<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 1998
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
ELECTRONICS BOUTIQUE HOLDINGS CORP.
(Exact Name of Registrant as Specified in its Charter)
Delaware 51-0379406
(State of Incorporation) (IRS Employer Identification Number)
103 Foulk Road
Suite 202
Wilmington, Delaware 19803
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 302/778-4778
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or such shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES [X] NO [ ]
At December 11, 1998, there were 20,169,200 shares of common stock,
$.01 par value per share, outstanding.
<PAGE>
ELECTRONICS BOUTIQUE HOLDINGS CORP.
AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets at
October 31, 1998 (unaudited) and January 31, 1998 3
Consolidated Statements of Income (unaudited)
Thirteen and thirty-nine weeks ended
October 31, 1998 and Novemeber 1, 1997 4
Consolidated Statements of Cash Flow (unaudited)
Thirty-nine weeks ended
October 31, 1998 and November 1, 1997 5
Notes to Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Part II. Other Information
Item 1 Legal Proceedings 14
Item 2. Changes in Securities and Use of Proceeds 14
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
</TABLE>
2
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
ELECTRONICS BOUTIQUE HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
October 31, January 31,
Assets 1998 1998
----------------- -----------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,086,743 $ 20,639,610
Accounts receivable 7,907,884 4,373,073
Due from affiliates 443,786 2,890,554
Merchandise inventories 92,971,752 52,973,314
Deferred tax asset 3,011,000 -
Prepaid expenses 4,686,286 2,837,647
----------------- -----------------
Total current assets 113,107,451 83,714,198
----------------- -----------------
Property and equipment:
Leasehold improvements 44,166,289 40,226,726
Fixtures and equipment 29,458,664 24,884,217
Building - 6,200,950
Land - 632,806
Construction in progress 1,119,718 556,663
----------------- -----------------
74,744,671 72,501,362
Less accumulated depreciation and amortization 35,192,240 32,535,305
----------------- -----------------
Net property and equipment 39,552,431 39,966,057
Investment in affiliated company - 11,025,345
Goodwill and other intangible assets 2,113,340 2,190,766
Deferred tax asset 4,817,000 -
Other assets 2,289,931 5,894,374
----------------- -----------------
Total assets $ 161,880,153 $ 142,790,740
----------------- -----------------
----------------- -----------------
Liabilities and Stockholders' Equity
Current liabilities:
Revolving credit facility $ 139,973 $ -
Current portion of long-term debt 99,996 2,400,396
Accounts payable 109,074,803 83,713,983
Accrued expenses 15,921,501 14,545,119
Due to affiliate 1,451,740 -
Income taxes payable 587,403 782,988
----------------- -----------------
Total current liabilities 127,275,416 101,442,486
----------------- -----------------
Long-term liabilities:
Notes payable 33,352 10,541,149
Deferred rent 2,331,173 2,408,579
----------------- -----------------
Total liabilities 129,639,941 114,392,214
----------------- -----------------
Stockholders' equity
Preferred stock - authorized 25,000,000 shares; $.01 par value;
no shares issued and outstanding at October 31, 1998 - -
Common stock - authorized 100,000,000 shares; $.01 par value;
20,169,200 shares issued and outstanding at October 31, 1998 201,692 -
Common stock:
Class A - authorized 5,000 shares; $.10 par value;
1,900 shares issued and outstanding at January 31, 1998 - 190
Class B - authorized 25,000 shares; $.10 par value;
21,000 shares issued and outstanding at January 31, 1998 - 2,100
Partners' capital of EB Services Company LLP at January 31, 1998 - 1,000
Additional paid-in capital 31,541,428 7,584,365
Cumulative translation adjustment (814,171) (1,023,493)
Retained earnings 1,311,263 21,834,364
----------------- -----------------
Total stockholders' equity 32,240,212 28,398,526
----------------- -----------------
Total liabilities and stockholders' equity $ 161,880,153 $ 142,790,740
----------------- -----------------
----------------- -----------------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
ELECTRONICS BOUTIQUE HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Thirteen weeks ended Thirty-nine weeks ended
-------------------------- -------------------------
October 31, November 1, October 31, November 1,
1998 1997 1998 1997
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Net sales $ 110,664,405 $ 93,699,745 $ 319,324,290 $ 250,281,685
Management fees 635,326 538,532 1,736,871 1,526,016
------------ ------------ ----------- ------------
Total revenues $ 111,299,731 $ 94,238,277 $ 321,061,161 $ 251,807,701
------------ ------------ ----------- ------------
Costs and expenses:
Costs of merchandise sold, including freight 83,627,904 70,059,827 239,051,971 186,307,898
Selling, general and administrative 22,657,291 21,691,222 68,987,520 58,913,348
Depreciation and amortization 2,495,421 1,846,830 7,154,509 5,587,557
------------ ------------ ----------- ------------
Operating income 2,519,115 640,398 5,867,161 998,898
Equity in loss of affiliates - (80,287) (160,575) (240,862)
Interest (income) expense, net (148,587) 342,591 659,993 1,032,580
Preacquisition loss of subsidiaries - 358,093 - 628,557
------------ ------------ ----------- ------------
Income before income taxes 2,667,702 575,613 5,046,593 354,013
Income tax expense 1,045,536 62,175 1,236,242 88,975
------------ ------------ ----------- ------------
Net income $ 1,622,166 $ 513,438 $ 3,810,351 $ 265,038
------------ ------------ ----------- ------------
------------ ------------ ----------- ------------
Net income per share - basic and diluted $ 0.08
------------
------------
Weighted average shares outstanding - basic and diluted 20,169,200
------------
------------
Pro Forma Data:
Pro forma operating income $ 640,398 $ 5,670,510 $ 998,898
Pro forma income before income tax expense 655,900 5,010,517 594,875
Pro forma income tax expense 269,575 1,963,919 244,493
------------ ----------- ------------
Pro forma net income $ 386,325 $ 3,046,598 $ 350,382
------------ ----------- ------------
------------ ----------- ------------
Pro forma net income per share - basic and diluted $ 0.02 $ 0.18 $ 0.02
------------ ----------- ------------
------------ ----------- ------------
Pro forma weighted average shares outstanding - basic and diluted 15,794,200 17,316,636 15,794,200
------------ ----------- ------------
------------ ----------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
ELECTRONICS BOUTIQUE HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Thirty-nine weeks ended
-------------------------------------
October 31, November 1,
1998 1997
----------------- ------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,810,351 $ 265,038
Adjustments to reconcile net income to cash used
in operating activities:
Depreciation of property and equipment 6,855,834 5,545,068
Amortization of other assets 298,675 42,489
Loss on disposal of property and equipment 198,704 292,119
Equity in loss of affiliates 160,575 240,862
Loss on investment in affiliated companies - 392,642
Changes in assets and liabilities:
Decrease (increase) in:
Accounts receivable (3,234,212) (4,252,275)
Due from affiliates 2,446,768 (1,405,679)
Merchandise inventories (39,998,437) (27,004,500)
Prepaid expenses (1,848,638) (322,045)
Other long-term assets (664,034) (483,615)
(Decrease) increase in:
Accounts payable 25,360,823 21,046,877
Accrued expenses 1,408,766 (2,311,018)
Due to affiliate (7,855,957) 204,324
Income taxes payable (195,585) (474,783)
Deferred rent (77,406) (521,179)
----------------- ------------------
Net cash used in operating activities (13,333,773) (8,745,675)
----------------- ------------------
Cash flows used in investing activities:
Purchases of property and equipment (13,561,834) (15,610,410)
Proceeds from disposition of assets 130,692 12,455
Net cash from business acquired - 2,286,023
Purchase of investment securities in affiliate - (822,406)
----------------- ------------------
Net cash used in investing activities (13,431,142) (14,134,338)
----------------- ------------------
Cash flows from financing activities:
Distributions (19,950,573) (4,500,000)
Net proceeds under revolving credit facility 139,973 8,250,000
Repayment of long-term debt (12,871,595) (20,074,997)
Proceeds from equity offering 54,962,500 -
Net cash retained by predecessor company (12,375,535) -
----------------- ------------------
Net cash provided by (used in) financing activities 9,904,770 (16,324,997)
----------------- ------------------
Effects of exchange rates on cash 307,278 (86,337)
Net decrease in cash and cash equivalents (16,552,867) (39,291,347)
Cash and cash equivalents, beginning of period 20,639,610 44,727,846
----------------- ------------------
Cash and cash equivalents, end of period $ 4,086,743 $ 5,436,499
----------------- ------------------
----------------- ------------------
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
ELECTRONICS BOUTIQUE HOLDINGS CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Basis of Presentation
The consolidated financial statements include the accounts of Electronics
Boutique Holdings Corp. and its wholly owned subsidiaries (collectively, the
"Company"). All intercompany transactions have been eliminated in consolidation.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included. The
Company completed its initial public offering on July 29, 1998. Historical
financial statements prior to that date include the results of operations of the
Company's predecessors.
The accompanying unaudited consolidated financial statements of the Company
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. These financial statements should be read in
conjunction with the more complete disclosures contained in the consolidated and
combined financial statements and notes thereto for the period ended May 2, 1998
(unaudited) and January 31, 1998 (audited) contained in the Company's
Registration Statement on Form S-1 (Registration No. 333-48523) as filed with
the Securities and Exchange Commission. Operating results for the thirteen and
thirty-nine week periods ended October 31, 1998 are not necessarily indicative
of the results that may be expected for the year ending January 30, 1999.
The pro forma data presented in the unaudited consolidated statements of
income is included in order to illustrate the effect of the reorganization
transactions described in the Company's registration statement as if such
transactions occurred as of the beginning of each fiscal period as they relate
to the pro forma statements of income for the thirty-nine weeks ended October
31, 1998 and the thirteen and thirty-nine weeks ended November 1, 1997.
Immediately prior to the initial public offering, a series of reorganization
transactions occurred in which the Company acquired substantially all of the
assets and liabilities of its predecessors and The Electronics Boutique, Inc., a
predecessor company, retained certain assets. The pro forma information is based
on the historical financial statements of The Electronics Boutique Group ("EB").
In the opinion of management, all adjustments have been made that are necessary
to present fairly the pro forma data.
(2) Earnings Per Share
In 1997, the FASB issued Statement of Financial Accounting Standards No.
128, Earnings Per Share ("FASB 128") which replaced the primary and fully
diluted earnings per share measures with basic and diluted earnings per share.
Basic earnings per share is computed on the basis of the weighted average number
of shares outstanding during the period. Diluted earnings per share is computed
on the basis of the weighted average number of shares outstanding during the
period plus the dilutive effect of stock options, warrants, and preferred stock.
Pro forma earnings per share amounts for all relevant periods have been
presented. For the periods presented, the diluted earnings per share amounts are
the same as the basic earnings per share amounts.
(3) Income Taxes
Prior to completion of the Company's initial public offering, federal taxes
were payable personally by the stockholders of EB pursuant to an election by EB
under subchapter "S" of the Internal Revenue Code. Accordingly, no provision has
been made for federal income taxes on taxable income of EB. EB elected
Subchapter "S" status for some states while remaining subject to corporate tax
in other states, and, as a result, has provided for certain state income taxes.
For the period after the Company's public offering, federal and state income
taxes have been provided based upon management's estimate of the annual
effective tax rate.
6
<PAGE>
The pro forma data reflects the adjustment to record income taxes as if the
Company had been a "C" corporation for federal and state income tax purposes.
(4) Equity Offering
In July 1998, the Company completed its reorganization and an initial public
offering of 5,000,000 shares of its common stock. Of the 5,000,000 shares sold,
4,375,000 shares were for the account of the Company and 625,000 were for the
account of the selling shareholder. The net proceeds to the Company, after
deducting underwriting discounts and commissions and estimated expenses were
$54,962,500. The net proceeds were recorded as an increase to additional paid in
capital and common stock. The proceeds were used, in part, to retire debt under
the Company's revolving credit facility and to repay an outstanding demand note
to the Company's Chairman.
(5) Debt
The Company has available a revolving credit facility with Fleet Capital
Corporation for maximum borrowings of $50,000,000. There was $140,000 in
outstanding borrowings under this facility at October 31, 1998.
(6) Related-Party Transactions
Transaction with Affiliate
On May 31, 1998, an operating subsidiary of the Company entered into a lease
agreement with EB to lease the Company's headquarters and primary distribution
center from EB. The lease has a two year term and provides the Company with an
option to purchase the property for $6.7 million. The monthly rent pursuant to
such lease is $50,000.
Loans and Advances from Affiliates
On June 4, 1998, the Company borrowed $7,000,000 from James J. Kim, the
Company's Chairman. The demand note reflected interest bearing at the highest
prime rate as published in the Wall Street Journal. The note was repaid in full
on July 31, 1998.
(7) Comprehensive Income
Effective February 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." This statement
requires that all items recognized under accounting standards as components of
comprehensive income be reported in an annual financial statement that is
displayed with the same prominence as other financial statements. Comprehensive
income (loss) is computed as follows:
<TABLE>
<CAPTION>
Thirteen weeks ended Thirty-nine weeks ended
--------------------------------------------------------
October 31, November 1, October 31, November 1,
1998 1997 1998 1997
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income $1,622,166 $ 513,438 $3,810,351 $ 265,038
Foreign currency translation adjustment 89,095 (44,992) 209,322 (439,187)
------------- ------------ ------------ ------------
Comprehensive income (loss) $1,711,261 $ 468,446 $4,019,673 $ (174,149)
------------- ------------ ------------ ------------
------------- ------------ ------------ ------------
</TABLE>
7
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The Company believes that it is among the world's largest specialty
retailers of electronic games. The Company's primary products are video games
and PC entertainment software, supported by the sale of video game hardware, PC
productivity software and accessories. As of October 31, 1998, the Company
operated a total of 500 stores in 43 states, Puerto Rico, Canada, Australia and
South Korea, primarily under the names Electronics Boutique and Stop 'N Save
Software. As of such date, the Company also provided management services for
Electronics Boutique plc., which operated 155 stores and 17 department
store-based concessions in the United Kingdom and Ireland. As of October 31,
1998, the Company also managed 33 mall-based WaldenSoftware stores for Borders
Group, Inc. The Company is a holding company and does not have any significant
assets or liabilities, other than all of the outstanding capital stock of its
subsidiaries.
Results of operations
The following table sets forth certain income statement items as a
percentage of total revenues for the periods indicated:
<TABLE>
<CAPTION>
Thirteen weeks ended Thirty-nine weeks ended
-------------------- -----------------------
October 31, November 1, October 31, November 1,
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales 99.4% 99.4% 99.5% 99.4%
Management fees 0.6 0.6 0.5 0.6
--------- --------- --------- ---------
Total revenues 100.0 100.0 100.0 100.0
Cost of goods sold 75.1 74.3 74.5 74.0
Gross profit 24.9 25.7 25.5 26.0
Operating expenses 20.4 23.0 21.5 23.4
Depreciation and amortization 2.2 2.0 2.2 2.2
--------- --------- --------- ---------
Income from operations 2.3 0.7 1.8 0.4
Equity in loss of affiliates 0.0 (0.1) (0.0) (0.1)
Interest (income) expense, net (0.1) 0.4 0.2 0.4
Preacquisition loss of subsidiaries 0.0 0.4 0.0 0.2
--------- --------- --------- ---------
Income before income tax expense 2.4 0.6 1.6 0.1
Income tax expense 0.9 0.1 0.4 0.0
--------- --------- --------- ---------
Net income 1.5% 0.5% 1.2% 0.1%
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
Thirteen weeks ended October 31, 1998 compared to Thirteen weeks ended November
1, 1997
Net sales increased by 18.1% from $93.7 million in the thirteen weeks ended
November 1, 1997 to $110.7 million in the thirteen weeks ended October 31, 1998.
The increase in net sales was primarily attributable to a 6.7% increase in
comparable store sales, which resulted in a $6.1 million increase in net sales,
and the additional sales volume attributable to 61 net new stores opened
subsequent to the third quarter of 1997. The increase in comparable store sales
was primarily attributable to increases in video game and PC entertainment
software sales as well as continued strong demand for PC accessory products.
There was no one specific hit video game title during the current quarter, while
in last year's quarter, one video game title, Final Fantasy VII, alone generated
revenues of $5.9 million (5.3% of quarterly revenues). The growth in net sales,
therefore, reflects a general increased demand for video game and PC
entertainment software, which was complimented by a steady stream of
well-received new titles.
Management fees increased from $0.5 million in the thirteen weeks ended
November 1, 1997 to $0.6 million in the thirteen weeks ended October 31, 1998.
The increase was primarily attributable to increased fees earned under
8
<PAGE>
the management agreement with Electronics Boutique plc., which were partially
offset by lower fees earned under the consulting agreement with Borders Group,
Inc.
Cost of goods sold increased by 19.4% from $70.1 million in the thirteen
weeks ended November 1, 1997 to $83.6 million in the thirteen weeks ended
October 31, 1998. As a percentage of net sales, cost of goods sold increased
from 74.8% in the thirteen weeks ended November 1, 1997 to 75.6% in the thirteen
weeks ended October 31, 1998. The increase in cost of goods sold as a percentage
of net sales was primarily attributable to an increase in freight expenses. This
increase is the result of three factors. First, the Company's decision to
expedite a larger percentage of new-release products to stores compared to last
year. Second, an increase in the number of units shipped to stores as a result
of a lower average cost per unit. Third, the early build-up at stores of
substantial quantities of products that will be needed during the fourth
quarter. It is expected that the early shipment of this product will allow store
associates to spend more time in the fourth quarter servicing customers instead
of unpacking boxes of product.
Selling, general and administrative expense increased by 4.4% from $21.7
million in the thirteen weeks ended November 1, 1997 to $22.7 million in the
thirteen weeks ended October 31, 1998. As a percentage of total revenues,
selling, general and administrative expense decreased from 23.0% in 1997 to
20.4% in 1998. The $1.0 million increase was attributable to the increase in the
Company's domestic and international store base and the associated increases in
store, distribution, and headquarter operating expenses, which was partially
offset by an increase in promotional and marketing reimbursements, including
more than $0.8 million in website advertising income. In addition, last year's
results included an unusual charge of $1.0 million relating to a Canadian
joint-venture prior to the Company's acquisition of its partner's remaining
fifty percent interest. The decrease in selling, general and administrative
expense as a percentage of total revenues was primarily attributable to an
increase in net sales and the impact of the above factors on operating expenses.
Depreciation and amortization expense increased by 35.1% from $1.8 million
in the thirteen weeks ended November 1, 1997 to $2.5 million in the thirteen
weeks ended October 31, 1998. This increase was primarily attributable to
capitalized expenditures for leasehold improvements and furniture and fixtures
for new store openings.
Operating income increased by $1.9 million from $0.6 million in the thirteen
weeks ended November 1, 1997 to $2.5 million in the thirteen weeks ended October
31, 1998. As a percentage of total revenues, operating income increased from
0.7% in 1997 to 2.3% in 1998, as the increase in cost of goods sold as a
percentage of total revenues was more than offset by the decline in operating
expenses as a percentage of total revenues.
Interest (income) expense, net, changed from an expense of $0.3 million in
the thirteen weeks ended November 1, 1997 to income of $0.1 million in the
thirteen weeks ended October 31, 1998. The change was primarily attributable to
the repayment of the Company's debt with the proceeds of the initial public
offering and the interest income from investing the excess cash in marketable
securities.
As a result of all the above factors, the Company's income before income
taxes increased by 363% from $0.6 million in the thirteen weeks ended November
1, 1997 to $2.7 million in the thirteen weeks ended October 31, 1998.
Thirty-nine weeks ended October 31, 1998 compared to Thirty-nine weeks ended
November 1, 1997
Net sales increased by 27.6% from $250.3 million in the thirty-nine weeks
ended November 1, 1997 to $319.3 million in the thirty-nine weeks ended October
31, 1998. The increase in net sales was primarily attributable to a 13.7%
increase in comparable store sales, which resulted in a $33.6 million increase
in net sales, and the additional sales volume attributable to new stores opened
subsequent to the third quarter of 1997. The increase in comparable store sales
was primarily attributable to increases in video game and PC entertainment
software sales and continued strong demand for PC accessories such as 3-D
accelerator cards.
Management fees increased from $1.5 million in the thirty-nine weeks ended
November 1, 1997 to $1.7 million in the thirty-nine weeks ended October 31,
1998. The increase was primarily attributable to increased fees earned under the
management agreement with Electronics Boutique plc., which were partially offset
by lower fees earned under the consulting agreement with Borders Group, Inc.
9
<PAGE>
Cost of goods sold increased by 28.3% from $186.3 million in the thirty-nine
weeks ended November 1, 1997 to $239.1 million in the thirty-nine weeks ended
October 31, 1998. As a percentage of net sales, cost of goods sold increased
from 74.4% in the thirty-nine weeks ended November 1, 1997 to 74.9% in the
thirty-nine weeks ended October 31, 1998. The increase in cost of goods sold as
a percentage of net sales was primarily attributable to an increase in freight
expenses. This increase is the result of several factors. The Company switched
its primary freight carrier and reorganized its third-party distribution
framework for improved service and merchandise availability at its stores. There
was an increase in the overall number of units shipped to stores as a result of
a lower average cost per unit. And, in the third quarter, the Company decided to
expedite a larger percentage of new-release products to stores and to build-up
in the stores substantial quantities of products that will be needed during the
fourth quarter. It is expected that the early shipment of this product will
allow store associates to spend more time during the fourth quarter servicing
customers instead of unpacking boxes of product.
Selling, general and administrative expense increased by 17.1% from $58.9
million in the thirty-nine weeks ended November 1, 1997 to $69.0 million in the
thirty-nine weeks ended October 31, 1998. As a percentage of total revenues,
selling, general and administrative expense decreased from 23.4% in 1997 to
21.5% in 1998. The $10.1 million increase was primarily attributable to the
increase in the Company's domestic and international store base and the
associated increases in store, distribution, and headquarter operating expenses,
partially offset by an increase in promotional and marketing reimbursements. In
addition, last year's results included an unusual charge of $1.0 million
relating to a Canadian joint-venture prior to the Company's acquisition of its
partner's fifty percent interest. The decrease in selling, general and
administrative expense as a percentage of total revenues was primarily
attributable to an increase in net sales which offset the impact of the above
factors on operating expenses.
Depreciation and amortization expense increased by 28.0% from $5.6 million
in the thirty-nine weeks ended November 1, 1997 to $7.2 million in the
thirty-nine weeks ended October 31, 1998. This increase was primarily
attributable to capitalized expenditures for leasehold improvements and
furniture and fixtures for new store openings.
Operating income increased by 487% from $1.0 million in the thirty-nine
weeks ended November 1, 1997 to $5.9 million in the thirty-nine weeks ended
October 31, 1998. As a percentage of total revenues, operating income increased
from 0.4% in 1997 to 1.8% in 1998, as the increase in cost of goods sold as a
percentage of total revenues was more than offset by the decline in operating
expenses as a percentage of total revenues.
Interest expense, net, decreased by 36.1% from $1.0 million in the
thirty-nine weeks ended November 1, 1997 to $0.7 million in the thirty-nine
weeks ended October 31, 1998. The decrease was primarily attributable to the
repayment of the Company's debt with the proceeds of the initial public offering
and the interest income from investing the excess cash in marketable securities
during the third quarter of this year.
As a result of all the above factors, the Company's income before income
taxes improved by $4.7 million from $0.4 million in the thirty-nine weeks ended
November 1, 1997 to $5.1 million in the thirty-nine weeks ended October 31,
1998.
Seasonality and quarterly results
The Company's business, like that of most retailers, is highly seasonal. A
significant portion of the Company's net sales, management fees and profits are
generated during the Company's fourth fiscal quarter, which includes the holiday
selling season. Results for any quarter are not necessarily indicative of the
results that may be achieved for a full fiscal year. Quarterly results may
fluctuate materially depending upon, among other factors, the timing of new
product introductions and new store openings, net sales contributed by new
stores, increases or decreases in comparable store sales, adverse weather
conditions, shifts in the timing of certain holidays or promotions and changes
in the Company's merchandise mix.
Liquidity and capital resources
The Company has historically financed its operations through a combination
of cash generated from operations and bank debt. In addition, on July 29, 1998,
the Company completed an initial public offering of 5,000,000 shares
10
<PAGE>
of its common stock. Of the 5,000,000 shares sold, 4,375,000 shares were for the
account of the Company and 625,000 shares were for the account of the selling
shareholder. The transaction resulted in net proceeds (after offering expenses)
to the Company of approximately $55.0 million, which was used to repay $25.7
million under the Company's revolving credit agreement, a $7.0 million demand
note due to the Company's Chairman, James J. Kim, $7.9 million owed by the
Company to EB, $3.2 million to terminate an outstanding bank term loan and for
working capital purposes. In addition, a predecessor to the Company retained
assets worth $31.0 million in connection with the reorganization of the Company
prior to the completion of its initial public offering.
The Company's working capital deficit decreased from $17.7 million at
January 31, 1998 to $14.2 million at October 31, 1998. At October 31, 1998 the
Company had $140,000 of borrowings under its revolving credit facility.
The Company used $13.3 million in cash from operations in the thirty-nine
week period ended October 31, 1998 and used $8.7 million of cash from operations
during the thirty-nine weeks ended November 1, 1997. The $13.3 million of cash
used in operations in 1998 was primarily the result of an increase of $14.6
million in the Company's net investment in merchandise inventories net of
accounts payable, a $5.4 million decrease in net affiliate liabilities and
receivables, a $3.2 million increase in accounts receivable, and a $1.8 million
increase in prepaid expenses, partially offset by $11.3 million of net income
and non-cash charges to net income. The $8.7 million of cash used in operations
in 1997 was primarily the result of an increase of $6.0 million in the Company's
net investment in merchandise inventories net of accounts payable, a $4.3
million increase in accounts receivable, a decrease of $2.3 million in accrued
expenses, a $1.2 million increase in net affiliate liabilities and receivables,
partially offset by $6.8 million of net income and non-cash charges to net
income.
The Company made capital expenditures of $13.6 million in the thirty-nine
weeks ended October 31, 1998, primarily to open new stores, to remodel existing
stores and for leasehold improvements at the Company's headquarters and primary
distribution center. The Company expects to make approximately $21.1 million of
capital expenditures in 1998. A predecessor to the Company made capital
expenditures of $15.6 million in the thirty-nine weeks ended November 1,1997
primarily for opening new stores, to remodel existing stores and to purchase the
its West Chester, Pennsylvania distribution center which was previously leased
by the predecessor to the Company.
The Company believes that cash generated from its operating activities and
available bank borrowings, will be sufficient to fund its operations and store
expansion programs for the next year.
Impact of inflation
The Company does not believe that inflation has had a material effect on its
net sales or results of operations.
Recent accounting pronouncements
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures About Segments of an Enterprise and Related Information"
("SFAS 131"). SFAS 131 established standards for reporting information about
operating segments in annual financial statements and requires selected
information about operating segments in interim financial reports issued to
shareholders. It also established standards for related disclosure about
products and services, geographic areas and major customers. The Company will
adopt the disclosure prescribed by SFAS 131 in its 1999 Annual Report as
required.
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" ("SFAS 132"). This statement revises employers'
disclosures about pension and other postretirement benefit plans but does not
change the measurement or recognition of costs associated with those plans. It
standardizes the disclosure requirements, eliminates unnecessary disclosures and
requires additional information on changes in the benefit obligations and fair
values of plan assets that will facilitate financial analysis. SFAS 132
supersedes the disclosure requirements of Statement of Financial Accounting
Standards ("SFAS ") No. 87, "Employers' Accounting for Pensions" and SFAS No.
106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." As
the Company has no pension nor postretirement benefit plans, it does not believe
the statement will have a significant impact on the financial statements.
11
<PAGE>
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." The Company intends to adopt
this statement in its 2000 Annual Report as required. The adoption of SOP 98-1
will not have a material impact on the Company's results from operations or
financial condition.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This statement provides guidance on accounting for all
derivative instruments and hedging activities. The statement concludes that
derivative instruments be recognized as assets or liabilities and that fair
value is the relevant measure for derivative instruments. Additionally, the
statement provides criteria for the determination of hedge accounting. As the
Company has not entered into derivative instruments, it does not believe the
statement will have a significant impact on its financial statements. To the
extent that the Company, in the future, enters into derivative instruments, it
will be required to comply with FASB No. 133.
Year 2000
The Company uses a significant number of computer software programs and
computer chip controlled devices in its operations, including applications used
in inventory management, distribution, financial business systems and various
administrative functions. To the extent that these software applications or
devices contain source code that is unable to interpret appropriately the
upcoming calendar year 2000 ("Y2K" issue), the Company may experience varying
levels of system failure or miscalculations. Therefore, some level of
modification or even possible replacement of such source code, applications or
devices will be necessary.
In recognizing this issue, the Company is currently modifying or upgrading
its computer software programs and operating systems to make them Y2K compliant.
The Company has employed both internal and external resources to reprogram or
replace and test these modifications for Y2K compliance. To date, the primary
order processing and inventory management systems operating on the Company's
AS400 computer have successfully been modified and tested. In addition, all
non-compliant third-party software operating in the AS400 environment has been
identified and scheduled for required upgrade or replacement. Included in this
group are EDI applications that the Company expects will be Y2K compliant by the
end of January 1999. Certain financial applications that are non-compliant are
being replaced in an accelerated manner. It is expected that these applications
will be implemented in the second quarter of 1999. An inventory of other PC and
LAN hardware and software applications, including store point-of-sale systems,
has been completed and evaluated for possible Y2K impact. It is expected that
modification, replacement and testing of these, where required, will be
completed by the end of July 1999.
The Company has begun an assessment of the Y2K status of its various
business partners, including vendors and service providers, and intends to work
with them in determining and mitigating common Y2K concerns. The Company will
evaluate the risks of non-compliance associated with its business partners on
its ability to conduct operations or obtain products and services and develop
contingency plans for these risks. In addition, the Company recognizes the
potential for Y2K issues in areas not directly related to its computer systems,
such as telephone and communications systems, utilities, alarm systems, water,
distribution and transportation services. The Company is currently developing
remediation and contingency plans as appropriate to address these issues.
The Company generally believes that its vendors who supply products to the
Company for resale are responsible for the Y2K functionality of those products.
However, should product failures occur, the Company may be required to address
the administrative aspects of those failures such as handling product returns or
coordinating repairs.
The Company expects that the aggregate cost of identification, assessment,
remediation, replacement, and testing efforts related to the Y2K compliance
issue will not exceed $800,000 and that these expenditures will be funded from
operating cash flows. As of October 31, 1998, the Company had incurred costs of
approximately $420,000 related to the Y2K issue, including analysis,
remediation, repair, or replacement of existing software, and upgrades to
existing software which have been expensed as incurred. The Company's estimates
of the costs of achieving Y2K compliance and the dates by which Y2K compliance
will be completed are based on management's best estimate and include
assumptions as to the availability of technical skills of Company associates and
independent contractors, timely compliance by its business partners, and other
factors.
12
<PAGE>
The Company has not yet completed its analysis of the operational problems
and costs that may likely result from the failure of the Company to properly
assess and correct all Y2K issues on a timely basis. Therefore, the Company has
not developed a contingency plan for dealing with the most likely worst case
scenarios that could occur. The Company intends to complete its analysis and
contingency planning by December 31, 1999.
Safe harbor provisions under the private securities litigation reform act of
1995
The Private Securities Litigation Reform Act of 1995 provides a safe harbor
for forward-looking statements. A number of matters and subject areas discussed
in "Management's Discussion and Analysis of Financial Condition and Results of
Operations", are not limited to historical or current facts and deal with
potential future circumstances and developments. Readers are cautioned that such
forward-looking statements are subject to risks and uncertainties that could
cause actual results to differ materially. These risks include, but are not
limited to, the Company's dependence on the continued introduction of new and
enhanced video games and PC hardware and software; the cyclical nature of the
video game market; the rapid technological changes which occur in the video game
and PC industry; the Company's ability to open and operate new stores on a
profitable basis; the intensely competitive nature of the electronic game
industry and its rapid changes in consumer preferences and frequent new product
introductions; the seasonal nature of the retail industry; the Company's
dependence on its suppliers for products; risks associated with the Year 2000
issue; risks inherent to conducting international operations; and consumer
spending patterns and prevailing economic conditions. Please refer to the
Company's registration statement on Form S-1 (Reg. No. 333-48523) on file with
the SEC for a more detailed discussion of these and other factors that could
cause results to differ materially.
13
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
The Company is involved from time to time in legal proceedings arising in
the ordinary course of its business. In the opinion of management, no pending
proceedings will have a material adverse effect on the Company's results of
operations or financial condition.
Item 2. Changes in Securities and Use of Proceeds
The Company filed a Registration Statement on Form S-1 with the Securities
and Exchange Commission (Registration No. 333-48523) for the sale of Common
Stock in the Company's initial public offering (the "Offering"). The effective
date of the Registration Statement was July 23, 1998. The Offering resulted in
gross proceeds of $61,250,000 to the Company.
The Company incurred the following expenses in connection with the issuance
and distribution of its Common Stock in the Offering:
<TABLE>
<CAPTION>
<S> <C>
Underwriting Discounts and Commissions $4,287,500
Other Expenses 2,000,000
-----------
Total Expenses $6,287,500
</TABLE>
All payments of expenses were direct or indirect payments to persons other
than directors or officers of the Company or their associates, persons owning
ten percent or more of any class of equity securities of the Company, or
affiliates of the Company.
The Company used its net proceeds of the Offering ($54,962,500 after
deducting total expenses set forth above) for the following purposes:
<TABLE>
<S> <C>
Repayment of outstanding bank indebtedness $25,674,536
Repayment of demand note 7,000,000
Repayment of due to affiliate 7,855,957
Repayment of bank term loan 3,199,600
Working capital 11,232,407
------------
Total $54,962,500
</TABLE>
The repayment of the demand note was made to James J. Kim, Chairman of the
Board of the Company and a controlling shareholder of EB Nevada Inc., a
shareholder owning more than 10% of the Common Stock of the Company. All other
payments were direct or indirect payments to persons other than directors or
officers of the Company or their associates, persons owning ten percent or more
of any class of equity securities of the Company, or affiliates of the Company.
14
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits:
11.1 Statement regarding computation of per share earnings
27.1 Financial Data Schedule
b. Reports on Form 8-K
Current Report on Form 8-K dated September 28, 1998, as filed
with the Securities and Exchange Commission regarding the
Company's decision to increase the size of its Board of
Directors and appoint Stanley Steinberg as a director of the
Company.
15
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Electronics Boutique Holdings Corp.
(Registrant)
Date: December 11, 1998 By: /s/ Joseph J. Firestone
-----------------------
Joseph J. Firestone
President and Chief
Executive Officer
(Principal Executive Officer)
Date: December 11, 1998 By: /s/ John R. Panichello
----------------------
John R. Panichello
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
16
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description
- ------- -----------
11.1 Statement Regarding Computation of Per Share Earnings
27.1 Financial Data Schedule
17
<PAGE>
Type: EX-11 Net Income Per Share
Electronics Boutique Holdings Corp. and Subsidiaries
Net Income Per Share and Pro Forma Net Income Per Share Exhibit 11.1
<TABLE>
<CAPTION>
Thirteen weeks ended Thirty-nine weeks ended
------------------------- --------------------------
October 31, November 1, October 31, November 1,
1998 1997 1998 1997
------- --------- ------- ---------
<S> <C> <C> <C> <C>
Net income $1,622,166
----------
Weighted average shares outstanding - beginning
and end of period 20,169,200
----------
Net income per share - basic and diluted $ 0.08
----------
----------
Pro forma net income $ 386,325 $ 3,046,598 $ 350,382
----------- ----------- ----------
Pro forma shares outstanding-
beginning of period 15,794,200 15,794,200 15,794,200
Weighted average shares attributable to initial
public offering - 1,522,436 -
---------- ---------- ----------
Pro forma weighted average shares outstanding 15,794,200 17,316,636 15,794,200
---------- ---------- ----------
Pro forma net income per share - basic and diluted $ 0.02 $ 0.18 $ 0.02
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> OCT-31-1998
<CASH> 4,086,743
<SECURITIES> 0
<RECEIVABLES> 7,907,884
<ALLOWANCES> 0
<INVENTORY> 92,971,752
<CURRENT-ASSETS> 113,107,451
<PP&E> 74,744,671
<DEPRECIATION> 35,192,240
<TOTAL-ASSETS> 161,880,153
<CURRENT-LIABILITIES> 127,275,416
<BONDS> 0
0
0
<COMMON> 201,692
<OTHER-SE> 32,038,520
<TOTAL-LIABILITY-AND-EQUITY> 161,880,153
<SALES> 319,324,290
<TOTAL-REVENUES> 321,061,161
<CGS> 239,051,971
<TOTAL-COSTS> 315,194,000
<OTHER-EXPENSES> 160,575
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 659,993
<INCOME-PRETAX> 5,046,593
<INCOME-TAX> 1,236,242
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,810,351
<EPS-PRIMARY> .18<F1>
<EPS-DILUTED> .18<F1>
<FN>
<F1>REPRESENTS PROFORMA DATA
</FN>
</TABLE>
