<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 MAY 1, 1999
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)
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
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 JUNE 2, 1999, 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
May 1, 1999 (unaudited) and January 30, 1999 3
Consolidated Statements of Income (unaudited)
Thirteen weeks ended
May 1, 1999 and May 2, 1998 4
Consolidated Statements of Cash Flows (unaudited)
Thirteen weeks ended
May 1, 1999 and May 2, 1998 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 6. Exhibits and Reports on Form 8-K 14
Signatures 15
</TABLE>
2
<PAGE>
PART I.
ITEM 1. FINANCIAL STATEMENTS
ELECTRONICS BOUTIQUE HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MAY 1, JANUARY 30,
ASSETS 1999 1999
----------------- -----------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 16,543,874 $ 42,006,179
Accounts receivable:
Trade and vendors 5,953,837 4,010,293
Other 1,514,858 1,516,085
Due from affiliates 401,550 984,096
Merchandise inventories 78,473,307 65,433,008
Deferred tax asset 2,694,000 2,694,000
Prepaid expenses 4,171,448 969,949
----------------- -----------------
Total current assets 109,752,874 117,613,610
----------------- -----------------
Property and equipment:
Leasehold improvements 48,716,886 46,933,403
Fixtures and equipment 33,911,678 32,362,909
Land 908,000 --
Construction in progress 1,558,879 1,087,964
----------------- -----------------
85,095,443 80,384,276
Less accumulated depreciation and amortization 39,439,024 37,349,298
----------------- -----------------
Net property and equipment 45,656,419 43,034,978
Goodwill and other intangible assets 1,799,643 1,898,395
Deferred tax asset 6,319,000 6,319,000
Other assets 3,057,071 3,181,566
----------------- -----------------
Total assets $ 166,585,007 $ 172,047,549
----------------- -----------------
----------------- -----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving credit facility $ -- $ --
Current portion of long-term debt 78,187 99,996
Accounts payable 89,892,428 90,835,578
Accrued expenses 17,460,182 19,625,068
Income taxes payable 4,597,269 10,144,023
----------------- -----------------
Total current liabilities 112,028,066 120,704,665
----------------- -----------------
Long-term liabilities:
Notes payable -- 8,353
Deferred rent 2,481,083 2,492,140
----------------- -----------------
Total liabilities 114,509,149 123,205,158
----------------- -----------------
Stockholders' equity
Preferred stock - authorized 25,000,000 shares; $.01 par value;
no shares issued and outstanding at May 1, 1999 -- --
Common stock - authorized 100,000,000 shares; $.01 par value;
20,169,200 shares issued and outstanding at May 1, 1999 201,692 201,692
Additional paid-in capital 31,541,428 31,541,428
Accumulated other comprehensive expense (326,022) (686,920)
Retained earnings 20,658,760 17,786,191
----------------- -----------------
Total stockholders' equity 52,075,858 48,842,391
----------------- -----------------
Total liabilities and stockholders' equity $ 166,585,007 $ 172,047,549
----------------- -----------------
----------------- -----------------
</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
-------------------------
May 1, May 2,
1999 1998
------------ -----------
<S> <C> <C>
Net sales $ 122,743,878 $ 106,729,814
Management fees 861,487 571,367
------------ -----------
Total revenues $ 123,605,365 $ 107,301,181
------------ -----------
Costs and expenses:
Costs of merchandise sold, including freight 90,438,138 79,519,589
Selling, general and administrative 26,025,263 22,270,148
Depreciation and amortization 2,707,082 2,253,768
------------ -----------
Operating income 4,434,882 3,257,676
Equity in loss of affiliates -- (80,287)
Interest (income) expense, net (289,736) 213,870
------------ -----------
Income before income taxes 4,724,618 2,963,519
Income tax expense 1,852,049 113,300
------------ -----------
Net income $ 2,872,569 $ 2,850,219
------------ -----------
------------ -----------
Net income per share - basic $ 0.14
------------
------------
Weighted average shares outstanding - basic 20,169,200
------------
------------
Net income per share - diluted $ 0.14
------------
------------
Weighted average shares outstanding - diluted 20,312,657
------------
------------
PRO FORMA DATA:
Pro forma operating income $ 3,159,351
Pro forma income before income tax expense 2,945,481
Pro forma income tax expense 1,154,628
-----------
Pro forma net income $ 1,790,853
-----------
-----------
Pro forma net income per share - basic and diluted $ 0.11
-----------
-----------
Pro forma weighted average shares outstanding - basic and diluted 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>
Thirteen Weeks Ended
----------------------------------
May 1, May 2,
1999 1998
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,872,569 $ 2,850,219
Adjustments to reconcile net income to cash used in
operating activities:
Depreciation of property and equipment 2,664,352 2,156,177
Amortization of other assets 42,730 177,878
Loss on disposal of property and equipment 11,507 72,844
Changes in assets and liabilities:
Decrease (increase) in:
Accounts receivable (1,926,836) (2,254,190)
Due from affiliates 583,670 (305,010)
Merchandise inventories (12,695,064) (5,792,298)
Prepaid expenses (3,186,651) (335,185)
Other long-term assets 146,264 (440,682)
(Decrease) increase in:
Accounts payable 847,579 603,292
Accrued expenses (4,216,461) (3,161,505)
Due to affiliate (97,585) 489
Income taxes payable (5,548,971) (221,258)
Deferred rent (17,406) (126,018)
--------------- ---------------
Net cash used in operating activities (20,520,303) (6,775,247)
--------------- ---------------
Cash flows used in investing activities:
Purchases of property and equipment (5,040,308) (3,142,589)
Proceeds from disposition of assets -- 4,454
--------------- ---------------
Net cash used in investing activities (5,040,308) (3,138,135)
--------------- ---------------
Cash flows from financing activities:
Distributions -- (13,891,545)
Net payments under revolving credit facility -- 21,437,687
Repayments of long-term debt (30,385) (9,291,799)
--------------- ---------------
Net cash used in financing activities (30,385) (1,745,657)
--------------- ---------------
Effects of exchange rates on cash 128,691 283,903
Net decrease in cash and cash equivalents (25,462,305) (11,375,136)
Cash and cash equivalents, beginning of period 42,006,179 20,639,610
--------------- ---------------
Cash and cash equivalents, end of period $ 16,543,874 $ 9,264,474
--------------- ---------------
--------------- ---------------
</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 28, 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
financial statements and notes thereto for the fiscal year ended January 30,
1999 contained in the Company's Form 10-K filed with the Securities and Exchange
Commission. Operating results for the thirteen week period ended May 1, 1999 are
not necessarily indicative of the results that may be expected for the fiscal
year ending January 29, 2000.
The pro forma data presented in the unaudited consolidated statement of
income for the thirteen weeks ended May 2, 1998 is included in order to
illustrate the effect of the reorganization transactions as if such transactions
occurred as of the beginning of that fiscal period and to reflect the change in
tax status as described in Note 3 below. As more fully described in the
Company's Form 10-K, 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 Group"). In the opinion of management, all
adjustments have been made that are necessary to present fairly the pro forma
data.
(2) NET INCOME PER SHARE
Basic net income per share is computed on the basis of the weighted
average number of shares outstanding during the period. Diluted net income
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 net income per share amounts for all
relevant periods have been presented.
(3) INCOME TAXES
The Company is subject to federal and state income taxes as a C
corporation whereas the EB Group had been treated as an S corporation and a
partnership for federal and certain state income tax purposes resulting in
taxable income being passed through to the shareholders and partners. For
purposes of comparison, a tax charge has been reflected in the pro forma data
on the statement of income for the thirteen week period ending May 2, 1998 to
show the results of operations as if the EB Group had been subject to taxes
as a C corporation.
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
6
<PAGE>
(4) DEBT
The Company has available a revolving credit facility with Fleet Capital
Corporation for maximum borrowings of $50,000,000. There were no borrowings
under this facility at May 1, 1999.
(5) 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 is computed as follows:
<TABLE>
<CAPTION>
Thirteen weeks ended
--------------------------------
May 1, May 2,
1999 1998
--------------- ----------------
<S> <C> <C>
Net income $ 2,872,569 $ 2,850,219
Foreign currency translation adjustment 360,898 115,660
--------------- ----------------
Comprehensive income $ 3,233,467 $ 2,965,879
--------------- ----------------
--------------- ----------------
</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 May 1, 1999, the Company operated a
total of 550 stores in 45 states, Puerto Rico, Canada, Australia and South
Korea, primarily under the names Electronics Boutique and Stop 'N Save Software.
In addition, the Company operated a commercial website under the URL address of
WWW.EBWORLD.COM. As of such date, the Company also provided management services
for Electronics Boutique Plc., which operated 167 stores and 17 department
store-based concessions in the United Kingdom, Ireland and Sweden. As of May 1,
1999, the Company also managed 17 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
-------------------------
May 1, May 2,
1999 1998
--------- ---------
<S> <C> <C>
Net sales 99.3% 99.5%
Management fees 0.7 0.5
--------- ---------
Total revenues 100.0 100.0
Cost of goods sold 73.2 74.1
Gross profit 26.8 25.9
Operating expenses 21.0 20.8
Depreciation and amortization 2.2 2.1
--------- ---------
Income from operations 3.6 3.0
Equity in loss of affiliates 0.0 (0.1)
Interest (income) expense, net (0.2) 0.2
--------- ---------
Income before income tax expense 3.8 2.7
Income tax expense 1.5 0.1
--------- ---------
Net income 2.3% 2.6%
--------- ---------
--------- ---------
</TABLE>
THIRTEEN WEEKS ENDED MAY 1, 1999 COMPARED TO THIRTEEN WEEKS ENDED MAY 2, 1998
Net sales increased by 15.0% from $106.7 million in the thirteen weeks ended
May 2, 1998 to $122.7 million in the thirteen weeks ended May 1, 1999. The
increase in net sales was primarily attributable to a 1.6% increase in
comparable store sales, which resulted in a $1.6 million increase in net sales,
and the additional sales volume attributable to 85 net new stores opened since
May 2, 1998. The increase in sales was primarily attributable to increases in
sales of Nintendo Gameboy software and hardware, PC entertainment software, toys
and software-related action figures. Sales of Sony Playstation and Nintendo64
video game software were below last year due to a relatively weak selection of
new titles for these hardware systems while last year's results were positively
impacted by sales of two very successful video game titles, Tekken 3 and
Resident Evil 2.
Management fees increased from $0.6 million in the thirteen weeks ended May
2, 1998 to $0.9 million in the thirteen weeks ended May 1, 1999. The increase
was primarily attributable to an additional $248,000 for a performance fee
earned for fiscal 1999 under the consulting agreement with Border's Group, Inc.
In addition, the
8
<PAGE>
Company earned increased fees under the management agreement with Electronics
Boutique plc., which were partially offset by lower continuing fees earned under
the consulting agreement with Borders Group, Inc.
Cost of goods sold increased by 13.7% from $79.5 million in the thirteen
weeks ended May 2, 1998 to $90.4 million in the thirteen weeks ended May 1,
1999. As a percentage of net sales, cost of goods sold decreased from 74.5% in
the thirteen weeks ended May 2, 1998 to 73.7% in the thirteen weeks ended May 1,
1999. The decrease in cost of goods sold as a percentage of net sales was
primarily attributable to increases in sales of Nintendo Gameboy software and
hardware, toys and software-related action figures that carry higher overall
margins than the console video game category which experienced reduced sales in
the current fiscal quarter.
Selling, general and administrative expense increased by 16.9% from $22.3
million in the thirteen weeks ended May 2, 1998 to $26.0 million in the thirteen
weeks ended May 1, 1999. As a percentage of total revenues, selling, general and
administrative expense increased from 20.8% in 1998 to 21.0% in 1999. The $3.7
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. The increase in selling, general and
administrative expenses as a percentage of total revenues were primarily
attributable to expenses associated with the addition of 85 net new stores since
May 2, 1998 and for expected new store openings in fiscal 2000.
Depreciation and amortization expense increased by 20.1% from $2.3 million
in the thirteen weeks ended May 2, 1998 to $2.7 million in the thirteen weeks
ended May 1, 1999. This increase was primarily attributable to capitalized
expenditures for leasehold improvements and furniture and fixtures for new store
openings.
Operating income increased by $1.1 million from $3.3 million in the thirteen
weeks ended May 2, 1998 to $4.4 million in the thirteen weeks ended May 1, 1999.
As a percentage of total revenues, operating income increased from 3.0% in 1998
to 3.6% in 1999, as the decrease in cost of goods sold as a percentage of total
revenues more than offset the increase in operating expenses as a percentage of
total revenues.
Interest (income) expense, net, improved from an expense of $0.2 million in
the thirteen weeks ended May 2, 1998 to income of $0.3 million in the thirteen
weeks ended May 1, 1999. 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 generated by investing excess cash in short term investments.
As a result of all the above factors, the Company's income before income
taxes increased by 59.4% from $3.0 million in the thirteen weeks ended May 2,
1998 to $4.7 million in the thirteen weeks ended May 1, 1999.
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. The Company's working capital
deficit decreased from $3.1 million at January 30, 1999 to $2.3 million at May
1, 1999. At May 1, 1999 the Company had no borrowings under its $50 million
revolving credit facility.
9
<PAGE>
The Company used $20.5 million in cash from operations in the thirteen week
period ended May 1, 1999 and used $6.8 million of cash from operations during
the thirteen weeks ended May 2, 1998. The $20.5 million of cash used in
operations in 1999 was primarily the result of an increase of $11.8 million in
the Company's investment in merchandise inventories net of accounts payable, a
decrease of $5.5 million in taxes payable, a decrease of $4.2 million in accrued
expenses, an increase of $3.2 million in prepaid expenses and an increase of
$1.9 million in accounts receivable, partially offset by $5.6 million of net
income and non-cash charges to net income. The increase in merchandise
inventories net of accounts payable was primarily due to the addition of 22 new
stores and the purchase of merchandise made in anticipation of comparable store
sales increases that were below expectation in the latter part of the fiscal
quarter. The Company expects to reduce these higher inventory levels by the end
of the second fiscal quarter. The $6.8 million of cash used in operations in
1998 was primarily the result of an increase of $5.2 million in the Company's
investment in merchandise inventories net of accounts payable, a decrease of
$3.2 million in accrued expenses, an increase of $2.3 million in accounts
receivable, and an increase of $0.8 million in prepaid expenses and other
assets, partially offset by $5.3 million of net income and non-cash charges to
net income.
The Company made capital expenditures of $5.0 million in the thirteen weeks
ended May 1, 1999, 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 $29.0 million of
capital expenditures in fiscal 2000. A predecessor to the Company made capital
expenditures of $3.1 million in the thirteen weeks ended May 2, 1998, primarily
for opening new stores, to remodel existing stores and for leasehold
improvements at the corporate headquarters and primary distribution center.
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 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 adopted this
statement on January 31, 1999 as required. The adoption of SOP 98-1 did not have
a material impact on the Company's results from operations or financial
condition.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). This statement establishes accounting and reporting standards for
derivative instruments and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measures those instruments at fair value. The Company
plans to adopt this statement in its fiscal 2002 Annual Report as required. The
adoption of this standard is not expected to materially impact the Company's
results of operations, financial condition or long-term liquidity
YEAR 2000 STRATEGY
The Company employs 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.
Y2K PROJECT METHODOLOGY AND APPROACH
10
<PAGE>
The Company's Y2K project uses a five-phase methodology and approach, of
which the first two phases are "work-in-progress" phases and are being updated
on an on-going basis. The five phases of the Company's Y2K project are as
follows:
Phase I - Inventory. The Company collects a comprehensive list of items that
may be affected by Y2K issues. Item categories are defined as facilities
("Facilities"), hardware ("Hardware"), software ("Software"), vendor
hardware and software ("Non-EB"), and system feeds and interfaces
("Interfaces"). As of May 1, 1999, the Company had inventoried
approximately 98% of items that it believes may be affected by the Y2K
issue.
Phase II - Assessment. The Company evaluates the inventory to determine
which items will function properly with the change to the new century and
ranks items based on their potential impact to the Company. Each Item is
assigned a priority as follows:
"Critical": Will potentially impair the company's ability to do business
should the item fail.
"Important": Will adversely affect some productivity should the item fail.
"Inconvenient": Will cause minor inconvenience should the item fail.
"Non-Essential": Will have no impact should the item fail.
Based on assigned priorities from phase I and II, the following three phases
are being carried out to the Critical items first, followed by the Important
items, then the Inconvenient items and finally the Non-Essential items if
resources are available. The Company is committed and on track to remediate all
Critical and Important items before July 31, 1999.
Phase III - Remediation. The Company analyzes the items affected by Year
2000, identifying problem areas and repairing non-compliant items.
Phase IV - Testing. The Company performs a thorough test of all remediated
systems, including present and forward date testing to simulate dates in Year
2000.
Phase V - Implementation. The Company places all items that have been
remediated and successfully tested into production.
SUPPLIER ELECTRONIC DATA INTERCHANGE (EDI) STATUS
As a retailer, the majority of products the Company resells are purchased
from a relatively small group of manufacturers and/or distributors. In order to
efficiently communicate with these companies, EDI was deployed wherever
possible. At the end of fiscal 1999, the Company had upgraded to the Y2K
compliant EDI "4010" format. However, since a good portion of the Company's
suppliers are still using non-compliant EDI formats, the Company will continue
using the "3020" and "3040" formats with these non-compliant suppliers. These
suppliers are being tracked in the Company's Y2K project database, and every
effort will be made to facilitate 100% Y2K compliance with these suppliers. In
case some suppliers are still Y2K non-compliant by December 31, 1999, the
Company's contingency plan is to communicate with them through facsimile, mail
and/or modem transmissions.
INTERNATIONAL SUBSIDIARIES AND DOMESTIC DISTRIBUTION CENTERS
The Company operates retail stores in Australia, Canada, Puerto Rico and
Korea with regional sales offices in all but Puerto Rico. In addition, the
Company ships products out of its own distribution centers as well as
third-party distribution centers in the continental United States. Instead of
deploying and replicating distributed systems at each of these locations, the
Company implemented a centralized computing environment with telecommunication
networks. This approach simplified the Y2K impact to the Company as a whole
since these locations do not have any Critical systems with which to contend.
Most, if not all, desktop applications and computers are the same as those at
the Company's headquarters. Accordingly, these sites should be less prone to Y2K
problems. Nonetheless, the Company is continuing to inventory and assess these
systems and will follow immediately with any necessary remediation, testing and
implementation. All locations are expected to be rid of Critical, if any, and
Important Y2K issues by July 31, 1999.
11
<PAGE>
OVERALL Y2K PROJECT STATUS BY PRIORITY (AS OF MAY 24, 1999)
<TABLE>
<CAPTION>
Complexity Y2K Y2K Y2K Compliant
Priority Count Unit (1) Ready (2) Tested (3) Compliant (4) By (5)
- ------------------ --------- -------------- -------------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Critical 75 1058 88.09% 75.14% 75.05% 7/31/1999
Important 196 334 53.59% 20.36% 20.06% 7/31/1999
Inconvenient 35 40 77.50% 40.00% 37.50% 9/30/1999
Non-essential 4 4 100.00% 0.00% 0.00% TBD
</TABLE>
- --------------
(1) Complexity Unit: Measures the aggregate complexity of all items within a
priority group based on resources such as people-hour, time and material
required. The scale ranges from 1 to 700 per item, with 1 representing the
least amount of complexity.
(2) Y2K Ready: The percentage of the items within a priority group as to which
the Company has received assurances by external providers or believes that
through its own remedial action will be able to process Year 2000 dates
correctly.
(3) Y2K Tested: The percentage of the items within a priority group for which
the Company has begun internal testing for Y2K compliance.
(4) Y2K Compliant: The percentage of the items within a priority group which
the Company believes to be Y2K compliant.
(5) Compliant By: Date by which the Company expects that the entire priority
group will be Y2K compliant.
The Company expects that the aggregate cost of its identification,
assessment, remediation, replacement, testing and implementation efforts related
to the Y2K issue will not exceed $900,000 and that these expenditures will be
funded from operating cash flows. As of May 1, 1999, the Company had incurred
costs of approximately $633,000 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.
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 Annual Report on Form 10-K for the year ended January 30, 1999 on file
with the SEC for a more detailed discussion of these and other factors 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.
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. Reports on Form 8-K
None
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: June 2, 1999 By: /s/ Joseph J. Firestone
-----------------------
Joseph J. Firestone
President and Chief
Executive Officer
(Principal Executive Officer)
Date: June 2, 1999 By: /s/ John R. Panichello
----------------------
John R. Panichello
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
15
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
- --- -----------
<S> <C>
11.1 Statement Regarding Computation of Per Share Earnings
27.1 Financial Data Schedule
</TABLE>
16
<PAGE>
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
--------------------
May 1, May 2,
1999 1998
---- ----
<S> <C> <C>
Net income $2,872,569
----------
----------
Weighted average shares outstanding - basic 20,169,200
Dilutive effect of stock options 143,457
----------
Weighted average shares outstanding - diluted 20,312,657
----------
----------
Net income per share - basic $ 0.14
----------
----------
Net income per share - diluted $ 0.14
----------
----------
Pro forma net income $1,790,853
----------
----------
Pro forma shares outstanding - basic and diluted
15,794,200
----------
----------
Pro forma net income per share - basic and diluted $ 0.11
----------
----------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-START> JAN-31-1999
<PERIOD-END> MAY-01-1999
<CASH> 16,543,874
<SECURITIES> 0
<RECEIVABLES> 7,468,695
<ALLOWANCES> 0
<INVENTORY> 78,473,307
<CURRENT-ASSETS> 109,752,874
<PP&E> 85,095,443
<DEPRECIATION> 39,439,024
<TOTAL-ASSETS> 166,585,007
<CURRENT-LIABILITIES> 112,028,066
<BONDS> 0
0
0
<COMMON> 201,692
<OTHER-SE> 51,874,166
<TOTAL-LIABILITY-AND-EQUITY> 166,585,007
<SALES> 122,743,878
<TOTAL-REVENUES> 123,605,365
<CGS> 90,438,138
<TOTAL-COSTS> 119,170,483
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (289,736)
<INCOME-PRETAX> 4,724,618
<INCOME-TAX> 1,852,049
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,872,569
<EPS-BASIC> 0.14
<EPS-DILUTED> 0.14
</TABLE>
