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 AUGUST 4, 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
------------------------ ------------------------------------
(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 12, 2001, there were 25,176,786 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
August 4, 2001 (unaudited) and February 3, 2001 3
Consolidated Statements of Income (unaudited)
Thirteen and twenty-six weeks ended
August 4, 2001 and July 29, 2000 4
Consolidated Statements of Cash Flows (unaudited)
Twenty-six weeks ended
August 4, 2001 and July 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 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 13
2
ELECTRONICS BOUTIQUE HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AUGUST 4, FEBRUARY 3,
2001 2001
------------- -------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 19,885,404 $ 45,111,445
Accounts receivable:
Trade and vendors 6,646,947 7,905,650
Other 260,144 257,176
Merchandise inventories 122,301,021 100,185,374
Deferred tax asset 4,453,282 4,460,780
Prepaid expenses 9,711,447 5,069,802
------------- -------------
Total current assets 163,258,245 162,990,227
------------- -------------
Property and equipment:
Building & leasehold improvements 82,212,920 76,709,776
Fixtures and equipment 65,976,456 59,916,886
Land 5,346,374 5,418,727
Construction in progress 4,269,589 4,752,103
------------- -------------
157,805,339 146,797,492
Less accumulated depreciation and amortization 63,787,836 55,629,616
------------- -------------
Net property and equipment 94,017,503 91,167,876
Goodwill and other intangible assets, net of
accumulated amortization of $1,355,669 and $1,242,890
as of August 4, 2001 and February 3, 2001, respectively 3,587,190 1,243,465
Deferred tax asset 8,559,408 8,676,258
Other assets 3,480,185 3,160,714
------------- -------------
Total assets $ 272,902,531 $ 267,238,540
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 115,406,028 $ 102,381,151
Accrued expenses 22,304,694 23,984,891
Income taxes payable -- 6,491,397
------------- -------------
Total current liabilities 137,710,722 132,857,439
Long-term liabilities:
Deferred rent and other long-term liabilities 3,411,191 3,161,205
------------- -------------
Total liabilities 141,121,913 136,018,644
------------- -------------
Stockholders' equity
Preferred stock - authorized 25,000,000 shares;
$.01 par value; no shares issued and outstanding
at August 4, 2001 and February 3, 2001 -- --
Common stock - authorized 100,000,000 shares; $.01 par value;
22,593,091 and 22,304,722 shares issued and outstanding
at August 4, 2001 and February 3, 2001, respectively 225,931 223,047
Additional paid-in capital 81,294,426 77,060,816
Accumulated other comprehensive loss (2,277,687) (1,551,809)
Retained earnings 52,537,948 55,487,842
------------- -------------
Total stockholders' equity 131,780,618 131,219,896
------------- -------------
Total liabilities and stockholders' equity $ 272,902,531 $ 267,238,540
============= =============
3
ELECTRONICS BOUTIQUE HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
------------------------------- -------------------------------
AUGUST 4, JULY 29, AUGUST 4, JULY 29,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Net sales $174,511,729 $125,383,277 $353,409,342 $275,937,937
Management fees 917,894 744,895 1,880,443 1,669,420
------------ ------------ ------------ ------------
Total revenues 175,429,623 126,128,172 355,289,785 277,607,357
------------ ------------ ------------ ------------
Costs and expenses:
Costs of merchandise sold, including freight 129,491,243 94,470,658 267,617,729 207,358,145
Selling, general and administrative 43,877,391 33,512,812 83,897,768 65,625,504
Depreciation and amortization 4,765,419 3,778,271 9,320,927 7,319,044
------------ ------------ ------------ ------------
Operating loss (2,704,430) (5,633,569) (5,546,639) (2,695,336)
Other income -- 1,611,394 -- 1,611,394
Interest income, net (163,844) (697,420) (654,609) (1,742,474)
------------ ------------ ------------ ------------
Income (loss) before income taxes (2,540,586) (3,324,755) (4,892,030) 658,532
Income tax expense (benefit) (1,008,613) (1,318,597) (1,942,136) 261,174
------------ ------------ ------------ ------------
Net income (loss) $ (1,531,973) $ (2,006,158) $ (2,949,894) $ 397,358
============ ============ ============ ============
Net income (loss) per share - basic $ (0.07) $ (0.09) $ (0.13) $ 0.02
============ ============ ============ ============
Weighted average shares outstanding - basic 22,525,945 22,229,979 22,429,021 22,226,711
============ ============ ============ ============
Net income (loss) per share - diluted $ (0.07) $ (0.09) $ (0.13) $ 0.02
============ ============ ============ ============
Weighted average shares outstanding - diluted 22,525,945 22,229,979 22,429,021 22,323,705
============ ============ ============ ============
4
ELECTRONICS BOUTIQUE HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
TWENTY-SIX WEEKS ENDED
-------------------------------
AUGUST 4, JULY 29,
2001 2000
------------- ------------
Cash flows from operating activities:
Net income (loss) $ (2,949,894) $ 397,358
Adjustments to reconcile net income(loss) to cash used in
operating activities:
Depreciation of property and equipment 9,208,148 7,121,540
Amortization of other assets 112,779 197,504
Loss on disposal of property and equipment 79,560 161,586
Changes in assets and liabilities:
Decrease (increase) in:
Accounts receivable 1,230,561 6,024,253
Merchandise inventories (20,994,882) 2,144,717
Prepaid expenses (4,674,843) 4,386,490
Deferred taxes 83,165 (11,195)
Other long-term assets (335,478) (356,609)
(Decrease) increase in:
Accounts payable 12,640,614 (38,867,522)
Accrued expenses (2,144,879) (2,471,183)
Income taxes payable (6,459,923) (13,064,752)
Deferred rent 228,333 160,971
------------ ------------
Net cash used in operating activities (13,976,739) (34,176,842)
------------ ------------
Cash flows used in investing activities:
Purchases of property and equipment (12,014,272) (22,212,915)
Proceeds from disposition of assets 87,547 16,571
Assets acquired, net of cash (3,400,509) 0
------------ ------------
Net cash used in investing activities (15,327,234) (22,196,344)
------------ ------------
Cash flows from financing activities:
Proceeds from exercise of stock options 4,054,576 51,800
Repayments of long-term debt -- (8,353)
Proceeds from issuance of common stock 181,918 130,028
------------ ------------
Net cash provided by financing activities 4,236,494 173,475
------------ ------------
Effects of exchange rates on cash (158,562) (593,976)
Net decrease in cash and cash equivalents (25,226,041) (56,793,687)
Cash and cash equivalents, beginning of period 45,111,445 88,356,091
------------ ------------
Cash and cash equivalents, end of period $ 19,885,404 $ 31,562,404
============ ============
Supplemental disclosures of cash flow information:
Taxes paid $ 6,170,337 $ 11,093,088
Interest paid 1,472 3,287
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 and
twenty-six week period ended August 4, 2001 are not necessarily indicative of
the results that may be expected for the fiscal year ending February 2, 2002.
(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 August 4,
2001, 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 Twenty-six weeks ended
------------------------------- ----------------------------
August 4, July 29, August 4, July 29,
2001 2000 2001 2000
------------ ------------ ------------ ----------
Net income (loss) $(1,531,973) $(2,006,158) $(2,949,894) $ 397,358
Foreign currency translation adjustment (46,774) 49,120 (725,878) (898,868)
----------- ----------- ----------- ---------
Comprehensive loss $(1,578,747) $(1,957,038) $(3,675,772) $(501,510)
=========== =========== =========== =========
6
(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, accounts
payable, and investments in foreign subsidiaries. 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 August 4, 2001, Electronics Boutique had a total of eleven forward
contracts. Electronics Boutique has seven forward contracts to sell Canadian
Dollars for United States Dollars totaling $14,050,000 with a fair value of
approximately ($19,000). These contracts were purchased as fair value hedges of
intercompany loans and accounts payable. Electronics Boutique has three forward
contracts to sell Danish Krone for United States Dollars totaling $4,862,000
with a fair value of approximately ($22,000). These contracts were purchased as
fair value hedges of an intercompany loan and investment in a Danish subsidiary.
Electronics Boutique has one forward contract to sell Italian Lira for United
States Dollars totaling $1,250,000 with a fair value of approximately ($2,000).
This contract was purchased as a fair value hedge of an intercompany loan.
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. Three contracts for $6,750,000 expired in August
2001 and the remaining contracts for $13,412,000 expire in December 2001.
(7) ACQUISITIONS
During the second quarter Electronics Boutique expanded into Europe via the
acquisition of the assets of eight retail stores and an internet site in Denmark
and Norway for approximately $1.9 million.
Additionally, Electronics Boutique acquired 70% of the capital stock of an
Italian company, consisting of 10 retail stores and a distribution facility, for
approximately $1.5 million. In conjunction with this acquisition Electronics
Boutique acquired an option to purchase the remaining 30% of the capital stock
of the Italian company.
These acquisitions were accounted for using the purchase method of
accounting and resulted in goodwill of $2.4 million. The results of operation of
the acquisitions are included in the results of operation since the acquisition
dates but were not significant to Electronics Boutique.
(8) SUBSEQUENT EVENT
On August 14, 2001, Electronics Boutique completed an offering of 4,600,000
shares of common stock. Of the 4,600,000 shares sold, 2,500,000 shares were sold
by Electronics Boutique and 2,100,000 shares were sold by EB Nevada Inc., a
selling stockholder. The transaction resulted in net proceeds (after offering
expenses) to Electronics Boutique of approximately $68.3 million.
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 August 4, 2001, we operated a total
of 813 stores in 46 states, Puerto Rico, Canada, Australia, New Zealand,
Denmark, Norway, Italy and South Korea, primarily under the names Electronics
Boutique and EB GameWorld. In addition, we operated a commercial website under
the URL address of www.ebgames.com. As of such date, we also provided management
services for Electronics Boutique Plc., which operated over 300 stores 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 Twenty-six weeks ended
--------------------- ----------------------
August 4, July 29, August 4, July 29,
2001 2000 2001 2000
--------- -------- --------- --------
Net sales 99.5% 99.4% 99.5% 99.4%
Management fees 0.5 0.6 0.5 0.6
----- ----- ----- -----
Total revenues 100.0 100.0 100.0 100.0
Cost of goods sold 73.8 74.9 75.3 74.7
----- ----- ----- -----
Gross profit 26.2 25.1 24.7 25.3
Operating expenses 25.0 26.6 23.6 23.6
Depreciation and amortization 2.7 3.0 2.7 2.7
----- ----- ----- -----
Loss from operations (1.5) (4.5) (1.6) (1.0)
Other income -- 1.3 -- 0.6
Interest income, net -- (0.6) (0.2) (0.6)
----- ----- ----- -----
Income (loss) before income tax expense (1.5) (2.6) (1.4) 0.2
Income tax expense (benefit) (0.6) (1.0) (0.6) 0.1
----- ----- ----- -----
Net income (loss) (0.9)% (1.6)% (0.8)% 0.1%
===== ===== ===== =====
THIRTEEN WEEKS ENDED AUGUST 4, 2001 COMPARED TO THIRTEEN WEEKS ENDED JULY 29,
2000
Net sales increased by 39.2% from $125.4 million in the thirteen weeks
ended July 29, 2000 to $174.5 million in the thirteen weeks ended August 4,
2001. The increase in net sales was primarily attributable to a 24.8% increase
in comparable store sales, which resulted in a $30.5 million increase in net
sales, and the additional sales volume resulting from 168 net new stores opened
since July 29, 2000. The increase in comparable store sales was primarily due to
strong sales of PlayStation 2 hardware, software and accessories and the
introduction of Game Boy Advance system in June 2001, partially offset by
reductions in sales of Dreamcast, PlayStation one and Nintendo 64 software
compared to a year ago.
Management fees increased by 23.2% from $745,000 in the thirteen weeks
ended July 29, 2000 to $918,000 in the thirteen weeks ended August 4, 2001. The
increase was primarily 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 37.1% from $94.5 million in the thirteen
weeks ended July 29, 2000 to $129.5 million in the thirteen weeks ended August
4, 2001. As a percentage of net sales, cost of goods sold decreased from 75.3%
in the thirteen weeks ended July 29, 2000 to 74.2% in the thirteen weeks ended
August 4, 2001. The decrease
8
in cost of goods sold as a percentage of net sales was primarily due to
increased sales of higher margin video game accessories and pre-owned products,
improved margins on PC game software and reduced freight costs, partially offset
by increased sales of lower margin video game hardware, particularly PlayStation
2 and Game Boy Advance.
Selling, general and administrative expense increased by 30.9% from $33.5
million in the thirteen weeks ended July 29, 2000 to $43.9 million in the
thirteen weeks ended August 4, 2001. As a percentage of total revenues, selling,
general and administrative expense decreased from 26.6% in the thirteen weeks
ended July 29, 2000 to 25.0% in the thirteen weeks ended August 4, 2001. The
$10.4 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 decrease in
selling, general and administrative expense as a percentage of total revenues
was primarily attributable to increase in sales, offset partially by the impact
of the above factors on operating expenses.
Depreciation and amortization expense increased by 26.1% from $3.8 million
in the thirteen weeks ended July 29, 2000 to $4.8 million in the thirteen weeks
ended August 4, 2001. This increase was primarily attributable to capitalized
expenditures for leasehold improvements and furniture and fixtures for new store
openings and remodeling of existing stores, new distribution centers, and
software expense.
Operating loss improved from a loss of $5.6 million in the thirteen weeks
ended July 29, 2000 to a loss of $2.7 million in the thirteen weeks ended August
4, 2001. As a percentage of total revenues, operating loss decreased from a loss
of 4.5% in the thirteen weeks ended July 29, 2000 to a loss of 1.5% in the
thirteen weeks ended August 4, 2001, as a result of the decreases in cost of
goods sold, operating expenses, 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, decreased from $0.7 million in the thirteen weeks
ended July 29, 2000 to $0.2 million in the thirteen weeks ended August 4, 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 loss before
income taxes improved $.8 million from a loss of $3.3 million in the thirteen
weeks ended July 29, 2000 to a loss of $2.5 million in the thirteen weeks ended
August 4, 2001.
Income tax benefit decreased from a benefit of $1.3 million in the thirteen
weeks ended July 29, 2000 to a benefit of $1.0 million in the thirteen weeks
ended August 4, 2001. As a percentage of pre-tax loss, income tax benefit
remained constant at 39.7%.
TWENTY-SIX WEEKS ENDED AUGUST 4, 2001 COMPARED TO TWENTY-SIX WEEKS ENDED JULY
29, 2000
Net sales increased by 28.1% from $275.9 million in the twenty-six weeks
ended July 29, 2000 to $353.4 million in the twenty-six weeks ended August 4,
2001. The increase in net sales was primarily attributable to a 19.2% increase
in comparable store sales, which resulted in a $50.6 million increase in net
sales, and the additional sales volume resulting from 168 net new stores opened
since July 29, 2000. Comparable store sales were positively impacted in the
twenty-six week period by strong sales of PlayStation 2 hardware, software and
accessories and the introduction of Game Boy Advance system in June 2001,
partially offset by reductions in sales of Dreamcast, PlayStation one and
Nintendo 64 software compared to a year ago.
Management fees increased by 12.6% from $1.7 million in the twenty-six
weeks ended July 29, 2000 to $1.9 million in the twenty-six weeks ended August
4, 2001. The increase was primarily 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.
9
Cost of goods sold increased by 29.1% from $207.4 million in the twenty-six
weeks ended July 29, 2000 to $267.6 million in the twenty-six weeks ended August
4, 2001. As a percentage of net sales, cost of goods sold increased from 75.1%
in the twenty-six weeks ended July 29, 2000 to 75.7% in the twenty-six weeks
ended August 4, 2001. The increase in cost of goods sold as a percentage of net
sales was primarily due to increased sales of lower margin video game hardware,
particularly PlayStation 2 and Game Boy Advance, partially offset by increased
sales of higher margin video game accessories and pre-owned products, improved
margins on PC game software and reduced freight costs.
Selling, general and administrative expense increased by 27.8% from $65.6
million in the twenty-six weeks ended July 29, 2000 to $83.9 million in the
twenty-six weeks ended August 4, 2001. As a percentage of total revenues,
selling, general and administrative expense remained constant at 23.6% in the
twenty-six weeks ended July 29, 2000 and in the twenty-six weeks ended August 4,
2001. The $18.3 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.
Depreciation and amortization expense increased by 27.4% from $7.3 million
in the twenty-six weeks ended July 29, 2000 to $9.3 million in the twenty-six
weeks ended August 4, 2001. This increase was primarily attributable to
capitalized expenditures for leasehold improvements and furniture and fixtures
for new store openings and remodeling of existing stores, three new distribution
centers and software expense.
Operating loss increased from a loss of $2.7 million in the twenty-six
weeks ended July 29, 2000 to a loss of $5.5 million in the twenty-six weeks
ended August 4, 2001. As a percentage of total revenues, operating loss
increased from a loss of 1.0% in the twenty-six weeks ended July 29, 2000 to a
loss of 1.6% in the twenty-six weeks ended August 4, 2001, as a result of the
increases in cost of goods sold 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, decreased from $1.7 million in the twenty-six weeks
ended July 29, 2000 to $0.7 million in the twenty-six weeks ended August 4,
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 $5.6 million from income of $.7 million in the
twenty-six weeks ended July 29, 2000 to a loss of $4.9 million in the twenty-six
weeks ended August 4, 2001.
Income tax expense (benefit) decreased by $2.2 million from an expense of
$.3 million in the twenty-six weeks ended July 29, 2000 to a benefit of $1.9
million in the twenty-six weeks ended August 4, 2001. As a percentage of pre-tax
income (loss), income tax expense (benefit) remained constant at 39.7%.
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.
10
LIQUIDITY AND CAPITAL RESOURCES
Electronics Boutique has historically financed its operations through a
combination of cash generated from operations and bank debt. At August 4, 2001,
we had no borrowings under our $50 million revolving credit facility. On August
14, 2001, Electronics Boutique completed an offering of 4,600,000 shares of
common stock. Of the 4,600,000 shares sold, 2,500,000 shares were sold by
Electronics Boutique and 2,100,000 shares were sold by EB Nevada Inc., a selling
stockholder. The transaction resulted in net proceeds (after offering expenses)
to Electronics Boutique of approximately $68.3 million.
Electronics Boutique used $14.0 million in cash from operations in the
twenty-six week period ended August 4, 2001 and used $34.2 million of cash from
operations during the twenty-six week period ended July 29, 2000. The $14.0
million of cash used in operations in the current year period was primarily the
result of the payment of accrued expenses and income taxes payable that were
outstanding at the end of the prior fiscal year, the increase in inventory and
prepaid expenses, and the net loss for the period, partially offset by an
increase in accounts payable, non-cash charges to net income, and collection of
accounts receivable. The $34.2 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 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 and prepaid expenses.
Electronics Boutique made capital expenditures of $12.0 million in the
twenty-six weeks ended August 4, 2001, primarily to open new stores and remodel
existing stores, for leasehold improvements and equipment at our distribution
centers. The Company spent $3.4 million on acquisitions in the twenty-six weeks
ended August 4, 2001. We 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.
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 July 2001, the FASB issued Statement No. 141, "Business Combinations",
and Statement No. 142, "Goodwill and Other Intangible Assets". Statement 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. Statement 141 also establishes that
intangible assets acquired in a purchase method business combination must meet
specific criteria in order to be recognized and reported apart from goodwill.
Statement 142 requires that, starting with fiscal year 2003, goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead tested for impairment at least annually. Statement 142 will also require
that intangible assets with estimable useful lives be amortized over their
respective estimated useful lives in proportion to the economic benefits
consumed. The Company has not yet determined the impact of adopting these
standards.
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FORWARD-LOOKING STATEMENTS
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:
o trends affecting Electronics Boutique's financial condition or results
of operations;
o changes in Electronics Boutique's acquisition and capital expenditure
plans;
o the competitive environment in the video game systems and software
product industries;
o changes in the costs of Electronics Boutique's products;
o economic conditions affecting the video game and PC markets;
o changes in demographics relating to Electronics Boutique's business;
o Electronics Boutique's ability to attract and retain qualified
personnel; and
o other factors described in this prospectus, including those set forth
under the caption "Risk Factors"
Please refer to Electronics Boutique's Pre-Effective Amendment No. 2
Registration Statement on Form S-3 (File no. 333-65248) available on the SEC's
web site (www.sec.gov) for a more detailed discussion of these and other factors
that could cause results to differ materially.
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 its business. Electronics Boutique is the
defendant in a lawsuit currently pending before the Commercial Court, Queen's
Bench Division of the High Court of Justice in the United Kingdom bought by
Electronics Boutique plc. Electronics Boutique plc. claims that under a services
agreement and related trademark license agreement, it is entitled operate a
retail web site targeted to consumers in the United Kingdom and Ireland in
connection with its retail store business in those countries. Specifically,
Electronics Boutique claims that the services agreement entitles them to use the
Electronics Boutique name and logo on such a web site under the terms of the
related trademark license agreement. Electronics Boutique plc. also claims that
sales by Electronics Boutique into the United Kingdom and Ireland through its
web site violate the services agreement. The case is currently set for trial in
March 2002. In the opinion of management, no pending proceedings will have a
material adverse effect on Electronics Boutique results of operation or
financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On July 16, 2001, Electronics Boutique held its Annual Meeting of
Stockholders at which the stockholders:
(1) Elected James J. Kim and Joseph J. Firestone to serve as Class III
Directors until the 2004 annual meeting or until their successors are
elected and qualified. Mr. Kim and Mr. Firestone received the number
of votes set opposite their respective names:
For Election Withheld
------------ --------
James J. Kim 19,643,634 1,426,109
Joseph J. Firestone 19,955,730 1,114,013
(2) Ratified the Company's appointment of KPMG LLP as the Company's
independent certified public accountants for the 2002 fiscal year. The
proposal received 21,033,743 votes for the ratification, 31,949
against the ratification and 3,550 votes abstained.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Reports on Form 8-K:
Electronics Boutique filed the following Current Reports on Form 8-K
during the three month period ended August 4, 2001:
On June 8, 2001, Electronics Boutique filed a Current Report on Form
8-K dated June 7, 2001, reporting under Item 5, announcing the
retirement of Electronics Boutique's president and chief executive
officer and the promotion of certain of Electronics Boutique's other
executive officers, each of which was effective as of June 11, 2001.
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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 18, 2001 By: /s/ Jeffrey W. Griffiths
------------------------
Jeffrey W. Griffiths
President and Chief
Executive Officer
(Principal Executive Officer)
Date: September 18, 2001 By: /s/ James A. Smith
------------------
James A. Smith
Senior Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
14