<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 28, 2000
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 8, 2000, THERE WERE 22,293,340 SHARES OF COMMON STOCK, $.01
PAR VALUE PER SHARE, OUTSTANDING.
<PAGE>
ELECTRONICS BOUTIQUE HOLDINGS CORP.
AND SUBSIDIARIES
INDEX
PAGE
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets at
October 28, 2000 (unaudited) and January 29, 2000 3
Consolidated Statements of Income (unaudited)
Thirteen and thirty-nine weeks ended
October 28, 2000 and October 30, 1999 4
Consolidated Statements of Cash Flows (unaudited)
Thirteen and thirty-nine weeks ended
October 28, 2000 and October 30, 1999 5
Notes to Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
Part II. Other Information
Item 1. Legal Proceedings 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
2
<PAGE>
PART I.
ITEM 1. FINANCIAL STATEMENTS
ELECTRONICS BOUTIQUE HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
OCTOBER 28, JANUARY 29,
Assets 2000 2000
------------ ------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 25,581,403 $ 88,356,091
Accounts receivable:
Trade and vendors 13,409,185 9,187,991
Other 792,383 2,630,622
Merchandise inventories 158,828,795 90,550,508
Deferred tax asset 3,691,000 3,691,000
Prepaid expenses 3,755,034 4,524,233
------------ ------------
Total current assets 206,057,800 198,940,445
------------ ------------
Property and equipment:
Leasehold improvements 72,105,746 59,816,209
Fixtures and equipment 55,283,920 45,391,518
Land 5,264,225 908,000
Construction in progress 3,741,452 2,446,460
------------ ------------
136,395,343 108,562,187
Less accumulated depreciation and amortization 52,155,877 45,566,262
------------ ------------
Net property and equipment 84,239,466 62,995,925
Goodwill and other intangible assets 1,302,799 1,503,387
Deferred tax asset 8,474,274 8,505,732
Other assets 3,892,267 3,567,388
------------ ------------
Total assets $303,966,606 $275,512,877
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ -- $ 8,353
Accounts payable 161,867,629 122,822,260
Accrued expenses 21,776,538 23,437,268
Income taxes payable -- 10,105,424
------------ ------------
Total current liabilities 183,644,167 156,373,305
------------ ------------
Long-term liabilities:
Deferred rent 3,030,678 2,653,103
------------ ------------
Total liabilities 186,674,845 159,026,408
------------ ------------
Stockholders' equity
Preferred stock - authorized 25,000,000 shares; $.01 par value;
no shares issued and outstanding at October 28, 2000 or January 29, 2000 -- --
Common stock - authorized 100,000,000 shares; $.01 par value;
22,291,240 shares issued and outstanding at October 28, 2000 and
22,221,114 shares issued and outstanding at January 29, 2000 222,912 222,211
Additional paid-in capital 76,866,231 75,888,405
Accumulated other comprehensive expense (2,205,291) (240,726)
Retained earnings 42,407,909 40,616,579
------------ ------------
Total stockholders' equity 117,291,761 116,486,469
------------ ------------
Total liabilities and stockholders' equity $303,966,606 $275,512,877
============ ============
</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 28, October 30, October 28, October 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 157,874,381 $ 176,465,510 $ 433,061,685 $ 411,584,871
Management fees 765,460 944,157 2,434,880 2,524,743
------------- ------------- ------------- -------------
Total revenues $ 158,639,841 $ 177,409,667 $ 435,496,565 $ 414,109,614
------------- ------------- ------------- -------------
Costs and expenses:
Costs of merchandise sold, including freight 121,704,001 135,979,488 328,311,513 308,757,045
Selling, general and administrative 30,902,421 32,020,460 96,527,925 85,020,258
Depreciation and amortization 4,083,821 3,118,557 11,402,865 8,665,310
------------- ------------- ------------- -------------
Operating income (loss) 1,949,598 6,291,162 (745,738) 11,667,001
Other income (expense) (61,362) -- 1,550,032 --
Interest income, net (421,959) (64,300) (2,164,433) (316,674)
------------- ------------- ------------- -------------
Income before income taxes 2,310,195 6,355,462 2,968,727 11,983,675
Income tax expense 916,223 2,491,555 1,177,397 4,697,815
------------- ------------- ------------- -------------
Net income $ 1,393,972 $ 3,863,907 $ 1,791,330 $ 7,285,860
============= ============= ============= =============
Net income per share - basic $ 0.06 0.19 0.08 0.36
============= ============= ============= =============
Weighted average shares outstanding - basic 22,265,270 20,187,898 22,239,564 20,175,438
============= ============= ============= =============
Net income per share - diluted $ 0.06 0.19 0.08 0.36
============= ============= ============= =============
Weighted average shares outstanding - diluted 22,621,368 20,733,249 22,463,160 20,467,167
============= ============= ============= =============
</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 28, OCTOBER 30,
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,791,330 $ 7,285,860
Adjustments to reconcile net income to cash used in
operating activities:
Depreciation of property and equipment 11,097,276 8,481,099
Amortization of other assets 305,589 184,211
Loss on disposal of property and equipment 239,589 250,842
Changes in assets and liabilities:
Decrease (increase) in:
Accounts receivable (2,476,878) (5,434,409)
Due from affiliates -- 985,086
Merchandise inventories (70,028,963) (66,436,619)
Prepaid expenses 675,209 (7,436,904)
Other long-term assets (515,026) (533,996)
(Decrease) increase in:
Accounts payable 40,664,512 60,035,876
Accrued expenses (1,405,129) 772,050
Due to affiliate -- (57,209)
Income taxes payable (9,967,704) (7,240,626)
Deferred rent 390,219 106,244
------------ ------------
Net cash used in operating activities (29,229,976) (9,038,495)
------------ ------------
Cash flows used in investing activities:
Purchases of property and equipment (33,813,070) (23,314,058)
Proceeds from disposition of assets 16,571 335
------------ ------------
Net cash used in investing activities (33,796,499) (23,313,723)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of common stock 978,527 464,800
Net payments under revolving credit facility -- --
Repayments of long-term debt (8,353) (74,997)
------------ ------------
Net cash (used in) provided by financing activities 970,174 389,803
------------ ------------
Effects of exchange rates on cash (718,387) 5,854
Net decrease in cash and cash equivalents (62,774,688) (31,956,561)
Cash and cash equivalents, beginning of period 88,356,091 42,006,179
------------ ------------
Cash and cash equivalents, end of period $ 25,581,403 $ 10,049,618
============ ============
</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 ("Electronics
Boutique"). 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 accompanying unaudited consolidated financial statements of Electronics
Boutique 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 29, 2000 contained in Electronics Boutique's Form 10-K filed with the
Securities and Exchange Commission. Operating results for the thirteen and
thirty-nine week period ended October 28, 2000 are not necessarily indicative of
the results that may be expected for the fiscal year ending February 3, 2001.
(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.
(3) INCOME TAXES
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
Electronics Boutique has available a revolving credit facility with Fleet
Capital Corporation for maximum borrowings of $50.0 million. As of October 28,
2000, there were no outstanding borrowings on this facility.
(5) COMPREHENSIVE INCOME
Effective February 1, 1998, Electronics Boutique 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 28, October 30, October 28, October 30,
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income $ 1,393,972 $ 3,863,907 $ 1,791,330 $ 7,285,860
Foreign currency translation
adjustment (1,065,697) (75,020) (1,964,565) 136,728
----------- ----------- ----------- -----------
Comprehensive income (loss) $ 328,275 $ 3,788,887 $ (173,235) $ 7,422,588
=========== =========== =========== ===========
</TABLE>
6
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Electronics Boutique believes that it is among the world's largest specialty
retailers of electronic games. Our 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 28, 2000, we operated a
total of 694 stores in 46 states, Puerto Rico, Canada, Australia, New Zealand
and South Korea, primarily under the names Electronics Boutique and Stop 'N Save
Software. In addition, we operated a commercial website under the URL address of
WWW.EBWORLD.COM. As of such date, we also provided management services for
Electronics Boutique Plc., which operated 310 stores in the United Kingdom,
Ireland and Sweden. As of October 28, 2000, we also managed four mall-based
Waldensoftware stores for Borders Group, Inc. We are a holding company and do
not have any significant assets or liabilities, other than all of the
outstanding capital stock of our 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 28, October 30, October 28, October 30,
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales 99.5% 99.5% 99.4% 99.4%
Management fees 0.5 0.5 0.6 0.6
------- ------- ------- -------
Total revenues 100.0 100.0 100.0 100.0
Cost of goods sold 76.7 76.6 75.4 74.6
------- ------- ------- -------
Gross profit 23.3 23.4 24.6 25.4
Operating expenses 19.5 18.0 22.2 20.5
Depreciation and amortization 2.6 1.8 2.6 2.1
------- ------- ------- -------
Income (loss) from operations 1.2 3.6 (0.2) 2.8
Other income (expense) -- -- 0.4 --
Interest income, net (0.3) -- (0.5) (0.1)
------- ------- ------- -------
Income before income tax expense 1.5 3.6 0.7 2.9
Income tax expense 0.6 1.4 0.3 1.1
------- ------- ------- -------
Net income 0.9% 2.2% 0.4% 1.8%
======= ======= ======= =======
</TABLE>
THIRTEEN WEEKS ENDED OCTOBER 28, 2000 COMPARED TO THIRTEEN WEEKS ENDED OCTOBER
30, 1999
Net sales decreased by 10.5% from $176.5 million in the thirteen weeks ended
October 30, 1999 to $157.9 million in the thirteen weeks ended October 28, 2000.
The decrease in net sales was primarily attributable to a 16.8% decrease in
comparable store sales, which resulted in a $28.9 million decrease in net sales.
This decline was partially offset by the additional sales volume resulting from
99 net new stores opened since October 30, 1999. Comparable store sales were
negatively impacted in the current quarter by several factors. Total sales of
PlayStation 2 hardware, software and accessories, which were only available for
the last three days of the current fiscal quarter, were lower than total sales
of Sega Dreamcast hardware, software and accessories over a seven week period of
availability in last year's quarter. In addition, sales of Pokemon trading cards
and toys were substantially lower than comparable sales during last year's third
quarter, when consumer demand was extremely high and Electronics Boutique had a
strong inventory position in these products. Also, sales of PlayStation software
were down from last year's period, as consumers awaited the release of the new
PlayStation 2 console system. Lastly, sales of PC games were lower, as several
new release titles did not perform as well as those in the prior year period.
7
<PAGE>
Management fees decreased by 18.9% from $944,000 in the thirteen weeks ended
October 30, 1999 to $765,000 in the thirteen weeks ended October 28, 2000. The
decrease was primarily attributable to lower fees earned under the management
services agreement with Electronics Boutique plc. and lower fees earned under
the consulting agreement with Borders Group, Inc. The lower fees earned from
Electronics Boutique plc were mainly due to an unfavorable foreign exchange rate
on the US dollar and on lower sales by Electronics Boutique plc. in the current
year quarter. Lower fees were earned under the Borders Group, Inc. consulting
agreement as fewer stores were in operation in the current year quarter.
Cost of goods sold decreased by 10.5% from $136.0 million in the thirteen
weeks ended October 30, 1999 to $121.7 million in the thirteen weeks ended
October 28, 2000. As a percentage of net sales, cost of goods sold was 77.1% in
both the thirteen weeks ended October 30, 1999 and the thirteen weeks ended
October 28, 2000. Due to a shift in the product sales mix, there was a slight
increase in cost of goods sold as a percentage of net sales attributable to a
reduction in sales of higher margin Pokemon trading cards which was offset by a
reduction in sales of lower margin video game console systems and by a higher
margin earned on PlayStation software sales compared to the prior year period.
Selling, general and administrative expense decreased by 3.5% from $32.0
million in the thirteen weeks ended October 30, 1999 to $30.9 million in the
thirteen weeks ended October 28, 2000. As a percentage of total revenues,
selling, general and administrative expense increased from 18.0% in the thirteen
weeks ended October 30, 1999 to 19.5% in the thirteen weeks ended October 28,
2000. Due to expansion of Electronics Boutique's domestic and international
store bases, there was an increase in store, distribution, and headquarter
operating expenses. Last year's period included $1.6 million of expense for an
advertising and marketing campaign for our e-commerce business which began in
the third quarter and continued into the fourth quarter. The result of these
factors was a decrease of $1.1 million in selling, general and administrative
expenses. The increase in selling, general and administrative expense as a
percentage of total revenues was primarily attributable to the decrease in net
sales, partially offset by the impact of the above factors on operating
expenses.
Depreciation and amortization expense increased by 31.0% from $3.1 million
in the thirteen weeks ended October 30, 1999 to $4.1 million in the thirteen
weeks ended October 28, 2000. This increase was primarily attributable to
capitalized expenditures for leasehold improvements and furniture and fixtures
for new store openings and remodeling of existing stores, the purchase of our
corporate headquarters in June 2000, building of a new distribution facility
completed in November 1999, and a call center in Nevada completed in July 1999.
Operating income decreased by 69.0% from $6.3 million in the thirteen weeks
ended October 30, 1999 to $1.9 million in the thirteen weeks ended October 28,
2000. As a percentage of total revenues, operating income decreased from 3.6% in
the thirteen weeks ended October 30, 1999 to 1.2% in the thirteen weeks ended
October 28, 2000, as a result of the increases in cost of goods sold, operating
expense, and depreciation and amortization expense as a percentage of total
revenues.
Other income (expense) included a non-recurring loss of $61,000 for the
thirteen weeks ended October 28, 2000. This represented additional expenses
related to the proposed merger with Funco, Inc.
Interest income, net, increased from $64,000 in the thirteen weeks ended
October 30, 1999 to $0.4 million in the thirteen weeks ended October 28, 2000.
The increase was primarily attributable to interest income earned on short-term
investment of the available proceeds of Electronics Boutique's secondary
offering in November 1999.
As a result of all the above factors, Electronics Boutique's income before
income taxes decreased by 63.7% from $6.4 million in the thirteen weeks ended
October 30, 1999 to $2.3 million in the thirteen weeks ended October 28, 2000.
Income tax expense decreased from $2.5 million in the thirteen weeks ended
October 30, 1999 to $0.9 million in the thirteen weeks ended October 28, 2000.
As a percentage of pre-tax income, income tax expense increased from 39.2% in
the thirteen weeks ended October 30, 1999 to 39.7% in the thirteen weeks ended
October 28, 2000. The increase as a percentage of pre-tax income was primarily
due to the impact of foreign taxes.
8
<PAGE>
THIRTY-NINE WEEKS ENDED OCTOBER 28, 2000 COMPARED TO THIRTY-NINE WEEKS ENDED
OCTOBER 30, 1999
Net sales increased by 5.2% from $411.6 million in the thirty-nine weeks
ended October 30, 1999 to $433.1 million in the thirty-nine weeks ended October
28, 2000. The increase in net sales was primarily attributable to the additional
sales volume resulting from 99 net new stores opened since October 30, 1999,
partially offset by a decrease in comparable store sales of 3.1%, which resulted
in a $12.5 million decrease in net sales from existing stores. Comparable store
sales were negatively impacted in the thirty-nine week period primarily by the
factors set forth above for the thirteen-week period ending October 28, 2000.
Comparable store sales had increased over the prior year in the first twenty-six
weeks of the current fiscal year.
Management fees decreased by 3.6% from $2.5 million in the thirty-nine weeks
ended October 30, 1999 to $2.4 million in the thirty-nine weeks ended October
28, 2000. The decrease was primarily attributable to results of the
thirteen-week period ending October 28, 2000 when lower fees were earned from
Electronics Boutique plc. due to an unfavorable foreign exchange rate on the US
dollar and lower sales for the period by Electronics Boutique plc. compared to
the prior year period. In addition, lower fees were earned under the consulting
agreement with Borders Group, Inc. due to fewer stores being in operation in the
current year quarter. In the first twenty-six week period ending July 29, 2000,
approximately $433,000 of additional management fees were earned from
Electronics Boutique plc. compared to the prior year period due to additional
sales resulting from the acquisition of a competitor in May 1999. Also, last
year's results included an additional $245,000 for a performance fee earned in
fiscal 1999 under the consulting agreement with Border's Group, Inc.
Cost of goods sold increased by 6.3% from $308.8 million in the thirty-nine
weeks ended October 30, 1999 to $328.3 million in the thirty-nine weeks ended
October 28, 2000. As a percentage of net sales, cost of goods sold increased
from 75.0% in the thirty-nine weeks ended October 30, 1999 to 75.8% in the
thirty-nine weeks ended October 28, 2000. The increase in cost of goods sold as
a percentage of net sales was primarily attributable to a shift in the sales mix
to a higher quantity of video and PC game products and a reduction in sales of
higher margin Pokemon trading cards and toys. Combined video and PC game
categories increased approximately 4% as a percentage of total sales compared to
the prior year.
Selling, general and administrative expense increased by 13.5% from $85.0
million in the thirty-nine weeks ended October 30, 1999 to $96.5 million in the
thirty-nine weeks ended October 28, 2000. As a percentage of total revenues,
selling, general and administrative expense increased from 20.5% in the
thirty-nine weeks ended October 30, 1999 to 22.2% in the thirty-nine weeks ended
October 28, 2000. The $11.5 million increase was primarily attributable to the
increase in Electronics Boutique's domestic and international store base and the
associated increases in store, distribution, and headquarter operating expenses.
Also included in this increase were expenses associated with sales, development
and support of our e-commerce business which were not fully in place in the
prior year's period. The increase in selling, general and administrative expense
as a percentage of total revenues was primarily attributable to the impact of
the above factors on operating expenses, partially offset by the increase in net
sales.
Depreciation and amortization expense increased by 31.6% from $8.7 million
in the thirty-nine weeks ended October 30, 1999 to $11.4 million in the
thirty-nine weeks ended October 28, 2000. This increase was primarily
attributable to capitalized expenditures for leasehold improvements and
furniture and fixtures for new store openings and remodeling of existing stores,
the purchase of our corporate headquarters in June 2000, building a new
distribution facility completed in November 1999, and a call center in Nevada
completed in July 1999.
Operating income (expense) decreased from income of $11.7 million in the
thirty-nine weeks ended October 30, 1999 to a loss of $(0.7) million in the
thirty-nine weeks ended October 28, 2000. As a percentage of total revenues,
operating income (loss) decreased from income of 2.8% in the thirty-nine weeks
ended October 30, 1999 to a loss of (0.2)% in the thirty-nine weeks ended
October 28, 2000, as a result of the increases in cost of goods sold, operating
expense and depreciation and amortization expense as a percentage of total
revenues.
9
<PAGE>
Other income included non-recurring income of $1.6 million for the
thirty-nine weeks ended October 28, 2000. This represented the $3.5 million
termination fee paid by Funco, Inc. upon termination of a merger agreement
between the companies, less associated expenses of $1.9 million.
Interest income, net, increased from income of $0.3 million in the
thirty-nine weeks ended October 30, 1999 to income of $2.2 million in the
thirty-nine weeks ended October 28, 2000. The increase was primarily
attributable to interest income earned on short-term investment of the proceeds
of Electronics Boutique's secondary offering completed in November 1999.
As a result of all the above factors, Electronics Boutique's income before
income taxes decreased by 75.2% from income of $12.0 million in the thirty-nine
weeks ended October 30, 1999 to income of $3.0 million in the thirty-nine weeks
ended October 28, 2000.
Income tax expense decreased by 74.9% from $4.7 million in the thirty-nine
weeks ended October 30, 1999 to $1.2 million in the thirty-nine weeks ended
October 28, 2000. As a percentage of pre-tax income, income tax expense
increased from 39.2% in the thirty-nine weeks ended October 30, 1999 to 39.7% in
the thirty-nine weeks ended October 28, 2000. The increase as a percentage of
pre-tax income was primarily due to the impact of foreign taxes.
SEASONALITY AND QUARTERLY RESULTS
Electronics Boutique's business, like that of most retailers, is highly
seasonal. A significant portion of our net sales, management fees and profits
are generated during our 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 our merchandise mix.
LIQUIDITY AND CAPITAL RESOURCES
Electronics Boutique has historically financed its operations through a
combination of cash generated from operations and bank debt. On November 23,
1999, we completed a secondary offering of common stock which resulted in net
proceeds to Electronics Boutique (after offering expenses) of approximately
$40.0 million. Our working capital decreased from $42.6 million at January 29,
2000 to $22.4 million at October 28, 2000, primarily due to the funding of
capital expenditures with working capital in excess of proceeds generated from
income. At October 28, 2000, we had no borrowings under our $50 million
revolving credit facility.
Electronics Boutique used $29.2 million in cash from operations in the
thirty-nine week period ended October 28, 2000 and used $9.0 million of cash
from operations during the thirty-nine week period ended October 30, 1999. The
$29.2 million of cash used in operations in the current year period was
primarily the result of an increase in merchandise inventory, the payment of
accrued expenses and income taxes payable that were outstanding at the end of
the prior fiscal year, and an increase in accounts receivable, partially offset
by cash generated from net income, non-cash charges to net income and an
increase in accounts payable. The $9.0 million of cash used in operations in
last year's period was primarily the result of an increase in merchandise
inventory, an increase in prepaid expenses, and the payment of income taxes
payable that were outstanding at the end of the fiscal year, partially offset by
cash generated from net income and non-cash charges to net income and an
increase in accounts payable.
Electronics Boutique made capital expenditures of $33.8 million in the
thirty-nine weeks ended October 28, 2000, primarily for the purchase of our
corporate headquarters and distribution center in West Chester, Pennsylvania, to
open new stores and remodel existing stores, for leasehold improvements and
equipment at our distribution centers, and for the construction of new
distribution centers in Canada and Australia. We 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 our corporate headquarters, for leasehold
improvements at our headquarters and primary distribution center, and for
equipment
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and leasehold improvements at a new customer service facility in Nevada to
support e-commerce and catalog sales operations.
Electronics Boutique believes that cash generated from our operating
activities, offering proceeds and available bank borrowings will be sufficient
to fund our operations and store expansion programs.
IMPACT OF INFLATION
Electronics Boutique does not believe that inflation has had a material
effect on our 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 Electronics Boutique'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.
In June 2000, the FASB issued statement of Financial Accounting Standards
No. 138, "Accounting for Derivative Instruments and Certain Hedging Activities"
("SFAS 138") (an amendment of FASB Statement No. 133). Management has evaluated
the impact of Statement No. 133 as amended by Statement No. 138, and believes
that it will not have a material impact on the net earnings of Electronics
Boutique.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"). The implementation date of SAB 101 has been delayed and will be effective
for Electronics Boutique in the fourth quarter of fiscal 2001. Electronics
Boutique is currently evaluating the impact of SAB 101 on its financial position
and results of operations.
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 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 29, 2000 on file with the SEC for a more detailed discussion
of these and other factors that could cause results to differ materially.
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<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Electronics Boutique is involved from time to time in legal proceedings
arising in the ordinary course of our business. In the opinion of management, no
pending proceedings will have a material adverse effect on our results of
operations or financial condition.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
10.1 Employment Agreement by and between Electronics Boutique
Holdings Corp. and James A. Smith dated August 21, 2000
11.1 Statement regarding computation of per share earnings
27.1 Financial Data Schedule
------------
b. Reports on Form 8-K
None
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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 12, 2000 By: /s/ Joseph J. Firestone
-----------------------
Joseph J. Firestone
President and Chief
Executive Officer
(Principal Executive Officer)
Date: December 12, 2000 By: /s/ John R. Panichello
----------------------
John R. Panichello
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<S> <C>
10.1 Employment Agreement by and between Electronics Boutique holdings
Corp. and James A. Smith dated August 21, 2000
11.1 Statement Regarding Computation of Per Share Earnings
27.1 Financial Data Schedule
</TABLE>
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