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 MAY 5, 2001
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
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(STATE OF INCORPORATION) (IRS EMPLOYER IDENTIFICATION NUMBER)
931 SOUTH MATLACK STREET
WEST CHESTER, PENNSYLVANIA 19382
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(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 JUNE 12, 2001, THERE WERE 22,516,889 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
May 5, 2001 (unaudited) and February 3, 2001 3
Consolidated Statements of Income (unaudited)
Thirteen weeks ended
May 5, 2001 and April 29, 2000 4
Consolidated Statements of Cash Flows (unaudited)
Thirteen weeks ended
May 5, 2001 and April 29, 2000 5
Notes to Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Part II. Other Information
Item 1. Legal Proceedings 11
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
2
ELECTRONICS BOUTIQUE HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MAY 5, FEBRUARY 3,
ASSETS 2001 2001
------------- -------------
(unaudited)
Current assets:
Cash and cash equivalents $ 17,533,619 $ 45,111,445
Accounts receivable:
Trade and vendors 5,821,758 7,905,650
Other 260,144 257,176
Merchandise inventories 117,305,249 100,185,374
Deferred tax asset 4,452,066 4,460,780
Prepaid expenses 5,883,979 5,069,802
------------- -------------
Total current assets 151,256,815 162,990,227
------------- -------------
Property and equipment:
Building & leasehold improvements 79,292,875 76,709,776
Fixtures and equipment 62,110,578 59,916,886
Land 5,343,507 5,418,727
Construction in progress 3,970,279 4,752,103
------------- -------------
150,717,239 146,797,492
Less accumulated depreciation and amortization 59,243,989 55,629,616
------------- -------------
Net property and equipment 91,473,250 91,167,876
Goodwill and other intangible assets, net of accumulated amortization
of $1,296,320 and $1,242,890 as of May 5, 2001 and February 3, 2001 1,190,035 1,243,465
Deferred tax asset 8,604,269 8,676,258
Other assets 3,115,461 3,160,714
------------- -------------
Total assets $ 255,639,830 $ 267,238,540
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 99,908,221 $ 102,381,151
Accrued expenses 21,687,525 23,984,891
Income taxes payable -- 6,491,397
------------- -------------
Total current liabilities 121,595,746 132,857,439
------------- -------------
Long-term liabilities:
Deferred rent 3,275,963 3,161,205
------------- -------------
Total liabilities 124,871,709 136,018,644
------------- -------------
Commitments
Stockholders' equity
Preferred stock - authorized 25,000,000 shares; $.01 par value;
no shares issued and outstanding at May 5, 2001 and February 3, 2001 -- --
Common stock - authorized 100,000,000 shares; $.01 par value;
22,421,540 and 22,304,722 shares issued and outstanding
at May 5, 2001 and February 3, 2001, respectively 224,215 223,047
Additional paid-in capital 78,704,898 77,060,816
Accumulated other comprehensive loss (2,230,913) (1,551,809)
Retained earnings 54,069,921 55,487,842
------------- -------------
Total stockholders' equity 130,768,121 131,219,896
------------- -------------
Total liabilities and stockholders' equity $ 255,639,830 $ 267,238,540
============= =============
3
ELECTRONICS BOUTIQUE HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THIRTEEN WEEKS ENDED
--------------------------------
MAY 5, APRIL 29,
2001 2000
------------- -------------
Net sales $ 178,897,613 $ 150,554,660
Management fees 962,549 924,525
------------- -------------
Total revenues $ 179,860,162 $ 151,479,185
------------- -------------
Costs and expenses:
Costs of merchandise sold, including freight 138,126,486 112,887,488
Selling, general and administrative 40,020,377 32,112,691
Depreciation and amortization 4,555,508 3,540,774
------------- -------------
Operating income(loss) (2,842,209) 2,938,232
Interest income, net (490,765) (1,045,054)
------------- -------------
Income(loss) before income taxes (2,351,444) 3,983,286
Income tax expense(benefit) (933,523) 1,579,771
------------- -------------
Net income(loss) $ (1,417,921) $ 2,403,515
============= =============
Net income(loss) per share - basic $ (0.06) $ 0.11
============= =============
Weighted average shares outstanding - basic 22,332,096 22,223,443
============= =============
Net income(loss) per share - diluted $ (0.06) $ 0.11
============= =============
Weighted average shares outstanding - diluted 22,332,096 22,417,430
============= =============
4
ELECTRONICS BOUTIQUE HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THIRTEEN WEEKS ENDED
------------------------------
MAY 5, APRIL 29,
2001 2000
------------ ------------
Cash flows from operating activities:
Net income(loss) $ (1,417,921) $ 2,403,515
Adjustments to reconcile net income(loss) to cash used in
operating activities:
Depreciation of property and equipment 4,502,078 3,442,021
Amortization of other assets 53,430 98,752
Loss on disposal of property and equipment 77,383 24,892
Changes in assets and liabilities:
Decrease (increase) in:
Accounts receivable 2,055,648 4,757,130
Merchandise inventories (17,743,997) 351,446
Prepaid expenses (849,928) (75,574)
Deferred taxes 39,975 --
Other long-term assets 28,036 (324,211)
(Decrease) increase in:
Accounts payable (1,801,871) (21,195,335)
Accrued expenses (2,185,786) (4,939,295)
Income taxes payable (6,459,923) (5,606,447)
Deferred rent 120,083 105,898
------------ ------------
Net cash used in operating activities (23,582,793) (20,957,208)
------------ ------------
Cash flows used in investing activities:
Purchases of property and equipment (5,550,658) (7,169,012)
Proceeds from disposition of assets 2,217 15,000
------------ ------------
Net cash used in investing activities (5,548,441) (7,154,012)
------------ ------------
Cash flows from financing activities:
Proceeds from exercise of stock options 1,551,080 --
Repayments of long-term debt -- (8,353)
Proceeds from issuance of common stock 94,170 51,800
------------ ------------
Net cash provided by financing activities 1,645,250 43,447
------------ ------------
Effects of exchange rates on cash (91,842) (622,144)
Net decrease in cash and cash equivalents (27,577,826) (28,689,917)
Cash and cash equivalents, beginning of period 45,111,445 88,356,091
------------ ------------
Cash and cash equivalents, end of period $ 17,533,619 $ 59,666,174
============ ============
Supplemental disclosures of cash flow information:
Taxes paid $ 5,520,669 $ 7,044,013
Interest paid 1,427 2,948
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
February 3, 2001 contained in Electronics Boutique's Form 10-K filed with the
Securities and Exchange Commission. Operating results for the thirteen-week
period ended May 5, 2001 are not necessarily indicative of the results that may
be expected for the fiscal year ending February 2, 2002.
(2) NET INCOME(LOSS) PER SHARE
Basic net income (loss) per share is computed on the basis of the weighted
average number of shares outstanding during the period. Because Electronics
Boutique incurred a net loss for the thirteen week period ended May 5, 2001, the
weighted average shares used for diluted net loss per share equals the weighted
average number of shares used for the basic net loss per share. Diluted net
income per share for the thirteen week period ended April 29, 2000 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 May 5, 2001,
there were no outstanding borrowings on this facility.
6
(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
----------------------------
May 5, April 29,
2001 2000
----------- -----------
Net income(loss) $(1,417,921) $ 2,403,515
Foreign currency translation adjustment (679,104) (947,988)
----------- -----------
Comprehensive income(loss) $(2,097,025) $ 1,455,527
=========== ===========
(6) FOREIGN CURRENCY
Electronics Boutique is subject to foreign currency risk as it operates in a
number of countries outside the United States. Electronics Boutique occasionally
enters into foreign currency forward contracts to manage its exposure against
foreign currency fluctuations on intercompany loans and accounts payable. These
contracts are generally for durations of less than twelve months and are used to
mitigate the foreign currency risk. Electronics Boutique does not purchase
speculative derivatives.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133, as amended, 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 on the balance sheet at fair value. Electronics Boutique
adopted this standard in the first quarter of fiscal year 2002. Adoption of this
standard did not materially impact the Company's results of operations or
financial condition.
As of May 5, 2001, Electronics Boutique has six forward contracts to sell
Canadian Dollars for United States Dollars totaling $11,400,000 with a fair
value of approximately $32,000. These contracts were purchased as fair value
hedges of intercompany loans. Electronics Boutique recorded an immaterial amount
of net loss related to hedge ineffectiveness in the quarter. The net loss is
recorded in selling, general and administrative expense. One contract for
$4,500,000 expires in May 2001 and the remaining contracts for $6,900,000 expire
in December 2001.
7
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 May 5, 2001, we operated a total of
763 stores in 46 states, Puerto Rico, Canada, Australia, New Zealand and South
Korea, primarily under the names Electronics Boutique, EB GameWorld, EBKids and
Stop 'N Save Software. In addition, we operated a commercial website under the
URL address of WWW.EBGAMES.COM. We also provided management services for
Electronics Boutique Plc., which operated over 300 stores and department
store-based concessions in the United Kingdom, Ireland and Sweden. 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
--------------------
May 5, April 29,
2001 2000
------- --------
Net sales 99.5% 99.4%
Management fees 0.5 0.6
------- -------
Total revenues 100.0 100.0
Cost of goods sold 76.8 74.5
------- -------
Gross profit 23.2 25.5
Selling, general and administrative 22.3 21.3
Depreciation and amortization 2.5 2.3
------- -------
Income(loss) from operations (1.6) 1.9
Interest income, net (0.3) (0.7)
------- -------
Income(loss) before income tax
expense (1.3) 2.6
Income tax expense(benefit) (0.5) 1.0
------- -------
Net income(loss) (0.8)% 1.6%
======= =======
THIRTEEN WEEKS ENDED MAY 5, 2001 COMPARED TO THIRTEEN WEEKS ENDED APRIL 29, 2000
Net sales increased by 18.8% from $150.6 million in the thirteen weeks ended
April 29, 2000 to $178.9 million in the thirteen weeks ended May 5, 2001. The
increase in net sales was primarily attributable to a 14.3% increase in
comparable store sales and the additional sales volume resulting from 135 net
new stores opened since April 29, 2000. The increase in comparable store sales
was primarily due to positive sales strength derived from PlayStation 2
hardware, software and accessories, which were partially offset by reductions in
sales of Dreamcast, PlayStation One and Nintendo 64 software and Pokemon trading
cards from the same quarter a year ago.
Management fees increased by 4.1% from $925,000 in the thirteen weeks ended
April 29, 2000 to $963,000 in the thirteen weeks ended May 5, 2001. The increase
was attributable to additional fees earned from Electronics Boutique plc., which
were partially offset by the elimination of fees earned under the consulting
agreement with Borders Group, Inc.
Cost of goods sold increased by 22.4% from $112.9 million in the thirteen
weeks ended April 29, 2000 to $138.1 million in the thirteen weeks ended May 5,
2001. As a percentage of net sales, cost of goods sold increased from
8
75.0% in the thirteen weeks ended April 29, 2000 to 77.2% in the thirteen weeks
ended May 5, 2001. The increase in cost of goods sold as a percentage of net
sales was primarily attributable to increased sales of lower margin video game
hardware and lower sales of higher margin Pokemon products. The increase was
partially offset by lower freight costs as a percentage of net sales.
Selling, general and administrative expense increased by 24.6% from $32.1
million in the thirteen weeks ended April 29, 2000 to $40.0 million in the
thirteen weeks ended May 5, 2001. As a percentage of total revenues, selling,
general and administrative expense increased from 21.3% in the thirteen weeks
ended April 29, 2000 to 22.3% in the thirteen weeks ended May 5, 2001. The $7.9
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. 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 28.7% from $3.5 million
in the thirteen weeks ended April 29, 2000 to $4.6 million in the thirteen weeks
ended May 5, 2001. This increase was primarily attributable to capitalized
expenditures for leasehold improvements and furniture and fixtures for new store
openings, remodeling of existing stores, new distribution centers and software
depreciation.
Operating income (loss) decreased by $5.8 million from income of $2.9
million in the thirteen weeks ended April 29, 2000 to a loss of $2.8 million in
the thirteen weeks ended May 5, 2001. As a percentage of total revenues,
operating income (loss) decreased from 1.9% in the thirteen weeks ended April
29, 2000 to (1.6)% in the thirteen weeks ended May 5, 2001, as a result of the
increase in cost of goods sold, operating expenses and depreciation and
amortization expense as a percentage of total revenues.
Interest income, net, decreased by 53% from $1.0 million in the thirteen
weeks ended April 29, 2000 to $0.5 million in the thirteen weeks ended May 5,
2001. The decrease was attributable to lower cash balances and declining
interest rates on short-term investments.
As a result of all the above factors, Electronics Boutique's income (loss)
before income taxes decreased by $6.3 million from income of $4.0 million in the
thirteen weeks ended April 29, 2000, to a loss of $2.4 million in the thirteen
weeks ended May 5, 2001.
Income tax expense (benefit) decreased from a tax expense of $1.6 million in
the thirteen weeks ended April 29, 2000 to a benefit of $0.9 million in the
thirteen weeks ended May 5, 2001. As a percentage of income(loss) before income
taxes, income tax expense(benefit) remained constant at 39.7% in the thirteen
weeks ended April 29, 2000 to the thirteen weeks ended May 5, 2001.
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. At May 5, 2001 we
had no borrowings under our $50 million revolving credit facility.
Electronics Boutique used $23.6 million of cash from operations in the
thirteen-week period ended May 5, 2001 and used $21.0 million of cash from
operations during the thirteen weeks ended April 29, 2000. The $23.6 million of
cash used in operations in the current year period was primarily the result of
payment of accounts payable, accrued
9
expenses and income taxes payable that were outstanding at the end of the prior
fiscal year, the purchase of inventory, and the net loss for the period,
partially offset by non-cash charges to net loss and collections of accounts
receivable. The $21.0 million of cash used in operations in last year's period
was primarily the result of an increase in merchandise inventories, payment of
accounts payable, accrued expenses and 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.
Electronics Boutique made capital expenditures of $5.6 million in the
thirteen weeks ended May 5, 2001, primarily to open new stores and remodel
existing stores, and at our headquarters and distribution centers. We made
capital expenditures of $7.2 million in the thirteen weeks ended April 29, 2000,
primarily to open new stores and remodel existing stores and at our headquarters
and distribution centers, and for the purchase of land on which new distribution
centers were built last year in Canada and Australia.
Electronics Boutique believes that cash generated from our operating
activities 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.
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 February 3, 2001 on file with the SEC for a more detailed discussion
of these and other factors that could cause results to differ materially.
10
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:
11.1 Statement regarding computation of per share earnings
b. Reports on Form 8-K
None.
11
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: June 14, 2001 By: /s/ Jeffrey Griffiths
---------------------
Jeffrey Griffiths
President and Chief
Executive Officer
(Principal Executive Officer)
Date: June 14, 2001 By: /s/ James A. Smith
------------------
James A. Smith
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting
Officer)
12
EXHIBIT INDEX
Exhibit
No. Description
- ------- -----------
11.1 Statement Regarding Computation of Per Share Earnings
13