ELECTRONICS BOUTIQUE HOLDINGS CORP - 10-Q Quarterly Report

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

FORM 10-Q

(Mark One)

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended August 3, 2002

o	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 (State of Incorporation)		51-0379406 (IRS Employer Identification Number)
931 South Matlack Street West Chester, Pennsylvania (Address of principal executive offices)		19382 (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 ý NO o

At September 10, 2002, there were 25,847,266 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 3, 2002 (unaudited) and February 2, 2002	3
		Consolidated Statements of Income (unaudited) Thirteen weeks ended and twenty-six weeks ended August 3, 2002 and August 4, 2001	4
		Consolidated Statements of Cash Flows (unaudited) Twenty-six weeks ended August 3, 2002 and August 4, 2001	5
		Notes to Consolidated Financial Statements (unaudited)	6
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	10
Part II.	Other Information
	Item 1.	Legal Proceedings	15
	Item 6.	Exhibits and Reports on Form 8-K	15
Signatures			16

ELECTRONICS BOUTIQUE HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

			August 3, 2002			February 2, 2002
			(unaudited)
Assets
Current assets:
	Cash and cash equivalents		$	102,111,735		$	126,523,541
	Accounts receivable:
		Trade and vendors		11,555,607			11,474,587
		Other		259,752			259,752
	Merchandise inventories			158,127,273			149,791,859
	Deferred tax asset			10,986,592			10,970,762
	Prepaid expenses			10,014,472			7,426,307

Total current assets				293,055,431			306,446,808

Property and equipment:
	Building & leasehold improvements			89,026,482			85,028,687
	Fixtures and equipment			82,389,877			76,247,107
	Land			5,316,129			5,277,572
	Construction in progress			2,146,477			1,175,599

				178,878,965			167,728,965
	Less accumulated depreciation and amortization			80,729,932			72,788,793

Net property and equipment				98,149,033			94,940,172
Goodwill and other intangible assets, net of accumulated amortization of $1,542,358 and $1,500,007				10,064,215			8,741,658
Deferred tax asset				11,964,850			11,897,160
Other noncurrent assets				4,265,852			3,811,832

Total assets			$	417,499,381		$	425,837,630

Liabilities and Stockholders' Equity
Current liabilities:
	Current portion of long-term debt		$	—		$	324,841
	Accounts payable			140,663,764			136,374,705
	Accrued expenses			31,266,977			34,326,224
	Income taxes payable			2,446,564			13,974,812

Total current liabilities				174,377,305			185,000,582

Long-term liabilities:
	Notes payable			—			142,937
	Deferred rent and other long-term liabilities			3,638,534			3,533,985

Total long-term liabilities				3,638,534			3,676,922

Total liabilities				178,015,839			188,677,504

Stockholders' equity
	Preferred stock—authorized 25,000,000 shares; $.01 par value; no shares issued and outstanding at August 3, 2002 and February 2, 2002			—			—
	Common stock—authorized 100,000,000 shares; $.01 par value; 25,830,416 and 25,782,857 shares issued and outstanding at August 3, 2002 and February 2, 2002, respectively			258,304			257,829
	Additional paid-in capital			167,117,438			166,312,221
	Accumulated other comprehensive loss			(2,414,198	)		(2,609,427	)
	Retained earnings			74,521,998			73,199,503

Total stockholders' equity				239,483,542			237,160,126

Total liabilities and stockholders' equity			$	417,499,381		$	425,837,630

See accompanying notes to consolidated financial statements.

ELECTRONICS BOUTIQUE HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

		Thirteen weeks ended					Twenty-six weeks ended
		August 3, 2002		August 4, 2001			August 3, 2002			August 4, 2001
Net sales		$	261,060,768	$	188,965,768		$	497,332,739		$	377,629,742
Management fees			1,574,207		917,894			2,942,505			1,880,443

Total revenues			262,634,975		189,883,662			500,275,244			379,510,185

Costs and expenses:
	Costs of goods sold, including freight		202,490,721		143,945,282			383,330,731			291,838,129
	Selling, general and administrative		53,882,527		43,877,391			105,490,112			83,897,768
	Restructuring and asset impairment charge (reversal), net		134,056		—			(373,772	)		—
	Depreciation and amortization		5,413,579		4,765,419			10,560,630			9,320,927

Operating income (loss)			714,092		(2,704,430	)		1,267,543			(5,546,639	)
Interest income, net			411,698		163,844			872,412			654,609

Income (loss) before income taxes			1,125,790		(2,540,586	)		2,139,955			(4,892,030	)
Income tax expense (benefit)			430,049		(1,008,613	)		817,460			(1,942,136	)

Net income (loss)		$	695,741	$	(1,531,973	)	$	1,322,495		$	(2,949,894	)

Net income (loss) per share—basic		$	0.03	$	(0.07	)	$	0.05		$	(0.13	)

Weighted average shares outstanding—basic			25,820,415		22,525,945			25,808,449			22,429,021

Net income (loss) per share—diluted		$	0.03	$	(0.07	)	$	0.05		$	(0.13	)

Weighted average shares outstanding—diluted			26,259,568		22,525,945			26,311,579			22,429,021

See accompanying notes to consolidated financial statements.

ELECTRONICS BOUTIQUE HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

					Twenty-six weeks ended
					August 3, 2002			August 4, 2001
Cash flows from operating activities:
	Net income (loss)				$	1,322,495		$	(2,949,894	)
	Adjustments to reconcile net income (loss) to cash used in operating activities:
		Depreciation of property and equipment				10,518,279			9,208,148
		Amortization of other assets				42,351			112,779
		Loss on disposal of property and equipment				35,128			79,560
		Changes in assets and liabilities:
			Decrease (increase) in:
				Accounts receivable		246,192			1,230,561
				Merchandise inventories		(7,025,738	)		(20,994,882	)
				Prepaid expenses		(2,435,499	)		(4,674,843	)
				Deferred taxes		(36,379	)		83,165
				Other long-term assets		10,958			(335,478	)
			(Decrease) increase in:
				Accounts payable		3,251,042			12,640,614
				Accrued expenses		(5,236,668	)		(2,144,879	)
				Income taxes payable		(11,578,386	)		(6,459,923	)
				Deferred rent		(24,917	)		228,333

Net cash used in operating activities						(10,911,142	)		(13,976,739	)

Cash flows used in investing activities:
	Purchases of property and equipment					(13,307,654	)		(12,014,272	)
	Proceeds from disposition of assets					213,278			87,547
	Businesses acquired, net of cash					(583,201	)		(3,400,509	)

Net cash used in investing activities						(13,677,577	)		(15,327,234	)

Cash flows from financing activities:
	Proceeds from exercise of stock options					595,850			4,054,576
	Repayments of long-term debt					(506,431	)		—
	Proceeds from issuance of common stock					209,843			181,918

Net cash provided by financing activities						299,262			4,236,494

Effects of exchange rates on cash						(122,349	)		(158,562	)
Net decrease in cash and cash equivalents						(24,411,806	)		(25,226,041	)
Cash and cash equivalents, beginning of period						126,523,541			45,111,445

Cash and cash equivalents, end of period					$	102,111,735		$	19,885,404

Supplemental disclosures of cash flow information:
Taxes paid					$	12,057,407		$	6,170,337
Interest paid					$	30,377		$	1,472

See accompanying notes to consolidated financial statements.

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 2, 2002 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 3, 2002 are not necessarily indicative of the results that may be expected for the fiscal year ending February 1, 2003.

(2) Net Income (Loss) Per Share

Basic net income (loss) per share is computed on the basis of the weighted average number of shares outstanding during the period. Diluted net income per share for the thirteen and twenty-six week period ended August 3, 2002 is computed on the basis of the weighted average number of shares outstanding during the period plus the dilutive effect of stock options. Because Electronics Boutique incurred a net loss for the thirteen and twenty-six week periods ended August 4, 2001, the weighted average shares used for diluted net loss per share equals the weighted average number of shares used for the basic net loss per share.

(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 3, 2002, there were no outstanding borrowings on this facility.

(5) Comprehensive Income

Comprehensive income is computed as follows:

	Thirteen weeks ended						Twenty-six weeks ended
	August 3, 2002			August 4, 2001			August 3, 2002		August 4, 2001
Net income (loss)	$	695,741		$	(1,531,973	)	$	1,322,495	$	(2,949,894	)
Foreign currency translation adjustment		(38,259	)		(46,774	)		195,229		(725,878	)

Comprehensive income (loss)	$	657,482		$	(1,578,747	)	$	1,517,724	$	(3,675,772	)

(6) Restructuring and asset impairment charge

In the fourth quarter of the fiscal year ended February 2, 2002, we decided to close all of our 29 EB Kids stores and sell our 22 store BC Sports Collectibles business. The closing of the EB Kids stores was completed in May 2002.

We have retained a financial advisor to assist in the sale of the BC Sports Collectibles business and expect to complete a transaction by the end of the third fiscal quarter. We continue to operate and incur expenses while we seek a purchaser of these stores.

As a result of these decisions, we recorded a $12.6 million pre-tax charge in the fiscal fourth quarter and year ended February 2, 2002, consisting of the write-down of fixed assets, estimated lease termination costs, and related expenses. To determine the charge, management made various estimates and assumptions regarding the fair values of fixed assets as well as estimating the costs associated with terminating certain leases. Actual costs could differ from these estimates. If this occurs, we will adjust our accrual accordingly.

The following table summarizes activity in the restructuring accrual for August 3, 2002, May 4, 2002 and February 2, 2002:

	Beginning Balance		Cash Payments			Charges		Reversals			Other			Ending Balance
	(Amounts in thousands)
Year ended February 2, 2002	$	—	$	—		$	12,638	$	—		$	(2,865	)	$	9,773
Quarter ended May 4, 2002	$	9,773	$	(1,325	)	$	—	$	(508	)	$	—		$	7,940
Quarter ended August 3, 2002	$	7,940	$	(1,088	)	$	134	$	—		$	—		$	6,986

In the fourth quarter of fiscal year ended 2002, the $2.9 million in "Other" related to the write down of $2.5 million of EB Kids fixed assets and the write off of other assets.

In the first quarter of fiscal 2003, Electronics Boutique made $1.2 million in cash payments relating to the termination of certain EB Kids store leases and $89,000 in cash payments for professional services associated with the restructuring. In addition we reversed $0.5 million of the restructuring accrual in the thirteen weeks ending May 4, 2002. The reversal of the accrual was due to actual costs being lower than original estimates for the termination of leases of the EB Kids stores.

In the second quarter of fiscal 2003, Electronics Boutique made $986,000 in cash payments relating to the termination of certain EB Kids store leases and $102,000 in cash payments for professional

services associated with the sale of the BC Sports Collectibles business. The $134,000 in "Charges" represents actual costs for the discontinuation of the EB Kids stores and the sale of the BC Sports Collectibles business being higher than original estimates.

As of August 3, 2002, $6.9 million of the restructuring accrual relates to the sale of the BC Sports Collectibles business, which is expected to take place in the third fiscal quarter. The remainder is an accrual for consulting costs related to the EB Kids closings, which will be paid in the third fiscal quarter of fiscal 2003.

(7) New Accounting Pronouncements

In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement No. 142, "Goodwill and Other Intangible Assets." FASB Statement 142 states that goodwill and intangible assets with indefinite useful lives will no longer be amortized, but instead be tested for impairment at least annually.

As of August 3, 2002, we had net unamortized goodwill and identifiable intangible assets of $10.1 million. Electronics Boutique has finalized its impairment test and, based on the analysis, no impairment charge is required.

In accordance with FASB Statement 142, the following tables show the intangible assets and goodwill as of August 3, 2002.

	Gross Carrying Amount		Accumulated Amortization
Amortized Intangible Assets	$	191,629	$	98,751
Unamortized Intangible Assets	$	425,569	$	—
Aggregate Amortization Expense:
Quarter ended August 3, 2002	$	9,949
Year to date ending August 3, 2002	$	42,351

Goodwill

The changes in carrying amount of goodwill for the twenty-six weeks ended August 3, 2002 are as follows:

Balance as of February 2, 2002	$	8,353,641
Foreign exchange adjustment		463,095

Balance as of May 4, 2002		8,816,736

Purchase additional 20% of subsidiary(1)		626,373
Reduction in purchase price of subsidiary(2)		(546,729	)
Foreign exchange adjustment		649,388

Balance as of August 3, 2002	$	9,545,768

(1): On May 1, 2002, Electronics Boutique purchased an additional 20% of the Italian subsidiary from its minority owner. We now own 90% of our Italian subsidiary.
(2): During the second quarter an adjustment was made to the purchase price for our acquisition made in Sweden in the fourth quarter of fiscal 2002.

Goodwill and Intangible Asset

The discontinuing of goodwill amortization in accordance with FASB Statement 142 did not change the results of the basic or diluted earnings per share for the thirteen and twenty-six weeks ended August 3, 2002 and August 4, 2001. The following table shows the tax effected adjustment to net income (loss).

	Thirteen weeks ended					Twenty-six weeks ended
	August 3, 2002		August 4, 2001			August 3, 2002		August 4, 2001
Net income (loss)	$	695,741	$	(1,531,973	)	$	1,322,495	$	(2,949,894	)
Add back goodwill amortization		—		31,114			—		56,880

Adjusted net income(loss)	$	695,741	$	(1,500,859	)	$	1,322,495	$	(2,893,014	)

(8) Reclassifications

Effective in the second quarter of fiscal 2003, Electronics Boutique changed the income statement classification for pre-owned merchandise trade-in activity to be consistent with industry practice. Previously, we recorded a reduction to both revenue and cost of goods sold for the cost of the pre-owned merchandise accepted for trade. The reclassification of these transactions increased both revenues and cost of goods sold by $14.4 million and $24.2 million for the thirteen and twenty-six week periods ended August 4, 2001, respectively. There was no impact on operating income or net income for any period as a result of this reclassification.

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 and accessories. As of August 3, 2002, we operated a total of 994 stores in the United States, Australia, Canada, Denmark, Germany, Italy, New Zealand, Norway, Puerto Rico, Sweden and South Korea, primarily under the names Electronics Boutique and EB GameWorld. We operate an e-commerce website under the URL address of ebgames.com. We also provide management services for Game Group Plc. (formerly Electronics Boutique Plc.), which operates over 300 stores and department store-based concessions primarily in the United Kingdom and Ireland. 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 3, 2002		August 4, 2001		August 3, 2002		August 4, 2001
Net sales	99.4	%	99.5	%	99.4	%	99.5	%
Management fees	0.6		0.5		0.6		0.5

Total revenues	100.0		100.0		100.0		100.0
Cost of goods sold	77.1		75.8		76.6		76.9

Gross profit	22.9		24.2		23.4		23.1
Selling, general and administrative	20.5		23.1		21.1		22.1
Restructuring and asset impairment charge	0.0		0.0		(0.1	)	0.0
Depreciation and amortization	2.1		2.5		2.1		2.5

Income (loss) from operations	0.3		(1.4	)	0.3		(1.5	)
Interest income, net	0.1		0.1		0.1		0.2

Income (loss) before income taxes	0.4		(1.3	)	0.4		(1.3	)
Income tax expense (benefit)	0.1		(0.5	)	0.1		(0.5	)

Net income (loss)	0.3	%	(0.8	)%	0.3	%	(0.8	)%

Thirteen weeks ended August 3, 2002 compared to thirteen weeks ended August 4, 2001

Net sales increased by 38.2% from $189.0 million in the thirteen weeks ended August 4, 2001 to $261.1 million in the thirteen weeks ended