<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 August 1, 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 [ ] NO [X]
At September 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
August 1, 1998 (unaudited) and January 31, 1998 3
Consolidated Statements of Income (unaudited)
Thirteen and twenty-six weeks ended
August 1, 1998 and August 2, 1997 4
Consolidated Statements of Cash Flow (unaudited)
Twenty-six weeks ended
August 1, 1998 and August 2, 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 13
Item 2. Changes in Securities and Use of Proceeds 13
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
</TABLE>
2
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
ELECTRONICS BOUTIQUE HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
August 1, January 31,
1998 1998
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 23,939,910 $ 20,639,610
Accounts receivable 5,883,552 4,373,073
Due from affiliates 342,194 2,890,554
Merchandise inventories 54,157,774 52,973,314
Deferred tax asset 3,011,000 --
Prepaid expenses 1,721,326 2,837,647
------------ ------------
Total current assets 89,055,756 83,714,198
------------ ------------
------------ ------------
Property and equipment:
Leasehold improvements 42,186,682 40,226,726
Fixtures and equipment 27,180,756 24,884,217
Building -- 6,200,950
Land -- 632,806
Construction in progress 990,198 556,663
------------ ------------
70,357,636 72,501,362
Less accumulated depreciation and amortization 33,978,441 32,535,305
------------ ------------
Net property and equipment 36,379,195 39,966,057
Investment in affiliated company -- 11,025,345
Goodwill and other intangible assets 2,127,369 2,190,766
Deferred tax asset 4,817,000 --
Other assets 2,381,122 5,894,374
------------ ------------
Total assets $134,760,442 $142,790,740
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving credit facility $ -- $ --
Current portion of long-term debt 900,396 2,400,396
Accounts payable 66,982,830 83,713,983
Accrued expenses 15,010,486 14,545,119
Due to affiliates 9,307,698 --
Income taxes payable 587,741 782,988
Distribution payable 6,059,028 --
------------ ------------
Total current liabilities 98,848,179 101,442,486
------------ ------------
Long-term liabilities:
Notes payable 2,555,264 10,541,149
Deferred rent 2,328,048 2,408,579
------------ ------------
Total liabilities 103,731,491 114,392,214
------------ ------------
Stockholders' equity
Preferred stock--authorized 25,000,000 shares, $.01 par value;
no shares issued and outstanding at August 1, 1998 -- --
Common stock--authorized 100,000,000 shares, $.01 par value;
20,169,200 shares issued and outstanding at August 1, 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 32,041,428 7,584,365
Cumulative translation adjustment (903,266) (1,023,493)
Retained earnings (deficit) (310,903) 21,834,364
------------ ------------
Total stockholders' equity 31,028,951 28,398,526
------------ ------------
Total liabilities and stockholders' equity $134,760,442 $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 Twenty-six weeks ended
--------------------------- ---------------------------
August 1, August 2, August 1, August 2,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $101,930,071 $ 72,894,231 $208,659,885 $156,581,940
Management fees 530,178 499,597 1,101,545 987,484
------------ ------------ ------------ ------------
Total revenues $102,460,249 $ 73,393,828 $209,761,430 $157,569,424
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Costs and expenses:
Costs of merchandise sold, including freight 75,904,478 54,306,846 155,424,067 116,248,071
Selling, general and administrative 24,060,081 19,021,544 46,330,229 37,222,126
Depreciation and amortization 2,405,320 1,866,171 4,659,088 3,740,727
------------ ------------ ------------ ------------
Operating income (loss) 90,370 (1,800,733) 3,348,046 358,500
Equity in loss of affiliates (80,288) (80,288) (160,575) (160,575)
Interest expense, net of interest income 594,710 395,613 808,580 689,989
Preacquisition (income) loss of subsidiaries -- (25,569) -- 270,464
------------ ------------ ------------ ------------
Income (loss) before income taxes (584,628) (2,302,203) 2,378,891 (221,600)
Income tax expense (benefit) 77,406 (50,900) 190,706 26,800
------------ ------------ ------------ ------------
Net income (loss) $ (662,034) $ (2,251,303) $ 2,188,185 $ (248,400)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Pro Forma Data:
Pro forma operating income (loss) $ (7,955) $ (1,800,733) $ 3,151,396 $ 358,500
Pro forma income (loss) before income tax expense (benefit) (602,665) (2,221,915) 2,342,816 (61,025)
Pro forma income tax expense (benefit) (236,245) (913,207) 918,383 (25,081)
------------ ------------ ------------ ------------
Pro forma net income (loss) $ (366,420) $ (1,308,708) $ 1,424,433 $ (35,944)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Pro forma net income (loss) per share--basic and diluted $ (0.02) $ (0.08) $ 0.09 $ 0.00
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Pro forma weighted average shares outstanding--basic and diluted 15,986,508 15,794,200 15,890,354 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>
Twenty-six weeks ended
----------------------------
August 1, August 2,
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 2,188,185 $ (248,400)
Adjustments to reconcile net income (loss) to cash used
in operating activities:
Depreciation of property and equipment 4,489,441 3,712,216
Amortization of other assets 169,647 28,511
Loss on disposal of property and equipment 129,360 152,398
Equity in loss of affiliates 160,575 160,575
Loss on investment in affiliated companies -- 270,464
Changes in assets and liabilities:
Decrease (increase) in:
Accounts receivable (1,209,879) (1,501,861)
Due from affiliates 2,548,360 (2,357,397)
Merchandise inventories (1,184,460) 4,127,567
Prepaid expenses 1,116,321 (302,286)
Other long-term assets (640,227) (904,789)
(Decrease) increase in:
Accounts payable (16,731,153) (18,507,388)
Accrued expenses 465,367 (3,039,447)
Due to affiliate -- 122,371
Income taxes payable (195,247) (474,289)
Deferred rent (80,531) (222,645)
------------ ------------
Net cash used in operating activities (8,774,241) (18,984,400)
------------ ------------
Cash flows used in investing activities:
Purchases of property and equipment (7,862,515) (4,509,240)
Proceeds from disposition of assets 54,074 1,306
------------ ------------
Net cash used in investing activities (7,808,441) (4,507,934)
------------ ------------
Cash flows from financing activities:
Distributions (13,891,545) (3,000,000)
Net payments under revolving credit facility -- (750,000)
Repayment of long-term debt (9,516,898) (49,998)
Proceeds from equity offering 55,462,500 --
Net cash retained by predecessor company (12,375,535) --
------------ ------------
Net cash used in financing activities 19,678,522 (3,799,998)
------------ ------------
Effects of exchange rates on cash 204,460 --
Net increase (decrease) in cash and cash equivalents 3,300,300 (27,292,332)
Cash and cash equivalents, beginning of period 20,639,610 44,727,846
---------- ----------
Cash and cash equivalents, end of period $ 23,939,910 $ 17,435,514
------------ ------------
------------ ------------
</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
twenty-six week periods ended August 1, 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 the thirteen and twenty-six week
periods ended August 1, 1998 and August 2, 1997. Immediately prior to the
initial public offering a series of reorganization transactions occurred
where 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
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
$55,462,500. 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 were no outstanding
borrowings under this facility at August 1, 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 Twenty-six weeks ended
------------------------- -------------------------
August 1, August 2, August 1, August 2,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income (loss) $ (662,034) $(2,251,303) $ 2,188,185 $ (248,400)
Foreign currency translation adjustment 4,567 14,129 120,227 (394,195)
----------- ----------- ----------- -----------
Comprehensive income (loss) $ (657,467) $(2,237,174) $ 2,308,412 $ (642,595)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</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 August 1, 1998, the Company
operated a total of 474 stores in 42 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 141 stores and 17 department
store-based concessions in the United Kingdom and Ireland. As of August 1, 1998,
the Company also managed 34 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 Twenty-six weeks ended
------------------------- --------------------------
August 1, August 2, August 1, August 2,
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales 99.5% 99.3% 99.5% 99.4%
Management fees 0.5 0.7 0.5 0.6
--------- --------- --------- ---------
Total revenues 100.0 100.0 100.0 100.0
Cost of goods sold 74.1 74.0 74.1 73.8
Gross profit 25.9 26.0 25.9 26.2
Operating expenses 23.5 25.9 22.1 23.6
Depreciation and amortization 2.3 2.5 2.2 2.4
--------- --------- --------- ---------
Income (loss) from operations 0.1 (2.4) 1.6 0.2
Equity in loss of affiliates (0.1) (0.1) (0.1) (0.1)
Interest expense, net 0.6 0.6 0.4 0.4
Preacquisition (income) loss of subsidiaries 0.0 0.0 0.0 0.2
--------- --------- --------- ---------
Income (loss) before income tax expense (0.6) (3.1) 1.1 (0.1)
Income tax expense (benefit) 0.1 0.0 0.1 0.0
--------- --------- --------- ---------
Net income (loss) (0.7%) (3.1%) 1.0% (0.1%)
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
Thirteen weeks ended August 1, 1998 compared to Thirteen weeks ended August 2,
1997
Net sales increased by 39.8% from $72.9 million in the thirteen weeks ended
August 2, 1997 to $101.9 million in the thirteen weeks ended August 1, 1998. The
increase in net sales was primarily attributable to a 23.2% increase in
comparable store sales, which resulted in a $16.5 million increase in net sales,
and the additional sales volume attributable to 67 net new stores opened
subsequent to the second quarter of 1997. The increase in comparable store sales
was primarily attributable to increases in PC entertainment software sales and
strong demand for 3-D accelerator cards for PC's. In addition, video game
software sales were strong, reflecting a steady stream of well-received new
titles rather than a single, specific hit.
Management fees were unchanged at $0.5 million from the thirteen weeks ended
August 2, 1997 to the thirteen weeks ended August 1, 1998. The increased fees
earned under the management agreement with Electronics Boutique plc. were offset
by lower fees earned under the consulting agreement with Borders Group, Inc.
8
<PAGE>
Cost of goods sold increased by 39.8% from $54.3 million in the thirteen
weeks ended August 2, 1997 to $75.9 million in the thirteen weeks ended
August 1, 1998. However, as a percentage of net sales, cost of goods sold
remained constant at 74.5% in the thirteen weeks ended August 2, 1997 and
August 1, 1998.
Selling, general and administrative expense increased by 26.5% from $19.0
million in the thirteen weeks ended August 2, 1997 to $24.1 million in the
thirteen weeks ended August 1, 1998. As a percentage of total revenues, selling,
general and administrative expense decreased from 25.9% in 1997 to 23.5% in
1998. The $5.1 million increase was primarily attributable to the increase in
the Company's domestic and international store base and the associated increases
in store and headquarter operating expenses. The decrease in selling, general
and administrative expense as a percentage of total revenues was primarily
attributable to an increase in net sales without a proportional increase in
corporate and store-level overhead.
Depreciation and amortization expense increased by 28.9% from $1.9 million
in the thirteen weeks ended August 2, 1997 to $2.4 million in the thirteen weeks
ended August 1, 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 a loss of $1.8 million in
the thirteen weeks ended August 2, 1997 to income of $0.1 million in the
thirteen weeks ended August 1, 1998. As a percentage of total revenues,
operating income (loss) increased from a loss of 2.4% in 1997 to income of 0.1%
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, increased by 50.3% from $0.4 million in the thirteen
weeks ended August 2, 1997 to $0.6 million in the thirteen weeks ended August 1,
1998. The increase was primarily attributable to interest expense associated
with short-term borrowings under the Company's revolving credit facility and
with a $7.0 million demand note that was issued on June 4, 1998. All borrowings
under the credit facility and demand note were repaid on July 31, 1998.
As a result of all the above factors, the Company's loss before income taxes
decreased by 74.6% from $2.3 million in the thirteen weeks ended August 2, 1997
to $0.6 million in the thirteen weeks ended August 1, 1998.
Twenty-six weeks ended August 1, 1998 compared to Twenty-six weeks ended
August 2, 1997
Net sales increased by 33.3% from $156.6 million in the twenty-six weeks
ended August 2, 1997 to $208.7 million in the twenty-six weeks ended August 1,
1998. The increase in net sales was primarily attributable to a 17.8% increase
in comparable store sales, which resulted in a $27.2 million increase in net
sales, and the additional sales volume attributable to new stores opened
subsequent to the second quarter of 1997. The increase in comparable store sales
was primarily attributable to increases in PC entertainment software sales and
strong demand for 3-D accelerator cards for PC's. In addition, video game
software sales were strong, reflecting a steady stream of well-received new
titles rather than a single, specific hit.
Management fees increased from $1.0 million in the twenty-six weeks ended
August 2, 1997 to $1.1 million in the twenty-six weeks ended August 1, 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.
Cost of goods sold increased by 33.7% from $116.2 million in the twenty-six
weeks ended August 2, 1997 to $155.4 million in the twenty-six weeks ended
August 1, 1998. As a percentage of net sales, cost of goods sold increased from
74.2% in the twenty-six weeks ended August 2, 1997 to 74.5% in the twenty-six
weeks ended August 1, 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 the Company's decision to switch its primary freight
carrier and reorganize its third-party distribution framework for improved
service and merchandise availability at its stores.
Selling, general and administrative expense increased by 24.5% from $37.2
million in the twenty-six weeks ended August 2, 1997 to $46.3 million in the
twenty-six weeks ended August 1, 1998. As a percentage of total revenues,
9
<PAGE>
selling, general and administrative expense decreased from 23.6% in 1997 to
22.1% in 1998. The $9.1 million increase was primarily attributable to the
increase in the Company's domestic and international store base and the
associated increases in store and headquarter operating expenses. The decrease
in selling, general and administrative expense as a percentage of total revenues
was primarily attributable to an increase in net sales without a proportional
increase in corporate and store-level overhead.
Depreciation and amortization expense increased by 24.6% from $3.7 million
in the twenty-six weeks ended August 2, 1997 to $4.7 million in the twenty-six
weeks ended August 1, 1998. This increase was primarily attributable to
capitalized expenditures for leasehold improvements and furniture and fixtures
for new store openings.
Operating income increased $3.0 million from $0.4 million in the twenty-six
weeks ended August 2, 1997 to $3.4 million in the twenty-six weeks ended
August 1, 1998. As a percentage of total revenues, operating income increased
from 0.2% in 1997 to 1.6% 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, increased by 17.2% from $0.7 million in the
twenty-six weeks ended August 2, 1997 to $0.8 million in the twenty-six weeks
ended August 1, 1998. The increase was primarily attributable to interest
expense associated with short-term borrowings under the Company's revolving
credit facility and with a $7.0 million demand note that was issued on June 4,
1998, partially offset by the repayment of long-term debt outstanding in 1997.
All borrowings under the credit facility and demand note were repaid on July 31,
1998.
As a result of all the above factors, the Company's income (loss) before
income taxes improved by $2.6 million from a loss of $0.2 million in the
twenty-six weeks ended August 2, 1997 to income of $2.4 million in the
twenty-six weeks ended August 1, 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, however on July 29, 1998, the
Company completed 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 shares were for the account of the selling shareholder.
The transaction resulted in net proceeds (after offering expenses) to the
Company of approximately $55.5 million, which was used primarily to repay $25.7
million under the Company's revolving credit agreement and a $7.0 million demand
note due to the Company's Chairman, James J. Kim. The remaining proceeds will be
used to repay $9.3 million owed by the Company to EB and for other general
corporate 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 $9.8 million at August 1, 1998. At August 1, 1998 the
Company had no borrowings under its revolving credit facility and had $3.5
million of debt outstanding, including $0.9 million classified as a current
liability.
The Company used $8.8 million in cash from operations in the twenty-six week
period ended August 1, 1998 and used $19.0 million of cash from operations
during the twenty-six weeks ended August 2, 1997. The $8.8 million of cash used
in operations in 1998 was primarily the result of a decrease of $16.3 million in
accounts payable and accrued expenses, an increase of $1.2 million in accounts
receivable, and a $1.2 million increase in merchandise
10
<PAGE>
inventories, partially offset by $7.1 million of net income and non-cash charges
to net income, a $2.5 million decrease in due from affiliates, and a $1.1
million decrease in prepaid expenses. The $19.0 million of cash used in
operations in 1997 was primarily the result of a decrease of $21.5 million in
accounts payable and accrued expenses, a $2.4 million increase in due from
affiliates, a $1.5 million increase in accounts receivable, and a $0.9 million
increase in other assets, partially offset by $4.1 million of net loss and
non-cash charges to net income, and a $4.1 million decrease in merchandise
inventories.
The Company made capital expenditures of $7.9 million in the twenty-six
weeks ended August 1, 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 $4.5 million in the twenty-six weeks ended August 2,1997
primarily for opening new stores and to remodel existing stores.
The Company believes that the net proceeds of the initial public offering,
together with 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 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
operating systems in its internal operations, including applications used in
inventory management, distribution, financial business systems and various
administrative functions. To the extent that these software applications contain
source code that is unable to interpret appropriately the upcoming calendar year
2000, some level of modification or even possible replacement of such source
code or applications will be necessary. The Company is currently modifying its
computer software programs and operating systems to make them "Year 2000"
compliant. The Company anticipates spending approximately $300,000 in the
current fiscal year, of which approximately $220,000 has been spent through
August 1, 1998, in connection with its "Year 2000" compliance programs. However,
there can be no assurance that the costs necessary to update software, or
potential systems interruptions, will not exceed such amount and have a material
adverse effect on the Company's results of operations or financial condition.
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
11
<PAGE>
introductions; the seasonal nature of the retail industry; the Company's
dependence on its suppliers for products; 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
(file No. 333-48523) on file with the SEC for a more detailed discussion of
these and other risks that could cause results to differ materially.
12
<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
(d) 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
Company registered 5,000,000 shares of Common Stock, 4,375,000 shares for the
account of the Company and 625,000 shares for the account of the selling
shareholder. The effective date of the Registration Statement was July 23, 1998.
The Offering commenced on July 29, 1998 and was terminated after the sale of all
securities registered. The managing underwriters for the Offering were
Prudential Securities Incorporated and Salomon Smith Barney. The aggregate price
to the public of the 5,000,000 shares of Common Stock registered was
$70,000,000. The Company completed the Offering, selling all 5,000,0000 shares
of Common Stock registered for the aggregate offering price of $70,000,000,
resulting in gross proceeds of $61,250,000 to the Company and $8,750,000 to the
selling shareholder.
The Company incurred the following expenses in connection with the issuance
and distribution of its Common Stock in the Offering:
<TABLE>
<S> <C>
Underwriting Discounts and Commissions $4,287,500
Other Expenses * 1,500,000
-----------
Total Expenses $5,787,500
</TABLE>
* Reasonable estimate
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 ($55,462,500 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
Cash and temporary investments 22,787,964
-----------
Total $55,462,500
</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 owing ten percent or more
of any class of equity securities of the Company, or affiliates of the Company.
13
<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. The Company did not file any reports on Form 8-K during the
thirteen weeks ended August 1, 1998.
14
<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: September 11, 1998 By: /s/ Joseph J. Firestone
-----------------------
Joseph J. Firestone
President and Chief
Executive Officer
(Principal Executive Officer)
Date: September 11, 1998 By: /s/ John R. Panichello
----------------------
John R. Panichello
Senior Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
15
<PAGE>
Electronics Boutique Holdings Corp. and Subsidiaries
Pro Forma Net Income Per Share Exhibit 11.1
<TABLE>
<CAPTION>
Thirteen weeks ended Twenty-six weeks ended
---------------------------- -------------------------
August 1, August 2, August 1, August 2,
1998 1997 1998 1997
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Pro forma net income (loss) $ (366,420) $ (1,308,708) $ 1,424,433 $ (35,944)
----------- ------------ ----------- -----------
Pro forma shares outstanding -
beginning of period 15,794,200 15,794,200 15,794,200 15,794,200
Weighted average shares attributable to initial
public offering 192,308 -- 96,154 --
----------- ------------ ----------- -----------
Pro forma weighted average shares outstanding 15,986,508 15,794,200 15,890,354 15,794,200
Pro forma net income (loss) per
share - basic and diluted $ (0.02) $ (0.08) $ 0.09 $ 0.00
----------- ------------ ----------- -----------
----------- ------------ ----------- -----------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> AUG-01-1998
<CASH> 23,939,910
<SECURITIES> 0
<RECEIVABLES> 5,883,552
<ALLOWANCES> 0
<INVENTORY> 54,157,774
<CURRENT-ASSETS> 89,055,756
<PP&E> 70,357,636
<DEPRECIATION> 33,978,441
<TOTAL-ASSETS> 134,760,442
<CURRENT-LIABILITIES> 98,848,179
<BONDS> 0
0
0
<COMMON> 201,692
<OTHER-SE> 30,827,259
<TOTAL-LIABILITY-AND-EQUITY> 134,760,442
<SALES> 208,659,885
<TOTAL-REVENUES> 209,761,430
<CGS> 155,424,067
<TOTAL-COSTS> 206,413,384
<OTHER-EXPENSES> 160,575
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 808,580
<INCOME-PRETAX> 2,378,891
<INCOME-TAX> 190,706
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,188,185
<EPS-PRIMARY> .09<F1>
<EPS-DILUTED> .09<F1>
<FN>
<F1>REPRESENTS PROFORMA DATA
</FN>
</TABLE>
