Back to GetFilings.com

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended February 2, 2002

or

For the transition period from                            to                             

Commission File Number: 000-24603

ELECTRONICS BOUTIQUE HOLDINGS CORP.
(Exact Name of Registrant as Specified in its Charter)

Registrant's telephone number, including area code: 610/430-8100

Securities registered pursuant to Section 12(b) of the Act:        None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.01 par value
(Title of Class)

        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 ý    No o

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to the Form 10-K. o

        The aggregate market value of Common Stock held by non-affiliates, based upon the closing sale price as reported on the NASDAQ National Market on April 23, 2002, was approximately $444,385,449.

        At April 23, 2002, there were 25,810,462 shares of common stock outstanding.

Documents Incorporated by Reference

Portions of the definitive Proxy Statement for the 2002 Annual Meeting of Stockholders are incorporated by reference in Part III hereof.

FORM 10-K
FOR THE FISCAL YEAR ENDED FEBRUARY 2, 2002
INDEX

2

PART I

Preliminary Note Regarding Forward-Looking Statements

        When used in this Annual Report on Form 10-K, the words "expect," "estimate," "anticipate," "intend," "predict," "believe," and similar expressions and variations thereof are intended to identify forward-looking statements within the meaning of and subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. Forward-looking statements appear in a number of places in this Annual Report on Form 10-K and include statements regarding the intent, belief or current expectations of Electronics Boutique, its directors or its officers with respect to, among other things: (i) trends affecting Electronics Boutique's financial condition or results of operations; and (ii) Electronics Boutique's business and growth strategies. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results or outcomes may differ materially from those projected in the forward-looking statements as a result of various factors, including those set forth in Item 1. "Business—Risk Factors".

Item 1. Business

General

        We believe we are among the world's largest specialty retailers of electronic games. As of February 2, 2002, we operated 937 stores, primarily under the names Electronics Boutique and EB GameWorld, in Australia, Canada, Denmark, Germany, Italy, New Zealand, Norway, South Korea, Sweden and the United States. We also operate a commercial web site under the URL address www.ebgames.com. We sell video game hardware and software, PC entertainment software and related accessories and products. Our compound annual growth rates for sales and pre-tax net income from fiscal 1997 through fiscal 2002 were 24.5% and 27.6%, respectively.

        The video game and PC entertainment industry is an approximately $9.5 billion market in the United States that has grown at a compound annual growth rate of 14.1% over the last two years. According to International Development Group, a leading market research firm in our industry, this industry is projected to grow at an annual rate of approximately 16.5% for the next two years primarily as a result of the recent roll-outs of new video game hardware systems. The introductions of Sony's PlayStation 2 in late 2000, Nintendo's Game Boy Advance in June 2001, and Nintendo's GameCube and Microsoft's Xbox in November 2001 represent the most significant video game hardware introductions since 1996. These introductions have increased the installed base of video game hardware units and are expected to drive growth in the software segment. We believe our position as the destination of choice for the electronic game enthusiast will enable us to benefit from this rapid industry growth.

        We serve the electronic game enthusiast who demands immediate access to new release titles and who generally purchases more video game titles and PC entertainment software than the average electronic game consumer. As a result, we believe our tie ratio of sales of software units to hardware units sold is consistently above the industry average. We believe that we attract the electronic game enthusiast due to our:

•

specialty store focus;



•

ability to stock sought-after new releases;



•

breadth of product selection; and



•

knowledgeable sales associates.

        We believe that our vendors recognize the importance of our electronic game enthusiast customer base and, consequently, often grant us disproportionately large allocations of new release titles and

3

products. We support our stores through a highly effective centralized inventory management system. This system enables us to execute our "first-to-market" new release strategy and efficiently manage overall inventory levels in order to maximize the sale of new products during peak periods and avoid markdowns as titles mature.

Risk Factors

Risks Related to the Electronic Games Industry

Manufacturers may fail to introduce or delay the introduction of new products, which could hurt our ability to attract and retain customers.

        We are highly dependent on the introduction of new and enhanced video game and PC hardware and software by manufacturers for our success. If manufacturers fail to introduce or delay the introduction of new products, we would have difficulty attracting and retaining customers to buy the products we sell, which could adversely affect our business. Many of the factors that impact our ability to offer new products are beyond our control, including:

•

our dependence upon manufacturers to introduce new or enhanced video game systems;



•

our reliance upon continued technological development and the continued use of PCs;



•

our dependence upon software publishers to develop popular game and entertainment titles for game systems or PCs; and



•

the availability and timeliness of new product releases.

The video game system and software product industries are cyclical, which could cause significant fluctuations in our earnings.

        Demand for video game systems and software fluctuates in relation to the introduction of next-generation hardware and related software titles. Manufacturers have historically introduced next-generation systems every four to five years. Sales volumes of new video game systems and related software titles are generally higher in the initial stages of the products' life cycles. As a product reaches the end of its life cycle, demand for the product will generally decline as our customers anticipate the introduction of next-generation products. If leading video game system manufacturers fail to continue to introduce next-generation systems, or fail to enhance existing systems on a periodic basis, our sales of hardware systems and related titles will decrease, which could have an adverse effect on our results of operations and financial condition.

If we fail to keep pace with rapidly changing industry technology, we will be at a competitive disadvantage.

        The video game and PC industries are characterized by swiftly changing technology, evolving industry standards, frequent new product introductions and rapid product obsolescence. These characteristics require us to respond quickly to technological changes and to understand their impact on our customers' preferences. If we fail to keep pace with these changes, our business may suffer. In addition, some of these technological changes, such as the ability to download electronic games onto PCs or play games on the Internet through consoles could make the retail sale of video games and PC entertainment software obsolete. If advances in technology continue to expand our customers' ability to access software through other sources, our sales and earnings could be negatively impacted.

4

Risks Related to Our Business

Failure to manage new store openings or renew existing locations as they expire could negatively impact our operational and financial results.

        Our growth depends on our ability to open and operate new stores profitably. We currently intend to open approximately 200 new stores in fiscal 2003. Our ability to open new stores in a timely and profitable manner depends upon numerous contingencies, including our ability to locate and lease suitable store sites build out these sites on a timely and cost-effective basis, hire and train new associates, and then integrate these stores into our existing operations. We cannot assure you that we will be able to achieve our planned expansion or that our new stores will achieve sales and profitability levels comparable to our existing stores.

        As of February 2, 2002, 120 or approximately 13% of our stores were operated under leases with terms that expire in less than one year. We cannot assure you that we will be able to maintain these existing store locations as leases expire or that we will be able to locate suitable alternative sites on acceptable terms.

If we do not compete effectively, we will lose customers and our earnings will decline.

        We are faced with intense competition in the electronic games industry and this could lead to reduced sales and profit margins. We compete with

•

video game and PC software specialty stores;



•

mass merchants;



•

toy retail chains;



•

online retailers;



•

mail-order businesses;



•

direct-to-consumer software publishers;



•

office supply, computer product and consumer electronic superstores; and



•

emerging alternative channels of distribution.

        Some of these competitors have longer operating histories and significantly greater financial, managerial, creative, sales and marketing and other resources than we have. We also compete with other forms of entertainment activities, including movies, television, theater, sporting events and family entertainment centers.

Failure to successfully complete and integrate future acquisitions could negatively impact our business.

        As part of our efforts to grow and compete, we may engage in acquisitions. In fiscal 2002, we acquired an aggregate of 32 stores in Denmark, Germany, Italy, Norway and Sweden. Our plans to pursue future acquisitions are subject to our ability to negotiate favorable terms for these acquisitions. Accordingly, we cannot assure you that future acquisitions will be completed. In addition, to facilitate future acquisitions, we may take actions that could dilute the equity interests of our stockholders, increase our debt or cause us to assume contingent liabilities, all of which may have a detrimental effect on the price of our common stock. Finally, if any acquisitions are not successfully integrated with our business, our ongoing operations could be adversely affected.

5

Our services agreement with Electronics Boutique Plc ("EB-UK") restricts our ability to expand our business in Europe and litigation with EB-UK could adversely affect our business and earnings.

        Our services agreement with EB-UK prohibits us from competing with EB-UK in the United Kingdom and Ireland until January 2007. The services agreement also requires that, until January 2006, we report to EB-UK any opportunity relating to the electronic game retailing business that we become aware of in Europe (excluding Scandinavia) which could be made available to EB-UK and that we use reasonable endeavors to procure that each and every such opportunity is first offered to EB-UK, on the same terms, including as to cost. As a result, EB-UK could impede our planned expansion into Europe by pursuing opportunities in Europe, which we report to it and entering into agreements with our intended business partners. EB-UK has publicly stated that it intends to expand its business into continental Europe. Our compliance with the services agreement will delay and could prevent, limit, or increase the cost of, any acquisitions in continental Europe. We have in the past had, and presently have, disagreements with EB-UK in connection with the application of its rights under the services agreement to our expansion activities in Europe. These disagreements have resulted in litigation and could result in additional litigation.

        Under the services agreement, EB-UK is responsible for the payment of fees equal to 1.0% of EB-UK's net sales plus a bonus calculated on the basis of net income in excess of a pre-established target set by EB-UK. In fiscal 2002, we received approximately $5.9 million in management fees from EB-UK. Our predecessor, The Electronics Boutique, Inc. ("EB") and EB Services Company, LLP ("EB Services") are currently defendants in a lawsuit pending before the Chancery Division of the High Court of Justice in the United Kingdom brought by EB-UK in March 2002. EB-UK claims that, as result of certain events, including our August 2001 secondary offering, a change in control has occurred allowing it to terminate the services agreement between EB Services and EB-UK prior to its expiration in 2006. No monetary damages are being sought by EB-UK. However, if EB-UK was to prevail in this lawsuit or in any subsequent disputes that may arise, our earnings could be significantly impacted.

Our operating results fluctuate from period to period, which could result in a lower price for our common stock.

        Our business is affected by seasonal patterns. We historically generate our highest net sales, management fees and net income during the fourth quarter, which includes the holiday selling season. During fiscal 2002, we generated approximately 48.3% of our net sales and substantially all of our operating income during the fourth quarter. Accordingly, any adverse trend in net sales during the holiday selling season could adversely affect our results of operations for the fourth quarter and the entire year. In addition to our dependence on fourth quarter sales, our results fluctuate from quarter to quarter depending upon a variety of factors, most of which we cannot control. These include:

•

the timing of new product introductions and new store openings;



•

general economic conditions;



•

weather;



•

shifts in the timing of certain holidays or promotions; and



•

changes in our merchandise mix.

        These fluctuations make the prediction of our financial results on a quarterly basis difficult.

6

If we fail to obtain products from our domestic and overseas suppliers, our sales and gross profit will be adversely affected.

        We rely heavily upon our suppliers to provide us with new products as quickly as possible. We purchase a significant amount of products from Nintendo of America, Inc., Microsoft Corp., Electronic Arts, Inc., and Sony Computer Entertainment, Inc. and often receive shipments of new release products which are disproportionately large relative to our share of the overall consumer electronic game market. During fiscal 2002, our purchases from Sony, Microsoft, Electronic Arts and Nintendo represented 18.2%, 11.3%, 9.6% and 7.5%, respectively, of our net purchases. We believe that the loss of any of these suppliers could reduce our product offerings, which could cause us to be at a competitive disadvantage. In addition, our financial performance largely depends upon the business terms we obtain from our suppliers, including competitive prices, unsold product return policies, advertising and market development allowances, freight charges and payment terms. Our failure to maintain favorable business terms with our suppliers could adversely affect our ability to offer products to consumers at competitive prices.

        During fiscal 2002, approximately one-third of our product purchases were from domestic distributors of products manufactured outside of the United States, primarily in Asia. To the extent that our distributors rely on overseas sources for a large portion of their products, any event causing a disruption of imports, including the imposition of important restrictions, could adversely affect our business. Trade restrictions in the form of tariffs or quotas, or both, applicable to the products we sell could also affect the importation of these products generally and could increase the cost and reduce the supply of products available to us.

If our management information systems fail to perform or are inadequate, our ability to manage our business could be disrupted.

        We rely on a warehouse management system used in our domestic distribution centers and an inventory replenishment system to track sales and inventory. Our systems allow us to execute our "first-to-market" new release strategy, to keep our stores in stock at optimum levels and to move inventory efficiently. If our management information systems fail to adequately perform these functions, our business could be adversely affected.

Our international operations expose us to numerous risks.

        We have international retail operations in Australia, Canada, Denmark, Germany, Italy, New Zealand, Norway, South Korea, and Sweden. Net sales in these foreign countries represented approximately 14.6% of our net sales in fiscal 2002. We are subject to a number of factors, which may impair our current or future international opportunities. These include:

•

economic downturns;



•

currency exchange rate fluctuations;



•

international incidents; and



•

government instability.

We depend upon our key personnel and they would be difficult to replace.

        Our success depends upon our ability to attract, motivate and retain key management associates for our stores and skilled merchandising, marketing and administrative personnel at our headquarters. While we have been successful in maintaining the continuity of our management team, including our executive officers, we cannot assure you that we will continue to be successful retaining such personnel. If we fail to retain qualified personnel, our business could suffer.

7

Other Risks

The Kim family has significant control of our company and can make decisions that could adversely affect our stock price and prevent a change of control.

        EB Nevada Inc., a company indirectly controlled by James Kim, his wife and certain trusts for the benefit of his children, beneficially owns approximately 46.1% of the outstanding shares of our common stock. Accordingly, the Kim family effectively controls our company and all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This control may have the effect of delaying, preventing or deterring a change in control of our company and could deprive our stockholders of an opportunity to receive a premium for their common stock as part of any sale or acquisition. Under a credit facility we have with Fleet Capital Corporation, if the Kim family does not own, indirectly through EB Nevada, at least 25% of our outstanding capital stock, we may be declared in default under the credit facility.

Our status as a holding company and our credit facility restrict our ability to pay dividends on our common stock.

        We are a holding company and do not have any material assets other than our ownership interests in our subsidiaries. Our common stock will be junior in right of payment to all of our existing and future liabilities and obligations and, by virtue of the fact that we are a holding company, our common stock will be structurally junior in right of payment to all existing and future liabilities and obligations of each of our subsidiaries. We have not declared or paid dividends on our common stock since our initial public offering in July 1998 and do not anticipate paying any dividends on our common stock in the foreseeable future. In addition, our credit facility with Fleet Capital Corporation restricts our ability to declare or pay dividends on our common stock.

Our certificate of incorporation and bylaws contain anti-takeover protections, which may discourage or prevent a takeover of our company, even if an acquisition would be beneficial to our stockholders.

        Certain provisions of our certificate of incorporation and bylaws, as well as provisions of Delaware law, could make it more difficult for a third party to acquire us, even if a takeover would benefit our stockholders.

Industry Overview

        The electronic game industry is segmented into two primary product categories, video games and PC entertainment software.

        Video games.    Domestic retail sales of video game titles and hardware were approximately $7.7 billion in 2001 and, according to International Development Group, are expected to grow approximately 13% annually for the next two years due to this past year's introduction of several new hardware platforms. Growth in the industry has been driven by continued improvements in systems technology, substantial growth in the number of titles available across game categories and the emergence of well-capitalized software publishers with significant advertising budgets to support new releases. Enhanced technological features of new hardware platforms expand gaming capabilities, encourage existing players to upgrade their hardware platforms and attract new video game players to purchase their first systems.

        From 1996 to September 1999, Nintendo and Sony, each of which manufactures proprietary hardware, dominated the video game market. Sony introduced the PlayStation in 1995 and Nintendo introduced the Nintendo 64 in 1996. In September 1999, Sega introduced the Sega Dreamcast. In October 2000, Sony introduced the PlayStation 2, which represented a significant improvement in graphics, processing power and audio quality over the systems in use at the time. Nintendo introduced

8

the Game Boy Advance, the successor to the highly successful Game Boy, in June 2001. Nintendo's GameCube, introduced in November 2001, features significant performance enhancements over the Nintendo 64 system and is based on CD technology as compared to the prior cartridge-based technology. Microsoft's Xbox, also launched in November 2001, provides advanced graphics and Internet connectivity. We believe that the Game Boy Advance, PlayStation 2, GameCube and Xbox represent the beginning of a new expansion cycle for the electronic game industry.

        At year end 2001, the installed base of video game hardware systems in the United States totaled approximately 7.3 million PlayStation units, 1.4 million Xbox units, 1.2 million GameCube units and 4.8 million Game Boy Advance units. Hardware manufacturers and third-party publishers produce a wide range of game titles for each of these major hardware systems. In addition, according to NPD Group, Inc., a market research firm, sales of video game systems accessories were estimated to be approximately $967 million in 2001.

        PC entertainment software.    Domestic retail sales of PC entertainment software were approximately $1.4 billion in 2001 and, according to International Development Group, are expected to grow at approximately 3% annually over the next several years. PC entertainment software is generally sold in the form of CD-Roms and played on multimedia PCs featuring fast processors, expanded memories, and enhanced graphics and audio capabilities. The domestic installed base of multimedia PCs has increased from approximately 14.0 million units in 1995 to approximately 58.4 million units in 2001.

        Customers.    We believe the typical electronic game consumer is male, between the ages of 14 and 34, and lives in a household with an annual income in excess of $50,000. According to a study conducted by Ziff Davis Media Game Group, our core customer, the electronic game enthusiast, owns multiple video game hardware systems and purchases an average of 12 game titles per year, significantly more than the average electronic game consumer. In addition, many electronic game players purchase PC entertainment software as well as video game titles.

Competitive Strengths

        We seek to enhance our position as one of the world's largest specialty retailers of video game titles and PC entertainment software by focusing on the following:

        Breadth of title selection.    We offer our customers an extensive selection of video game titles and PC entertainment software at competitive prices. Our typical store offers over 1,200 titles at any given time from over 70 video game and PC entertainment software vendors. Most of these titles are also available on our web site. We continuously update our title selection in each store to reflect the tastes and buying patterns of the store's local market. We carry game titles which are compatible with all major video game hardware systems and PCs. In addition to video game titles and PC entertainment software, we offer a complementary line of productivity and educational software and PC and video game accessories and peripheral products, including graphics accelerators, joysticks, memory cards, books and magazines. By offering all major video game hardware systems and providing a broad but focused assortment of electronic game software and accessories, we seek to establish our stores and web site as the destination of choice for electronic game enthusiasts.

        Immediate availability of new releases.    We strive to be the first in our markets to offer new video game and PC entertainment software titles upon their release. We believe that vendors recognize the importance of our electronic game enthusiast customer base and, consequently, often grant us disproportionately large allocations of new release products. Our inventory management systems then rapidly move the products from our distribution centers to our stores. New release titles are often preceded by substantial publicity in the form of print advertisements and reviews in publications and, increasingly, are promoted through television advertisements by the game and software publishers. This publicity tends to create high levels of demand for new releases among electronic game enthusiasts,

9

often well in advance of release dates. This demand has afforded us an important marketing opportunity to drive traffic to our stores and our web site.

        To assure our customers immediate access to new releases, we offer our customers the "EB Pre-Sell Program" through which they can pre-order video games and PC software prior to their release for delivery upon our receipt of the product. We also have established the "EB Reserve List," which entitles participants on this list to be notified when a game has arrived in our stores. On average, we introduce 20 new game titles in our stores and on our web site each week.

        Highly effective inventory management system.    We have a highly effective inventory management system that enables us to maximize sales of new release titles and avoid markdowns as titles mature. The system forecasts our inventory requirements on an individual store basis, aggregates our total requirements and manages the daily replenishment function from our automated distribution centers to our stores. This results in improved in-stock levels in our stores, increased inventory turns and lower shrinkage, which, at less than 0.6% of sales in fiscal 2002, we believe is among the lowest of primarily mall-based retailers.

        Knowledgeable sales associates.    We believe that our knowledgeable sales associates, many of whom are electronic game enthusiasts, and our higher level of customer service provide us with an important advantage over competitors such as mass merchants, toy retail chains, and office supply, computer product and consumer electronics superstores. We provide all of our sales associates training and information on video game and PC entertainment software products, system requirements and selling techniques through vendor-sponsored "EB University" seminars, held for store managers and field managers, and through regularly scheduled in-store seminars for our sales associates. We also encourage sales associates to learn about customers' game preferences. With this knowledge, sales associates introduce customers to a selection of games and accessories that may suit their preferences and advise them of new releases suited to their interests, thereby enhancing our customers' overall gaming experience.

        Disciplined store operations.    Our management team exercises significant control over all aspects of our store operations, including product research, purchasing, distribution, site selection, store development, POS financial reporting and sales training. We believe that this commitment to operational control enables us to:

•

generate positive cash flow in substantially all of our stores;



•

identify opportunities to improve store productivity quickly; and



•

react quickly to shifts in product pricing and consumer purchasing trends.

        We strive to increase the productivity of our stores by actively managing our payroll expense and operating our stores as efficiently as possible. In order to display most of our products on our stores' shelves, we maintain selling space which averages approximately 90% of our stores' total square footage in each of our store formats. In an effort to enhance our sales conversion rates, we utilize a system, known as ShopperTrak, that electronically measures store customer traffic throughout the day and provides us with an analysis of sales conversion rates by store and by sales associate. We also utilize our POS reporting systems to assure the best possible match of sales associate floor coverage to customer traffic.

        Value pricing.    In an effort to offer maximum value to our customers and discourage comparison shopping, we maintain an "everyday low price" policy on advertised merchandise. We complement this policy with an extensive selection of merchandise and a high level of customer service.

        Leadership in e-Business.    We believe that our customers are generally more familiar with the Internet and with online retailing than the average consumer. Our web site offers over 5,000 new and

10

pre-owned SKUs that are available for immediate shipping to our customers. In addition, we have designed our web site to serve our customers by providing product reviews, access to new releases, user-friendly online purchasing and the ability to pre-order video games and PC entertainment software.

Growth Strategy

        New store expansion.    We believe that there are domestic and international opportunities for significant new store growth. Over the last four fiscal years, we have more than doubled our store base. We plan to open approximately 200 new stores in fiscal 2003.

        Domestic opportunity.    We plan to open approximately 130 new stores in fiscal 2003 in the United States. We plan to continue to open stores under our Electronics Boutique format in selected malls. In addition, we plan to accelerate the growth of the EB GameWorld format, primarily in urban areas, central business districts and strip and power shopping centers. We expect our EB GameWorld stores to require lower initial investments, generate higher gross margins on lower revenue and have a lower operating cost structure than our mall-based stores. EB GameWorld stores, which carry a wider assortment of pre-owned electronic games, target the more value conscious electronic game enthusiast.

        International opportunity.    As of February 2, 2002, we operated a total of 208 stores in Australia, Canada, Denmark, Germany, Italy, New Zealand, Norway, South Korea, and Sweden. We plan to open approximately 70 new stores in fiscal 2003 in these markets.

        In fiscal 2002, we began a store expansion program in continental Europe which includes both the acquisition of regional chains and the opening of new stores. In May 2001, we completed the acquisition of eight stores in Denmark and Norway. In August 2001, we acquired a controlling interest in a ten-store chain in Italy, which was followed by the acquisition of a retail, mail order and e-commerce gaming business in Germany in October 2001. In November 2001, we acquired an eleven-store chain in Sweden.

        The electronic games market in continental Europe is approximately $6.5 billion in size, has consumer demand characteristics similar to the U.S. market and, according to International Development Group, is expected to grow at a faster rate than the U.S. market. We believe retail competition in the electronic game industry is weaker throughout continental Europe than in the United States. There are very few specialty electronic game retail chains in continental Europe and the existing specialty chains are small and undercapitalized, with little or no investment in distribution and information systems. Most electronic games are sold in Europe through general merchandise stores that offer less service and a smaller product selection than our stores. We believe that our store model, merchandising expertise and strong vendor relationships should enable us to gain significant market share in our targeted continental European markets over the next several years.

        Expansion of online retailing.    We believe that our core customer tends to be an Internet user, and we strive to meet their needs through our web site, www.ebgames.com., which provides product reviews, access to new release titles, user friendly online purchasing and the ability to pre-order video games and PC entertainment software.

Retail Operations

        As of February 2, 2002, we operated a total of 937 stores in the United States, Australia, Canada, Denmark, Germany, Italy, New Zealand, Norway, South Korea and Sweden, primarily under the names Electronics Boutique and EB GameWorld.

        Store formats.    Electronics Boutique stores are specialty retail stores located primarily in high traffic areas in regional shopping malls. As of February 2, 2002, we operated 796 stores with this

11

format. These stores average approximately 1,200 square feet. We believe that our Electronics Boutique stores generate sales per square foot that are among the highest of any mall-based retailer.

        EB GameWorld stores are generally larger stores located in urban areas, central business districts, and strip and power shopping centers. We opened our first EB GameWorld store in fiscal 2001. As of February 2, 2002, we operated 90 stores (including 15 under the Stop 'N Save brand) with this format. These stores average approximately 1,700 square feet. We believe that our EB GameWorld stores do not compete directly with our Electronics Boutique stores due to their locations and their focus on pre-owned electronic games.

        In addition, as of February 2, 2002, we operated 22 stores that sell sports collectibles and memorabilia under the name BC Sports Collectibles and 29 stores that sell interactive and developmental toys and family-friendly, non-violent software under the EBKids brand. In February, 2002, we announced our decision to sell the BC Sports Collectibles chain and to close the EBKids chain and liquidate the merchandise. Many of the EBKids stores will be converted to the Electronics Boutique format. We made this strategic decision to enable us to focus all of our resources—management, capital, and systems—on the growth opportunities in our core video game market.

        We continue to operate, and incur expenses related to, the BC Sports Collectibles chain while we look for a purchaser of the chain. While we intend to complete a transaction to sell the BC Sports Collectibles chain during the second quarter of fiscal 2003, there can be no assurances that we will be able to identify a purchaser and close a sale to that purchaser within that, or any, time frame.

        We typically locate our stores in malls and strip and power shopping centers and we believe that these are many suitable locations available for future sites. We use standardized site selection criteria for each of our formats to choose sites and we regularly review the profitability and prospects of each of our stores and evaluate whether any underperforming stores should be closed or relocated to more desirable locations.

        Store economics.    The average cost, net of payables, of opening a new Electronics Boutique store in fiscal 2002 was approximately $170,000. This included approximately $153,000 for furniture, fixtures, equipment and leasehold improvements. Pre-opening expenses are minimal and are included in the store's expenses for the first month of operation.

        The average cost, net of payables, of opening a new EB GameWorld store in fiscal 2002 was approximately $86,000. This includes approximately $63,000 for furniture, fixtures, equipment and leasehold improvements. Pre-opening expenses are minimal and are included in the store's expenses for the first month of operation.

        The cost to open an international store is approximately the same in U.S. dollars as the cost to open a domestic store. Typically, our new stores have generated a positive store operating contribution within the first 12 months of operations. We regularly review the profitability and prospects of each of our stores and evaluate whether any under-performing stores should be closed or relocated to more desirable locations.

        Following the opening of a store, we utilize inventory management and controls and manage store payroll in an effort to maximize profitability. Our POS and inventory management systems allow us to analyze merchandise mix and in-stock positions, increase inventory turns and reduce shrinkage. We also utilize various payroll management and efficiency systems to improve sales conversions and store profitability.

12

        Store operations.    We divide our North American store base (United States and Canada) into 10 geographic regions, which are supervised by our President of Stores—North America and Canada, 10 Regional Vice Presidents/Directors and 60 District Managers. Each District Manager is responsible for approximately 10 stores. Our Senior Vice President of International Operations, who is based in France, supervises our international operations. Five Managing Directors, three District Managers and one Area Manager supervise our stores in Denmark, Germany, Italy, Norway and Sweden. A Director of Store Operations, a Store Operations Manager, three District Managers and seven Area Managers supervise our stores in Australia, New Zealand and South Korea.

        Each of our stores has a full-time manager and a full-time assistant manager in addition to hourly sales associates, most of whom work part-time. The number of hourly sales associates in each store fluctuates depending on our seasonal needs. Our domestic stores are open seven days per week and generally ten hours each day. We operate our international stores in a manner substantially similar to our domestic stores.

Online Retailing

        We launched our e-commerce website, ebgames.com, in August 1997. Since then, we have experienced continual growth in traffic and revenue, and fiscal 2002 was the first year that our e-commerce operating subsidiary achieved profitability.

        The Internet represents a logical extension of our traditional store-based retail business. Our own in-store and online surveys indicate that our web site's detailed product reviews, game previews, new release schedules, product notification services, industry news and advanced search capabilities appeal to a significant portion of the game enthusiast audience. Ebgames.com utilizes our merchandising expertise and strong vendor relationships to provide online customers with over 5,000 new and pre-owned SKUs that are available for immediate shipping. Further, ebgames.com leverages our distribution and fulfillment capabilities to provide delivery of new release titles to online consumers on the same day they are available in our stores.

        We believe that Internet broadband technology will play an important role in the future of online retailing. We continue to explore different ways to assume a leadership role in the online distribution of PC games. Adoption of this new technology by consumers has been limited. However, as adoption of this technology grows and other game delivery technologies emerge, we expect to actively pursue these opportunities.

EB-UK Services Agreement

        Under a services agreement with EB-UK, we provide management services for EB-UK's stores and department store-based concessions in the United Kingdom, Ireland and Sweden. We also license the use of the name Electronics Boutique to EB-UK in the United Kingdom and Ireland. EB-UK is one of the leading specialty retailers of electronic games in the United Kingdom and Ireland, operating over 300 stores. EB-UK's business strategy is substantially similar to our business strategy.

        Under the terms of the services agreement, at the request of EB-UK, we are required to provide management services, including assistance with ordering and purchasing inventory, store design and acquisition, advertising, promotion, publicity and information systems. EB-UK is responsible for the payment of fees, payable, at our option, in cash or EB-UK stock, equal to 1.0% of EB-UK's net sales plus a bonus calculated on the basis of net income in excess of a pre-established target set by EB-UK. In fiscal 2002, we received approximately $5.9 million in management fees from EB-UK. The services agreement prohibits us from competing with EB-UK in the United Kingdom and Ireland until January 2007. The services agreement also requires that, until January 2006, we report to EB-UK any opportunity relating to the electronic game retailing business which we become aware of in Europe (excluding Scandinavia) which could be made available to EB-UK and use reasonable endeavors to

13

procure that each and every such opportunity is first offered to EB-UK, on the same terms, including as to cost. EB-UK's right to use the Electronics Boutique name terminates six months after the services agreement expires in January 2006. In January 2002, EB-UK announced it was changing its name to Game Plc.

Products

        Our product line consists of video game titles, PC entertainment software titles, video game hardware systems, related products and toys, trading cards, and accessories. We also market selected PC productivity and educational software titles. Our in-store inventory at any given time averages over 2,900 SKUs.

        Video game titles and PC entertainment software.    We carry an average of over 1,200 video game (excluding pre-owned games) and PC entertainment software titles at any given time. We purchase video game titles directly from the leading manufacturers, which include Nintendo, Microsoft and Sony, as well as a variety of third-party game publishers, such as Electronic Arts, Inc., Sega Corporation, Take-Two Interactive Software, Inc., THQ Inc. and Activision, Inc. We are one of the largest domestic customers of video game products sold by these publishers. We currently purchase titles from over 70 vendors across a variety of genres, including Action, Strategy, Adventure/Role Playing, Simulation, Sports, Children's Entertainment and Family Entertainment. We maintain a broad selection of popular new release titles, which we define as titles that have been available for less than six weeks from the date of their release.

        Pre-owned electronic games.    Video game software has a useful life of thousands of plays. As a result of the proliferation of new titles and the tendency of electronic game players to seek new game challenges after mastering a particular title, a growing market for pre-owned video game titles has evolved. We carry approximately 600 pre-owned SKUs in a typical Electronics Boutique store. We allow customers to trade in pre-owned games in our stores. We believe that the opportunity to trade in games and the availability of pre-owned titles in our stores is attractive to the value conscious electronic game enthusiast and differentiates us from most of our competition, which we do not generally accept trade-ins or offer pre-owned games. The customers receive a store credit, which can be applied towards the purchase of new or pre-owned products. At our in-house reclamation center, these trade-ins can be tested, cleaned, relabeled, repackaged, repriced and redistributed back to the stores. These trade-ins are then resold in our stores at a discount to the price of new releases. Sales of pre-owned video game titles generate significantly higher margins than new titles. We believe that availability of pre-owned games in our stores attracts our core game enthusiast customer and drives traffic into our stores.

        Video game hardware.    We offer the video game hardware systems of all major manufacturers, including Sony's PlayStation 2 and PlayStation one, Nintendo's GameCube, Game Boy Advance and Microsoft's Xbox. Due to our strong relationships with the publishers, we often receive disproportionately large allocations of new release hardware products, which is an important component of our strategy to be the destination of choice for electronic game enthusiasts. We believe that selling video game hardware increases store traffic, promotes customer loyalty and leads to increased sales of video game titles, which typically have higher gross margins than video game hardware systems. We also offer extended service agreements and extensions of manufacturer warranties for the video game systems.

        Accessories.    In recent years, the growing popularity of electronic games has led to an increase in sales of accessory products, which generally have higher gross margins than hardware and software products. Presently, we offer approximately 600 accessory product SKUs, including 3-D graphics accelerators, memory cards, controllers and steering wheels. We also market instructional books on the most popular electronic game titles.

14

        Related products and trading cards.    We offer an assortment of trading cards, such as Harry Potter and Star Wars products, that also appeal to our core customers. We also offer action figures that are related to video game characters.

Inventory Management and Distribution

        Inventory management.    We do extensive research prior to the release of new products and titles and carefully manage our inventory to minimize the risk associated with introducing new products and titles. Our centralized merchandising staff evaluates potential products and analyzes the EB Pre-Sell Program and EB Reserve List information and other data to estimate initial demand and the projected life cycle for a new release. We then use our new product analyses to plan our initial purchases and allocations among our stores and web site. Through our inventory replenishment system, we then forecast and actively manage our ongoing inventory requirements on an individual store and aggregate basis.

        Distribution.    We currently operate three distribution centers in the United States, each of which focuses on separate components of our business. Our 97,500 square foot facility in West Chester, Pennsylvania handles staple products and online fulfillment. Our 80,000 square foot distribution center in West Chester, Pennsylvania handles returns and reclamation. Our 200,000 square foot distribution center in Louisville, Kentucky supports flow-through operations on new releases, top selling products and online fulfillment. We also have a 120,000 square foot facility in Canada, a 70,000 square foot facility in Australia and four smaller European facilities in Denmark, Germany, Italy and Sweden.

        These distribution facilities allow us to replenish our stores on a daily basis, thereby reducing inventory levels and increasing inventory turns, while supporting our "first-to-market" new-release strategy. Our rapid processing capability in our distribution centers is facilitated by several advanced inventory management technologies, including paperless picking and radio frequency support. We also use a warehouse management system in our domestic distribution centers that enables us to better manage labor and freight costs. Our distribution network also enables us to provide immediate delivery service to our online customers.

Marketing

        In-store promotions.    Our Electronics Boutique stores are primarily located in high traffic, high visibility areas in regional shopping malls. Accordingly, our marketing efforts at these stores are designed to draw mall patrons into our stores through the use of window displays and other attractions visible to shoppers in the mall concourse. We actively publicize our EB GameWorld stores through a variety of media, including print, radio and selected local television advertising. Inside our stores, we feature selected products through the use of vendor displays, signs, fliers, point of purchase materials and end-cap displays. A majority of these promotions are funded through cooperative advertising and market development funds from manufacturers, distributors, software publishers and accessory suppliers.

        Catalogs.    We publish eight or more full color catalogs each year ranging in size from 48 to 100 pages. Our vendors fund the cost of these catalogs. The catalogs are available in our stores and are mailed to several hundred thousand households from our proprietary customer lists. The catalogs are also inserted in leading industry magazines.

        ebgames.com.    We believe our online presence and marketing initiatives play a key role in driving sales to our stores and strengthening our brand identity. Our online marketing initiatives focus on partnering with companies that operate other web sites, such as CNET, IGN.com and Gamespot.com. These initiatives enable us to access the broad reach of the Internet at a low cost. We also advertise in game focused magazines and online with portals such as AOL and MSN.

15

Management Information Systems

        Our primary management information system is a customized version of the AS400-based JDA Merchandise Management System. We have made proprietary enhancements to this program, which enable us to analyze total, comparative and new store sales and inventory data at the company, region, district and store levels. We operate our own proprietary store POS and back office systems and believe this provides a strategic advantage by allowing us to make enhancements to meet business opportunities quickly. We have integrated the ShopperTrak customer counting technology into our POS and our AS400 system. This combination of technology provides centralized access to store traffic and sales conversion information by store and hour at our store locations.

Vendors

        We purchase substantially all of our products directly from manufacturers and software publishers. Our top 25 vendors accounted for approximately 81% of our purchases in fiscal 2002. Our largest vendors in fiscal 2002 were Sony, Microsoft, Electronics Arts, and Nintendo, which accounted for 18.2%, 11.3%, 9.6% and 7.5%, respectively, of our net purchases. No other vendor accounted for more than 5.0% of our software or accessory purchases during fiscal 2002. We believe that we have good relationships with our vendors. Maintaining and strengthening these relationships is essential to our operations and continued expansion.

Competition

        The electronic game industry is intensely competitive and subject to rapid changes in consumer preferences and frequent new product introductions. We compete with other video game and PC software stores, as well as with mass merchants, toy retail chains, mail-order businesses, catalogs, direct sales by software publishers, online retailers, and office supply, computer product and consumer electronics superstores. In addition, video games are available for rental from many video stores. Further, other methods of distribution may emerge in the future, resulting in increased competition.

Environmental Matters

        Under various federal, state and local and foreign environmental laws and regulations, a current or previous owner or occupant of real property may become liable for fines as well as the costs of removal or remediation of hazardous substances present or generated at the premises, at times without regard to fault. Although we have not been notified of, and are not aware of, any current environmental liability, claim or non-compliance, it is possible that we may incur fines or remediation costs in the future.

Trademarks/Registrations

        We possess registered trademarks for Electronics Boutique® (and design), EBX®, BC Sports Collectibles® and ebworld.com® as well as other registered trademarks and service marks, both in the United States and in certain foreign jurisdictions. We also have numerous trademark applications pending in the United States and in certain foreign jurisdictions, including ebgames.com and EB GameWorld.

        We believe our trademarks are valid and valuable and intend to maintain our trademarks and their related registrations. We do not know of any pending claims of infringement or other challenges to our right to use our marks in the United States or elsewhere. We have no patents, licenses, franchises or other concessions that are material to our operations.

16

Associates

        As of February 2, 2002, we had approximately 6,650 non-seasonal associates. Approximately 3,300 were employed on a part-time basis, and 565 were employed on a temporary basis. In addition, during the calendar 2001 peak holiday shopping season, we hired approximately 1,680 temporary associates. We believe that our relationship with our associates is good. None of our associates is represented by a labor union or is a member of a collective bargaining unit.

Item 1A. Executive Officers of Electronics Boutique

        Set forth below is information regarding the executive officers of Electronics Boutique:

        Mr. Griffiths, age 51, has served as the President and Chief Executive Officer of Electronics Boutique and a Class I Director since June 2001. Prior thereto, he served as Senior Vice President of Merchandising and Distribution from March 1998 to June 2001. Mr. Griffiths served as Senior Vice President of Merchandising and Distribution of EB, our predecessor, from March 1996 to March 1998. From March 1987 to February 1996, Mr. Griffiths served as Vice President of Merchandising of EB, and from April 1984 to February 1987 he served as Merchandise Manager.

        Mr. Panichello, age 40, has served as Executive Vice President, Chief Operating Officer and President of BC Sports Collectibles, a division of Electronics Boutique, since April 2002. Prior thereto, Mr. Panichello served as Senior Vice President, Chief Operating Officer, President of EB GameWorld and BC Sports Collectibles and Secretary of Electronics Boutique from June 2001 to April 2002. Mr. Panichello served as Senior Vice President, Chief Financial Officer, President of EB GameWorld and BC Sports Collectibles and Secretary of Electronics Boutique from June 2000 to June 2001. Mr. Panichello served as Senior Vice President, Chief Financial Officer, President of BC Sports Collectibles and Secretary of Electronics Boutique from March 1998 to June 2000. Mr. Panichello served as the Senior Vice President of Finance of EB and the President of the BC Sports Collectibles division from March 1997 to February 1998. Mr. Panichello served as EB's Vice President of Finance and Treasurer from June 1994 to February 1997. Mr. Panichello served as a director of EB-UK from May 1995 to November 1999. Mr. Panichello is a Certified Public Accountant. Mr. Panichello is the husband of Susan Y. Kim and the son-in-law of James J. Kim. Mr. Panichello serves on the Board of Directors of the Interactive Entertainment Merchants Association.

        Mr. Smith, age 46, has served as Senior Vice President, Chief Financial Officer and Secretary since June 2001. Prior thereto, Mr. Smith served as Senior Vice President of Finance of Electronics Boutique from August 2000 to June 2001. Mr. Smith served as Electronics Boutique's Vice President-Finance from May 1998 to August 2000. From 1996 to 1998, Mr. Smith served as Vice President and Controller of EB, our predecessor, and from 1993 to March 1996, he served as Controller of EB.

17

        Mr. Levy, age 44, has served as Senior Vice President, Logistics, Chief Information Officer and the President of Electronics Boutique's EBWorld.com subsidiary since June 2001. Prior thereto, he served as Senior Vice President, Chief Information Officer and the President of Ebworld.com from March 1999 to June 2001 From February 1997 to March 1999, Mr. Levy served as the Vice President and Chief Information Officer. From 1991 to February 1997, Mr. Levy served as the Director of System Development for the May Merchandising and May Department International divisions of May Department Stores.

        Mr. Morgan, age 50, has served as Senior Vice President, President of Stores—North America and President of Canadian Operations since April 2002. Prior thereto, Mr. Morgan served as Senior Vice President of Stores of Electronics Boutique and Canadian Operations from June 2001 to June 2002. Mr. Morgan served as Senior Vice President of Stores of Electronics Boutique from January 2001 to June 2001. From May 1998 to January 2001, Mr. Morgan served as President and CEO of Millennium Futures, Inc., a commodity trading company. From July 1996 to May 1998, he served as Senior Vice President, Director of Stores at Filene's Department Stores. From May 1988 to July 1996, he served as Regional Vice President at Filene's Department Stores.

Item 2. Properties

        Store leases.    All of our stores are leased. As of February 2, 2002, we had 937 stores. In general, our mall-based leases have initial terms of seven to ten years. Our strip and power center locations typically have initial terms of three to five years with at least one or more renewal options.

        Headquarters and distribution centers.    We own our 140,000 square foot headquarters in West Chester, Pennsylvania. This building includes a 97,500 square foot distribution center. In addition, we own an adjacent 80,000 square foot distribution facility. We lease a 200,000 square foot distribution center in Louisville, Kentucky. This lease expires in May 2005. We also lease a 52,000 square foot building in Louisville, Kentucky, however we subleased this building in February 2002. This lease expires in March 2004.

        In Brampton, Ontario, Canada, we own a 120,000 square foot distribution and office facility. In Pinkenba, Queensland, Australia, we own a 70,000 square foot distribution and office facility. We also lease small distribution facilities in Denmark, Germany, Italy and Sweden.

        Customer service call center.    We lease a 17,900 square foot customer service telephone call center in Las Vegas, Nevada, from which we respond to consumers' inquiries regarding our products. The lease expires in June 2004.

Item 3. Legal Proceedings

        We are involved from time to time in legal proceedings arising in the ordinary course of our business. Our predecessor, EB, and EB Services are the defendants in a lawsuit currently pending before the Chancery Division of the High Court of Justice in the United Kingdom filed by EB-UK on March 25, 2002. EB-UK claims that, as result of certain events, including our August 2001secondary offering, a change in control has occurred allowing it to terminate the services agreement between EB Services and EB-UK prior to its expiration in 2006. No monetary damages are being sought by EB-UK. We believe we have meritorious defenses against the suit and intend to defend the suit vigorously. However, if EB-UK prevails and terminates the services agreement, our earnings could be significantly impacted. Other than this lawsuit, in the opinion of management, no pending proceedings could have a material adverse effect on our results of operation or financial condition.

Item 4. Submission of Matters to a Vote of Security Holders

        None

18

PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters

        The common stock of Electronics Boutique was first traded publicly on July 28, 1998. The stock is quoted on the NASDAQ National Market under the symbol ELBO. The table below represents the high and low closing prices of Electronics Boutique's common stock as reported by NASDAQ.

        Such quotations reflect inter-dealer prices, without retail mark-ups, mark-downs or commissions and may not necessarily reflect actual transactions.

        As of April 23, 2002, the Company had approximately 29 shareholders of record (including Cede & Co., the nominee for Depository Trust Company, a registered clearing agency) of the 25,810,462 outstanding shares of the Company's Common Stock. On April 23, 2002, the last reported sale price for the Company's common stock as quoted by NASDAQ was $31.22 per share.

        Electronics Boutique has not paid any dividends on its common stock to date and does not anticipate paying any dividends on the common stock in the foreseeable future.

Item 6. Selected Financial Data

        The following table sets forth for the periods indicated selected financial and other data for Electronics Boutique for periods subsequent to its initial public offering on July 28, 1998. Prior periods reflect financial data of Electronics Boutique's predecessors, The Electronics Boutique, Inc. ("EB") and subsidiaries and EB Services Company LLP ("EB Services"). The statement of income data and balance sheet data, which follow, have been derived from Electronics Boutique's consolidated financial statements. This information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and Notes thereto included elsewhere in this Form 10-K. The pro forma data, in the opinion of

19

management, include all adjustments necessary to present fairly the information set forth therein including the matters referred to in footnotes 3 and 4.