3              |       | Bylaws(1)                                                                                                                                                                                                                                                                    |
| 3.4              |       | Amendment to Bylaws(2)                                                                                                                                                                                                                                                       |
| 4.1              |       | Specimen Stock Certificate(1)                                                                                                                                                                                                                                                |
| 10.1             |       | Form of Indemnification Agreement for Directors and Officers(1)                                                                                                                                                                                                              |
| 10.2             |       | Form of 1998 Equity Participation Plan(1)                                                                                                                                                                                                                                    |
| 10.3             |       | Form of 2000 Equity Participation Plan(3)                                                                                                                                                                                                                                    |
| 10.4             |       | Amended and Restated 2000 Employee Stock Purchase Plan(4)                                                                                                                                                                                                                    |
| 10.5             |       | Loan and Security Agreement, dated March 16, 1998, by and between The  Electronics Boutique, Inc. and Fleet Capital Corporation(1)                                                                                                                                           |
| 10.6             |       | Joinder Agreement by and between Electronics Boutique of America Inc.  and Fleet Capital Corporation(1)                                                                                                                                                                      |
| 10.7             |       | Amendment No. 1 to Loan and Security Agreement, dated April 28, 1998,  by and among The Electronics Boutique, Inc., Electronics Boutique of America  Inc. and Fleet Capital Corporation(1)                                                                                   |
| 10.8             |       | Amendment No. 2 to Loan and Security Agreement, dated July 23, 1998,  by and among The Electronics Boutique, Inc., Electronics Boutique of America  Inc. and Fleet Capital Corporation(1)                                                                                    |
| 10.9             |       | Employment Agreement, dated November 7, 2002, by and between  Electronics Boutique Holdings Corp. and Jeffrey W. Griffiths(5)                                                                                                                                                |
| 10.10            |       | Employment Agreement, dated November 7, 2002, by and between  Electronics Boutique Holdings Corp. and John R. Panichello(5)                                                                                                                                                  |
| 10.11            |       | Employment Agreement, dated November 7, 2002, by and between  Electronics Boutique Holdings Corp. and Seth P. Levy(5)                                                                                                                                              |
| 10.12            |       | Employment Agreement, dated November 7, 2002, by and between  Electronics Boutique Holdings Corp. and James A. Smith(5)                                                                                                                                                      |
| 10.13            |       | Form of Employment Agreement by and between Electronics Boutique  Holdings Corp. and Steven R. Morgan(6)                                                                                                                                                                     |
| 10.14            |       | Asset Purchase Agreement, dated as of October 10, 2002, between  Electronics Boutique of America Inc. and Sports Collectibles Acquisition  Corporation(7)                                                                                                                    |
| 10.15            |       | Form of Transition Agreement between Electronics Boutique of America  Inc. and Sports Collectibles Acquisition Corporation(7)                                                                                                                                                |
| 10.16            |       | Form of Indemnification Agreement between Electronics Boutique of  America Inc. and Sports Collectibles Acquisition Corporation(7)                                                                                                                                           |
| 10.17            |       | Agreement, dated January 30, 2004, among The Game Group Plc, The  Electronics Boutique, Inc. and EB Services, LLP(8)                                                                                                                                                         |
| 10.18            |       | Amendment No. 3 to Loan and Security Agreement, dated September 5,  2003, by and among The Electronics Boutique, Inc., Electronics Boutique of  America Inc. and Fleet Capital Corporation(9)                                                                                |
| 10.19            |       | Executive Bonus Plan(4)                                                                                                                                                                                                                                                      |
| 10.20            |       | Amendment No. 4 to Loan and Security Agreement, dated March 16, 2005,  by and among Fleet Retail Group, Inc. (successor by assignment to Fleet  Capital Corporation), Electronics Boutique of America Inc., Electronics  Boutique Holdings Corp. and EB Investment Corp.(10) |
| 14.1             |       | Code of Ethical Conduct for Officers, Directors and Associates of  Electronics Boutique(11)                                                                                                                                                                                  |
| 21.1             |       | Subsidiaries of Electronics Boutique Holdings Corp.*                                                                                                                                                                                                                         |
| 23.1             |       | Consent of Independent Registered Public Accounting Firm*                                                                                                                                                                                                                    |
| 31.1             |       | Certification dated May 20, 2005 pursuant to Exchange  Act Rule 13a-14(a) or 15d-14(a) of the                                                                                                                                                                           |

 

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|   |   | Principal Executive Officer as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002, by Jeffrey W. Griffiths, President and Chief  Executive Officer*                                                                                                                                      |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.2   |   | Certification dated May 20,  2005 pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a) of the Principal  Financial Officer as adopted pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002, by James A. Smith, Senior Vice President and Chief Financial  Officer*                                 |
| 32.1   |   | Certification  dated May 20, 2005 of CEO and CFO  pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 by Jeffrey W. Griffiths, President and Chief  Executive Officer and James A. Smith, Senior Vice President and Chief  Financial Officer*  |

 

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(1)           Incorporatedby reference from the applicable exhibits of Electronics Boutique’sRegistration Statement on Form S-1 (Reg. No. 333-48523).

 

(2)           Incorporatedby reference from Electronics Boutique’s Proxy on Schedule 14A dated May 28,2004.

 

(3)           Incorporatedby reference from Electronics Boutique’s Proxy on Schedule 14A dated June 16,2000.

 

(4)           Incorporatedby reference from the applicable exhibits on Electronics Boutique’s CurrentReport on Form 8-K dated March 14, 2005.

 

(5)           Incorporatedby reference from the applicable exhibits to Electronics Boutique’s AnnualReport on Form 10-K for the period ended February 1, 2003.

 

(6)           Incorporatedby reference from the applicable exhibit to Electronics Boutique’s AnnualReport on Form 10-K for the period ended February 3, 2001.

 

(7)           Incorporatedby reference from the applicable exhibits to Electronics Boutique’s CurrentReport on Form 8-K dated October 10, 2002.

 

(8)           Incorporatedby reference from the applicable exhibit to Electronics Boutique’s CurrentReport on Form 8-K dated January 30, 2004.

 

(9)           Incorporatedby reference from the applicable exhibit to Electronics Boutique’s QuarterlyReport on Form 10-Q for the period ended November 1, 2003.

 

(10)         Incorporatedby reference from the applicable exhibit to Electronics Boutique’s CurrentReport on Form 8-K dated March 16, 2005.

 

(11)         Incorporatedby reference from the applicable exhibit to Electronics Boutique’s AnnualReport on Form 10-K for the period ended January 31, 2004.

 

*              Filedherewith

 

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**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 

 
|   | ELECTRONICS BOUTIQUE HOLDINGS CORP. |
|--------|-------------------------------------|
|   |                                |
|   | By:                                 | /s/ Jeffrey W. Griffiths |
|   |                                | Jeffrey W. Griffiths |
|   |                                     | *President and Chief Executive Officer* |

 

Date: May 20, 2005  

 

Pursuant to the requirements of the Securities Exchange Act of 1934,this report has been signed below by the following persons on behalf of theRegistrant and in the capacities indicated on May 20, 2005.  

 
| **Name**                       | ** ** | **Title**                                          |
|--------------------------------|------------|----------------------------------------------------|
|                           |       |                                               |
|  /s/ James J. Kim         |       | Chairman of the Board                              |
| James J. Kim                   |       |                                               |
|                           |       |                                               |
|  /s/ Jeffrey W. Griffiths |       | President and Chief Executive Officer and Director |
| Jeffrey W. Griffiths           |       | (Principal Executive Officer)                      |
|                           |       |                                               |
|  /s/ James A. Smith       |       | Senior Vice President and Chief Financial Officer  |
| James A. Smith                 |       | (Principal Financial and Accounting Officer)       |
|                           |       |                                               |
|  /s/ Dean S. Adler        |       | Director                                           |
| Dean S. Adler                  |       |                                               |
|                           |       |                                               |
|  /s/ Susan Y. Kim         |       | Director                                           |
| Susan Y. Kim                   |       |                                               |
|                           |       |                                               |
|  /s/ Louis J. Siana       |       | Director                                           |
| Louis J. Siana                 |       |                                               |
|                           |       |                                               |
|  /s/ Stanley Steinberg    |       | Director                                           |
| Stanley Steinberg              |       |                                               |
|                           |       |                                               |
|  /s/ Alfred J. Stein      |       | Director                                           |
| Alfred J. Stein                |       |                                               |

 

64

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**EXHIBIT INDEX**

 
| 21.1 |   | Subsidiaries of Electronics Boutique Holdings Corp.                                                                                                                                                                                                                                         |
|------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 23.1 |   | Consent of Independent Registered Public Accounting Firm                                                                                                                                                                                                                                         |
| 31.1 |   | Certification dated May 20, 2005 pursuant to Exchange  Act Rule 13a-14(a) or 15d-14(a) of the Principal Executive Officer as adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, by Jeffrey W.  Griffiths, President and Chief Executive Officer                                 |
| 31.2 |   | Certification dated May 20, 2005 pursuant to Exchange  Act Rule 13a-14(a) or 15d-14(a) of the Principal Financial Officer as adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, by James A. Smith,  Senior Vice President and Chief Financial Officer                           |
| 32.1 |   | Certification  dated May 20, 2005 of CEO and CFO pursuant  to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002 by Jeffrey W. Griffiths, President and Chief Executive Officer  and James A. Smith, Senior Vice President and Chief Financial Officer |

 

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