<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 JULY 31, 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 SEPTEMBER 1, 1999, THERE WERE 20,175,500 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
July 31, 1999 (unaudited) and January 30, 1999 3
Consolidated Statements of Income (unaudited)
Thirteen and twenty-six weeks ended
July 31, 1999 and August 1, 1998 4
Consolidated Statements of Cash Flows (unaudited)
Twenty-six weeks ended
July 31, 1999 and August 1, 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 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
</TABLE>
2
<PAGE>
Part I.
Item 1. Financial Statements
ELECTRONICS BOUTIQUE HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
July 31, January 30,
1999 1999
----------------- -----------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 10,389,943 $ 42,006,179
Accounts receivable:
Trade and vendors 6,142,320 4,010,293
Other 1,285,974 1,516,085
Due from affiliates 483,144 984,096
Merchandise inventories 67,099,070 65,433,008
Deferred tax asset 2,694,000 2,694,000
Prepaid expenses 1,462,098 969,949
------------ ------------
Total current assets 89,556,549 117,613,610
------------ ------------
Property and equipment:
Leasehold improvements 51,471,602 46,933,403
Fixtures and equipment 37,459,576 32,362,909
Land 908,000 --
Construction in progress 2,700,439 1,087,964
------------ ------------
92,539,617 80,384,276
Less accumulated depreciation and amortization 41,139,083 37,349,298
------------ ------------
Net property and equipment 51,400,534 43,034,978
Goodwill and other intangible assets 1,700,890 1,898,395
Deferred tax asset 6,414,680 6,319,000
Other assets 3,363,365 3,181,566
------------ ------------
Total assets $152,436,018 $172,047,549
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving credit facility $ 8,989,523 $ --
Current portion of long-term debt 58,351 99,996
Accounts payable 68,048,585 90,835,578
Accrued expenses 19,834,191 19,625,068
Income taxes payable 530,169 10,144,023
------------ ------------
Total current liabilities 97,460,819 120,704,665
------------ ------------
Long-term liabilities:
Notes payable -- 8,353
Deferred rent 2,489,307 2,492,140
------------ ------------
------------ ------------
Total liabilities 99,950,126 123,205,158
------------ ------------
Stockholders' equity
Preferred stock - authorized 25,000,000 shares; $.01 par value;
no shares issued and outstanding at July 31, 1999 -- --
Common stock - authorized 100,000,000 shares; $.01 par value;
20,169,900 shares issued and outstanding at July 31, 1999 201,699 201,692
Additional paid-in capital 31,551,221 31,541,428
Accumulated other comprehensive expense (475,172) (686,920)
Retained earnings 21,208,144 17,786,191
------------ ------------
Total stockholders' equity 52,485,892 48,842,391
------------ ------------
Total liabilities and stockholders' equity $152,436,018 $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 Twenty-six weeks ended
------------------------- -------------------------
July 31, August 1, July 31, August 1,
1999 1998 1999 1998
----------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Net sales $112,375,483 $101,930,071 $235,119,361 $208,659,885
Management fees 719,099 530,178 1,580,586 1,101,545
------------ ------------ ------------ ------------
Total revenues $113,094,582 $102,460,249 $236,699,947 $209,761,430
------------ ------------ ------------ ------------
Costs and expenses:
Costs of merchandise sold, including freight 82,339,419 75,904,478 172,777,557 155,424,067
Selling, general and administrative 26,974,535 24,060,081 52,999,798 46,330,229
Depreciation and amortization 2,839,671 2,405,320 5,546,753 4,659,088
------------ ------------ ------------ ------------
Operating income 940,957 90,370 5,375,839 3,348,046
Equity in loss of affiliates -- (80,288) -- (160,575)
Interest (income) expense, net 37,362 594,710 (252,374) 808,580
------------ ------------ ------------ ------------
Income (loss) before income taxes 903,595 (584,628) 5,628,213 2,378,891
Income tax expense 354,211 77,406 2,206,260 190,706
------------ ------------ ------------ ------------
Net income (loss) $549,384 $(662,034) $3,421,953 $2,188,185
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Net income per share - basic $ 0.03 $ 0.17
------------ ------------
------------ ------------
Weighted average shares outstanding - basic 20,169,215 20,169,208
----------- ------------
----------- ------------
Net income per share - diluted $ 0.03 $ 0.17
----------- ------------
----------- ------------
Weighted average shares outstanding - diluted 20,355,595 20,334,126
----------- ------------
----------- ------------
Pro Forma Data:
Pro forma operating income (loss) $ (7,955) $ 3,151,396
Pro forma income (loss) before income tax expense (602,665) 2,342,816
Pro forma income tax expense (benefit) (236,245) 918,383
------------ -----------
Pro forma net income (loss) $ (366,420) $ 1,424,433
------------ -----------
------------ -----------
Pro forma net income (loss) per share - basic and diluted $ (0.02) $ 0.09
------------ -----------
------------ -----------
Pro forma weighted average shares outstanding - basic and diluted 15,986,508 15,890,354
------------ -----------
------------ -----------
</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
--------------------------------
July 31, August 1,
1999 1998
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,421,953 $ 2,188,185
Adjustments to reconcile net income to cash used in
operating activities:
Depreciation of property and equipment 5,461,294 4,489,441
Amortization of other assets 85,459 169,647
Loss on disposal of property and equipment 137,859 129,360
Equity in loss of affiliates -- 160,575
Changes in assets and liabilities:
Decrease (increase) in:
Accounts receivable (1,899,253) (1,209,879)
Due from affiliates 501,116 2,548,360
Merchandise inventories (1,499,917) (1,184,460)
Prepaid expenses (487,380) 1,116,321
Other long-term assets (273,970) (640,227)
(Decrease) increase in:
Accounts payable (20,884,704) (16,731,153)
Accrued expenses (1,798,831) 465,367
Due to affiliate (6,781) --
Income taxes payable (9,615,347) (195,247)
Deferred rent (13,659) (80,531)
--------------- ---------------
Net cash used in operating activities (26,872,161) (8,774,241)
--------------- ---------------
Cash flows used in investing activities:
Purchases of property and equipment (13,703,258) (7,862,515)
Proceeds from disposition of assets 335 54,074
--------------- ---------------
Net cash used in investing activities (13,702,923) (7,808,441)
--------------- ---------------
Cash flows from financing activities:
Distributions -- (13,891,545)
Proceeds from exercise of stock options 9,800 --
Proceeds from equity offering -- 55,462,500
Net cash retained by predecessor company -- (12,375,535)
Net payments under revolving credit facility 8,989,523 --
Repayments of long-term debt (49,998) (9,516,898)
--------------- ---------------
Net cash provided by financing activities 8,949,325 19,678,522
--------------- ---------------
Effects of exchange rates on cash 9,523 204,460
Net increase (decrease) in cash and cash equivalents (31,616,236) 3,300,300
Cash and cash equivalents, beginning of period 42,006,179 20,639,610
--------------- ---------------
Cash and cash equivalents, end of period $ 10,389,943 $ 23,939,910
--------------- ---------------
--------------- ---------------
</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 and twenty-six week periods ended
July 31, 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 and twenty-six weeks ended August 1, 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 and twenty-six week periods ending August 1, 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 $50.0 million. As of July 31, 1999,
$ 9.0 million was outstanding on this facility.
(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 Twenty-six weeks ended
------------------------------- -----------------------------
July 31, August 1, July 31, August 1,
1999 1998 1999 1998
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net income (loss) $ 549,384 $ (662,034) $ 3,421,953 $ 2,188,185
Foreign currency translation adjustment (149,150) 4,567 211,748 120,227
------------ ------------- ------------- -------------
Comprehensive income (loss) $ 400,234 $ (657,467) $ 3,633,701 $ 2,308,412
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
</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 July 31, 1999, the Company operated
a total of 567 stores in 46 states, Puerto Rico, Canada, Australia and South
Korea, primarily under the names Electronics Boutique and Stop 'N Save Software.
In addition, the Company offers its products over the internet under the URL
address of WWW.EBWORLD.COM. As of July 31, 1999, the Company also provided
management services for Electronics Boutique Plc., which operated 267 stores and
17 department store-based concessions in the United Kingdom, Ireland and Sweden.
As of such date, the Company also managed 16 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
---------------------- ----------------------
July 31, August 1, July 31, August 1,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales 99.4% 99.5% 99.3% 99.5%
Management fees 0.6 0.5 0.7 0.5
--------- --------- --------- ---------
Total revenues 100.0 100.0 100.0 100.0
Cost of goods sold 72.8 74.1 73.0 74.1
Gross profit 27.2 25.9 27.0 25.9
Operating expenses 23.9 23.5 22.4 22.1
Depreciation and amortization 2.5 2.3 2.3 2.2
--------- --------- --------- ---------
Income from operations 0.8 0.1 2.3 1.6
Equity in loss of affiliates 0.0 (0.1) 0.0 (0.1)
Interest (income) expense, net 0.0 0.6 (0.1) 0.4
--------- --------- ---------- ---------
Income (loss) before income tax expense 0.8 (0.6) 2.4 1.1
Income tax expense 0.3 0.1 0.9 0.1
--------- --------- --------- ---------
Net income (loss) 0.5% (0.7)% 1.5% 1.0%
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
THIRTEEN WEEKS ENDED JULY 31, 1999 COMPARED TO THIRTEEN WEEKS ENDED AUGUST 1,
1998
Net sales increased by 10.3% from $101.9 million in the thirteen weeks ended
August 1, 1998 to $112.4 million in the thirteen weeks ended July 31, 1999. The
increase in net sales was primarily attributable to the additional sales volume
resulting from 93 net new stores opened since August 1, 1998, partially offset
by a 4.1% decrease in comparable store sales. Continuing strong demand for
Nintendo Game Boy software and hardware, PC entertainment software, toys and
software-related action figures positively impacted comparable store sales.
However, sales of Sony PlayStation and Nintendo 64 video game hardware were
below the comparable period for the prior year due to a price reduction in June
of 1998 that significantly increased unit sales in the prior year period.
Additionally, the Company believes that the current quarter's hardware sales
were negatively impacted by consumer anticipation of another price reduction to
these systems, which did occur in mid-August. Sales of Sony PlayStation and
Nintendo 64 video game software were negatively impacted by the delay in the
release of several major titles into the third quarter of the current fiscal
year and a relatively weak selection of new release titles throughout the second
quarter. The company expects sales to be positively impacted in the third
quarter by the introduction of a
8
<PAGE>
new video game hardware system, Sega Dreamcast, on September 9, 1999. Based on
presales of this item to date, it is expected that sales volume for this day
will be the largest single sales day in the Company's history.
Management fees increased from $0.5 million in the thirteen weeks ended
August 1, 1998 to $0.7 million in the thirteen weeks ended July 31, 1999. The
increase was primarily attributable to additional fees earned from Electronics
Boutique plc., which were partially offset by lower continuing fees earned under
the consulting agreement with Borders Group, Inc. In May 1999, Electronics
Boutique plc. completed an acquisition of a competitor, which resulted in
approximately $245,000 of additional management fees earned on the sales of
these newly acquired stores.
Cost of goods sold increased by 8.5% from $75.9 million in the thirteen
weeks ended August 1, 1998 to $82.3 million in the thirteen weeks ended July 31,
1999. As a percentage of net sales, cost of goods sold decreased from 74.5% in
the thirteen weeks ended August 1, 1998 to 73.3% in the thirteen weeks ended
July 31, 1999. The decrease in cost of goods sold as a percentage of net sales
was primarily attributable to increases in sales of Nintendo Game Boy 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. The Company expects cost of goods as a percentage of
sales to be higher during the third quarter as a result of the magnitude of
sales anticipated for the release of the new Sega Dreamcast video hardware
system.
Selling, general and administrative expense increased by 12.1% from $24.1
million in the thirteen weeks ended August 1, 1998 to $27.0 million in the
thirteen weeks ended July 31, 1999. As a percentage of total revenues, selling,
general and administrative expense increased from 23.5% in 1998 to 23.9% in
1999. The $2.9 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 was primarily attributable to expenses associated with the addition of
93 net new stores since August 1, 1998 and for expected new store openings in
fiscal 2000.
Depreciation and amortization expense increased by 18.1% from $2.4 million
in the thirteen weeks ended August 1, 1998 to $2.8 million in the thirteen weeks
ended July 31, 1999. This increase was primarily attributable to capitalized
expenditures for leasehold improvements and furniture and fixtures for new store
openings.
Operating income increased by $0.8 million from $0.1 million in the thirteen
weeks ended August 1, 1998 to $0.9 million in the thirteen weeks ended July 31,
1999. As a percentage of total revenues, operating income increased from 0.1% in
1998 to 0.8% 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, decreased from an expense of $0.6 million in
the thirteen weeks ended August 1, 1998 to an expense of $37,000 in the thirteen
weeks ended July 31, 1999. The decrease was primarily attributable to the
repayment of the Company's debt in the prior year with the proceeds of the
initial public offering and a modest level of borrowing in the current quarter
under the Company's credit facility, which amount was partially offset by
interest income.
As a result of all the above factors, the Company's income before income
taxes increased by $1.5 million from a loss of $0.6 million in the thirteen
weeks ended August 1, 1998 to income of $0.9 million in the thirteen weeks ended
July 31, 1999.
TWENTY-SIX WEEKS ENDED JULY 31, 1999 COMPARED TO TWENTY-SIX WEEKS ENDED AUGUST
1, 1998
Net sales increased by 12.7% from $208.7 million in the twenty-six weeks
ended August 1, 1998 to $235.1 million in the twenty-six weeks ended July 31,
1999. The increase in net sales was primarily attributable to the additional
sales volume attributable to new stores opened since August 1, 1998, partially
offset by a 1.2% decrease in comparable store sales. Strong demand for Nintendo
Game Boy software and hardware, PC entertainment software, toys and
software-related action figures positively impacted comparable store sales.
However, sales of Sony PlayStation and Nintendo 64 video game hardware were
below last year primarily due to a price reduction in June of 1998 that
significantly increased unit sales during last year's comparable period. Sales
of Sony Playstation
9
<PAGE>
and Nintendo 64 video game software were negatively impacted by a relatively
weak selection of new release titles throughout the current year and by the
delay in the release of several major titles into the third quarter of this
year, while last year's results were positively impacted by sales of a few very
successful titles.
Management fees increased by $0.5 million from $1.1 million in the
twenty-six weeks ended August 1, 1998 to $1.6 million in the twenty-six weeks
ended July 31, 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. and to $245,000 of additional management
fees earned from Electronics Boutique plc. on the sales of a newly acquired
competitor which occurred in May 1999.
Cost of goods sold increased by 11.2% from $155.4 million in the twenty-six
weeks ended August 1, 1998 to $172.8 million in the twenty-six weeks ended July
31, 1999. As a percentage of net sales, cost of goods sold decreased from 74.5%
in the twenty-six weeks ended August 1, 1998 to 73.5% in the twenty-six weeks
ended July 31, 1999. The decrease in cost of goods sold as a percentage of net
sales was primarily attributable to increases in sales of Nintendo Game Boy
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 year.
Selling, general and administrative expense increased by 14.4% from $46.3
million in the twenty-six weeks ended August 1, 1998 to $53.0 million in the
twenty-six weeks ended July 31, 1999. As a percentage of total revenues,
selling, general and administrative expense increased from 22.1% in 1998 to
22.4% in 1999. The $6.7 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
93 net new stores since August 1, 1998 and for expected new store openings in
fiscal 2000.
Depreciation and amortization expense increased by 19.1% from $4.7 million
in the twenty-six weeks ended August 1, 1998 to $5.5 million in the twenty-six
weeks ended July 31, 1999. This increase was primarily attributable to
capitalized expenditures for leasehold improvements and furniture and fixtures
for new store openings.
Operating income increased by 60.6% from $3.4 million in the twenty-six
weeks ended August 1, 1998 to $5.4 million in the twenty-six weeks ended July
31, 1999. As a percentage of total revenues, operating income increased from
1.6% in 1998 to 2.3% 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 $0.8 million in
the twenty-six weeks ended August 1, 1998 to income of $0.3 million in the
twenty-six weeks ended July 31, 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, partially offset by a modest level of borrowing under the
company's credit facility.
As a result of all the above factors, the Company's income before income
taxes increased by 136.6% from $2.4 million in the twenty-six weeks ended August
1, 1998 to $5.6 million in the twenty-six weeks ended July 31, 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.
10
<PAGE>
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 increased from $3.1 million at January 30, 1999 to $7.9 million at July
31, 1999. At July 31, 1999 the Company had $9.0 million of borrowings under its
$50 million revolving credit facility.
The Company used $26.9 million in cash from operations in the twenty-six
week period ended July 31, 1999 and used $8.8 million of cash from operations
during the twenty-six weeks ended August 1, 1998. The $26.9 million of cash used
in operations in 1999 was primarily the result of a decrease of $20.9 million in
accounts payable, a decrease of $9.6 million in taxes payable, a decrease of
$1.8 million in accrued expenses, an increase of $1.9 million in accounts
receivable and an increase of $1.5 million in merchandise inventories, partially
offset by $9.1 million of net income and non-cash charges to net income. The
decrease in accounts payable was primarily due to payments of outstanding
balances from the end of fiscal 1999. The $8.8 million of cash used in
operations in 1998 was primarily the result of a decrease of $16.7 million in
accounts payable, an increase of $1.2 million in accounts receivable, and an
increase of $1.2 million in merchandise inventories, partially offset by $7.1
million of net income and non-cash charges to net income, a decrease of $2.5
million in due from affiliates, and a $1.1 million decrease in prepaid expenses.
The Company made capital expenditures of $13.7 million in the twenty-six
weeks ended July 31, 1999, primarily to open new stores and remodel existing
stores, for leasehold improvements at the Company's headquarters and primary
distribution center, and for equipment and leasehold improvements at a new
customer service facility in Nevada to support internet and catalog sales
operations. The Company expects to make approximately $29.0 million of capital
expenditures in fiscal 2000. A predecessor to the Company made capital
expenditures of $7.9 million in the twenty-six weeks ended August 1, 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 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 adoption of
this standard is not expected to materially impact the Company's results of
operations, financial condition or long-term liquidity
In June 1999, the FASB issued Statement of Financial Accounting Standards
No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral
of the Effective Date of FASB Statement No. 133 ("SFAS 137"). SFAS 137 delays
the implementation of SFAS No. 133 until the year 2002.
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.
11
<PAGE>
Y2K Project Methodology and Approach.
The Company's Y2K project uses a five-phase methodology and approach, of
which the first two phases have been completed 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 July 31, 1999, the Company had inventoried 100% 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 had planned to remediate all Critical and
Important items before July 31, 1999, however this goal was not accomplished due
to delays caused by external vendor software issues. The Company now intends to
achieve this goal before October 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
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 not
Y2K 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 has completed the inventory and assessment of
these systems and is continuing with any necessary
12
<PAGE>
remediation, testing and implementation. All locations are expected to be rid of
Critical, if any, and Important Y2K issues by October 31, 1999.
<TABLE>
<CAPTION>
OVERALL Y2K PROJECT STATUS BY PRIORITY (AS OF JULY 31, 1999)
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 93 1223 95.50% 93.05% 93.05% 10/31/1999
Important 227 405 95.31% 85.93% 85.93% 10/31/1999
Inconvenient 45 51 98.04% 92.16% 92.16% 10/31/1999
Non-essential 14 23 100.00% 100.00% 100.00%
- --------------
</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 July 31, 1999, the Company had incurred
costs of approximately $720,000 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.
13
<PAGE>
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.
14
<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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 22, 1999, the Company held its Annual Meeting of Stockholders at which
the stockholders:
(1) Elected Susan Y. Kim and Stanley ("Mickey") Steinberg to serve as Class I
Directors until the 2002 annual meeting or until their successors are
elected and qualified. Ms. Kim and Mr. Steinberg received the number of
votes set opposite their respective names:
<TABLE>
<CAPTION>
FOR ELECTION WITHHELD
------------ --------
<S> <C> <C>
Susan Y. Kim 19,689,305 4,980
Stanley ("Mickey") Steinberg 19,689,305 4,980
</TABLE>
(2) Ratified the Company's appointment of KPMG LLP as the Company's independent
certified public accountants for the 2000 fiscal year. Such proposal
received 19,691,095 votes for the ratification, 2,140 against the
ratification and 1,050 votes abstained.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits:
10.1 Employment Agreement by and between the Company and
Seth P. Levy dated July 9, 1999.
11.1 Statement regarding computation of per share earnings
27.1 Financial Data Schedule
b. Reports on Form 8-K
None
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: September 2, 1999 By: /s/ Joseph J. Firestone
-----------------------------
Joseph J. Firestone
President and Chief
Executive Officer
(Principal Executive Officer)
Date: September 2, 1999 By: /s/ John R. Panichello
------------------------------
John R. Panichello
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
16
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
Exhibit
NO. DESCRIPTION
- ------- -----------
<S> <C>
10.1 Employment Agreement by and between the Company and Seth P.
Levy dated July 9, 1999.
11.1 Statement Regarding Computation of Per Share Earnings
27.1 Financial Data Schedule
</TABLE>
17
<PAGE>
Type: EX-10.1 Employment Agreement by and between the Company and Seth P. Levy
EMPLOYMENT AGREEMENT
AGREEMENT dated as of the ninth day of July, 1999 between ELECTRONICS
BOUTIQUE HOLDINGS CORP., a Delaware corporation (the "Company"), and SETH P.
LEVY (the "Executive").
WHEREAS, the Executive has been employed by the Company since February
4, 1997; and
WHEREAS, the Company and Executive mutually desire to enter into this
Agreement with respect to Executive's continued employment with the Company on
the terms set forth herein; and
NOW, THEREFORE, in consideration of the mutual covenants hereinafter
contained, the Company and Executive agree as follows:
1. EMPLOYMENT AND TERM. The Company agrees to continue to employ
Executive and Executive agrees to continue to serve the Company as its Senior
Vice President/Chief Information Officer and President EBWorld.Com or in such
other executive positions as may be mutually agreed upon by Executive and the
Company, during the Term (as defined below). The term of this Agreement (the
"Term") shall commence on July 9, 1999, and end on the date which is the second
year anniversary thereof, or such later date to which Executive's employment may
be extended as provided in Section 12 hereof.
2. DUTIES. During the Term, Executive agrees to serve the Company
faithfully and to the best of his ability; to devote his entire working time,
energy and skill (except for illness or incapacity and except for vacation time
as provided herein) to such employment; to use his best efforts, skills and
ability to promote its interests and to perform such duties as from time to time
may be assigned to him, subject to Section 3 hereof. Notwithstanding the
foregoing, Executive may engage in charitable and public and industry service
activities so long as such activities do not materially interfere with the
performance of his duties and responsibilities under this Agreement.
3. RESPONSIBILITIES. Executive's area of responsibility shall be that
of Senior Vice President/Chief Information Officer and President EBWorld.Com,
or such other executive position as may be mutually agreed upon by Executive and
the Company, and during the Term, the Company shall not assign any duties to or
remove any duties from Executive inconsistent therewith and, further, the
Company shall at all times provide Executive with such executive powers and
authority as shall reasonably be required to enable him to discharge such duties
in an efficient manner, together with such facilities and services as are
suitable or customary to such position. During the Term, Executive shall report
directly to the Chief Executive Officer of the Company.
4. COMPENSATION. The Company agrees to pay Executive as compensation
for all duties performed by him in any capacity during the period of his
employment under this Agreement:
<PAGE>
(a) base salary ("Base Salary"), payable in accordance with the
Company's normal payroll practices, at the annual rate of $175,450, subject
to such adjustments as the Board of Directors or a committee thereof shall
approve.
(b) a bonus (the "Bonus") payable in cash, determined pursuant to
a bonus program adopted by the Board of Directors that will have a target
amount of 50% of Base Salary with objectives to be established in the
approved program.
(c) from time to time, Executive shall also be eligible to
participate prospectively in the 1998 Equity Participation Plan of the
Company, in the amounts determined by the Board of Directors committee which
administers the 1998 Equity Participation Plan.
5. BENEFITS; REIMBURSEMENT OF EXPENSES; VACATION. Executive shall also
be entitled to:
(a) participate in all of the benefit programs which are
presently or may hereafter be provided by the Company including, without
limitation, all stock option, pension, thrift, incentive, deferred
compensation, retirement, health insurance and life insurance programs
(collectively, the "benefit programs"), which includes specifically (i) the
policies of "key man" insurance, if any, on Executive's life, payable at $1
million to each of the Company and the Executive, and (ii) the deferred
compensation plan presently existing between the Company and the Executive;
(b) reimbursement by the Company of all expenses reasonably
incurred by him in connection with the performance of his duties including,
without limitation, travel and entertainment expenses reasonably related to
the business or interests of the Company, upon submission by him of written
documentation of such expenses;
(c) a vacation of four (4) weeks each year at such time or times
as he shall reasonably determine; and
(d) have the Company pay the reasonable costs and expenses of a
leased automobile for Executive, commensurate with an automobile for a person
with Executive's position, including the reasonable expense of maintaining
and operating the automobile for business and personal use, in accordance
with Company policy.
6. DISABILITY OR DEATH.
(a) If, during the Term of this Agreement, Executive becomes
disabled or incapacitated as determined under the Company's Long Term
Disability Policy ("Permanently Disabled"), the Company shall have the right
at any time thereafter, so long as Executive is then still Permanently
Disabled, to terminate this Agreement. If the Company elects to terminate
this Agreement by reason of Executive becoming Permanently Disabled, the
Company, for the unexpired
2
<PAGE>
Term of this Agreement, shall (whether or not such benefits are covered under
the Company's Long Term Disability Policy), continue to pay:
(i) to Executive, sixty percent (60%) of his Base Salary
(through insurance or otherwise) at the rate in effect on the date of such
termination, such payments to be made as set forth in Section 4;
(ii) in the event of Executive's death after such termination
for Permanent Disability, then to the persons and in the manner set forth in
subparagraph (c) of this Section 6, an amount per annum equal to sixty
percent (60%) of Executive's Base Salary at the rate in effect on the date
this Agreement is terminated by the Company, such payments to be made as set
forth in Section 4; or
(iii) if, and so long as, the Company does not elect to
terminate this Agreement as a result of Executive's Permanent Disability,
this Agreement shall continue in full force and effect and Executive shall be
entitled to all benefits including compensation as set forth herein.
(b) If Executive dies during the Term, this Agreement shall
automatically terminate, and the Company shall pay to the persons set forth
in Subparagraph (c) of this Section 6, all accrued but unpaid salary, bonus
(calculated for the then current year prorated up to the date of death),
benefits and other amounts, as required by law.
(c) Any payments to be made pursuant to subparagraph (a) or (b)
of this Section 6 to persons other than Executive in the event of the death
of Executive shall be made to Executive's designated beneficiaries or, if no
such designation has been made and Executive's spouse survives Executive,
then the payments shall be made to Executive's spouse, and if such spouse
subsequently dies before all such payments are made, the remaining payments
shall be made to the estate of Executive's spouse. If Executive is not
survived by a spouse, then the payments shall be made among Executive's issue
who survive Executive, PER STIRPES, and if any individual who is issue of
Executive and who as of the date of death of Executive is entitled to receive
payments dies after Executive's death, the payments which such issue would
have been entitled to receive shall be made to his or her estate. If at the
date of Executive's death Executive is not survived by any spouse, or any
issue, then the payments shall be made to Executive's estate.
7. CONFIDENTIAL INFORMATION; CONFLICT OF INTEREST; NON-COMPETE.
(a) Without the express prior written consent of the Board of
Directors, Executive shall not disclose or make available to anyone outside
the Company, its subsidiaries or affiliated corporations or entities any
confidential or proprietary information of, or concerning, the Company,
including, without limitation, trade secrets, knowhow, customer lists,
inventions or other information not generally known or reasonably available
to any competitor of the Company, its subsidiaries or affiliated corporations
or entities.
3
<PAGE>
(b) In consideration of the compensation, grant of stock options
and other benefits payable to Executive hereunder, Executive agrees that he
shall not, without the prior written consent of the Company, engage in a
"Prohibited Business" (as defined herein) during the Term and for a
three-year period following the Term (the "Non-Compete"). For this purpose,
the term "Prohibited Business" shall mean the development, distribution, or
retail sale of video games, personal computer gaming or similar entertainment
software and devices, personal computers and related devices that facilitate
or enhances the use of gaming and similar entertainment equipment, devices,
programs and software for game systems or personal computers provided such
business does or is intended to amount to more than an insubstantial part of
the annual revenue of the entity engaged in such business. Executive shall be
regarded as engaged in a Prohibited Business if he engages as partner, owner,
agent, representative, executive, officer, director, employee or consultant,
or participates directly or indirectly, whether through investment,
partnership, license, joint venture or otherwise, in any Prohibited Business.
Nothing set forth above shall be deemed to prevent the Executive from merely
acquiring or owning for investment purposes only five percent or less of any
entity, whether public or private, regardless of the business in which such
entity is engaged, except to the extent such ownership violates any Federal
or state law, rule or regulation governing the issuance, purchase, or sale of
securities. No such acquisition or ownership shall be made during the Term by
Executive to the extent such ownership exceeds the percentage ownership
Executive has in the Company.
(c) Executive shall not, directly or indirectly, engage in any or
have an interest, financial or otherwise, in any other business enterprise
which interferes or is likely to interfere with Executive's independent
exercise of judgment in the Company's best interests. Executive will not
undertake involvement in any outside business interest without first assuring
that no conflict of interest exists and obtaining prior written approval of
the Board of Directors of the Company to undertake the contemplated
involvement. Executive acknowledges that he has a continuing responsibility
for insuring that no outside business interest in which Executive presently
is involved or in the future may be involved is detrimental to the interests
of the Company.
(d) Upon the termination of this Agreement (including any renewal
term) or earlier as provided herein, Executive shall be permitted to act as a
consultant to any entity as to any business or investment other than a
Prohibited Business.
8. TERMINATION. In addition to the provisions of Section 1 hereof, this
Agreement may be terminated prior to the expiration of its Term as follows:
(a) Automatically upon Executive's death, in which event the
provisions of Section 6 shall be applicable;
(b) Upon notice from the Company upon Executive's Permanent
Disability, in the event of the Company elects to terminate Executive's
employment pursuant to the provisions of Section 6;
4
<PAGE>
(c) Upon thirty (30) days' prior written notice from the Company
for "cause," which for purposes hereof shall mean that (i) Executive has been
found guilty of committing any felony, or (ii) in the reasonable judgment of
the Board, Executive has been negligent or has committed willful misconduct
in carrying out his duties hereunder (unless Executive cures such breach, or
has taken substantial and continuing actions to cure such breach, within such
thirty (30) day notice period);
(d) Upon thirty (30) days notice from Executive upon the
Company's breach of any material provision of this Agreement (unless the
Company cures such breach within the thirty (30) notice period). Without
limiting the generality of the foregoing, it is acknowledged and agreed that
Sections 2, 3, 4, 5 and 8 of this Agreement are material provisions of this
Agreement; or
(e) Upon notice from Executive following a "change in control".
"Change in Control" shall mean a change in ownership or control of the
Company effected through either of the following transactions.
i. any person or related group of persons (other than the
Company or a person that directly or indirectly controls, is controlled by, or
is under common control with, the Company) directly or indirectly acquires
beneficial ownership (within the meaning of Rule 13d-3 under the Exchange Act)
of securities possessing more than fifty percent (50%) of the total combined
voting power of the Company's outstanding, securities through a transaction
which the Board does not recommend or approve or through a negotiated sale of
securities to any person or persons who is considered hostile; or
ii. there is a change in the composition of the Board over a
period of thirty-six (36) consecutive months (or less) such that a majority of
the Board members (rounded up to the nearest whole number) ceases, by reason of
one or more proxy contests for the election of Board members, to be comprised of
individuals who either (i) have been Board members continuously since the
beginning of such period or (ii) have been elected or nominated for election as
Board members during such period by at least a majority of the Board members
described in clause (i) who were still in office at the time such election or
nomination was approved by the Board.
9. WRONGFUL TERMINATION; COMPANY BREACH; CHANGE IN CONTROL. In the
event of the termination of this Agreement by Executive pursuant to paragraph
(d) or (e) of Section 8, or in the event of termination of this Agreement by the
Company other than pursuant a notice of termination under paragraph (b) or (c)
of Section 8, Executive shall be entitled to receive all of the compensation and
benefits provided herein until the later of (i) the date the Term would have
expired absent any termination of this Agreement, or (ii) twelve (12) months
from the effective date of such termination. In no event will an amount be
payable to Executive in excess of $100 less than the maximum amount of
compensation deductible to the Company under Section 280G of the Internal
Revenue Code of 1986, as amended. If the Company and Executive shall become
involved in a dispute relating to any alleged breach of this Agreement by the
Company or Executive, the dispute shall be submitted to binding arbitration by
the AAA (American Arbitration Association) in Philadelphia, Pennsylvania upon
the demand of either party, the results of which may be transferred to a court
of competent
5
<PAGE>
jurisdiction and entered of record as a judgment upon which execution may issue.
If Executive substantially prevails (by judgment, settlement or otherwise) in
such dispute, the Company shall reimburse Executive for all reasonable costs
(including reasonable fees and disbursements of counsel) incurred by him in
connection with such dispute upon presentation to the Company of evidence of
such costs. Nothing herein shall prevent either party from going directly to a
court of competent jurisdiction for any form of injunctive or other equitable
relief, whereby the other party shall not have any right to mandate the
arbitration provisions.
10. TERMINATION OF PRIOR AGREEMENTS. This Agreement expressly
supersedes all agreements and understandings between the parties regarding the
subject matter hereof and any such agreement or understanding is terminated as
of the date the IPO is completed.
11. RENEWAL/NON-RENEWAL. This Agreement shall be automatically extended
without further action by the parties for one (1) additional year unless either
party shall, at least 90 days prior to the expiration date have given notice to
the other party that this Agreement shall not be so extended.
12. BINDING EFFECT. This Agreement shall be binding upon and inure to
the benefit of the parties hereof, their respective legal representatives and to
any successor of the Company, which successor shall be deemed substituted for
the Company under the terms of this Agreement. As used in this Agreement, the
term "successor" shall include any person, firm, corporation or other business
entity which at any time, whether by merger, purchase or otherwise, acquires all
or substantially all of the assets or business of the Company. The Executive
consents to the assignment of this Agreement to any successor who or which
agrees to be bound by all of its provisions without modification adverse to the
Executive.
13. WAIVER OF BREACH. The waiver by the Company of a breach of any
provision of this Agreement by Executive shall not operate or be construed as a
waiver of any subsequent breach.
14. NOTICES. Any notice required or permitted to be given hereunder
shall be sufficient if in writing and if sent by registered or certified mail to
Executive at his residence or to the Company at its principal place of business.
15. ENTIRE AGREEMENT. This document contains the entire agreement of
the parties and may not be changed except in a writing signed by both parties.
16. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of Pennsylvania as applied to
contracts executed and performed wholly within the Commonwealth of Pennsylvania.
6
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first set forth above.
ELECTRONICS BOUTIQUE HOLDINGS
CORP.
BY: /s/ Joseph J. Firestone
------------------------
Joseph J. Firestone
President and Chief Executive Officer
EXECUTIVE: /s/ Seth P. Levy
----------------
Seth P. Levy
SVP/CIO
President, EBWorld.com
7
<PAGE>
Type: EX-11 Net Income (Loss) Per Share
ELECTRONICS BOUTIQUE HOLDINGS CORP. AND SUBSIDIARIES
NET INCOME PER SHARE AND PRO FORMA NET INCOME (LOSS) PER SHARE EXHIBIT 11.1
<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty-six Weeks Ended
-------------------- ----------------------
July 31, August 1, July 31, August 1,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net income $ 549,384 $ 3,421,953
----------- -----------
----------- -----------
Weighted average shares outstanding - basic 20,169,215 20,169,208
Dilutive effect of stock options 186,380 164,918
----------- -----------
Weighted average shares outstanding - diluted 20,355,595 20,334,126
----------- -----------
----------- -----------
Net income per share - basic $ 0.03 $ 0.17
----------- -----------
----------- -----------
Net income per share - diluted $ 0.03 $ 0.17
----------- -----------
----------- -----------
Pro forma net income (loss) $ (366,420) $ 1,424,433
----------- -----------
----------- -----------
Pro forma shares outstanding - beginning of period 15,794,200 15,794,200
Weighted average shares attributable to initial
public offering 192,308 96,154
----------- -----------
Pro forma weighted average shares outstanding -
basic and diluted 15,986,508 15,890,354
----------- -----------
----------- -----------
Pro forma net income (loss) per share - basic and $ (0.02) $ 0.09
diluted ----------- -----------
----------- -----------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-START> JAN-31-1999
<PERIOD-END> JUL-31-1999
<CASH> 10,389,943
<SECURITIES> 0
<RECEIVABLES> 7,428,294
<ALLOWANCES> 0
<INVENTORY> 67,099,070
<CURRENT-ASSETS> 89,556,549
<PP&E> 92,539,617
<DEPRECIATION> 41,139,083
<TOTAL-ASSETS> 152,436,018
<CURRENT-LIABILITIES> 97,460,819
<BONDS> 0
0
0
<COMMON> 201,699
<OTHER-SE> 52,284,193
<TOTAL-LIABILITY-AND-EQUITY> 152,436,018
<SALES> 235,119,361
<TOTAL-REVENUES> 236,699,947
<CGS> 172,777,557
<TOTAL-COSTS> 231,324,108
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (252,374)
<INCOME-PRETAX> 5,628,213
<INCOME-TAX> 2,206,260
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,421,953
<EPS-BASIC> 0.17
<EPS-DILUTED> 0.17
</TABLE>
