<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 29, 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 SEPTEMBER 6, 2000, THERE WERE 22,256,705 SHARES OF COMMON STOCK,
$.01 PAR VALUE PER SHARE, OUTSTANDING.
<PAGE>
ELECTRONICS BOUTIQUE HOLDINGS CORP.
AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
Part I. Financial Information
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets at
July 29, 2000 (unaudited) and January 29, 2000 3
Consolidated Statements of Income (unaudited)
Thirteen and twenty-six weeks ended
July 29, 2000 and July 31, 1999 4
Consolidated Statements of Cash Flows (unaudited)
Thirteen and twenty-six weeks ended
July 29, 2000 and July 31, 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 4. Submission of Matters to a Vote of Security Holders 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
</TABLE>
2
<PAGE>
PART I.
ITEM 1. FINANCIAL STATEMENTS
ELECTRONICS BOUTIQUE HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JULY 29, JANUARY 29,
ASSETS 2000 2000
----------------- -----------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 31,562,404 $ 88,356,091
Accounts receivable:
Trade and vendors 5,536,624 9,187,991
Other 235,613 2,630,622
Merchandise inventories 87,687,585 90,550,508
Deferred tax asset 3,691,000 3,691,000
Prepaid expenses 3,203,012 4,524,233
----------------- -----------------
Total current assets 131,916,238 198,940,445
----------------- -----------------
Property and equipment:
Leasehold improvements 67,681,056 59,816,209
Fixtures and equipment 51,249,950 45,391,518
Land 5,382,657 908,000
Construction in progress 3,270,773 2,446,460
----------------- -----------------
127,584,436 108,562,187
Less accumulated depreciation and amortization 50,132,128 45,566,262
----------------- -----------------
Net property and equipment 77,452,308 62,995,925
Goodwill and other intangible assets 1,380,884 1,503,387
Deferred tax asset 8,476,641 8,505,732
Other assets 3,836,880 3,567,388
----------------- -----------------
Total assets $ 223,062,951 $ 275,512,877
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ - $ 8,353
Accounts payable 83,248,183 122,822,260
Accrued expenses 20,839,587 23,437,268
Income taxes payable - 10,105,424
----------------- -----------------
Total current liabilities 104,087,770 156,373,305
----------------- -----------------
Long-term liabilities:
Deferred rent 2,808,394 2,653,103
----------------- -----------------
Total liabilities 106,896,164 159,026,408
----------------- -----------------
Stockholders' equity
Preferred stock - authorized 25,000,000 shares;
$.01 par value; no shares issued and outstanding at July 29, - -
2000
Common stock - authorized 100,000,000 shares; $.01 par value;
22,234,505 shares issued and outstanding at July 29, 2000 222,345 222,211
Additional paid-in capital 76,070,099 75,888,405
Accumulated other comprehensive expense (1,139,594) (240,726)
Retained earnings 41,013,937 40,616,579
----------------- -----------------
Total stockholders' equity 116,166,787 116,486,469
----------------- -----------------
Total liabilities and stockholders' equity $ 223,062,951 $ 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 Twenty-six weeks ended
------------------------- ---------------------------
July 29, July 31, July 29, July 31,
2000 1999 2000 1999
----------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Net sales $ 125,036,778 $ 112,375,483 275,187,304 $ 235,119,361
Management fees 744,895 719,099 1,669,420 1,580,586
------------- ------------- ------------- -------------
Total revenues $ 125,781,673 $ 113,094,582 276,856,724 $ 236,699,947
------------- ------------- ------------- -------------
Costs and expenses:
Costs of merchandise sold, including 94,124,159 82,339,419 206,607,512 172,777,557
freight
Selling, general and administrative 33,512,812 26,974,535 65,625,504 52,999,798
Depreciation and amortization 3,778,271 2,839,671 7,319,044 5,546,753
------------- ------------- ------------- -------------
Operating income (loss) (5,633,569) 940,957 (2,695,336) 5,375,839
Other income 1,611,394 -- 1,611,394 --
Interest (income) expense, net (697,420) 37,262 (1,742,474) (252,374)
------------- ------------- ------------- -------------
Income (loss) before income taxes (3,324,755) 903,695 658,532 5,628,213
Income tax expense (benefit) (1,318,597) 354,211 261,174 2,206,260
------------- ------------- ------------- -------------
Net income (loss) $ (2,006,158) $ 549,484 397,358 $ 3,421,953
============= ============= ============= =============
Net income (loss) per share - basic $ (0.09) 0.03 0.02 0.17
============= ============= ============= =============
Weighted average shares outstanding - basic 22,229,979 20,169,215 22,226,712 20,169,208
============= ============= ============= =============
Net income (loss) per share - diluted $ (0.09) 0.03 0.02 0.17
============= ============= ============= =============
Weighted average shares outstanding - diluted 22,229,979 20,355,595 22,384,056 20,334,126
============= ============= ============= =============
</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 29, JULY 31,
2000 1999
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 397,358 $ 3,421,953
Adjustments to reconcile net income to cash used in
operating activities:
Depreciation of property and equipment 7,121,540 5,461,294
Amortization of other assets 197,504 85,459
Loss on disposal of property and equipment 161,586 137,859
Changes in assets and liabilities:
Decrease (increase) in:
Accounts receivable 6,024,253 (1,899,253)
Due from affiliates -- 501,116
Merchandise inventories 2,144,717 (1,499,917)
Prepaid expenses 1,293,004 (487,380)
Other long-term assets (367,804) (273,970)
(Decrease) increase in:
Accounts payable (38,867,522) (20,884,704)
Accrued expenses (2,471,183) (1,798,831)
Due to affiliate -- (6,781)
Income taxes payable (9,971,266) (9,615,347)
Deferred rent 160,971 (13,659)
------------ ------------
Net cash used in operating activities (34,176,842) (26,872,161)
------------ ------------
Cash flows used in investing activities:
Purchases of property and equipment (22,212,915) (13,703,258)
Proceeds from disposition of assets 16,571 335
------------ ------------
Net cash used in investing activities (22,196,344) (13,702,923)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of common stock 181,828 9,800
Net payments under revolving credit facility -- 8,989,523
Repayments of long-term debt (8,353) (49,998)
------------ ------------
Net cash (used in) provided by financing activities 173,475 8,949,325
------------ ------------
Effects of exchange rates on cash (593,976) 9,523
Net decrease in cash and cash equivalents (56,793,687) (31,616,236)
Cash and cash equivalents, beginning of period 88,356,091 42,006,179
------------ ------------
Cash and cash equivalents, end of period $ 31,562,404 $ 10,389,943
============ ============
</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
twenty-six week period ended July 29, 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 July 29,
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 Twenty-six weeks ended
-------------------------------- -------------------------------
July 29, July 31, July 29, July 31,
2000 1999 2000 1999
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net income (loss) $ (2,006,158) $ 549,484 $ 397,358 $ 3,421,953
Foreign currency translation adjustment 49,120 (149,150) (898,868) 211,748
============ ============= ============= =============
Comprehensive income (loss) $ (1,957,038) $ 400,234 $ (501,510) $ 3,633,701
============ ============= ============= =============
</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 July 29, 2000, we operated a total
of 645 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 300 stores in the United Kingdom,
Ireland and Sweden. As of July 29, 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 Twenty-six weeks ended
-------------------- ----------------------
July 29, July 31, July 29, July 31,
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales 99.4% 99.4% 99.4% 99.3%
Management fees 0.6 0.6 0.6 0.7
----- ----- ----- -----
Total revenues 100.0 100.0 100.0 100.0
Cost of goods sold 74.8 72.8 74.6 73.0
----- ----- ----- -----
Gross profit 25.2 27.2 25.4 27.0
Operating expenses 26.6 23.9 23.8 22.4
Depreciation and amortization 3.0 2.5 2.6 2.3
----- ----- ----- -----
Income (loss) from operations (4.4) 0.8 (1.0) 2.3
Other income 1.3 -- 0.6 --
Interest income, net (0.5) 0.0 (0.6) (0.1)
----- ----- ----- -----
Income (loss) before income tax expense (2.6) 0.8 0.2 2.4
Income tax expense (benefit) (1.0) 0.3 0.1 0.9
----- ----- ----- -----
Net income (loss) (1.6)% 0.5% 0.1% 1.5%
===== ===== ===== =====
</TABLE>
THIRTEEN WEEKS ENDED JULY 29, 2000 COMPARED TO THIRTEEN WEEKS ENDED JULY 31,
1999
Net sales increased by 11.3% from $112.4 million in the thirteen weeks ended
July 31, 1999 to $125.0 million in the thirteen weeks ended July 29, 2000. The
increase in net sales was primarily attributable to a 3.1% increase in
comparable store sales, which resulted in a $3.4 million increase in net sales,
and the additional sales volume resulting from 81 net new stores opened since
July 31, 1999. Comparable store sales were positively impacted in the current
quarter by strength in the PC and video game categories and continuing strong
growth in our internet business. The PC game category was driven by the highly
anticipated release of Diablo II in late June, 2000. The video game category was
positively impacted by sales of Dreamcast and Nintendo 64 software, partially
offset by the slowing of PlayStation software arising from the anticipated
release of the Sony PlayStation 2 in October of this year. The above factors
also offset a reduction in the sales of Pokemon trading cards compared to the
prior year quarter.
Management fees increased by 3.6% from $719,000 in the thirteen weeks ended
July 31, 1999 to $745,000 in the thirteen weeks ended July 29, 2000. 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
7
<PAGE>
agreement with Borders Group, Inc. In May 1999, Electronics Boutique plc.
completed the acquisition of a competitor. Approximately $65,000 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 14.3% from $82.3 million in the thirteen
weeks ended July 31, 1999 to $94.1 million in the thirteen weeks ended July 29,
2000. As a percentage of net sales, cost of goods sold increased from 73.3% in
the thirteen weeks ended July 31, 1999 to 75.3% in the thirteen weeks ended July
29, 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. Combined video and PC game categories increased approximately 8% as a
percentage of total sales compared to the prior year.
Selling, general and administrative expense increased by 24.2% from $27.0
million in the thirteen weeks ended July 31, 1999 to $33.5 million in the
thirteen weeks ended July 29, 2000. As a percentage of total revenues, selling,
general and administrative expense increased from 23.9% in the thirteen weeks
ended July 31, 1999 to 26.6% in the thirteen weeks ended July 29, 2000. The $6.5
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
internet 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 33.1% from $2.8 million
in the thirteen weeks ended July 31, 1999 to $3.8 million in the thirteen weeks
ended July 29, 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, a new distribution facility
completed in November 1999, and a call center in Nevada completed in July 1999.
Operating income (loss) decreased from income of $0.9 million in the
thirteen weeks ended July 31, 1999 to a loss of $(5.6) million in the thirteen
weeks ended July 29, 2000. As a percentage of total revenues, operating income
(loss) decreased from income of 0.8% in the thirteen weeks ended July 31, 1999
to a loss of (4.4)% in the thirteen weeks ended July 29, 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 included non-recurring income of $1.6 million for the thirteen
weeks ended July 29, 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 an expense of $37,000 in the thirteen
weeks ended July 31, 1999 to income of $0.7 million in the thirteen weeks ended
July 29, 2000. The increase was primarily attributable to interest income earned
on short-term investment of the proceeds of Electronics Boutique's secondary
offering in November 1999.
As a result of all the above factors, Electronics Boutique's income (loss)
before income taxes decreased from income of $0.9 million in the thirteen weeks
ended July 31, 1999 to a loss of $3.3 million in the thirteen weeks ended July
29, 2000.
Income tax expense (benefit) decreased from a tax expense of $0.4 million in
the thirteen weeks ended July 31, 1999 to a tax benefit of $1.3 million in the
thirteen weeks ended July 29, 2000. As a percentage of pre-tax income (loss),
income tax expense (benefit) increased from 39.2% in the thirteen weeks ended
July 31, 1999 to 39.7% in the thirteen weeks ended July 29, 2000. The increase
as a percentage of pre-tax income was primarily due to the impact of foreign
taxes.
TWENTY-SIX WEEKS ENDED JULY 29, 2000 COMPARED TO TWENTY-SIX WEEKS ENDED JULY 31,
1999
Net sales increased by 17.0% from $235.1 million in the twenty-six weeks
ended July 31, 1999 to $275.2 million in the twenty-six weeks ended July 29,
2000. The increase in net sales was primarily attributable to a 7.2% increase
8
<PAGE>
in comparable store sales, which resulted in a $16.5 million increase in net
sales, and the additional sales volume resulting from 81 net new stores opened
since July 31, 1999. Comparable store sales were positively impacted in the
twenty-six week period by strength in the PC and video game categories and
continuing strong growth in our internet business. The PC game category was
driven by the highly anticipated release of Diablo II in late June, 2000. The
video game category was positively impacted by sales of Dreamcast and Nintendo
64 software, partially offset by the slowing of PlayStation software arising
from the anticipated release of the Sony PlayStation 2 in October of this year.
The above factors also offset a reduction in the sales of Pokemon trading cards
compared to the prior year quarter.
Management fees increased by 5.6% from $1.6 million in the twenty-six weeks
ended July 31, 1999 to $1.7 million in the twenty-six weeks ended July 29, 2000.
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 $433,000 of additional management fees were earned in the
twenty-six week period on the combined sales of the Electronics Boutique plc.
stores compared to the prior year period. 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 19.6% from $172.8 million in the twenty-six
weeks ended July 31, 1999 to $206.6 million in the twenty-six weeks ended July
29, 2000. As a percentage of net sales, cost of goods sold increased from 73.5%
in the twenty-six weeks ended July 31, 1999 to 75.1% in the twenty-six weeks
ended July 29, 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. Combined video and PC game categories increased
approximately 7% as a percentage of total sales compared to the prior year.
Selling, general and administrative expense increased by 23.8% from $53.0
million in the twenty-six weeks ended July 31, 1999 to $65.6 million in the
twenty-six weeks ended July 29, 2000. As a percentage of total revenues,
selling, general and administrative expense increased from 22.4% in the
twenty-six weeks ended July 31, 1999 to 23.8% in the twenty-six weeks ended July
29, 2000. The $12.6 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 internet 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 32.0% from $5.5 million
in the twenty-six weeks ended July 31, 1999 to $7.3 million in the twenty-six
weeks ended July 29, 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, a new distribution
facility completed in November 1999, and a call center in Nevada completed in
July 1999.
Operating income (loss) decreased from income of $5.4 million in the
twenty-six weeks ended July 31, 1999 to a loss of $(2.7) million in the
twenty-six weeks ended July 29, 2000. As a percentage of total revenues,
operating income (loss) decreased from income of 2.3% in the twenty-six weeks
ended July 31, 1999 to a loss of (1.0)% in the twenty-six weeks ended July 29,
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 included non-recurring income of $1.6 million for the
twenty-six weeks ended July 29, 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
twenty-six weeks ended July 31, 1999 to income of $1.7 million in the twenty-six
weeks ended July 29, 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.
9
<PAGE>
As a result of all the above factors, Electronics Boutique's income before
income taxes decreased by 88.3% from income of $5.6 million in the twenty-six
weeks ended July 31, 1999 to income of $0.7 million in the twenty-six weeks
ended July 29, 2000.
Income tax expense decreased by 88.2% from $2.2 million in the twenty-six
weeks ended July 31, 1999 to $0.3 million in the twenty-six weeks ended July 29,
2000. As a percentage of pre-tax income, income tax expense increased from 39.2%
in the twenty-six weeks ended July 31, 1999 to 39.7% in the twenty-six weeks
ended July 29, 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 $27.8 million at July 29, 2000, primarily due to the funding of capital
expenditures with working capital in excess of proceeds generated from income.
At July 29, 2000, we had no borrowings under our $50 million revolving credit
facility.
Electronics Boutique used $34.2 million in cash from operations in the
twenty-six week period ended July 29, 2000 and used $26.9 million of cash from
operations during the twenty-six week period ended July 31, 1999. The $34.2
million of cash used in operations in the current year period was primarily the
result of the payment of accounts payable, accrued expenses and income taxes
payable that were outstanding at the end of the prior fiscal year, partially
offset by cash generated from net income, non-cash charges to net income,
collections of accounts receivable and a decrease in merchandise inventory. The
$26.9 million of cash used in operations in last year's period was primarily the
result of the payment of accounts payable, accrued expenses and income taxes
payable that were outstanding at the end of the fiscal year, and an increase in
accounts receivable and merchandise inventory, partially offset by cash
generated from net income and non-cash charges to net income.
Electronics Boutique made capital expenditures of $22.2 million in the
twenty-six weeks ended July 29, 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 purchase of land on which new
distribution centers are to be built later this year in Canada and Australia. We
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 our 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.
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.
On March 31, 2000, Electronics Boutique entered into a definitive merger
agreement for the acquisition of all outstanding shares of Funco, Inc. for
$17.50 per share or approximately $110 million in cash. On April 6, 2000, Funco,
Inc. received a competing offer from Barnes and Noble Inc., for $135 million or
approximately $21.00 per share. On April 20, 2000, we raised our cash offer to
10
<PAGE>
$21.00 per share to match the competing offer by Barnes & Noble Inc., which was
accepted by Funco, Inc. On April 26, 2000, Barnes and Noble Inc. raised its cash
offer to $24.75 per share. On May 2, 2000, we notified Funco, Inc. that we did
not intend to raise our offer and would not pursue the acquisition.
Subsequently, Electronics Boutique received a payment of $3.5 million
representing a termination fee and reimbursement of fees and expenses in
accordance with the original merger agreement. Electronics Boutique recorded the
non-recurring income net of all associated expenses, approximately $1.9 million,
in the quarter ended July 29, 2000.
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 March 2000, the FASB issued FASB interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation - an Interpretation of APB
Opinion No. 25" ("FIN44"). Fin 44 is generally effective for transactions
occurring after July 1, 2000 but applies to option repricings and certain other
transactions after December 15, 1998. Electronics Boutique believes that FIN 44
will not have a material impact on the its net earnings.
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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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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On July 17, 2000, Electronics Boutique held its Annual Meeting of Stockholders
at which the stockholders:
(1) Elected Dean S. Adler and Louis J. Siana to serve as Class II Directors
until the 2003 annual meeting or until their successors are elected and
qualified. Mr. Adler and Mr.Siana received the number of votes set opposite
their respective names:
<TABLE>
<CAPTION>
For Election Withheld
------------ --------
<S> <C> <C>
Dean S. Adler 21,121,296 79,077
Louis J. Siana 21,121,396 78,977
</TABLE>
(2) Approved the adoption of the Electronics Boutique 2000 Employee Stock
Purchase Plan. The proposal received 18,852,551 votes approving adoption of
the plan, 367,675 votes against adoption of the plan, and 21,924 votes
abstained.
(3) Approved the adoption of the Electronics Boutique 2000 Equity Participation
Plan. The proposal received 16,787,733 votes approving adoption of the
plan, 2,433,221 votes against adoption of the plan, and 21,196 votes
abstained.
(4) Ratified the Company's appointment of KPMG LLP as the Company's independent
certified public accountants for the 2001 fiscal year. The proposal
received 21,194,602 votes for the ratification, 2,463 against the
ratification and 3,308 votes abstained.
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
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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: September 11, 2000 By: /S/ JOSEPH J. FIRESTONE
-----------------------
Joseph J. Firestone
President and Chief
Executive Officer
(Principal Executive Officer)
Date: September 11, 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
Exhibit
No. Description
------ -----------
11.1 Statement Regarding Computation of Per Share Earnings
27.1 Financial Data Schedule
14
