<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED OCTOBER 30, 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 DECEMBER 7, 1999, THERE WERE 22,213,914 SHARES OF COMMON STOCK, $.01 PAR
VALUE PER SHARE, OUTSTANDING.
<PAGE>
ELECTRONICS BOUTIQUE HOLDINGS CORP.
AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets at
October 30, 1999 (unaudited) and January 30, 1999 3
Consolidated Statements of Income (unaudited)
Thirteen and thirty-nine weeks ended
October 30, 1999 and October 31, 1998 4
Consolidated Statements of Cash Flows (unaudited)
Thirty-nine weeks ended
October 30, 1999 and October 31, 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 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>
October 30, January 30,
ASSETS 1999 1999
----------------- -----------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 10,049,618 $ 42,006,179
Accounts receivable:
Trade and vendors 8,056,506 4,010,293
Other 2,913,402 1,516,085
Due from affiliates - 984,096
Merchandise inventories 132,093,565 65,433,008
Deferred tax asset 2,694,000 2,694,000
Prepaid expenses 8,409,558 969,949
----------------- -----------------
Total current assets 164,216,649 117,613,610
----------------- -----------------
Property and equipment:
Leasehold improvements 54,242,286 46,933,403
Fixtures and equipment 41,910,875 32,362,909
Land 908,000 -
Construction in progress 3,883,608 1,087,964
----------------- -----------------
100,944,769 80,384,276
Less accumulated depreciation and amortization 43,043,196 37,349,298
----------------- -----------------
Net property and equipment 57,901,573 43,034,978
Goodwill and other intangible assets 1,602,139 1,898,395
Deferred tax asset 6,522,723 6,319,000
Other assets 3,505,580 3,181,566
----------------- -----------------
Total assets $ 233,748,664 $ 172,047,549
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 33,352 $ 99,996
Accounts payable 149,060,027 90,835,578
Accrued expenses 22,417,949 19,625,068
Income taxes payable 2,903,630 10,144,023
----------------- -----------------
Total current liabilities 174,414,958 120,704,665
----------------- -----------------
Long-term liabilities:
Notes payable - 8,353
Deferred rent 2,603,927 2,492,140
----------------- -----------------
Total liabilities 177,018,885 123,205,158
----------------- -----------------
Stockholders' equity
Preferred stock - authorized 25,000,000 shares; $.01 par value;
no shares issued and outstanding at October 30, 1999 - -
Common stock - authorized 100,000,000 shares; $.01 par value;
20,202,400 shares issued and outstanding at October 30, 1999 202,024 201,692
Additional paid-in capital 32,005,896 31,541,428
Accumulated other comprehensive expense (550,192) (686,920)
Retained earnings 25,072,051 17,786,191
----------------- -----------------
Total stockholders' equity 56,729,779 48,842,391
----------------- -----------------
Total liabilities and stockholders' equity $ 233,748,664 $ 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 Thirty-nine weeks ended
-------------------------- ---------------------------
October 30, October 31, October 30, October 31,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $176,465,510 $110,664,405 $411,584,871 $319,324,290
Management fees 944,157 635,326 2,524,743 1,736,871
------------ ------------ ------------ ------------
Total revenues $177,409,667 $111,299,731 $414,109,614 $321,061,161
------------ ------------ ------------ ------------
Costs and expenses:
Costs of merchandise sold, including freight 135,979,488 83,627,904 308,757,045 239,051,971
Selling, general and administrative 32,020,460 22,657,291 85,020,258 68,987,520
Depreciation and amortization 3,118,557 2,495,421 8,665,310 7,154,509
------------ ------------ ------------ ------------
Operating income 6,291,162 2,519,115 11,667,001 5,867,161
Equity in loss of affiliates - - - (160,575)
Interest (income) expense, net (64,300) (148,587) (316,674) 659,993
------------ ------------ ------------ ------------
Income before income taxes 6,355,462 2,667,702 11,983,675 5,046,593
Income tax expense 2,491,555 1,045,536 4,697,815 1,236,242
------------ ------------ ------------ ------------
Net income $ 3,863,907 $ 1,622,166 $ 7,285,860 $ 3,810,351
============ ============= ============ ============
Net income per share - basic $ 0.19 $ 0.08 $ 0.36
=========== ============ ============
Weighted average shares outstanding - basic 20,187,898 20,169,200 20,175,438
=========== ============ ============
Net income per share - diluted $ 0.19 $ 0.08 $ 0.36
=========== ============ ============
Weighted average shares outstanding - diluted 20,733,249 20,169,200 20,467,167
=========== ============ ============
PRO FORMA DATA:
Pro forma income before income tax expense 5,046,593
Pro forma income tax expense 1,978,061
------------
Pro forma net income $ 3,068,532
============
Pro forma net income per share - basic and diluted $ 0.18
============
Pro forma weighted average shares outstanding - basic and diluted 17,316,636
===========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
ELECTRONICS BOUTIQUE HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Thirty-nine weeks ended
--------------------------------
October 30, October 31,
1999 1998
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 7,285,860 $ 3,810,351
Adjustments to reconcile net income to cash used in
operating activities:
Depreciation of property and equipment 8,481,099 6,855,834
Amortization of other assets 184,211 298,675
Loss on disposal of property and equipment 250,842 198,704
Equity in loss of affiliates - 160,575
Changes in assets and liabilities:
Decrease (increase) in:
Accounts receivable (5,434,409) (3,234,212)
Due from affiliates 985,086 2,446,768
Merchandise inventories (66,436,619) (39,998,437)
Prepaid expenses (7,436,904) (1,848,638)
Other long-term assets (533,996) (664,034)
(Decrease) increase in:
Accounts payable 60,035,876 25,360,823
Accrued expenses 772,050 1,408,766
Due to affiliate (57,209) (7,855,957)
Income taxes payable (7,240,626) (195,585)
Deferred rent 106,244 (77,406)
--------------- ---------------
Net cash used in operating activities (9,038,495) (13,333,773)
--------------- ---------------
Cash flows used in investing activities:
Purchases of property and equipment (23,314,058) (13,561,834)
Proceeds from disposition of assets 335 130,692
--------------- ---------------
Net cash used in investing activities (23,313,723) (13,431,142)
--------------- ---------------
Cash flows from financing activities:
Distributions - (19,950,573)
Proceeds from exercise of stock options 464,800 -
Proceeds from equity offering - 54,962,500
Net cash retained by predecessor company - (12,375,535)
Net payments under revolving credit facility - 139,973
Repayments of long-term debt (74,997) (12,871,595)
--------------- ---------------
Net cash provided by financing activities 389,803 9,904,770
--------------- ---------------
Effects of exchange rates on cash 5,854 307,278
Net decrease in cash and cash equivalents (31,956,561) (16,552,867)
Cash and cash equivalents, beginning of period 42,006,179 20,639,610
--------------- ---------------
Cash and cash equivalents, end of period $ 10,049,618 $ 4,086,743
=============== ===============
</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 thirty-nine week periods
ended October 30, 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 thirty-nine weeks ended October 31, 1998 is included in order to
reflect the change in tax status as described in Note 3 below.
(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. 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 predecessor to the Company (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 thirty-nine week period ending
October 31, 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.
(4) DEBT
The Company has available a revolving credit facility with Fleet Capital
Corporation for maximum borrowings of $50.0 million. As of October 30, 1999,
there were no outstanding borrowings on this facility.
6
<PAGE>
(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 Thirty-nine weeks ended
-------------------------------- -------------------------------
October 30, October 31, October 30, October 31,
1999 1998 1999 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net income $ 3,863,907 $ 1,622,166 $ 7,285,860 $ 3,810,351
Foreign currency translation adjustment (75,020) 89,095 136,728 209,322
------------ -------------- -------------- --------------
Comprehensive income $ 3,788,887 $ 1,711,261 $ 7,422,588 $ 4,019,673
============ ============== ============== ==============
</TABLE>
7
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company believes that it is among the world's largest specialty
retailers of electronic games. The Company's primary products are video games
and PC entertainment software, supported by the sale of video game hardware, PC
productivity software and accessories. As of October 30, 1999, the Company
operated a total of 595 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 October 30, 1999, the Company also
provided management services for Electronics Boutique Plc., which operated 273
stores and 18 department store-based concessions in the United Kingdom, Ireland
and Sweden. As of such date, the Company also managed 15 mall-based
Waldensoftware stores for Borders Group, Inc. The Company is a holding company
and does not have any significant assets or liabilities, other than all of the
outstanding capital stock of its subsidiaries.
RESULTS OF OPERATIONS
The following table sets forth certain income statement items as a
percentage of total revenues for the periods indicated:
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-nine Weeks Ended
--------------------------- ----------------------------
October 30, October 31, October 30, October 31,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales 99.5% 99.4% 99.4% 99.5%
Management fees 0.5 0.6 0.6 0.5
--------- --------- --------- ---------
Total revenues 100.0 100.0 100.0 100.0
Cost of goods sold 76.6 75.1 74.6 74.5
--------- --------- --------- ---------
Gross profit 23.4 24.9 25.4 25.5
Operating expenses 18.0 20.4 20.5 21.5
Depreciation and amortization 1.8 2.2 2.1 2.2
--------- --------- --------- ---------
Income from operations 3.6 2.3 2.8 1.8
Equity in loss of affiliates - - - (0.0)
Interest (income) expense, net 0.0 (0.1) (0.1) 0.2
--------- --------- --------- ---------
Income before income tax expense 3.6 2.4 2.9 1.6
Income tax expense 1.4 0.9 1.1 0.4
--------- --------- --------- ---------
Net income 2.2% 1.5% 1.8% 1.2%
========= ========= ========= =========
</TABLE>
THIRTEEN WEEKS ENDED OCTOBER 30, 1999 COMPARED TO THIRTEEN WEEKS ENDED
OCTOBER 31, 1998
Net sales increased by 59.5% from $110.7 million in the thirteen weeks ended
October 31, 1998 to $176.5 million in the thirteen weeks ended October 30, 1999.
The increase in net sales was primarily attributable to a 37.5% increase in
comparable store sales, which resulted in a $40.5 million increase in net sales,
and the additional sales volume resulting from 95 net new stores opened since
October 31, 1998. Comparable store sales were positively impacted in the current
quarter by the release of the Sega Dreamcast console system on September 9,
1999, a good quantity of well-received new release titles for existing video
game console platforms, a continuing strong demand for Nintendo Game Boy
software and hardware, and a surge in the toy categories including Pokemon
trading cards. The Company was the number one retailer on the release day of
Sega's Dreamcast system and had a 22% market share over the first three days of
sales after the release date in the United States, as determined from NPD
Interactive Entertainment reports.
8
<PAGE>
Management fees increased by 48.6% from $0.6 million in the thirteen weeks
ended October 31, 1998 to $0.9 million in the thirteen weeks ended October 30,
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.
Approximately $370,000 of additional management fees were earned in the current
quarter on the combined sales of the Electronics Boutique plc. stores compared
to the prior year period.
Cost of goods sold increased by 62.6% from $83.6 million in the thirteen
weeks ended October 31, 1998 to $136.0 million in the thirteen weeks ended
October 30, 1999. As a percentage of net sales, cost of goods sold increased
from 75.6% in the thirteen weeks ended October 31, 1998 to 77.1% in the thirteen
weeks ended October 30, 1999. As expected, the increase in cost of goods sold as
a percentage of net sales was primarily attributable to the significant sales of
lower margin Sega Dreamcast hardware in the current quarter, partially offset by
strong sales of higher margin software with this new system and higher margin
Game Boy products, toys and trading cards.
Selling, general and administrative expense increased by 41.3% from $22.7
million in the thirteen weeks ended October 31, 1998 to $32.0 million in the
thirteen weeks ended October 30, 1999. As a percentage of total revenues,
selling, general and administrative expense decreased from 20.4% in the thirteen
weeks ended October 31, 1998 to 18.0% in the thirteen weeks ended October 30,
1999. The $9.3 million increase was primarily attributable to the increase in
the Company's domestic and international store base and the associated increases
in store, distribution, and headquarter operating expenses. Also included in
this increase was $1.6 million for an advertising and promotional campaign for
the Company's e-commerce business that began in the current quarter. The
decrease in selling, general and administrative expense as a percentage of total
revenues was primarily attributable to an increase in net sales and the impact
of the above factors on operating expenses.
Depreciation and amortization expense increased by 25.0% from $2.5 million
in the thirteen weeks ended October 31, 1998 to $3.1 million in the thirteen
weeks ended October 30, 1999. This increase was primarily attributable to
capitalized expenditures for leasehold improvements and furniture and fixtures
for new store openings and remodeling of existing stores.
Operating income increased by 150% from $2.5 million in the thirteen weeks
ended October 31, 1998 to $6.3 million in the thirteen weeks ended October 30,
1999. As a percentage of total revenues, operating income increased from 2.3% in
the thirteen weeks ended October 31, 1998 to 3.6% in the thirteen weeks ended
October 30, 1999, as the increase in cost of goods sold as a percentage of total
revenues was more than offset by a decrease in operating expenses and
depreciation and amortization expense as a percentage of total revenues.
Interest (income) expense, net, decreased by 56.7% from income of $149,000
in the thirteen weeks ended October 31, 1998 to income of $64,000 in the
thirteen weeks ended October 30, 1999. The decrease was primarily attributable
to a higher level of interest income earned on short term investments of the
proceeds of the initial public offering after repayment of the Company's debt in
the prior year and the impact of interest expense on a modest level of borrowing
under the Company's credit facility in the current year period which offset
interest income earned.
As a result of all the above factors, the Company's income before income
taxes increased by 138% from income of $2.7 million in the thirteen weeks ended
October 31, 1998 to income of $6.4 million in the thirteen weeks ended October
30, 1999.
THIRTY-NINE WEEKS ENDED OCTOBER 30, 1999 COMPARED TO THIRTY-NINE WEEKS ENDED
OCTOBER 31, 1998
Net sales increased by 28.9% from $319.3 million in the thirty-nine weeks
ended October 31, 1998 to $411.6 million in the thirty-nine weeks ended October
30, 1999. The increase in net sales was primarily attributable to the additional
sales volume attributable to 95 net new stores opened since October 31, 1998 and
by a 12.1% increase in comparable store sales. Comparable store sales were
positively impacted in the current year period primarily by the release of the
Sega Dreamcast console system on September 9, 1999, which was supported by 18
software titles at launch and more shortly thereafter. In addition, a strong
demand for Nintendo Game Boy software and hardware, toy categories including
software-related action figures and Pokemon trading cards, and a stronger
selection of new
9
<PAGE>
release titles for existing hardware platforms in this year's third quarter
positively impacted comparable store sales for the thirty-nine week period.
Management fees increased by 45.4% from $1.7 million in the thirty-nine
weeks ended October 31, 1998 to $2.5 million in the thirty-nine weeks ended
October 30, 1999. The increase was primarily attributable to additional
management fees earned from Electronics Boutique plc. on the sales of a newly
acquired competitor which occurred in May 1999 and to an additional $248,000 for
a performance fee earned for fiscal 1999 under the consulting agreement with
Border's Group, Inc.
Cost of goods sold increased by 29.2% from $239.1 million in the thirty-nine
weeks ended October 31, 1998 to $308.8 million in the thirty-nine weeks ended
October 30, 1999. As a percentage of net sales, cost of goods sold increased
from 74.9% in the thirty-nine weeks ended October 31, 1998 to 75.0% in the
thirty-nine weeks ended October 30, 1999. The increase in cost of goods sold as
a percentage of net sales was primarily attributable to the significant sales of
the Sega Dreamcast hardware in the third quarter of this year, which carry much
lower margins than software, partially offset by increases in sales of Nintendo
Game Boy software and hardware, toys, software-related action figures and
trading cards that carry higher overall margins than the console video game
category.
Selling, general and administrative expense increased by 23.2% from $69.0
million in the thirty-nine weeks ended October 31, 1998 to $85.0 million in the
thirty-nine weeks ended October 30, 1999. As a percentage of total revenues,
selling, general and administrative expense decreased from 21.5% in 1998 to
20.5% in 1999. The $16.0 million increase was primarily attributable to the
increase in the Company's domestic and international store base and the
associated increases in store, distribution, and headquarter operating expenses,
which was partially offset by an increase in promotional and marketing
reimbursements. In addition, $1.6 million was incurred for an advertising and
promotional campaign that began in the third quarter of 1999 for the Company's
e-commerce business. The decrease in selling, general and administrative
expenses as a percentage of total revenues were primarily attributable to an
increase in net sales and the impact of the above factors on operating expenses.
Depreciation and amortization expense increased by 21.1% from $7.2 million
in the thirty-nine weeks ended October 31, 1998 to $8.7 million in the
thirty-nine weeks ended October 30, 1999. This increase was primarily
attributable to capitalized expenditures for leasehold improvements and
furniture and fixtures for new store openings and remodeling of existing stores.
Operating income increased by 98.9% from $5.9 million in the thirty-nine
weeks ended October 31, 1998 to $11.7 million in the thirty-nine weeks ended
October 30, 1999. As a percentage of total revenues, operating income increased
from 1.8% in 1998 to 2.8% in 1999, as the increase in cost of goods sold as a
percentage of total revenues was more than offset by a decrease in operating
expenses as a percentage of total revenues.
Interest (income) expense, net, improved from an expense of $0.7 million in
the thirty-nine weeks ended October 31, 1998 to income of $0.3 million in the
thirty-nine weeks ended October 30, 1999. The change was primarily attributable
to the repayment of the Company's debt with the proceeds of the initial public
offering and 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 137% from $5.0 million in the thirty-nine weeks ended
October 31, 1998 to $12.0 million in the thirty-nine weeks ended October 30,
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
10
<PAGE>
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 increased from $3.1 million at January 30, 1999 to $10.2 million at
October 30, 1999, primarily due to the funding of capital expenditures in excess
of proceeds generated from income with working capital. At October 30, 1999 the
Company had no borrowings under its $50 million revolving credit facility.
The Company used $9.0 million in cash from operations in the thirty-nine
week period ended October 30, 1999 and used $13.3 million of cash from
operations during the thirty-nine weeks ended October 31, 1998. The $9.0 million
of cash used in operations in 1999 was primarily the result of an increase of
$7.4 million in prepaid expenses, a decrease of $7.2 million in taxes payable,
an increase of $6.4 million in the Company's investment in merchandise
inventories net of accounts payable and an increase of $5.4 million in accounts
receivable, partially offset by $16.2 million of net income and non-cash charges
to net income. The $13.3 million of cash used in operations in 1998 was
primarily the result of an increase of $14.6 million in the Company's investment
in merchandise inventories net of accounts payable, a decrease of $5.4 million
in net affiliate liabilities and receivables, an increase of $3.2 million in
accounts receivable, and an increase of $1.8 million in prepaid expenses,
partially offset by $11.3 million of net income and non-cash charges to net
income.
The Company made capital expenditures of $23.3 million in the thirty-nine
weeks ended October 30, 1999, primarily to open new stores and remodel existing
stores, for the building of a new 80,000 square foot distribution center
adjacent to the Company's headquarters, 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. The Company and its
predecessor, the EB Group, made capital expenditures of $13.6 million in the
thirty-nine weeks ended October 31, 1998, primarily for opening new stores, to
remodel existing stores and for leasehold improvements at the corporate
headquarters and primary distribution center.
The Company completed a secondary offering of 2,000,000 shares of common
stock that was effective on November 23, 1999. The offering price for these
shares was $21.375 and the net proceeds received by the Company were
$40,210,000.
The Company believes that cash generated from its operating activities,
offering proceeds and available bank borrowings will be sufficient to fund its
operations and store expansion programs.
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
11
<PAGE>
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.
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"). The Company inventoried 100% of items that it believed
might be affected by the Y2K issue by July 31, 1999.
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. As of
October 30, 1999, the Company had resolved all Critical issues and had one
remaining Important issue. This item involves the ability of the Company to
efficiently ship product to its stores and was expected to be resolved by
October 30, 1999, however this goal was not accomplished due to delays caused by
external vendor software issues. While this item is considered important by the
Company and is expected to be resolved before the end of the calendar year, the
Company will still be able to ship product using alternative, although less
efficient, resources and equipment.
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
12
<PAGE>
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.
OVERALL Y2K PROJECT STATUS BY PRIORITY (AS OF NOVEMBER 15, 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 84 1124 100.0% 100.0% 100.0%
Important 240 504 100.0% 90.1% 90.1% 12/15/1999
Inconvenient 45 51 100.0% 100.0% 100.0%
Non-essential 14 23 100.0% 100.0% 100.0%
</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 $850,000 and that these expenditures will be
funded from operating cash flows. As of October 30, 1999, the Company had
incurred costs of approximately $794,000 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 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
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ELECTRONICS BOUTIQUE HOLDINGS CORP.
(Registrant)
Date: December 9, 1999 By: /s/ Joseph J. Firestone
-----------------------
Joseph J. Firestone
President and Chief
Executive Officer
(Principal Executive Officer)
Date: December 9, 1999 By: /s/ John R. Panichello
----------------------
John R. Panichello
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting
Officer)
16
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description
- ------- -----------
11.1 Statement Regarding Computation of Per Share Earnings
27.1 Financial Data Schedule
17
<PAGE>
Type: EX-11 Net Income Per Share
ELECTRONICS BOUTIQUE HOLDINGS CORP. AND SUBSIDIARIES
NET INCOME PER SHARE AND PRO FORMA NET INCOME PER SHARE EXHIBIT 11.1
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-nine Weeks Ended
----------------------------------------------------
October 30, October 31, October 30, October 31,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income $ 3,863,907 $ 1,622,166 $ 7,285,860
=========== =========== ===========
Weighted average shares outstanding - basic 20,187,898 20,169,200 20,175,438
Dilutive effect of stock options 545,351 - 291,729
----------- ----------- -----------
Weighted average shares outstanding - diluted 20,733,249 20,169,200 20,467,167
=========== =========== ===========
Net income per share - basic $ 0.19 $ 0.08 $ 0.36
=========== =========== ===========
Net income per share - diluted $ 0.19 $ 0.08 $ 0.36
=========== =========== ===========
Pro forma net income $ 3,068,532
===========
Pro forma shares outstanding - beginning of period 15,794,200
Weighted average shares attributable to initial
public offering 1,522,436
-----------
Pro forma weighted average shares outstanding
- -basic and diluted 17,316,636
===========
Pro forma net income per share - basic and diluted $ 0.18
===========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-START> JAN-31-1999
<PERIOD-END> OCT-30-1999
<CASH> 10,049,618
<SECURITIES> 0
<RECEIVABLES> 10,969,908
<ALLOWANCES> 0
<INVENTORY> 132,093,565
<CURRENT-ASSETS> 164,216,649
<PP&E> 100,944,769
<DEPRECIATION> 43,043,196
<TOTAL-ASSETS> 233,748,664
<CURRENT-LIABILITIES> 174,414,958
<BONDS> 0
0
0
<COMMON> 202,024
<OTHER-SE> 56,527,755
<TOTAL-LIABILITY-AND-EQUITY> 233,748,664
<SALES> 411,584,871
<TOTAL-REVENUES> 414,109,614
<CGS> 308,757,045
<TOTAL-COSTS> 402,442,613
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (316,674)
<INCOME-PRETAX> 11,983,675
<INCOME-TAX> 4,697,815
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,285,860
<EPS-BASIC> 0.36
<EPS-DILUTED> 0.36
</TABLE>
