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. 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 PART I. ITEM 1. FINANCIAL STATEMENTS ELECTRONICS BOUTIQUE HOLDINGS CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS OCTOBER 28, JANUARY 29, Assets 2000 2000 ------------ ------------ (unaudited) 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 ============ ============ See accompanying notes to consolidated financial statements. 3 ELECTRONICS BOUTIQUE HOLDINGS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Thirteen weeks ended Thirty-nine weeks ended -------------------------------- -------------------------------- October 28, October 30, October 28, October 30, 2000 1999 2000 1999 ------------- ------------- ------------- ------------- 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 ============= ============= ============= ============= See accompanying notes to consolidated financial statements. 4 ELECTRONICS BOUTIQUE HOLDINGS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) THIRTY-NINE WEEKS ENDED ------------------------------ OCTOBER 28, OCTOBER 30, 2000 1999 ------------ ------------ 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 ============ ============ See accompanying notes to consolidated financial statements. 5 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: Thirteen weeks ended Thirty-nine weeks ended ---------------------------- ---------------------------- October 28, October 30, October 28, October 30, 2000 1999 2000 1999 ----------- ----------- ----------- ----------- 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 =========== =========== =========== =========== 6 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: THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED ------------------------ -------------------------- October 28, October 30, October 28, October 30, 2000 1999 2000 1999 ------- ------- ------- ------- 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% ======= ======= ======= ======= 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 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 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 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 10 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. 11 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 12 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) 13 EXHIBIT INDEX Exhibit No. Description - ------- ----------- 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 14