<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 22, 1998.
REGISTRATION NO. 333-48523
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 5
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
ELECTRONICS BOUTIQUE HOLDINGS CORP.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE
(State or Other Jurisdiction of Incorporation or Organization)
5734
(Primary Standard Industrial Classification Number)
51-0379406
(I.R.S. Employer Identification Number)
931 SOUTH MATLACK STREET
WEST CHESTER, PENNSYLVANIA 19382
(610) 430-8100
(Address, Including Zip Code and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
------------------------------
JOSEPH J. FIRESTONE, PRESIDENT AND CHIEF EXECUTIVE OFFICER
931 SOUTH MATLACK STREET
WEST CHESTER, PENNSYLVANIA 19382
(610) 430-8100
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent For Service)
------------------------------
Copies to:
<TABLE>
<S> <C>
STEPHEN T. BURDUMY, ESQUIRE MARY A. BERNARD, ESQUIRE
KLEHR, HARRISON, HARVEY, BRANZBURG & ELLERS LLP KING & SPALDING
1401 WALNUT STREET 1185 AVENUE OF THE AMERICAS
PHILADELPHIA, PENNSYLVANIA 19102 NEW YORK, NEW YORK 10036
(215) 568-6060 (212) 556-2100
</TABLE>
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are being offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / / _____________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.
/ / _____________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.
/ / _____________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE>
SUBJECT TO COMPLETION--DATED JULY 22, 1998
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
PROSPECTUS
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6,250,000 Shares
<TABLE>
<S> <C>
[LOGO] ELECTRONICS BOUTIQUE HOLDINGS CORP.
</TABLE>
Common Stock
- ----------------------------------------------------------------
Of the 6,250,000 shares of common stock, par value $.01 per share (the "Common
Stock"), offered hereby (the "Offering"), 4,375,000 shares are being sold by
Electronics Boutique Holdings Corp. (the "Company"), and 1,875,000 shares are
being sold by EB Nevada Inc., the Company's parent ("EB Nevada" or the "Selling
Shareholder"). The Company will not receive any proceeds from the sale of shares
of Common Stock by the Selling Shareholder. See "Principal and Selling
Shareholders."
Prior to the Offering, there has been no public market for the Common Stock. The
Company intends to apply to have the Common Stock included for quotation in The
Nasdaq Stock Market's National Market (the "Nasdaq National Market") under the
symbol "ELBO." It is currently anticipated that the initial public offering
price will be between $15.00 and $17.00 per share. See "Underwriting" for a
discussion of the factors to be considered in determining the initial public
offering price.
SEE "RISK FACTORS" ON PAGES 7 TO 11 FOR A DISCUSSION OF CERTAIN MATERIAL FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK
OFFERED HEREBY.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
Underwriting Proceeds to
Price to Discounts and Proceeds to Selling
Public Commissions(1) Company(2) Shareholder
<S> <C> <C> <C> <C>
Per Share.................................. $ $ $ $
Total(3)................................... $ $ $ $
</TABLE>
(1) The Company, the Selling Shareholder, James J. Kim, the Chairman of the
Company, his wife, Agnes C. Kim, and certain trusts established for benefit
of their children (the "Kim Trusts," and, together with James J. and Agnes
C. Kim, the "Kim Shareholders") have agreed to indemnify the several
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act"). See
"Underwriting."
(2) Before deducting expenses estimated to be $1,225,000, payable by the
Company.
(3) The Selling Shareholder has granted the several Underwriters a 30-day
over-allotment option to purchase up to 937,500 additional shares of Common
Stock on the same terms and conditions as set forth above. If all such
additional shares are purchased by the Underwriters, the total Price to
Public will be $ , the total Underwriting Discounts and Commissions
will be $ , the total Proceeds to Company will be $ and the total
Proceeds to Selling Shareholder will be $ . See "Underwriting."
- --------------------------------------------------------------------------------
The shares of Common Stock are offered by the several Underwriters subject to
delivery by the Company and the Selling Shareholder and acceptance by the
Underwriters, to prior sale and to withdrawal, cancellation or modification of
the offer without notice. Delivery of the shares to the Underwriters is expected
to be made through the facilities of the Depository Trust Company, New York, New
York, on or about , 1998.
PRUDENTIAL SECURITIES INCORPORATED SALOMON SMITH BARNEY
, 1998
<PAGE>
[PHOTOS, MAPS, ETC.]
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING
PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET PRICE, PURCHASES OF THE
COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN THE COMMON STOCK
MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING
ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, ALL REFERENCES IN THIS
PROSPECTUS (I) TO THE "COMPANY" MEAN ELECTRONICS BOUTIQUE HOLDINGS CORP., A
DELAWARE CORPORATION ("EB HOLDINGS"), AND ITS SUBSIDIARIES, (II) TO "EB NEVADA"
MEAN EB NEVADA, INC., A NEVADA CORPORATION, WHICH IS THE PARENT OF EB HOLDINGS,
(III) TO "EB" MEAN THE ELECTRONICS BOUTIQUE, INC., A PENNSYLVANIA CORPORATION,
WHICH IS THE SOLE SHAREHOLDER OF EB NEVADA, AND (IV) TO THE COMPANY'S
ELECTRONICS BOUTIQUE STORES INCLUDES THE COMPANY'S SIMILARLY-FORMATTED EBX
STORES. THE COMPANY'S FISCAL YEAR ENDS ON THE SATURDAY NEAREST JANUARY 31.
UNLESS OTHERWISE INDICATED, ALL REFERENCES IN THIS PROSPECTUS TO ANY YEAR REFERS
TO THE FISCAL YEAR OF THE COMPANY ENDED OR ENDING IN JANUARY OR FEBRUARY, AS THE
CASE MAY BE, OF THE FOLLOWING CALENDAR YEAR (E.G., THE FISCAL YEAR ENDED JANUARY
31, 1998 IS REFERRED TO HEREIN AS "1997"). 1997 AND 1996 CONSISTED OF 52 WEEKS
AND 1995 CONSISTED OF 53 WEEKS. UNLESS OTHERWISE INDICATED, THE INFORMATION IN
THIS PROSPECTUS ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION WILL NOT BE
EXERCISED.
THE COMPANY
The Company believes that it is among the world's largest specialty
retailers of electronic games. The Company's primary products are video games
and personal computer ("PC") entertainment software, supported by the sale of
video game hardware, PC productivity software and accessories. As of May 2,
1998, the Company operated 465 stores in 42 states, Puerto Rico, Canada,
Australia and South Korea, primarily under the names Electronics Boutique and
Stop 'N Save Software. As of such date, the Company also provided management
services for an affiliate of EB, Electronics Boutique Plc ("EB-UK"), which
affiliate operated 134 stores and 17 department store-based concessions in the
United Kingdom and Ireland. As of May 2, 1998, the Company also managed 37
mall-based WaldenSoftware stores for Borders Group, Inc. The Company's stores
are primarily located in high traffic areas in regional shopping malls and
average 1,100 square feet in size. The Company believes that its stores generate
sales per square foot that are among the highest of any mall-based retailer. The
Company plans to open approximately 50 to 55 domestic and 30 to 35 foreign
stores in each of 1998 and 1999. The Company's revenues and operating income
have grown from $250.7 million and $6.3 million, respectively, in 1994, to
$454.0 million and $20.5 million, respectively, in 1997. Comparable store sales
increased 3.5%, 20.8%, 15.3% and 13.0% in 1995, 1996, 1997 and the thirteen
weeks ended May 2, 1998, respectively.
The electronic game industry is segmented into two primary product
platforms: video games and PC entertainment software. This industry has
experienced rapid growth in recent years due primarily to the increasing
availability of sophisticated, yet affordable, video game hardware systems and
multimedia PCs featuring fast processors, expanded memories, and enhanced
graphics and audio capabilities. Total domestic retail sales of video game
titles, hardware and accessories were approximately $5.1 billion in calendar
1997, an increase of approximately 40% over retail sales in the prior year.
Domestic sales of PC entertainment software totaled approximately $1.3 billion
in calendar 1997, an increase of approximately 23% over retail sales in the
prior year. In addition, the domestic installed base of multimedia PCs has
increased from approximately 14 million units in calendar 1995 to approximately
23 million units in calendar 1997.
The Company's core customer is the electronic game enthusiast who demands
immediate access to new title releases and who generally purchases more video
game titles and PC entertainment software than the average electronic game
consumer. The Company believes that it attracts the core game enthusiast due to
the Company's: (i) specialty store focus on the electronic game category; (ii)
ability to stock sought-after new releases on its stores' shelves immediately
after release by publishers; (iii) breadth of product selection; and (iv)
knowledgeable sales associates, who are often game enthusiasts themselves and
who have extensive knowledge of game titles and features. The Company places
significant emphasis on offering its customers immediate access to new releases
and has designed its product merchandising strategy and distribution systems to
facilitate such access. The Company introduces, on average, 20 new
3
<PAGE>
game titles in its stores each week. The Company believes that this FIRST TO
MARKET strategy establishes its stores as the logical destination of choice for
electronic game enthusiasts. The Company's strict inventory management system
enables it to (i) maintain over 2,600 active stock keeping units ("SKUs"), (ii)
replenish a large and geographically dispersed store base on a daily basis, and
(iii) minimize mark-downs as titles mature. The Company supports its product
offerings with a strong commitment to customer service, which the Company
believes distinguishes it from its competitors. All sales associates receive
extensive training on video game and PC entertainment software products, system
requirements and selling techniques.
The Company believes that it was one of the first video game and PC
entertainment software specialty retailers to offer a World Wide Website
enabling both product review and online purchasing. The Company believes that
its customer base and product mix are ideally suited for online retailing. The
Company's customers are generally males who are technically proficient, a
demographic which has traditionally represented the largest percentage of
consumers who make online purchases. Further, the Company's products are
recognizable brand name items, which serves to provide online customers with a
higher degree of confidence that products purchased will meet expectations. The
Company believes that the local market identity provided by its stores is a
significant competitive advantage over competing online retailers. In April
1998, the Company began providing customers with a complete product offering,
including access to the Company's database of over 4,600 items.
The Company is committed to disciplined store operations, including
merchandising, purchasing and distribution, real estate selection, store
development, point of sale ("POS") financial reporting, and sales training. The
Company believes that this commitment to operational control enables it to
operate substantially all of its stores on a profitable basis, quickly identify
opportunities to improve store productivity and react to shifts in product
pricing and consumer purchasing trends.
The Company was incorporated under the laws of the State of Delaware in
March 1998 as a holding company for EB's operating activities. EB was
incorporated in the Commonwealth of Pennsylvania in 1977. The Company's
principal executive offices are located at 931 South Matlack Street, West
Chester, Pennsylvania 19382 and the Company's telephone number is (610)
430-8100.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the Company........................... 4,375,000 shares
Common Stock Offered by the Selling Shareholder............... 1,875,000 shares
Common Stock to be Outstanding after the Offering (1)......... 20,169,200 shares
Use of Proceeds by the Company................................ (i) To repay certain outstanding third
party indebtedness, (ii) to repay
certain obligations owed by the
Company to EB, (iii) to repay certain
indebtedness owed to an affiliate of
the Company, and (iv) for general
corporate purposes, including
financing new store openings. See "Use
of Proceeds."
Proposed Nasdaq National Market Symbol........................ ELBO
</TABLE>
- ------------------------
(1) Excludes 1,425,000 shares of Common Stock issuable upon exercise of options
to be granted immediately prior to the completion of the Offering under the
1998 Equity Participation Plan of the Company (the "Equity Participation
Plan"), which have an exercise price equal to the initial public offering
price per share. Also excludes an aggregate of 675,000 shares of Common
Stock available for the future grant of stock options and other equity
securities under the Equity Participation Plan. See "Management--Equity
Participation Plan."
RISK FACTORS
Investors should consider the material risks involved in connection with an
investment in the Common Stock and the impact to investors from various events
that could adversely affect the Company's business. See "Risk Factors."
Electronics Boutique-Registered Trademark-, EBX-Registered Trademark- and
Stop 'N Save Software-Registered Trademark- are registered trademarks of the
Company. Nintendo-Registered Trademark- and N64-Registered Trademark- are
registered trademarks of Nintendo Companies Limited ("Nintendo"),
Sega-Registered Trademark- and Sega Saturn-Registered Trademark- are registered
trademarks of Sega Enterprises ("Sega"), and Sony-Registered Trademark- and
Playstation-Registered Trademark- are registered trademarks of Sony Computer
Entertainment, Inc. ("Sony").
5
<PAGE>
SUMMARY CONSOLIDATED AND COMBINED FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
--------------------
<S> <C> <C> <C> <C> <C> <C> <C>
MAY 3, MAY 2,
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- --------- ---------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales.......................................... $ 240,387 $ 249,552 $ 268,956 $ 337,059 $ 449,180 $ 83,688 $ 106,730
Management fees.................................... 411 1,158 1,905 2,526 4,792 488 571
--------- --------- --------- --------- --------- --------- ---------
Total revenues..................................... 240,798 250,710 270,861 339,585 453,972 84,176 107,301
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Cost of goods sold................................. 175,865 182,505 199,226 252,813 338,498 61,941 79,520
--------- --------- --------- --------- --------- --------- ---------
Gross profit....................................... 64,933 68,205 71,635 86,772 115,474 22,235 27,781
Operating expenses................................. 56,187 56,594 58,989 69,828 87,003 18,201 22,270
Depreciation and amortization...................... 4,638 5,324 6,047 6,615 7,997 1,875 2,254
--------- --------- --------- --------- --------- --------- ---------
Income from operations............................. 4,108 6,287 6,599 10,329 20,474 2,159 3,257
Equity in earnings (loss) of affiliates............ (118) (634) (1,319) (573) 2,903 (80) (80)
Interest expense, net.............................. 1,578 1,727 1,818 1,298 1,380 294 214
Preacquisition loss of subsidiaries (1)............ -- -- -- -- 913 296 --
--------- --------- --------- --------- --------- --------- ---------
Income before income tax expense................... 2,412 3,926 3,462 8,458 22,910 2,081 2,963
Income tax expense (2)............................. 391 286 280 550 846 78 113
--------- --------- --------- --------- --------- --------- ---------
Net income......................................... $ 2,021 $ 3,640 $ 3,182 $ 7,908 $ 22,064 $ 2,003 $ 2,850
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
PRO FORMA INCOME DATA:
Pro forma income before income tax expense......... $ 19,909 $ 2,946
Pro forma income tax provision..................... 8,182 1,155
--------- ---------
Pro forma net income (3)........................... $ 11,727 $ 1,791
--------- ---------
--------- ---------
Pro forma net income per share..................... .74 .11
Pro forma weighted average shares
outstanding (4).................................. 15,794 15,794
OPERATING DATA (5):
Stores open at beginning of period (6)............. 274 311 325 341 390 390 452
Stores open at end of period....................... 311 325 341 360 452 393 465
Sales per square foot (7).......................... $ 763 $ 721 $ 729 $ 831 $ 926 $ 187 $ 196
Average sales per store (000s)..................... $ 822 $ 785 $ 808 $ 962 $ 1,106 $ 214 $ 233
Comparable store sales increase (decrease)......... (10.8%) (6.6%) 3.5% 20.8% 15.3% 43.9% 13.0%
Inventory turnover................................. 3.0x 3.6x 3.8x 5.1x 5.3x 1.2x 1.3x
</TABLE>
<TABLE>
<CAPTION>
MAY 2, 1998
-------------------------
<S> <C> <C>
ACTUAL AS ADJUSTED(4)
--------- --------------
<CAPTION>
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)............................................................... ($ 37,776) $ 1,999
Total assets............................................................................ 140,696 142,612
Total liabilities....................................................................... 123,223 102,195
Stockholders' equity.................................................................... 17,473 40,417
</TABLE>
- ------------------------
(1) The results of operations of EB Int'l and EB Canada have been consolidated
since the beginning of 1997. Preacquisition loss of subsidiaries represents
losses in EB Int'l and EB Canada prior to their acquisition by the Company.
(2) The predecessors to the Company were taxed as an S Corporation and a
partnership. As a result, their taxable income was passed through to their
partners and shareholders for federal income tax purposes. Accordingly, the
financial statements do not include a provision for federal income taxes. A
predecessor to the Company elected to be treated as an S corporation for
some states, while remaining subject to corporate tax in other states and,
as a result, the financial statements provide for certain state income
taxes. See Note 1 of Notes to Consolidated and Combined Financial Statements
and Notes to the Unaudited Pro Forma Consolidated Financial Statements.
(3) The pro forma net income gives effect to the application of the pro forma
income tax expense that would have been reported had the Company's
predecessors been corporations subject to federal and all state income taxes
for all periods shown and to the retention by EB of certain assets. See Note
1 of Notes to Consolidated and Combined Financial Statements and Notes to
the Unaudited Pro Forma Consolidated Financial Statements.
(4) Pro forma weighted average shares outstanding is equal to the number of
shares which will be outstanding upon completion of the Reorganization. See
"Reorganization" and Notes to the Unaudited Pro Forma Consolidated Financial
Statements.
(5) Does not reflect stores operated by EB-UK and WaldenSoftware for which the
Company provides management services. See "Business--Management Services."
(6) Stores open at beginning of period reflects, as of February 2, 1997, the
consolidation of EB's domestic stores and its international stores.
(7) Calculated based on stores open for one year or longer.
6
<PAGE>
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. Prospective investors should consider carefully the following
risk factors, in addition to the other information contained in this Prospectus,
in connection with an investment in the Common Stock offered hereby.
When used in this Prospectus, the words "expect," "estimate," "anticipate,"
"intend," "predict," "believe," and similar expressions and variations thereof
are intended to identify forward-looking statements. Forward-looking statements
appear in a number of places in this Prospectus and include statements regarding
the intent, belief or current expectations of the Company, its directors or its
officers with respect to, among other things: (i) trends affecting the Company's
financial condition or results of operations; (ii) the Company's business and
growth strategies; (iii) the use of the net proceeds to the Company of this
Offering; and (iv) the declaration and payment of dividends. Prospective
investors 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. The accompanying
information contained in this Prospectus, including, without limitation, the
information set forth under the headings "Risk Factors," "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
"Business" identify important factors that could cause such differences.
DEPENDENCE ON NEW PRODUCT INTRODUCTIONS. The Company is highly dependent
upon the continued introduction of new and enhanced video game and PC hardware
and software. The failure of manufacturers to introduce new or enhanced video
game systems, a decline in the continued technological development and use of
multimedia PCs or the failure of software publishers to develop popular game and
entertainment titles for current or future generation game systems or PCs could
have a material adverse effect on the Company's results of operations and
financial condition.
VIDEO GAME SYSTEMS AND SOFTWARE PRODUCT CYCLES. The video game market has
historically been cyclical in nature. Following the introduction of new
generation systems, sales of new generation hardware and related titles steadily
increase, while sales of prior generation hardware and related titles steadily
decrease. New generation systems historically have been introduced every four to
five years. Sales of prior generation hardware systems historically have peaked
in the year of introduction of next generation systems, and sales of prior
generation titles historically have peaked in the following year. The failure of
the industry's leading video game systems manufacturers to introduce next
generation systems, or significant enhancements to existing systems, could lead
to a significant decrease in sales of hardware systems and related titles by the
Company. Any such decrease could have a material adverse effect on the Company's
results of operations and financial condition. See "Business--Products."
TECHNOLOGICAL OBSOLESCENCE. The video game and PC industry is subject to
rapid technological changes. The failure of the Company to respond quickly to
such technological changes and to assess accurately their influence on customer
preferences could have a material adverse effect on the Company's results of
operations and financial condition. In addition, technological advances, such as
the ready availability of games and other entertainment software on the Internet
and the ability to down-load such games onto PCs for repeated use, could make
the retail sale of video games and PC entertainment software obsolete. Further
developments in these technologies or other technologies which expand the
ability to access software through other sources could have a material adverse
effect on the Company's results of operations and financial condition.
NEW STORE OPENINGS. The Company's continued growth will depend, in part, on
its ability to open and operate new stores on a profitable basis. The Company
currently intends to open approximately 80 to 90 new stores in each of 1998 and
1999. The Company's ability to open new stores on a timely and profitable basis
is subject to various contingencies, some of which are beyond the Company's
control. These contingencies include the Company's ability to locate suitable
store sites, negotiate acceptable lease terms, build-out or refurbish sites on a
timely and cost-effective basis, hire, train and retain skilled associates,
obtain adequate capital resources and successfully integrate new stores into
existing operations. In
7
<PAGE>
addition, the management services agreement between EB and EB-UK (the "UK
Services Agreement") significantly restricts the Company's ability to open
stores in Europe. See "Business--Management Services." There can be no assurance
that the Company will be able to achieve its planned expansion or that its new
stores will achieve levels of sales and profitability comparable to the
Company's existing stores. Failure of the Company to achieve its planned
expansion on a profitable basis could have a material adverse effect on the
Company's results of operations and financial condition. See "Business--Retail
Operations."
COMPETITION. The electronic game industry is intensely competitive and
subject to rapid changes in consumer preferences and frequent new product
introductions. The Company competes with other video game and PC software
specialty stores located in malls and other locations, 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. Increased competition may lead to reduced
profit margins on video games and PC entertainment software, which could have a
material adverse effect on the Company's results of operations and financial
condition. In addition, video games are available for rental from many video
stores and cable television providers. Further, there can be no assurance that
other methods of distribution will not emerge in the future which would result
in increased competition for the Company. Most of the Company's competitors have
longer operating histories and significantly greater financial, managerial,
creative, sales and marketing and other resources than the Company. The Company
also competes with other forms of entertainment activities, including movies,
television, theater, sporting events and family entertainment centers. The
Company's failure to compete effectively or a decrease in the popularity of
video games and PC entertainment software would have a material adverse effect
on the Company's results of operations and financial condition. See "Business--
Competition."
In addition, the Company's ability to retain its existing customers and
attract new customers depends on numerous factors, some of which are beyond the
Company's control. These factors include: (i) the continued introduction of new
and enhanced video game and PC hardware and software; (ii) the availability and
timeliness of new product releases at the Company's stores; and (iii) the
Company's reputation in the industry.
SEASONALITY AND QUARTERLY RESULTS. The Company's business is affected by
the seasonal patterns common to most retailers. Historically, its highest net
sales, management fees and net income have been generated during the fourth
quarter, which includes the holiday selling season. During 1997, approximately
44% of the Company's net sales and approximately 94% of the Company's operating
income were generated during the fourth quarter. Accordingly, any adverse trend
in net sales for such period could have a material adverse effect on the
Company's results of operations for the quarter as well as for the entire year.
In addition, the Company's results of operations may fluctuate from quarter to
quarter depending upon, among other things, 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 the
Company's merchandise mix. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Seasonality and Quarterly
Results."
DEPENDENCE ON SUPPLIERS. The Company purchases a significant amount of
products from Nintendo, Sony and Electronic Arts, Inc. ("Electronics Arts") and
often receives quantities of certain products disproportionate to its market
share from these suppliers upon initial release. During 1997, products purchased
from Nintendo, Sony and Electronic Arts accounted for 13.5%, 13.3% and 9.4%,
respectively, of the Company's net sales. The Company believes that the loss of
any of these companies as a supplier could have a material adverse effect on the
Company's results of operations and financial condition. In addition, the
Company's financial performance is in large part dependent upon the business
terms it obtains from its suppliers, including unit prices, unsold product
return policies, advertising and market development allowances, freight charges
and payment terms. If the Company is unable to maintain
8
<PAGE>
favorable business terms with its suppliers, its results of operations and
financial condition could be materially adversely affected.
During 1997, approximately 37% of the Company's product purchases were from
domestic distributors of products manufactured overseas, primarily in Asia. To
the extent that the Company's distributors rely on overseas sources for a large
portion of their products, any event causing a disruption of imports, including
the imposition of import restrictions, could have a material adverse effect on
the Company's results of operations and financial condition. In addition, in
recent months, certain Asian currencies have devalued significantly in relation
to the U.S. dollar and financial markets in Asia have experienced significant
turmoil. There can be no assurance that the Company's ability to purchase from
domestic distributors products manufactured in Asia would not be materially
adversely affected by such developments. Trade restrictions in the form of
tariffs or quotas, or both, applicable to such products could also affect the
importation of such products generally and could increase the cost and reduce
the supply of such products available to the Company.
RISKS OF INTERNATIONAL RETAIL OPERATIONS. The Company has retail operations
in various foreign countries, including Canada, South Korea and Australia, and
intends to pursue opportunities that may arise in these and other countries. Net
sales in these foreign countries represented 7.3% of the Company's net sales in
1997. The Company is subject to the risks inherent in conducting business across
national boundaries, including currency exchange rate fluctuations, currency
devaluations, international incidents, military outbreaks, economic downturns,
government instability, nationalization of foreign assets, government
protectionism and changes in governmental policy, any of which could adversely
affect the Company's business in one or more of its international markets. Since
substantially all of the Company's operations are domestic, the Company does not
believe that currency exchange rate fluctuations would have a material adverse
effect on the Company's results of operations and financial condition and,
accordingly, does not hedge its risk in this area. The Company intends to
monitor its exposure to currency exchange rate fluctuations as it expands its
international presence and to reevaluate its hedging strategies as appropriate.
LEASE EXPIRATIONS AND TERMINATIONS. As of June 19, 1998, 59 of the
Company's stores (12.9% of all stores) were operated under leases with terms
that expire in less than one year, including 6 month-to-month leases. In
connection with the Reorganization (as defined below), all of the leases have
been assigned to the Company by EB. Substantially all of the leases either
required the landlord's prior consent to assign or permitted assignment upon
satisfaction of certain conditions. EB did not solicit and the Company does not
intend to solicit landlord consents for the assignment of the leases in
connection with the Reorganization and/or the Offering; accordingly, affected
landlords could seek to terminate their leases. There can be no assurance that
the Company will be able to maintain its existing store locations as leases
expire or are terminated by landlords or that the Company will be able to locate
suitable alternative sites on acceptable terms. The Company's failure to
maintain existing store locations or to locate alternative sites could have a
material adverse effect on the Company's results of operations and financial
condition. See "Business--Properties."
IMPACT OF GENERAL ECONOMIC CONDITIONS. The Company's business is sensitive
to consumer spending patterns, which in turn are subject to prevailing economic
conditions. Adverse local, regional or national economic conditions may cause
shifts in consumer spending that could have a material adverse effect on the
Company's results of operations and financial condition.
CONTROL BY KIM SHAREHOLDERS. Upon completion of the Offering, EB Nevada
will beneficially own approximately 69.0% of the outstanding shares of Common
Stock (64.4% if the Underwriters' over-allotment option is exercised in full).
Accordingly, the Kim Shareholders, through their ownership of all of the
outstanding capital stock of EB, EB Nevada's sole stockholder, will be able to
control the Company, elect all the directors and generally direct the affairs of
the Company. See "Management" and "Principal and Selling Shareholders." Under a
credit facility with Fleet Capital Corporation ("Fleet"), the Kim Shareholders
are obligated to own, directly or indirectly, not less than 25.0% of the issued
and outstanding
9
<PAGE>
capital stock of the Company. See "Use of Proceeds" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
DEPENDENCE ON KEY PERSONNEL. The success of the Company will depend on its
ability to attract, motivate and retain key management associates for its stores
and skilled merchandising, marketing and administrative personnel at the
Company's headquarters. In the past, the Company has been successful in
maintaining the continuity of its management team, including its executive
officers, Joseph J. Firestone, its President and Chief Executive Officer,
Jeffrey W. Griffiths, its Senior Vice President of Merchandising and
Distribution and John R. Panichello, its Senior Vice President and Chief
Financial Officer. However, there can be no assurance that the Company will
continue to be successful in attracting and retaining such personnel. The loss
of the services of one or more of such persons or other key personnel could have
a material adverse effect on the Company's results of operations and financial
condition. See "Management."
IMMEDIATE AND SUBSTANTIAL DILUTION. Purchasers of shares of Common Stock in
the Offering will experience an immediate and substantial dilution in the net
tangible book value of each share of Common Stock of $14.11 per share based upon
an assumed initial public offering price of $16.00. See "Dilution."
SHARES ELIGIBLE FOR FUTURE SALE. Upon completion of the Offering, the
Company will have 20,169,200 shares of Common Stock outstanding. Of those
shares, a total of 6,250,000 shares (plus 937,500 additional shares if the
Underwriters exercise their over-allotment option in full) will be freely
tradeable without restriction or further registration under the Securities Act,
unless purchased or held by "affiliates" of the Company as that term is defined
in Rule 144 under the Securities Act ("Rule 144"). Substantially all of the
remaining shares will be held by EB Nevada, which is an "affiliate" of the
Company. Beginning 360 days after the Offering, EB Nevada will be entitled to
certain rights with respect to registration of such shares. If exercised, such
registration rights could result in such shares being sold in greater amounts
than otherwise allowable under Rule 144. See "Description of Capital
Stock--Registration Rights" and "Shares Eligible for Future Sale."
Under Rule 144, sales of Common Stock by affiliates of the Company are
subject to the volume limitations, manner of sale, and notice requirements of
Rule 144. See "Shares Eligible for Future Sale." The Company's executive
officers and directors, EB Nevada, the Kim Shareholders and the Company have
agreed with the Underwriters that they will not, directly or indirectly, offer,
sell, offer to sell, contract to sell, pledge, grant any option to purchase or
otherwise sell or dispose (or announce any offer, sale, offer of sale, contract
of sale, pledge, grant of any option to purchase or other sale or disposition)
of any shares of Common Stock or other capital stock or any securities
convertible into, or exercisable or exchangeable for, or any rights to purchase
or acquire any shares of Common Stock, or other capital stock of the Company for
a period of 360 days after the date of this Prospectus without the prior written
consent of Prudential Securities Incorporated, on behalf of the Underwriters,
except for options granted pursuant to the Equity Participation Plan. Prudential
Securities Incorporated may, in its sole discretion, at any time and without
notice, release all or any portion of the shares of Common Stock subject to such
lock-up agreements.
Sales of substantial amounts of Common Stock in the public market, or the
perception that such sales could occur, could adversely affect the prevailing
market price for the Common Stock and could impair the Company's ability to
raise capital through a public offering of equity securities. See "Shares
Eligible for Future Sale" and "Underwriting."
NO PRIOR MARKET; POSSIBLE VOLATILITY OF STOCK PRICE. Prior to the Offering,
there has been no public market for the Common Stock, and there can be no
assurance that an active trading market for the Common Stock will develop or
continue upon completion of the Offering. The initial public offering price will
be determined by negotiations among the Company, the Selling Shareholder and the
representatives of the Underwriters. See "Underwriting" for a discussion of the
factors to be considered in determining the initial public offering price. There
can be no assurance that after completion of the Offering the market price of
the Common Stock will not decline below the initial public offering price. In
addition, the stock markets have experienced extreme price and volume
fluctuations which may affect the market price
10
<PAGE>
of the Common Stock in a manner unrelated or disproportionate to the operating
performance of the Company. These market fluctuations may adversely affect the
market price of the Common Stock. See "Underwriting."
DISCRETION IN USE OF PROCEEDS. The Company intends to utilize approximately
$17.7 million, representing approximately 27.6%, of the estimated net proceeds
to the Company of the Offering, for general corporate purposes, including
working capital. Accordingly, the Company will have broad discretion in the
application of such net proceeds and an investor will not have the opportunity
to evaluate the economic, financial and other relevant information used by the
Company in determining how to apply such proceeds. See "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
HOLDING COMPANY STRUCTURE; DIVIDEND RESTRICTIONS. The Company was formed as
a holding company to effect the Reorganization and does not have any material
assets other than its ownership interests in its subsidiaries and its 99.99%
partnership interest in EB Services. The Common Stock will be junior in right of
payment to all existing and future liabilities and obligations of the Company
and, by virtue of the fact that the Company is a holding company, the Common
Stock will be structurally junior in right of payment to all existing and future
liabilities and obligations of each of the Company's subsidiaries. The Company
has never declared or paid dividends on the Common Stock and does not currently
intend to do so. Further, since the operations of the Company are conducted
through its subsidiaries, its ability to pay dividends on the Common Stock in
any event is dependent on the earnings and cash flow of its subsidiaries.
ANTI-TAKEOVER EFFECTS OF DELAWARE LAW AND CERTAIN CHARTER AND BYLAW
PROVISIONS. Certain provisions of the Company's Certificate of Incorporation
and Bylaws, as well as the Delaware General Corporation Law, could delay or make
more difficult the removal of incumbent directors as well as a merger, tender
offer or proxy contest involving the Company, even if such events could be
viewed as beneficial by the Company's stockholders. For example, the Board of
Directors of the Company is empowered to issue preferred stock in one or more
series without stockholder action. Any issuance of this "blank-check" preferred
stock could materially limit the rights of holders of the Common Stock and
render more difficult or discourage an attempt to obtain control of the Company
by means of a tender offer, merger, proxy context or otherwise. In addition, the
Certificate of Incorporation and Bylaws contain a number of provisions which
could impede a takeover or change in control of the Company, including, among
other things, staggered terms for members of the Board, no cumulative voting,
and prohibitions on the taking of any stockholder action by written consent or
removing a director other than for cause. The Company is also subject to the
anti-takeover provisions of Section 203 of the Delaware General Corporation Law,
which prohibits the Company from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. The application of
Section 203 could have the effect of delaying or preventing a change of control
of the Company. See "Description of Capital Stock."
YEAR 2000 COMPLIANCE. The Company uses a significant number of computer
software programs and operating systems in its internal operations, including
applications used in inventory management, distribution, financial business
systems and various administrative functions. To the extent that these software
applications contain source code that is unable to interpret appropriately the
upcoming calendar year 2000, some level of modification or even possible
replacement of such source code or applications will be necessary. The Company
is currently modifying its computer software programs and operating systems to
make them "Year 2000" compliant and intends to complete its "Year 2000"
compliance program in 1998. The Company anticipates spending approximately
$300,000 in connection with its "Year 2000" compliance program. However, there
can be no assurance that the costs necessary to update software, or potential
systems interruptions, will not exceed such amount and have a material adverse
effect on the Company's results of operations or financial condition. See
"Business--Management Information Systems."
11
<PAGE>
REORGANIZATION
The Company was incorporated under the laws of the State of Delaware in
March 1998 as a holding company for EB's operating activities. EB was
incorporated in the Commonwealth of Pennsylvania in 1977.
PRE-REORGANIZATION
Prior to the Reorganization, (i) the Kim Shareholders owned all of the
outstanding shares of capital stock of EB and all of the limited partnership
interests of EB Services, with EB Services Corp., a company wholly-owned by
James J. Kim, as the 1.0% corporate general partner, (ii) EB owned 25.1% of the
outstanding shares of capital stock of EB-UK, and (iii) EB owned all of the
outstanding shares of capital stock of Electronics Boutique Canada Inc. ("EB
Canada") and EB International, Inc. ("EB Int'l").
REORGANIZATION
On May 31, 1998, EB (i) transferred certain assets, including its leases,
leasehold improvements, inventory, employee contracts, fixed assets and prepaid
expenses, subject to all of its liabilities, to Electronics Boutique of America
Inc. ("EBOA") in exchange for all of the outstanding shares of capital stock of
EBOA, (ii) entered into a two year lease with EBOA for the West Chester
distribution center and headquarters, which lease grants EBOA an option to
purchase the property for $6.7 million, and (iii) assigned its intangible
assets, including its trademarks and trade names, to Elbo Inc. ("Elbo"), in
exchange for all of the outstanding shares of capital stock of Elbo. EB retained
(i) all of the outstanding shares of capital stock in its affiliates EBOA, Elbo,
EB Int'l and EB Canada (collectively, the "Operating Shares"), (ii) its shares
of EB-UK capital stock (which represent 25.1% of the outstanding shares of
capital stock of EB-UK), (iii) the West Chester distribution center and
headquarters, (iv) approximately $17.5 million of cash, accounts receivable and
cash surrender value of certain split-dollar life insurance policies and (v)
approximately $7.7 million of intercompany receivables. In addition, EBOA joined
EB as a party to the Fleet loan documents.
Prior to the completion of the Offering, (i) EB will transfer the Operating
Shares and its shares of EB-UK capital stock to EB Nevada in exchange for all of
the outstanding shares of capital stock of EB Nevada, (ii) EB Nevada will then
contribute the Operating Shares to the Company in exchange for 15,794,100 shares
of Common Stock, and (iii) the Company will then acquire from the Kim
Shareholders and EB Services Corp., for an aggregate of 100 shares of Common
Stock, 99.99% of the partnership interests of EB Services, with EB Services
Corp. retaining a 0.01% general partnership interest. The transactions in this
and the preceding paragraph have been or will be made pursuant to the terms of
certain contribution, assignment and exchange agreements among such entities
(the transactions in this and the immediately preceding paragraph are
collectively referred to herein as the "Reorganization").
The Reorganization is structured to allow the shareholders of EB to retain
both the Company's previously taxed earnings, which exceed book earnings due to
timing differences, and the shares of EB-UK capital stock. As a result, the
Company's stockholder's equity account after the Reorganization and prior to the
completion of the Offering will reflect a deficit of approximately $23.6
million. The sale by the Company of the 4,375,000 shares of Common Stock offered
hereby (at an assumed initial public offering price of $16.00 per share) will
restore the Company's stockholder's equity account to a positive balance of
approximately $40.4 million.
POST-REORGANIZATION
After the Reorganization and prior to the completion of the Offering, (i) EB
will (A) own cash, accounts receivable, real estate and the cash surrender value
of certain split-dollar life insurance policies with an aggregate value equal to
the sum of EB's paid in capital, retained earnings and previously taxed but
undistributed S Corporation earnings, (B) own all of the outstanding shares of
capital stock of EB Nevada and (C) continue to be a party to the UK Services
Agreement, which will continue in accordance with its original terms, (ii) EB
Nevada will own substantially all of the outstanding shares of Common Stock, and
(iii) the Company, through its wholly-owned subsidiaries, will own substantially
all of the operating assets and all of the liabilities that were owned by EB
prior to the Reorganization. See "Certain Transactions," "Principal and Selling
Shareholders" and Notes to the Unaudited Pro Forma Consolidated Financial
Statements.
12
<PAGE>
Set forth below and on the next page are charts which illustrate the
organizational structure of (i) EB prior to the Reorganization and (ii) the
Company after the Reorganization and prior to the completion of the Offering.
PRE-REORGANIZATION
[LOGO]
13
<PAGE>
POST-REORGANIZATION
[LOGO]
14
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 4,375,000 shares of
Common Stock offered by the Company hereby (at an assumed initial public
offering price of $16.00 per share and after deducting underwriting discounts
and commissions and estimated Offering expenses) are estimated to be $64.1
million. The Company will not receive any proceeds from the sale of Common Stock
by the Selling Shareholder. See "Principal and Selling Shareholders."
The Company intends to use (i) approximately $31.7 million of the net
proceeds to repay borrowings outstanding under the Company's revolving credit
facility with Fleet, (ii) approximately $7.7 million to repay certain
obligations owed by the Company to EB, (iii) approximately $7.0 million to repay
borrowings outstanding to James J. Kim under a demand note between Mr. Kim and
EBOA, and (iv) the balance of the net proceeds for general corporate purposes,
including financing new store openings. See "Certain Transactions", "Risk
Factors--Discretion in Use of Proceeds" and "Management's Discussion and
Analysis of Financial Condition and Results of Operation--Liquidity and Capital
Resources."
On March 16, 1998, EB entered into a credit agreement with Fleet, pursuant
to which Fleet agreed to make available to EB an asset based revolving credit
and term loan facility in an amount up to $50.0 million. Borrowings under this
facility bear interest at a per annum rate equal to either LIBOR plus 250 basis
points or Fleet's base rate of interest, at EB's option. As of June 11, 1998, EB
had approximately $31.7 million of borrowings outstanding under the revolving
credit facility with Fleet, which borrowings bear interest at Fleet's base rate.
The revolving credit facility expires and the term loan, if borrowed, is
repayable on March 16, 2001. Of such borrowings, EB used $9.4 million to retire
outstanding indebtedness, approximately $13.9 million to pay dividends to
certain of the Kim Shareholders and approximately $8.4 million for general
working capital purposes. See "Reorganization," "Certain Transactions" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
On June 4, 1998, EB loaned $7.0 million to James J. Kim, who in turn loaned
such funds to EBOA. The demand notes reflecting such loans bear interest at the
highest prime rate as published in the Wall Street Journal.
Pending application of the net proceeds of the Company from the Offering,
the Company intends to invest in short-term, interest-bearing, investment grade
securities or guaranteed obligations of the United States government.
DIVIDEND POLICY
EB Services, which was formed in January 1997, paid a distribution to its
partners aggregating $1.0 million in 1997. EB Services has not paid any
distributions to its partners during 1998, but intends to pay a distribution of
approximately $6.1 million of cash and accounts receivable immediately prior to
the Reorganization.
Except as described above, the Company has not declared or paid any cash
dividends or distributions on its capital stock. Pursuant to the Fleet revolving
credit and term loan facility, the Company will not be permitted to declare or
pay any dividends or make any other distributions if (i) there is an outstanding
default under such facility or (ii) the Company does not have $3.5 million of
availability under such facility. The Company currently intends to retain future
earnings, if any, for business use and does not anticipate declaring or paying
any dividends on shares of its Common Stock in the foreseeable future. The Board
of Directors of the Company intends to review this policy from time to time,
after taking into account various factors such as the Company's financial
condition, results of operations, current and anticipated cash needs and plans
for expansion.
15
<PAGE>
CAPITALIZATION
The following table sets forth the current portion of long-term debt and the
capitalization of the Company at May 2, 1998 (i) on an actual basis, (ii) on a
pro forma basis to give effect to the Reorganization and (iii) on a pro forma as
adjusted basis to give effect to the Reorganization, the sale by the Company of
4,375,000 shares of Common Stock offered hereby (at an assumed initial public
offering price of $16.00 per share) and the application of the estimated net
proceeds therefrom. See "Use of Proceeds" and "Reorganization." This table
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations," the Consolidated and Combined
Financial Statements and Notes thereto and the Unaudited Pro Forma Consolidated
Financial Statements and Notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MAY 2, 1998
-----------------------------------
<S> <C> <C> <C>
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- ----------- -----------
<CAPTION>
(IN THOUSANDS, EXCEPT FOR SHARE
DATA)
(UNAUDITED)
<S> <C> <C> <C>
Current portion of long-term debt............................................ $ 900 $ 900 $ 900
Long-term debt............................................................... 2,749 2,749 2,749
Stockholders' equity:
Preferred stock, $100.00 par value;
200,000 shares authorized;
none issued and outstanding (1).......................................... -- -- --
Common stock, Class A, $.10 par value;
5,000 shares authorized;
1,900 shares issued and outstanding (1).................................. -- -- --
Common stock, Class B, $.10 par value;
25,000 shares authorized;
21,000 shares issued and outstanding (1)................................. 2 -- --
Preferred stock, $.01 par value;
25,000,000 shares authorized;
none issued and outstanding.............................................. -- -- --
Common stock, $.01 par value;
100,000,000 shares authorized;
none issued and outstanding;
15,794,200 shares issued and outstanding pro forma and 20,169,200 shares
issued and outstanding pro forma as adjusted (2)......................... -- 158 202
Partners' capital of EB Services Company LLP................................. 1 -- --
Additional paid-in capital................................................... 7,584 (22,883) 41,123
Accumulated other comprehensive expense...................................... (908) (908) (908)
Retained earnings............................................................ 10,793 -- --
--------- ----------- -----------
Total stockholders' equity (deficit)......................................... 17,472 (23,633) 40,417
--------- ----------- -----------
Total capitalization......................................................... $ 21,121 $ (19,984) $ 44,066
--------- ----------- -----------
--------- ----------- -----------
</TABLE>
- ------------------------
(1) Represents the capitalization of EB.
(2) Excludes 1,425,000 shares of Common Stock issuable upon exercise of options
to be granted immediately prior to the completion of the Offering under the
Equity Participation Plan, which have an exercise price equal to the initial
public offering price per share. Also excludes an aggregate of 675,000
shares of Common Stock available for the future grant of stock options and
other equity securities under the Equity Participation Plan. See
"Management--Equity Participation Plan."
16
<PAGE>
DILUTION
Purchasers of the Common Stock offered hereby will experience an immediate
and substantial dilution in the net tangible book value (total tangible assets
minus total liabilities) of the Common Stock from the initial public offering
price. At May 2, 1998, the pro forma net tangible book value of the Company was
a deficit of $25.8 million, or a deficit of $1.64 per share. After giving effect
to both the Reorganization and the sale by the Company of 4,375,000 shares of
Common Stock offered hereby (at an assumed initial public offering price of
$16.00 per share) and the application of the net proceeds therefrom, the pro
forma net tangible book value of the Common Stock would have been $38.2 million,
or $1.89 per share. This represents an immediate increase in net tangible book
value of $3.53 per share of Common Stock to existing stockholders and an
immediate and substantial dilution of $14.11 per share of Common Stock to new
investors purchasing shares of Common Stock in the Offering. The following table
illustrates the dilution per share:
<TABLE>
<S> <C> <C>
Assumed initial public offering price....................... $ 16.00
Net tangible book value before the Reorganization......... $ .97
Decrease attributable to the Reorganization............... 2.61
---------
Net tangible book value after the Reorganization and
before the Offering..................................... (1.64)
Increase attributable to new investors.................... 3.53
---------
Pro forma net tangible book value after the Offering........ 1.89
---------
Dilution to new investors................................... $ 14.11
---------
---------
</TABLE>
The following table sets forth the number of shares of Common Stock sold by
the Company, the total consideration paid to the Company and the average price
per share paid by the existing stockholders and by the new investors purchasing
shares of Common Stock in the Offering:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------------- -------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders (1)(2)....................... 15,794,200 78.3% $ 3,290 0.0% $ 0.0
New investors (2).................................. 4,375,000 21.7 70,000,000 100.0 16.00
------------ ----- ------------- -----
Total...................................... 20,169,200 100.0% $ 70,003,290 100.0%
------------ ----- ------------- -----
------------ ----- ------------- -----
</TABLE>
- ------------------------
(1) Excludes 1,425,000 shares of Common Stock issuable upon exercise of options
to be granted immediately prior to the completion of the Offering under the
Equity Participation Plan, which have an exercise price at the initial
public offering price per share. Also excludes 675,000 shares of Common
Stock available for the future grant of stock options and other equity
securities under the Equity Participation Plan. See "Management--Equity
Participation Plan."
(2) Sales by the Selling Shareholder will reduce the number of shares of Common
Stock held by existing stockholders to 13,919,200 shares or 69.0% of the
total number of shares of Common Stock outstanding after completion of the
Offering (12,981,700 shares or 64.4% if the Underwriters' over-allotment
option is exercised in full), and will increase the number of shares of
Common Stock held by new investors to 6,250,000 shares or 31.0% of the total
number of shares of Common Stock held by new investors after the Offering
(7,187,500 shares or 35.6% if the Underwriters' over-allotment option is
exercised in full). See "Principal and Selling Shareholders."
17
<PAGE>
SELECTED CONSOLIDATED AND COMBINED FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
The following table sets forth, for the periods and at the dates indicated,
summary consolidated and combined financial and operating data for the Company.
The information presented below under the captions "Statement of Income Data"
for 1993 through 1997 and "Balance Sheet Data" as of January 29, 1994, January
28, 1995, February 3, 1996, February 1, 1997 and January 31, 1998 is derived
from the Company's audited Consolidated and Combined Financial Statements. The
Company's audited financial statements for each of the three fiscal years in the
period ended, and as of January 31, 1998, are included elsewhere in this
Prospectus. The information presented below under the captions "Statement of
Income Data" for the thirteen weeks ended May 3, 1997 and May 2, 1998 and
"Balance Sheet Data" as of May 2, 1998 are derived from the Company's unaudited
financial statements. In the opinion of management, such unaudited financial
information contains all adjustments (which consist only of normal recurring
adjustments) necessary to present fairly the financial position and results of
operations of the Company as of such dates and for such periods. The selected
financial data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Consolidated
and Combined Financial Statements and Notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
THIRTEEN WEEKS
ENDED
--------------------
MAY 3, MAY 2,
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- ----------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales............................. $ 240,387 $ 249,552 $ 268,956 $ 337,059 $ 449,180 $ 83,688 $ 106,730
Management fees....................... 411 1,158 1,905 2,526 4,792 488 571
--------- --------- --------- --------- ----------- --------- ---------
Total revenues........................ 240,798 250,710 270,861 339,585 453,972 84,176 107,301
Cost of goods sold.................... 175,865 182,505 199,226 252,813 338,498 61,941 79,520
--------- --------- --------- --------- ----------- --------- ---------
Gross profit.......................... 64,933 68,205 71,635 86,772 115,474 22,235 27,781
Operating expenses.................... 56,187 56,594 58,989 69,828 87,003 18,201 22,270
Depreciation and amortization......... 4,638 5,324 6,047 6,615 7,997 1,875 2,254
--------- --------- --------- --------- ----------- --------- ---------
Income from operations................ 4,108 6,287 6,599 10,329 20,474 2,159 3,257
Equity in earnings (loss) of
affiliates.......................... (118) (634) (1,319) (573) 2,903 (80) (80)
Interest expense, net................. 1,578 1,727 1,818 1,298 1,380 294 214
Preacquisition loss of subsidiaries
(1)................................. -- -- -- -- 913 296 --
--------- --------- --------- --------- ----------- --------- ---------
Income before income tax expense...... 2,412 3,926 3,462 8,458 22,910 2,081 2,963
Income tax expense (2)................ 391 286 280 550 846 78 113
--------- --------- --------- --------- ----------- --------- ---------
Net income............................ $ 2,021 $ 3,640 $ 3,182 $ 7,908 $ 22,064 $ 2,003 $ 2,850
--------- --------- --------- --------- ----------- --------- ---------
--------- --------- --------- --------- ----------- --------- ---------
PRO FORMA INCOME DATA:
Pro forma income before income tax
expense............................. $ 19,909 $ 2,946
Pro forma income tax provision........ 8,182 1,155
----------- ---------
Pro forma net income (3).............. $ 11,727 $ 1,791
----------- ---------
----------- ---------
Pro forma net income per share........ .74 .11
Pro forma weighted average shares
outstanding (4)..................... 15,794 15,794
Supplemental pro forma net income
(5)................................. $ 12,178 $ 2,077
Supplemental pro forma net income per
share (5)........................... .74 .12
Supplemental pro forma weighted
average shares outstanding (5)...... 16,357 17,108
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
THIRTEEN WEEKS
ENDED
--------------------
MAY 3, MAY 2,
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- ----------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA (6):
Stores open at beginning of period
(7)................................. 274 311 325 341 390 390 452
Stores open at end of period.......... 311 325 341 360 452 393 465
Sales per square foot (8)............. $ 763 $ 721 $ 729 $ 831 $ 926 $ 187 $ 196
Average sales per store (000s)........ $ 822 $ 785 $ 808 $ 962 $ 1,106 $ 214 $ 233
Comparable store sales increase
(decrease).......................... (10.8%) (6.6%) 3.5% 20.8% 15.3% 43.9% 13.0%
Inventory turnover.................... 3.0x 3.6x 3.8x 5.1x 5.3x 1.2x 1.3x
</TABLE>
<TABLE>
<CAPTION>
JANUARY 29, JANUARY 28, FEBRUARY 3, FEBRUARY 1, JANUARY 31,
1994 1995 1996 1997 1998
------------ ------------ ------------- ------------- ------------ MAY 2,
1998
-----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)... $ (2,531) $ 3,344 $ (11,038) $ 9,893 $ (17,728) $ (37,776)
Total assets................ 80,580 82,900 95,515 139,244 142,791 140,696
Total liabilities........... 68,153 66,833 78,066 118,887 114,392 123,223
Stockholders' equity........ 12,427 16,067 17,449 20,357 28,399 17,473
</TABLE>
- ------------------------
(1) The results of operations of EB Int'l and EB Canada have been consolidated
since the beginning of 1997. Preacquisition loss of subsidiaries represents
losses in EB Int'l and EB Canada prior to their acquisition by the Company.
(2) The predecessors to the Company were taxed as an S Corporation and a
partnership. As a result, their taxable income was passed through to their
partners and shareholders for federal income tax purposes. Accordingly, the
financial statements do not include a provision for federal income taxes. A
predecessor to the Company elected to be treated as an S Corporation for
some states, while remaining subject to corporate tax in other states and,
as a result, the financial statements provide for certain state income
taxes. See Note 1 of Notes to Consolidated and Combined Financial Statements
and Notes to the Unaudited Pro Forma Consolidated Financial Statements.
(3) The pro forma net income gives effect to the application of the pro forma
income tax expense that would have been reported had EB and EB Services been
corporations subject to federal and all state income taxes for all periods
shown and to the retention by EB of certain assets. See Note 1 of Notes to
Consolidated and Combined Financial Statements and Notes to the Unaudited
Pro Forma Consolidated Financial Statements.
(4) Pro forma weighted average shares outstanding is equal to the number of
shares which will be outstanding upon completion of the Reorganization. See
"Reorganization" and Notes to the Unaudited Pro Forma Consolidated Financial
Statements.
(5) Supplemental pro forma data assumes the issuance of additional shares to
provide proceeds in an amount to pay down the outstanding debt to Fleet at
May 2, 1998 of $21,028,034 and certain debt repaid with the Fleet revolving
credit agreement outstanding at January 31, 1998 of $9,000,000. Interest
saving, net of tax, were assumed based on the rates applicable to the
specific debt outstanding during each period.
(6) Does not reflect stores operated by EB-UK and WaldenSoftware for which the
Company provides management services. See "Business--Management Services."
(7) Stores open at beginning of period reflects, as of February 2, 1997, the
consolidation of EB's domestic stores and its international stores.
(8) Calculated based on stores open for one year or longer.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE
CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED
ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
The Company believes that it is among the world's largest specialty
retailers of electronic games. The Company's primary products are video games
and PC entertainment software, supported by the sale of video game hardware, PC
productivity software and accessories. As of May 2, 1998, the Company operated a
total of 465 stores in 42 states, Puerto Rico, Canada, Australia and South
Korea, primarily under the names Electronics Boutique and Stop 'N Save Software.
As of such date, the Company also provided management services for EB-UK, which
operated 134 stores and 17 department store-based concessions in the United
Kingdom and Ireland. As of May 2, 1998, the Company also managed 37 mall-based
WaldenSoftware stores for Borders Group, Inc. The Company is a holding company
and does not have any significant assets or liabilities, other than all of the
outstanding capital stock of its subsidiaries.
The Company's net sales have increased in each of the last three years as a
result of new store openings and sales growth in existing stores. In 1997, the
Company opened 71 new stores (17 of which were in foreign markets) and expects
to open 80 to 90 new stores in 1998 (30 to 35 of which are expected to be in
foreign markets). The Company believes that its success in achieving sales
growth and increased profitability is largely due to efficiencies created by its
inventory management and distribution systems, store operating efficiencies and
its knowledge of its market area and its customers. However, the Company's
comparable store sales have experienced significant fluctuations in the past due
to, among other things, timing of new product introductions and promotions,
adverse weather conditions, shifts in the timing of certain holidays, prevailing
economic conditions, changes in merchandise trends, the Company's ability to
source merchandise efficiently, and the timing and concentration of store
openings. The Company believes the impact of new video game hardware system
introductions on comparable store sales is likely to decline in future periods
due to improvements in hardware technology and the growing popularity of
PC-based games. The Company regularly reviews the performance of each of its
stores and may close or relocate those that are performing inadequately.
Prior to 1997, the Company operated stores in Canada and South Korea with
local joint venture partners. In 1997, the Company acquired its joint venture
partners' interests in these operations. The results of these foreign operations
are consolidated in the Company's financial statements for the entire fiscal
year.
Over the past two years, the video game industry has experienced substantial
growth due to the introduction of next generation video game hardware systems in
the latter part of 1995 and in 1996. Historically, the introduction of a next
generation video game hardware system has resulted in increased sales, as the
new technology encourages current video game players to update their video game
hardware systems and attracts new video game players to purchase their first
systems. The increased sales volume, however, is partially offset as video game
hardware systems have a lower gross margin than the Company's other products.
Following the introduction of next generation video game hardware systems, the
market has traditionally experienced growth in the quantity and sophistication
of related video game titles. In 1997, the Company reduced its gross margins on
these video game titles as well as on PC entertainment titles to increase its
overall sales volume.
20
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain income statement items as a
percentage of total revenues for the periods indicated:
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
------------------------
MAY 3, MAY 2,
1995 1996 1997 1997 1998
--------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net sales............................................................ 99.3% 99.3% 98.9% 99.4% 99.5%
Management fees...................................................... 0.7 0.7 1.1 0.6 0.5
--------- --------- --------- ----- -----
Total revenues....................................................... 100.0 100.0 100.0 100.0 100.0
Cost of goods sold................................................... 73.5 74.5 74.6 73.6 74.1
--------- --------- --------- ----- -----
Gross profit......................................................... 26.5 25.5 25.4 26.4 25.9
Operating expenses................................................... 21.8 20.5 19.1 21.6 20.7
Depreciation and amortization........................................ 2.2 1.9 1.8 2.2 2.1
--------- --------- --------- ----- -----
Income from operations............................................... 2.5 3.1 4.5 2.6 3.1
Equity in earnings (loss) of affiliates.............................. (0.5) (0.2) 0.7 (0.1) (0.1)
Interest expense, net................................................ 0.7 0.4 0.3 0.4 0.2
Preacquisition loss of subsidiaries.................................. 0.0 0.0 0.2 0.4 0.0
--------- --------- --------- ----- -----
Income before income tax expense..................................... 1.3 2.5 5.1 2.5 2.8
State income taxes................................................... 0.1 0.2 0.2 0.1 0.1
--------- --------- --------- ----- -----
Net income........................................................... 1.2% 2.3% 4.9% 2.4% 2.7%
--------- --------- --------- ----- -----
--------- --------- --------- ----- -----
</TABLE>
THIRTEEN WEEKS ENDED MAY 2, 1998 COMPARED TO THIRTEEN WEEKS ENDED MAY 3, 1997
Net sales increased by 27.5% from $83.7 million in the thirteen weeks ended
May 3, 1997 to $106.7 million in the thirteen weeks ended May 2, 1998. The
increase in net sales was primarily attributable to (i) the opening of 52 net
new domestic stores and one new Canadian store, which resulted in a $9.6 million
increase in net sales, (ii) a 13.0% increase in comparable store sales, which
resulted in a $10.6 million increase in net sales, and (iii) the consolidation
of $2.8 million of net sales from the Company's Australian retail operations,
which commenced business in the second quarter of 1997.
Management fees increased by 17.0% from $0.5 million in the thirteen weeks
ended May 3, 1997 to $0.6 million in the thirteen weeks ended May 2, 1998. The
increase was primarily attributable to increased fees earned under the UK
Services Agreement. See "Business--Managed Stores."
Cost of goods sold increased by 28.4% from $61.9 million in the thirteen
weeks ended May 3, 1997 to $79.5 million in the thirteen weeks ended May 2,
1998. As a percentage of net sales, cost of goods sold increased from 74.0% in
the thirteen weeks ended May 3, 1997 to 74.5% in the thirteen weeks ended May 2,
1998. The increase in cost of goods sold as a percentage of net sales was
primarily attributable to increased freight expenses. This increase is the
result of the Company's decision to switch its primary freight carrier and
reorganize its third-party distribution framework for improved service and
merchandise availability at its stores.
Selling, general and administrative expense increased by 22.4% from $18.2
million in the thirteen weeks ended May 3, 1997 to $22.3 million in the thirteen
weeks ended May 2, 1998. As a percentage of total revenues, selling, general and
administrative expense decreased from 21.6% in 1997 to 20.7% in 1998. The $4.1
million increase was primarily attributable to the increase in the Company's
domestic and international store base and the associated increases in store and
headquarter operating expenses. The decrease in selling, general and
administrative expense as a percentage of total revenues was primarily
21
<PAGE>
attributable to an increase in net sales and management fee income without a
proportional increase in corporate and store-level overhead.
Depreciation and amortization expense increased by 20.2% from $1.9 million
in the thirteen weeks ended May 3, 1997 to $2.3 million in the thirteen weeks
ended May 2, 1998. This increase was primarily attributable to capitalized
expenditures for leasehold improvements and furniture and fixtures for new store
openings.
Operating income increased by 50.9% from $2.2 million in the thirteen weeks
ended May 3, 1997 to $3.3 million in the thirteen weeks ended May 2, 1998. As a
percentage of total revenues, operating income increased from 2.6% in 1997 to
3.1% in 1998, as the increase in cost of goods sold as a percentage of total
revenues was more than offset by the decline in operating expenses as a
percentage of total revenues.
Interest expense, net, decreased by 27.4% from $0.3 million in the thirteen
weeks ended May 3, 1997 to $0.2 million in the thirteen weeks ended May 2, 1998.
The decrease was primarily attributable to the repayment of long-term debt
outstanding in 1997.
As a result of all the above factors, the Company's income before income
taxes increased by 42.4% from $2.1 million in the thirteen weeks ended May 3,
1997 to $3.0 million in the thirteen weeks ended May 2, 1998.
1997 COMPARED TO 1996
Net sales increased by 33.3% from $337.1 million in 1996 to $449.2 million
in 1997. The increase in net sales was primarily attributable to (i) the opening
of 45 net new domestic stores, which resulted in a $29.0 million increase in net
sales, (ii) a 15.3% increase in comparable store sales, which resulted in a
$50.1 million increase in net sales, and (iii) the consolidation of $33.0
million of net sales from international retail operations, which net sales were
fully consolidated as a result of the acquisition of interests of joint venture
partners acquired by the Company in 1997.
Management fees increased by 89.7% from $2.5 million in 1996 to $4.8 million
in 1997. This increase was primarily attributable to the $2.2 million bonus
earned by the Company under the UK Services Agreement. The Company does not
anticipate receiving bonus payments under the UK Services Agreement in the
future.
Cost of goods sold increased by 33.9% from $252.8 million in 1996 to $338.5
million in 1997. As a percentage of net sales, cost of goods sold increased from
75.0% in 1996 to 75.4% in 1997. The increase in cost of goods sold as a
percentage of net sales was primarily attributable to the Company's decision to
reduce prices for selected electronic game titles in order to increase market
share and sales volume.
Selling, general and administrative expense increased by 24.6% from $69.8
million in 1996 to $87.0 million in 1997. As a percentage of total revenues,
selling, general and administrative expense decreased from 20.5% in 1996 to
19.1% in 1997. The $17.2 million increase was primarily a result of the increase
in the Company's store base and the associated increases in store and
headquarter operating expenses. The decrease in selling, general and
administrative expense as a percentage of total revenue was primarily
attributable to an increase in net sales and management fee income without a
proportional increase in corporate and store-level overhead.
Depreciation and amortization expense increased by 20.9% from $6.6 million
in 1996 to $8.0 million in 1997. This increase was primarily attributable to
capitalized expenditures for leasehold improvements and furniture and fixtures
for new store openings.
Operating income increased by 98.2% from $10.3 million in 1996 to $20.5
million in 1997. As a percentage of total revenues, operating income increased
from 3.1% in 1996 to 4.5% in 1997, as the increase in cost of goods sold as a
percentage of total revenues was more than offset by the decline in operating
expenses as a percentage of total revenues.
22
<PAGE>
Equity in earnings of affiliates increased by $3.5 million from a loss of
$0.6 million in 1996 to earnings of $2.9 million in 1997. The increase was
attributable to a $3.2 million increase in equity income recorded for the
Company's 25.1% investment in EB-UK and the effect of consolidating the
Company's equity interests in Canada and Korea beginning in 1997.
Interest expense, net, increased by 6.2% from $1.3 million in 1996 to $1.4
million in 1997. The increase was primarily attributable to the inclusion of
foreign operation interest expense in 1997, which was partially offset by
reduced short-term borrowings and the repayment of long-term debt in 1997.
As a result of all the above factors, the Company's income before income
taxes increased by 171% from $8.5 million in 1996 to $22.9 million in 1997.
1996 COMPARED TO 1995
Net sales increased by 25.3% from $269.0 million in 1995 to $337.1 million
in 1996. The increase in net sales was primarily attributable to the opening of
19 net new domestic stores, which resulted in a $14.3 million increase in net
sales and a 20.8% increase in comparable store sales, which resulted in a $53.8
million increase in net sales. The increase in comparable store sales was
primarily a result of a full year of sales of the Sony PlayStation and the Sega
Saturn, which were released in calendar year 1995, and the introduction of the
Nintendo N64, which was released in the fall of 1996.
Management fees increased by 32.6% from $1.9 million in 1995 to $2.5 million
in 1996. This increase was primarily attributable to a full year of management
fees earned under the UK Services Agreement in 1996 as compared to seven months
of management fees earned in 1995, the initial year of the UK Services
Agreement.
Cost of goods sold increased by 26.9% from $199.2 million in 1995 to $252.8
million in 1996. As a percentage of net sales, cost of goods sold increased from
74.1% in 1995 to 75.0% in 1996. The increase in cost of goods sold as a
percentage of net sales was primarily attributable to a greater percentage of
the Company's sales mix being generated from video game hardware systems, which
have a lower gross margin than the Company's other products.
Selling, general and administrative expense increased by 18.4% from $59.0
million in 1995 to $69.8 million in 1996. As a percentage of total revenues,
selling, general and administrative expense decreased from 21.8% in 1995 to
20.5% in 1996. The $10.8 million increase was a result of the increase in the
Company's store base and the associated increases in store and headquarter
operating expenses. The decrease in selling, general and administrative expense
as a percentage of total revenues was primarily attributable to an increase in
net sales and management fee income without a proportional increase in corporate
and store-level overhead.
Depreciation and amortization expense increased by 9.4% from $6.0 million in
1996 to $6.6 million in 1997. This increase was primarily attributable to
capitalized expenditures for leasehold improvements and furniture and fixtures
for new store openings.
Operating income increased by 56.5% from $6.6 million in 1995 to $10.3
million in 1996. As a percentage of total revenues, operating income increased
from 2.5% in 1995 to 3.1% in 1996, as the increase in cost of goods sold as a
percentage of total revenues was more than offset by the decline in operating
expenses as a percentage of total revenues.
Equity in loss of affiliates decreased by $0.7 million from a loss of $1.3
million in 1995 to a loss of $0.6 million in 1996. The decrease was attributable
to the increase of equity income recorded for the Company's 25% investment in
EB-UK of $0.7 million, a reduction in the equity loss of the Company's Canadian
joint venture of $0.5 million, and an increase in the equity loss of the
Company's Korean joint venture of $0.5 million.
23
<PAGE>
Interest expense, net, decreased by 28.6% from $1.8 million in 1995 to $1.3
million in 1996. This decrease is primarily attributable to reduced short-term
borrowings, repayment of long-term debt and an increase in interest income
during 1996.
As a result of all the above factors, the Company's income before income
taxes increased 144% from $3.5 million in 1995 to $8.5 million in 1996.
SEASONALITY AND QUARTERLY RESULTS
The Company's business, like that of most retailers, is highly seasonal. A
significant portion of the Company's net sales, management fees and profits are
generated during the Company's 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 the Company's merchandise mix. See "Risk Factors--Seasonality and Quarterly
Results."
The following table sets forth certain unaudited quarterly income statement
information for 1996, 1997 and 1998. The unaudited quarterly information
includes all normal recurring adjustments that management considers necessary
for a fair presentation of the information shown.
<TABLE>
<CAPTION>
FISCAL QUARTER ENDED
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MAY 4, AUG. 3, NOV. 2, FEB. 1, MAY 3, AUG. 2, NOV. 1, JAN. 31, MAY 2,
1996 1996 1996 1997 1997 1997 1997 1998 1998
------- ------- ------- -------- ------- ------- ------- -------- --------
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE
DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenues................ $52,413 $51,392 $77,046 $158,734 $84,176 $73,394 $94,239 $202,163 $107,301
Gross profit.................. 14,602 14,504 18,702 38,964 22,235 19,087 24,179 49,973 27,781
Operating income (loss)....... (2,029) (2,885) 1,067 14,176 2,159 (1,800) 640 19,475 3,257
Income (loss) before income
taxes....................... (2,501) (3,733) 354 14,338 2,081 (2,303) 576 22,556 2,963
Net income (loss)............. $(2,339) $(3,490) $ 331 $ 13,406 $ 2,003 $(2,252) $ 514 $ 21,799 $ 2,850
AS A PERCENTAGE OF TOTAL
REVENUES:
Gross profit.................. 27.9% 28.2% 24.3% 24.5% 26.4% 26.0% 25.7% 24.7% 25.9%
Operating income (loss)....... (3.9) (5.6) 1.4 8.9 2.6 (2.5) 0.7 9.6 3.1
Income (loss) before income
taxes....................... (4.8) (7.3) 0.5 9.0 2.5 (3.1) 0.6 11.2 2.8
Net income (loss)............. (4.5%) (6.8%) 0.4% 8.4% 2.4% (3.1%) 0.5% 10.8% 2.7%
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations through a combination
of cash generated from operations and bank debt. The Company generated $12.3
million, $37.1 million and $32.3 million in cash from operations in 1995, 1996
and 1997, respectively. The Company used $6.8 million of cash from operations
during the thirteen weeks ended May 2, 1998. The $32.3 million of cash generated
from operations in 1997 was primarily the result of $22.1 million of net income,
$5.7 million of non-cash charges to net income, and a $9.9 million increase in
accounts payable and accrued expenses, partially offset by an increase of $2.5
million in other assets, a $2.1 million increase in due from affiliates and a
$2.0 million decrease in due to affiliates. The $4.8 million decrease in cash
generated from operations in 1997 as compared to 1996 was primarily attributable
to (i) a reduction in accounts payable and accrued expenses of $16.7 million,
(ii) an increase in other assets of $1.8 million, (iii) a decrease in affiliate
payables of $2.4 million, (iv) an increase in affiliate receivables of $1.5
million and (v) a decrease in non-cash charges of
24
<PAGE>
$2.6 million. Such amounts were partially offset by an increase in net income of
$14.2 million and a decrease in inventory of $5.7 million. The $24.8 million
increase in cash generated from operations in 1996 as compared to 1995 was
primarily attributable to an increase in accounts payable and accrued expenses
of $20.7 million, an increase in net income of $4.8 million, an increase in
non-cash charges of $0.9 million and a decrease in receivables from affiliates
of $1.6 million. Such amounts were partially offset by a $4.4 million increase
in inventory.
In 1996, EB Canada entered into a $4.0 million term loan facility with Cho
Hung Bank of Canada. At January 31, 1998, the outstanding balance on this loan
was $3.7 million. The note matures on September 1, 2002 and bears interest at
the bank's prime rate plus 0.125%. In 1997, EB Canada entered into a $1.0
million line of credit with Cho Hung Bank of Canada. At January 31, 1998, there
was no outstanding balance on this line of credit. The line of credit expires on
November 5, 1998 and bears interest at the bank's prime rate plus 0.125%.
On March 16, 1998, EB entered into a credit agreement with Fleet, pursuant
to which Fleet agreed to make available to EB an asset based revolving credit
and term loan facility in an amount up to $50.0 million. The revolving credit
facility expires and the term loan, if borrowed, is repayable on March 16, 2001.
Interest accrues on borrowings at a per annum rate equal to either LIBOR plus
250 basis points or Fleet's base rate of interest, at EB's option. The revolving
credit and term loan facilities are secured by certain assets, including
accounts receivable, inventory, fixtures and equipment, and the term loan
facility is also secured by EB's West Chester, Pennsylvania property. As of June
11, 1998, EB had approximately $31.7 million of outstanding borrowings under the
revolving credit facility and had not borrowed amounts under the term loan. The
borrowings under the revolving credit facility bear interest at Fleet's base
rate of interest. In connection with the Reorganization, EBOA joined EB as a
party to the Fleet loan documents and the Company intends to guarantee the
obligations of EBOA thereunder. See "Reorganization" and "Certain Transactions."
The Company intends to use $31.7 million of its net proceeds of the Offering to
repay its obligations to Fleet.
In June 1998, EB loaned $7.0 million to James J. Kim, who in turn loaned
such funds to EBOA for working capital purposes. The demand notes reflecting
such loans bear interest at the highest prime rate as published in the Wall
Street Journal. The Company intends to use $7.0 million of its net proceeds of
the Offering to repay this obligation to Mr. Kim. See "Use of Proceeds."
A predecessor to the Company made capital expenditures of $18.5 million in
1997, primarily for opening 71 new stores and to acquire its West Chester,
Pennsylvania distribution center, which was previously leased by the predecessor
to the Company. See "Certain Transactions." The Company expects to make capital
expenditures in 1998 of approximately $21.1 million, primarily to open
approximately 80 to 90 new stores.
The Reorganization is structured to allow shareholders of EB to retain both
the Company's previously taxed earnings, which exceed book earnings due to
timing differences, and the shares of EB-UK capital stock. As a result, the
Company's stockholder's equity account after the Reorganization and prior to the
completion of the Offering will reflect a deficit of approximately $23.6
million. The sale by the Company of the 4,375,000 shares of Common Stock offered
hereby (at an assumed initial public offering price of $16.00 per share) will
restore the Company's stockholder's equity account to a positive balance of
approximately $40.4 million. See "Reorganization."
The Company believes that the net proceeds of the Offering, together with
cash generated from its operating activities and available bank borrowings, will
be sufficient to fund its operations and store expansion programs through the
end of 1999.
25
<PAGE>
IMPACT OF INFLATION
The Company does not believe that inflation has had a material effect on its
net sales or results of operations.
RECENT ACCOUNTING PRONOUNCEMENT
In March 1998, the AICPA issued Statement of Position 98-1, "Accounting for
the Cost of Computer Software Developed or Obtained for Internal Use." This
statement requires that certain costs related to the development or purchase of
internal use software be capitalized and amortized over the estimated useful
life of the software. This statement also requires that costs related to the
preliminary project stage and post-implementation/operation stage of an internal
use software development project be expensed as incurred. The Company plans to
adopt this Statement for the year ended January 29, 2000, as required.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This statement provides guidance on accounting for all
derivative instruments and hedging activities. The statement concludes that
derivative instruments be recognized as assets or liabilities and that fair
value is the relevant measure for derivative instruments. Additionally, the
statement provides criteria for the determination of hedge accounting. As the
Company has not entered into derivative instruments, it does not believe the
statement will have a significant impact on its financial statements. To the
extent that the Company, in the future, enters into derivative instruments, it
will be required to comply with FASB No. 133.
YEAR 2000
The Company uses a significant number of computer software programs and
operating systems in its internal operations, including applications used in
inventory management, distribution, financial business systems and various
administrative functions. To the extent that these software applications contain
source code that is unable to interpret appropriately the upcoming calendar year
2000, some level of modification or even possible replacement of such source
code or applications will be necessary. The Company is currently modifying its
computer software programs and operating systems to make them "Year 2000"
compliant. The Company anticipates spending approximately $300,000 in connection
with its "Year 2000" compliance programs. However, there can be no assurance
that the costs necessary to update software, or potential systems interruptions,
will not exceed such amount and have a material adverse effect on the Company's
results of operations or financial condition.
26
<PAGE>
BUSINESS
GENERAL
The Company believes that it is among the world's largest specialty
retailers of electronic games. The Company's primary products are video games
and PC entertainment software, supported by the sale of video game hardware, PC
productivity software and accessories. As of May 2, 1998, the Company operated
465 stores in 42 states, Puerto Rico, Canada, Australia and South Korea,
primarily under the names Electronics Boutique and Stop 'N Save Software. As of
such date, the Company also provided management services for EB-UK, which
operated 134 stores and 17 department store-based concessions in the United
Kingdom and Ireland. As of May 2, 1998, the Company also managed 37 mall-based
WaldenSoftware stores for Borders Group, Inc. The Company's stores are primarily
located in high traffic areas in regional shopping malls and average 1,100
square feet in size. The Company plans to open approximately 50 to 55 domestic
and 30 to 35 foreign stores in each of 1998 and 1999. The Company's revenues and
operating income have grown from $250.7 million and $6.3 million, respectively,
in 1994, to $454.0 million and $20.5 million, respectively, in 1997. Comparable
store sales increased 3.5%, 20.8%, 15.3% and 13.0% in 1995, 1996, 1997 and the
thirteen weeks ended May 2, 1998, respectively.
The Company's core customer is the electronic game enthusiast who demands
immediate access to new title releases and who generally purchases more video
game titles and PC entertainment software than the average electronic game
consumer. The Company believes that it attracts the core game enthusiast due to
the Company's: (i) specialty store focus on the electronic game category; (ii)
ability to stock sought-after new releases on its stores' shelves immediately
after release by publishers; (iii) breadth of product selection; and (iv)
knowledgeable sales associates, who are often game enthusiasts themselves and
who have extensive knowledge of game titles and features. The Company places
significant emphasis on offering its customers immediate access to new releases
and has designed its product merchandising strategy and distribution systems to
facilitate such access. The Company introduces, on average, 20 new game titles
in its stores per week. The Company believes that this FIRST TO MARKET strategy
establishes its stores as the logical destination of choice for electronic game
enthusiasts. The Company's strict inventory management system enables it to (i)
maintain over 2,600 active SKUs, (ii) replenish its large and geographically
dispersed store base on a daily basis, and (iii) minimize mark-downs as titles
mature. The Company supports its product offerings with a strong commitment to
customer service, which the Company believes distinguishes it from its
competitors. All sales associates receive extensive training on video game and
PC entertainment software products, system requirements and selling techniques.
INDUSTRY OVERVIEW
The electronic game industry is segmented into two primary product
platforms: video games and PC entertainment software.
VIDEO GAMES. Video game play requires two components, video game consoles
(hardware) and video game titles (software). Video game consoles are specialized
processing devices which are connected to a free-standing monitor or, typically,
a television set. Video game titles are small cartridges or CD-Roms that are
inserted into a video game console. The video game market is dominated by three
manufacturers, Nintendo, Sega and Sony, each of which manufactures proprietary
hardware (in the form of console systems) and publishes game titles which run on
their systems but cannot run on those of its competitors. Third party publishers
also produce a wide range of game titles for each of these major hardware
systems. Growth in the video game industry has been primarily driven by the
periodic introduction of new generations of hardware systems. The current 32/64
bit systems offer highly developed, three dimensional graphics capabilities,
speed, and sound effects. Manufacturers have introduced next generation hardware
technologies every four to five years. Sales of prior generation video game
titles generally peak five years after the introduction of new hardware systems.
Total domestic retail sales of video game titles, hardware and accessories
was approximately $5.1 billion in calendar 1997, an increase of approximately
40% over retail sales in the prior year. This increase was primarily the result
of an increased penetration rate of the fourth generation of video game hardware
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technology (32/64 bit systems), which was introduced in calendar years 1995 and
1996. As was the case with each prior generation, the introduction of the new
hardware technology has led to an increase in the total installed base of the
new technology over that of the prior generation. The enhanced technological
features of new hardware expand gaming capabilities, thereby encouraging
existing players to upgrade their hardware platforms, and simultaneously
attracting new video game players to purchase their first systems. Management
believes that continued growth in sales of the current generation of hardware
technology and related software will continue in calendar year 1998 and 1999. It
is anticipated that the current generation of hardware systems will be replaced
by a new generation of systems, beginning with the expected U.S. introduction of
a new Sega system called "Dreamcast," which Sega is targeting for release in the
fall of 1999. See "Risk Factors--Video Game Systems and Software Product Life
Cycles."
PC ENTERTAINMENT SOFTWARE. PC entertainment software is generally sold in
the form of a CD-Rom and played on multimedia PCs featuring fast processors,
expanded memories, and enhanced graphics and audio capabilities. The PC
entertainment software industry is more fragmented than the video game industry,
with game publishers producing game titles which can be used on most PCs. The
market for PC entertainment software has experienced steady growth in recent
years, due primarily to the growth in the installed base of multimedia PCs. The
domestic installed base of multimedia PCs has increased from approximately 14
million units in calendar 1995 to approximately 23 million units in calendar
1997. Domestic unit sales of PC entertainment software have increased from
approximately 23 million units in calendar 1995 to approximately 46 million
units in calendar 1997. Domestic retail sales of PC entertainment software
totaled approximately $1.3 billion in calendar 1997, an increase of
approximately 23% over retail sales in the prior year. It is anticipated that
the recent introduction of multimedia PCs priced at or below $1,000 will
accelerate growth in PC unit sales and broaden the appeal of home PCs as an
alternative source of in-home entertainment. Worldwide, the installed base of
multimedia PCs as well as sales of PC entertainment software have experienced
comparable increases to those experienced domestically.
The typical electronic game consumer is male, between the ages of 14 and 34,
and lives in a household with income in excess of $50,000. Owners of video game
hardware systems purchase an average of 3.2 game titles per year. The Company
believes that many electronic game players purchase video game titles as well as
PC entertainment software. Electronic games are principally sold through retail
channels, including mass merchants, toy retail chains, electronics retailers,
computer retailers, specialty software retailers, wholesale clubs, and mail
order.
BUSINESS STRATEGY
The Company seeks to enhance its position as one of the world's premier
specialty retailers of video game titles and PC entertainment software.
BREADTH OF TITLE SELECTION. The Company offers its customers an extensive
selection of video game titles and PC entertainment software at competitive
prices. The Company's typical store offers approximately 1,650 titles at any
given time from over 120 video game and PC entertainment software vendors. The
title selection in each store is continuously updated and tailored to reflect
the tastes and buying patterns of the store's local market. The Company carries
game titles which are compatible with all major video game hardware systems and
PCs. In addition to video game titles and PC entertainment software, the Company
offers 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, the Company seeks to establish its stores as the
logical destination of choice for electronic game enthusiasts.
IMMEDIATE AVAILABILITY OF NEW RELEASES. The Company strives to be the first
in its markets to offer new video game titles upon their release. New release
titles are often preceded by substantial publicity in the form of advertisements
and reviews in publications and, increasingly, are promoted through television.
This publicity tends to create high levels of demand for new releases among
video game enthusiasts, often
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well in advance of release dates. This demand has afforded the Company an
important marketing opportunity to create excitement surrounding its stores. To
assure its customers immediate access to new releases, the Company offers its
customers the opportunity to purchase video games prior to their release (the
"EB Pre-Sell Program") and has established a reserve list (the "EB Reserve
List") which guarantees its customers a copy of a new release immediately after
its launch. The Company introduces approximately 20 new game titles in its
stores each week. The Company believes that its FIRST TO MARKET strategy
establishes the Company's stores as the logical destination of choice for
electronic game enthusiasts.
HIGHLY EFFECTIVE INVENTORY MANAGEMENT SYSTEM. The Company emphasizes strict
inventory policies in order to effectively manage over 2,600 SKUs, including
video game titles, PC entertainment software, video game consoles, and
accessories. The Company has developed a sophisticated inventory management
system which enables it to maximize sales of new release titles and avoid
markdowns as titles mature. The Company minimizes its inventory risk by: (i)
conducting extensive research on new release titles to forecast anticipated
daily sell-through; (ii) utilizing POS polling technology to provide daily
sales, margin and inventory reports to the Company's merchandising staff; (iii)
managing inventory on a store-by-store basis in order to address local customer
merchandise preferences; and (iv) replenishing store-level inventories daily
from its fully automated distribution center. The Company introduces an average
of 10 new SKUs in its stores each day. As a result of these inventory management
initiatives, the Company has been able to achieve desired in-stock positions and
increase its inventory turns from 3.8x in 1995 to 5.1x in 1996 to 5.3x in 1997.
In addition, the Company's 1997 inventory shortage was less than 0.8% of cost of
sales.
DISCIPLINED STORE OPERATIONS. The Company's management team exercises
significant control over all aspects of its store operations, from product
research, purchasing and distribution to real estate selection, store
development, POS financial reporting, and sales training. The Company believes
that this commitment to operational control enables it to operate substantially
all of its stores on a profitable basis, to identify quickly opportunities to
improve store productivity and to react to shifts in product pricing and
consumer purchasing trends more quickly than its competitors.
KNOWLEDGEABLE SALES ASSOCIATES. The Company believes that its knowledgeable
sales associates provide the Company with an important competitive advantage
over mass merchants, toy retail chains and electronics and computer superstores,
all of which compete with the Company, but generally offer much lower levels of
customer service in the electronic game category than the Company. All sales
associates are given extensive training on video game and PC entertainment
software products, system requirements and selling techniques. Many of the
Company's sales associates are also electronic game enthusiasts. Training is
facilitated through vendor-sponsored EB University seminars, held semi-annually
for field management associates, as well as through regularly scheduled in-store
seminars conducted by District Training Managers who provide merchandise and
sales training to the Company's sales associates. In addition, sales associates
are encouraged to learn about their customers' game preferences. With this
knowledge, sales associates can introduce customers to a selection of electronic
games and accessories which may suit their preferences or enhance the overall
game experience. In addition, the Company's sales associates advise customers of
pending new releases suited to the customer's expressed interests.
VALUE PRICING AND AFFINITY PROGRAMS. In an effort to offer maximum value to
its customers and discourage comparison shopping, the Company maintains an
everyday low pricing policy and supports this policy with price matching (the
"EB Code of Honor Program") and affinity programs. These affinity programs are
the Frequent Buyer Card (the "EB-FBC"), the EB Pre-Sell Program, and the EB
Reserve List. An extensive selection of merchandise and a high level of customer
service complement the Company's everyday low price policy.
GROWTH STRATEGY
DOMESTIC NEW STORE EXPANSION. The Company plans to expand its domestic
retail operations by opening 35 to 40 Electronics Boutique stores and 10 to 15
Stop 'N Save Software stores in both existing and new markets during 1998 and
1999. As of May 2, 1998, the Company had opened 12 domestic stores,
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had executed leases for an additional 16 domestic stores, and is currently
negotiating with landlords with respect to 19 potential domestic stores. The
Company's real estate team applies standardized site selection criteria to
secure the best location for its stores when entering a new market or expanding
within an existing market. The Company believes its store formats can operate
profitably in high traffic/high rent malls as well as in lower traffic/lower
rent malls and strip shopping centers. This flexibility provides the Company
with an extensive selection of locations for future store openings.
INTERNATIONAL OPPORTUNITIES. As of May 2, 1998, the Company operated 19
stores in Australia, 27 stores in Canada, five stores in South Korea, and
provided management services to an affiliate of EB, EB-UK, which affiliate, as
of such date, operated 134 stores and 17 department store-based concessions in
the United Kingdom and Ireland. The Company intends to open 15 stores annually
in both Australia and Canada during 1998 and 1999. As of May 2, 1998, the
Company had opened four stores in Australia, had executed a lease for one store
in Canada, and is currently negotiating with landlords with respect to 11
potential stores in Australia and three potential new stores in Canada. The
Company believes that its current international presence will enable it to
leverage its existing distribution and management infrastructure for further
international expansion. See "Risk Factors--New Store Openings and "--Risks of
International Retail Operations."
EXPANSION OF ONLINE RETAILING. The Company believes that it was one of the
first video game and PC entertainment software specialty retailers to offer a
World Wide Website enabling both product review and online purchasing. The
Company's core game enthusiast customer is technically proficient and, as such,
the Company believes that online retailing is a natural extension of its current
retail operations. Since the Company believes that its primary distribution
center is well configured to enable fulfillment of online orders, the Company
provides its own fulfillment function. The Company intends to pursue
aggressively strategic alliances with directories, search engines, content
providers, and sites geared toward electronic game players. In April 1998, the
Company began providing customers with a complete product offering, including
access to the Company's database of over 4,600 items.
STORE PRODUCTIVITY. The Company constantly strives to increase the
productivity of its stores by focusing on:
- Inventory Management and Controls. Utilizing its sophisticated POS and
inventory management systems, including its fully automated distribution
center, the Company seeks to continuously improve the merchandise mix and
in-stock positions in its stores, increase inventory turns and drive down
shrinkage (which, at less than 0.8% of cost of sales in 1997, the Company
believes is among the lowest of mall-based retailers).
- Managing Store Payroll. The Company seeks to optimize store payroll
expense by utilizing its sophisticated POS reporting systems to assure the
best possible match of sales associate floor coverage to customer traffic.
In an effort to further enhance its store payroll strategy, the Company is
currently testing a new system which electronically measures store
customer traffic throughout the day and provides management with an
analysis of sales conversion rates by store and by sales associate. This
system will allow management to further improve its on-going sales
conversion training.
- Pre-owned Electronic Games. 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 in recent years. The Company offers its customers
a store credit for their pre-owned video game titles. Sales of pre-owned
video game titles generate higher margins than new titles and their
availability in the Company's stores tends to attract the Company's core
game enthusiast customer. The Company believes that a significant
opportunity exists to increase sales of pre-owned game titles and is
currently implementing a number of marketing and merchandising programs,
coupled with incentives to its sales associates, to increase its
participation in the growing market for pre-owned game titles.
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RETAIL OPERATIONS
As of May 2, 1998, the Company operated a total of 465 stores in 42 states,
Puerto Rico, Canada, Australia and South Korea, primarily under the names
Electronics Boutique and Stop 'N Save Software.
STORE FORMATS. Electronics Boutique stores are specialty retail stores that
offer video game hardware and game titles, PC entertainment, educational and
productivity software and video game and PC accessories. Electronics Boutique
stores are primarily located in high traffic areas in regional shopping malls
and generally stock over 2,600 SKUs. The typical mall-based Electronics Boutique
store is approximately 1,100 square feet, but stores range in size from 450
square feet to 1,500 square feet, with retail sales space encompassing
approximately 90% of total square footage. The Company believes that its stores
generate sales per square foot that are among the highest of any mall-based
retailer.
Stop 'N Save Software stores are generally larger format stores located in
urban areas and strip and power shopping centers. The Company's merchandising
strategy at its Stop 'N Save Software stores is comparable to its merchandising
strategy at its Electronics Boutique stores. The Company opened its first Stop
'N Save Software store in 1995. Stop 'N Save Software stores range in size from
1,250 to 5,000 square feet, with retail sales space encompassing approximately
90% of total square footage. In addition, the Company also operates seven stores
that sell sports collectibles and memorabilia under the name Brandywine Sports
Collectables ("BC Collectables"). The Company is developing BC Collectables as a
new concept, as it believes the customer base of BC Collectables shares many of
the same demographic characteristics as the customer base of the Company's
Electronics Boutique stores. BC Collectables stores are located in malls and
strip and power shopping centers and generally range in size from 1,000 to 5,000
square feet.
The following table sets forth information concerning the number of stores
open at the end of the periods indicated:
<TABLE>
<CAPTION>
1993 1994 1995 1996
----- ----- ----- -----
<S> <C> <C> <C> <C>
Domestic Stores:
Electronics Boutique........................................................... 311 325 338 351
Stop 'N Save Software.......................................................... 0 0 1 3
BC Collectables................................................................ 0 0 2 6
--- --- --- ---
Total...................................................................... 311 325 341 360
Total International Company Stores............................................. 7 22 23 30
--- --- --- ---
Total Company Stores........................................................... 318 347 364 390
--- --- --- ---
--- --- --- ---
<CAPTION>
1997
-----
<S> <C>
Domestic Stores:
Electronics Boutique........................................................... 390
Stop 'N Save Software.......................................................... 8
BC Collectables................................................................ 7
---
Total...................................................................... 405
Total International Company Stores............................................. 47
---
Total Company Stores........................................................... 452
---
---
</TABLE>
SITE SELECTION. Company representatives visit numerous mall and power and
strip shopping center sites throughout the year in the United States and in
several foreign countries in search of suitable store locations. The Company's
standardized site selection criteria include, but are not limited to: population
demographics; psychographics; traffic count; store-front visibility and
presence; adjacencies; competition; lease terms; and accessible parking. The
Company believes its store formats can operate profitably in high traffic/high
rent malls as well as lower traffic/lower rent malls and shopping centers. The
Company, therefore, believes that there is a large selection of locations
available for future sites and views lease terms as the most critical element in
its selection process. The Company has used its knowledge of its market areas to
negotiate favorable lease terms at many of its store locations, which has
resulted in lowered occupancy costs. The Company regularly reviews the
profitability and prospects of each of its stores and evaluates whether any
underperforming stores should be closed or relocated to more desirable
locations. The Company will seek to negotiate with landlords to convert
desirable WaldenSoftware locations into Company stores when their leases
terminate.
STORE ECONOMICS. The Company believes that its store concepts offer
attractive unit economics. The Company estimates that the average Electronics
Boutique store had net sales of approximately $1.1 million
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in 1997. The average cost to open an Electronics Boutique store (exclusive of
inventory costs) is $135,000. These costs include furniture, fixtures, leasehold
improvements and equipment. The Company expects such costs to remain constant in
1998. The Company's stores have an average opening inventory of $95,000. The
Company's cost to open an international store is approximately the same in U.S.
dollars as the cost to open a domestic store. Historically, the Company's new
stores have generated a positive store operating contribution within the first
12 months of operations.
STORE OPERATIONS. The Company's North American stores (in the U.S., Canada,
and Puerto Rico) are divided into two geographic regions (East and West), each
consisting of an area encompassing approximately 50% of the Company's stores.
These regions are supervised by two Field Operations Vice Presidents, 11
Regional Vice Presidents/Directors and 42 District Managers. Each District
Manager is responsible for approximately 12 stores. The Company's stores in
Australia and South Korea are supervised by a Regional Vice President. The
Company has recently instituted a program in the U.S. whereby each region has
specialists in sales training, loss prevention and merchandising in an effort to
provide on-going education and training to store associates. Each of the
Company's 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 fluctuates greatly depending on seasonal needs. The
Company's domestic stores are open seven days per week and generally ten hours
each day. The Company operates its foreign stores in a manner substantially
similar to its domestic stores.
MANAGEMENT SERVICES
As of May 2, 1998, the Company provided management services to 188 specialty
electronic game stores in the United States, the United Kingdom and Ireland.
EB-UK STORES. The Company provides management services for 134 stores and
17 department store-based concessions in the United Kingdom and Ireland under a
contract with EB-UK, a corporation organized under the laws of the United
Kingdom (and an affiliate of EB). As of May 2, 1998, EB owned 25.1% of the
outstanding shares of capital stock of EB-UK, which stock is listed for trading
on the London Stock Exchange. Pursuant to the Reorganization, EB will assign
such shares of capital stock to EB Nevada. See "Reorganization."
EB-UK is one of the leading speciality retailers of electronic games in the
United Kingdom and Ireland. EB-UK's business strategy is substantially similar
to that of the Company's. EB-UK strives to offer its customers an extensive
selection of video games and PC entertainment software, immediate availability
of new releases, knowledgeable sales associates, and value pricing and other
customer incentive programs. EB-UK also has a highly effective inventory
management system and distribution center. EB-UK stores are generally located in
"high street" shopping districts.
On October 13, 1995, EB entered into the UK Services Agreement with EB-UK.
The UK Services Agreement provides that EB shall provide management services to
EB-UK, including assistance with ordering and purchasing inventory, store design
and acquisition, advertising, promotion and publicity information and
information systems. In exchange, EB-UK is responsible for the payment of fees
(payable in cash or EB-UK stock at EB's option), equal to 1.0% of net sales plus
a bonus calculated on the basis of net income in excess of a pre-established
target set by EB-UK. The UK Services Agreement provides for EB-UK to have a
right of first refusal on any business opportunity of which EB becomes aware in
Europe (excluding Scandinavia) relating to electronic game retailing. The UK
Services Agreement also prohibits EB from competing with EB-UK in the United
Kingdom or Ireland during the term of the UK Services Agreement, and for one
year after its termination. The UK Services Agreement has an initial term
expiring on January 31, 2006. In January 1997, EB assigned its rights and
obligations under the UK Services Agreement to EB Services, a partnership in
which, after the Reorganization, the Company will own 99.99% of the partnership
interests. The stockholders of EB-UK elected Joseph J. Firestone, the Company's
President and Chief Executive Officer, and John R. Panichello, the Company's
Senior Vice President and Chief Financial Officer, to serve as non-executive
Directors of EB-UK.
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WALDENSOFTWARE STORES. The Company manages 37 WaldenSoftware stores under a
management contract with Borders Group, Inc. The WaldenSoftware stores are
domestic mall-based stores that offer the same product lines as the Company's
Electronics Boutique stores. The Company provides management services to
WaldenSoftware in exchange for a fixed fee per store. The Company manages the
stores in a manner substantially similar to the Company's Electronics Boutique
stores. The Company will seek to negotiate with landlords to convert desirable
WaldenSoftware locations into Company stores when their leases terminate.
ONLINE RETAILING
The Company believes that it was one of the first electronic game specialty
retailers to offer a Website that enables visitors to review a broad selection
of products and make purchases online. In 1995, the Company created its Website
and, in 1997, the Website was upgraded to offer online purchasing. The Company
believes that its customer base and product mix are uniquely suited for online
retailing. The Company's customers are generally males who are technically
proficient, a demographic which has traditionally represented the largest
percentage of consumers who make online purchases. Further, the Company's
products are recognizable brand name items, which serves to provide online
customers with a higher degree of confidence that products purchased will meet
the customer's expectations. In addition, the scope of the Company's store
operations enhances the reputation of the Company's Website as a source for
products at competitive prices. The Company believes that the local market
identity provided by the Company's stores is a significant competitive advantage
over competing online retailers.
The Company currently is able to offer over 600 of its most popular
electronic game titles and accessory products for sale through its Website. In
April 1998, the Company began providing customers with a complete product
offering, including access to the Company's database of over 4,600 items. The
Company's Website also features colorful product descriptions, new release
schedules, vendor promotions and other relevant product information. The
Company's Website also serves as a venue for online interaction between
electronic game enthusiasts and popular electronic game authors, producers and
other notables. The Company continually enhances its Website to broaden its
promotional appeal and has recorded a significant increase in the number of
visits to the Website. From February through May 1998, the Company recorded
nearly 2,056,000 unique visits to its Website, compared to a total of 884,000
unique visits during the 11 months from March 1997 through January 1998. In
addition, revenues from the Company's Website in the first eight months of
online purchasing (June 1997 through January 1998) were approximately $399,000,
compared to revenues of approximately $429,000 during the four months from
February through May 1998. The Company intends to pursue aggressively strategic
alliances with directories, search engines, content providers, and sites geared
toward electronic game players. The Company believes that its current in-house
distribution facilities afford the Company a competitive advantage by enabling
it to fulfill online orders rapidly.
PRODUCTS
The Company's primary product line consists of video game titles, PC
entertainment software titles, video game hardware systems and related accessory
products. The Company also markets selected PC productivity and education
software titles. The Company's in-store inventory at any given time consists of
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2,600 SKUs. The following table sets forth sales mix, expressed as a percentage
of net sales, for the periods indicated:
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Video Games:
Video Game Software........................................ 42% 40% 35% 33% 39%
Video Game Hardware........................................ 11 10 13 16 9
PC Software:
PC Entertainment Software.................................. 16 17 18 20 20
PC Productivity Software................................... 13 13 14 10 8
PC Education Software...................................... 3 4 3 4 4
Accessories and Other:
Accessories................................................ 14 15 14 15 17
Other...................................................... 1 1 3 2 3
--------- --------- --------- --------- ---------
Total.................................................... 100% 100% 100% 100% 100%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
VIDEO GAME TITLES AND PC ENTERTAINMENT SOFTWARE. The Company carries over
650 video game titles (excluding pre-owned games) and over 1,000 active PC
entertainment software SKUs at any given time. In 1997, the average sales price
of a video game title was $41.50 and the average sales price of a PC
entertainment software title was $29.60. The Company purchases video game titles
directly from the leading manufacturers, which include Nintendo, Sega and Sony,
as well as a variety of third-party game publishers, such as Electronic Arts,
Acclaim Entertainment, Inc. and Midway Home Entertainment, Inc. The Company
ranks as one of the larger domestic customers of video game products from these
publishers. Within the more fragmented PC entertainment software segment, the
Company purchases titles from approximately 90 vendors. The Company markets
electronic games across a variety of genres, including Action, Strategy,
Adventure/Role Playing, Simulation, Sports, Children's Entertainment and Family
Entertainment. The Company maintains a broad selection of popular new release
titles, which are defined by the Company as titles which have been available for
no more than six weeks from the date of their release.
VIDEO GAME HARDWARE. The Company offers the video game hardware systems of
all major manufacturers, including the Sony PlayStation, Nintendo N64 and Sega
Saturn. In support of its strategy to be the logical destination of choice for
electronic game enthusiasts, the Company aggressively promotes the sale of video
game hardware systems. The Company believes that this policy increases store
traffic and promotes customer loyalty, leading to increased sales of video game
titles, which have higher gross margins. The Company also offers extended
service agreements and extensions of manufacturer warranties of the video game
systems.
PC EDUCATION AND PRODUCTIVITY SOFTWARE. In addition to its category
dominant assortment of video game and PC entertainment software titles, the
Company offers a selection of educational, personal productivity and finance
software titles. Management believes that these titles also appeal to the
electronic game enthusiasts who comprise the Company's core customer base.
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. Accessory products
enhance the total gaming experience. Presently, the Company's stores offer
approximately 500 accessory product SKUs, including 3-D graphics accelerators,
memory cards and joysticks. The Company also markets instructional books on the
most popular electronic game titles.
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INVENTORY MANAGEMENT AND DISTRIBUTION
INVENTORY MANAGEMENT. The Company carefully manages its inventory to
minimize the risk associated with introducing new products. The Company's
merchandising staff evaluates potential products by testing many pre-release
samples received from publishers, reading game reviews, interviewing customers
and store associates, and studying vendor marketing plans. The Company's
centralized merchandising staff also analyzes the EB Pre-Sell Program and EB
Reserve List information and other data to estimate initial demand as well as
the life cycle for a new release. The Company then uses its new product analyses
to plan initial allocations among stores of the total initial purchase of a
newly-released title (which typically ranges from 1,200 to 4,800 units, but has
been as low as 500 units and as high as 60,000 units).
Once initial stocking decisions have been made, the Company uses its
management information system to measure, on a daily basis, SKU level sales,
gross margins and inventory balances. After sales histories for a particular
product are compiled, appropriate stock levels are designed for that specific
product. Sales levels are continuously monitored by the merchandising staff,
which receives sales and inventory reports by SKU on a daily basis through POS
polling technology as well as recommended order quantities and product
discontinuations from each store. Product shortages and replenishment
allocations among stores are then made based on this data. By focusing on
inventory turnover, the Company's allocation, traffic, buying, distribution and
third party functions operate on a "just in time" replenishment basis.
DISTRIBUTION. The Company's primary distribution center is located in West
Chester, Pennsylvania, and supports the Company's full product line. The 120,000
square foot facility allows the Company to replenish its stores on a daily
basis, thereby reducing inventory levels and increasing inventory turns, while
supporting the Company's FIRST TO MARKET new release strategy. The Company's
rapid processing capability in its distribution center is facilitated by several
advanced inventory management technologies, including paperless picking and
radio frequency support. The Company's ability to rapidly process incoming
shipments of new release titles quickly and distribute them to all of its stores
either that same day or by the next morning enables the Company to meet peak
demand.
During peak sales periods, the Company enters into short-term arrangements
for additional retail distribution centers to ensure timely restocking of all
stores. The Company has also developed a flexible third-party network to provide
regional distribution support for all new product releases.
The Company believes that it maintains industry-leading distribution and
inventory management systems. The Company believes that these systems promote a
level of efficiency in inventory management which affords the Company an
important competitive advantage. In addition, when managed effectively, stock
balancing and markdown allowances offered selectively by vendors can reduce a
portion of the risk associated with carrying inventory. Products that either
sell poorly at launch or experience a reduction in sales after a successful
launch often can achieve an acceptable rate of sale at a lower price.
MARKETING
IN-STORE PROMOTIONS. The Company's Electronics Boutique stores are
primarily located in high traffic, high visibility areas in regional shopping
malls. Accordingly, the Company's marketing efforts are designed to draw mall
patrons into the Company's stores through the use of window displays and other
attractions visible from the mall concourse. Inside the stores, the Company
features selected products through the use of vendor displays, signs, fliers,
point of purchase materials and end-cap displays. The Company receives
cooperative advertising and market development funds from manufacturers,
distributors, software publishers and accessory suppliers to promote their
respective products.
THE EB PRE-SELL PROGRAM AND THE EB RESERVE LIST. The EB Pre-Sell Program
offers the Company's customers the opportunity to purchase video games prior to
their release, and the EB Reserve List entitles participants to be placed on a
list for notification when a game has arrived in the Company's stores.
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Customers who participate in the EB Pre-Sell Program pay for a game prior to its
release and receive a promotional gift in connection with the purchase (e.g., a
t-shirt or a watch). The EB Pre-Sell Program and the EB Reserve List enable the
Company's customers to receive a new product on the first day on which it is
available in the Company's stores, and are designed to enhance the reputation of
the Company's stores as the logical destination of choice for electronic game
enthusiasts.
FREQUENT BUYER CARDS. Following an initial successful test in Canada, the
Company introduced the EB-FBC in the U.S. in July 1997. For an annual fee, a
cardholder is entitled to receive discounts on all purchases and to participate
in exclusive EB-FBC promotions and events. As of May 2, 1998, over 88,000
EB-FBCs have been sold domestically. The Company is constructing a profile of
these cardholders and intends to use this information to develop marketing
programs designed specifically to meet cardholder buying needs.
CATALOGS. The Company publishes six full color catalogs each year, which
range in size from 48 to 100 pages. These catalogs have been fully vendor funded
since 1986 and feature a broad array of products. The catalogs are available in
the Company's stores and are also mailed to several hundred thousand households
from the Company's proprietary customer lists. The catalogs are also inserted in
leading industry magazines.
PRE-OWNED GAMES. As with music compact discs, video game cartridges have
useful lives 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 in recent years. The Company offers its customers a store
credit for their pre-owned video game titles, which can be applied towards the
purchase of new or pre-owned products. The Company then resells the pre-owned
video game titles at discount prices, but with gross margins higher than those
for new video game titles. The Company believes its wide assortment of pre-owned
video game titles distinguishes it from its competitors.
OTHER MARKETING PROGRAMS. The Company provides its customers with a liberal
return policy. The Company's customers can return opened software products for a
full credit within ten days after purchase. In addition, the EB Code of Honor
Program discourages comparison shopping, as the Company will match its
competitors' prices. Further, the Company maintains an everyday low pricing
strategy.
MANAGEMENT INFORMATION SYSTEMS
The Company's primary management information system is a customized version
of the AS400-based JDA Merchandise Management System. The proprietary
enhancements made by the Company to this program enable management to analyze
total, comparative and new store sales data at the Company, region, district and
store levels. Additional revisions to the program have enhanced analysis of top
selling items, new release sales and gross margin item rankings. The Company
plans to continue to invest in its management information system by, among other
things, upgrading its global financial reporting and analytical capabilities
through the implementation of the Lawson Associates, Inc. financial software
products. The Company intends to further enhance its management information
systems with client server and data warehousing applications geared towards
sales analysis and targeted consumer marketing. The Company spent $1.1 million
for information system improvements in 1997 and has budgeted $1.5 million for
1998 for additional improvements.
The Company has contracted with a third party to upgrade all programs
running on the AS400 system to be "Year 2000" compliant, with full
implementation targeted for the fourth quarter of 1998. All other Company
software and hardware products are being inventoried and updated as necessary.
The Company intends to address all potential "Year 2000" problems in 1998 and
anticipates spending approximately $300,000 in connection with its "Year 2000"
compliance program. See "Risk Factors--Year 2000 Compliance."
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<PAGE>
VENDORS
With the exception of certain personal productivity software titles and
accessories, the Company purchases substantially all of its products directly
from manufacturers and software publishers. The Company's top 25 vendors
accounted for approximately 77% of the Company's purchases in 1997. The
Company's largest vendors in 1997 were Nintendo, Sony and Electronic Arts, which
accounted for 13.5%, 13.3% and 9.4%, respectively, of the Company's net sales,
with no other vendor accounting for more than 5.0% of the Company's software or
accessory purchases during that year. The Company believes that maintaining and
strengthening its long-term relationships with its vendors is essential to the
Company's operations and expansion. The Company has no contracts with trade
vendors and conducts business on an order-by-order basis, a practice that is
typical throughout the industry. The Company believes that it has very good
relations with the vendor community. See "Risk Factors--Dependence on
Suppliers."
COMPETITION
The electronic game industry is intensely competitive and subject to rapid
changes in consumer preferences and frequent new product introductions. The
Company believes that key competitive factors are availability of product,
ability to procure product in high demand, knowledgeable service, price,
reputation, and shopping environment. The Company competes with other video game
and PC software stores located in malls, 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 and cable television providers. Further, other methods of
retail distribution may emerge in the future which would result in increased
competition for the Company. Most of the Company's competitors have longer
operating histories and significantly greater financial, managerial, creative,
sales and marketing and other resources than the Company. The Company also
competes with other forms of entertainment activities, including movies,
television, theater, sporting events and family entertainment centers. The
Company's ability to retain its existing customers and attract new customers
depends on numerous factors, some of which are beyond the Company's control.
These factors include: the continued introduction of new and enhanced video game
and PC hardware and software; the availability and timeliness of new product
releases at the Company's stores; and the Company's reputation in the industry.
See "Risk Factors-- Competition."
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PROPERTIES
STORE LEASES. All of the Company's stores are leased. The table below sets
forth, as of January 31, 1998, the number of the Company's store leases that
will expire each year (assuming the lease is not terminated by either party
prior to the expiration of the term).
<TABLE>
<CAPTION>
NUMBER OF LEASES
--------------------------------
<S> <C> <C>
CALENDAR YEAR IN
WHICH LEASE EXPIRES DOMESTIC INTERNATIONAL
- --------------------------------------------------- ------------- -----------------
1998............................................... 56(1) 4
1999............................................... 40 2
2000............................................... 35 0
2001............................................... 46 3
2002............................................... 43 3
2003............................................... 39 11
2004............................................... 24 19
2005............................................... 33 4
2006............................................... 33 0
2007............................................... 46 1
2008............................................... 7 0
2009 and thereafter................................ 3 0
</TABLE>
- ------------------------
(1) Includes, as of June 19, 1998, five leases which have been subsequently
extended, five leases in negotiation and six stores currently leased on a
month-to-month basis, of which three leases are pending term renewals.
In general, the Company's leases have an initial term of seven to ten years,
with some leases having one or more five to seven year options to extend. See
"Risk Factors--Lease Expirations."
HEADQUARTERS. EB owns the Company's headquarters and its primary
distribution center, which are located in a single 140,000 square foot building
on several acres in West Chester, Pennsylvania. In addition, EB owns four acres
adjacent to the distribution center that will allow the Company to expand its
operations at the West Chester site as required. Pursuant to the Reorganization,
as of May 31, 1998, EBOA, an operating subsidiary of the Company, entered into a
lease agreement with EB, pursuant to which EBOA leases the West Chester
headquarters and primary distribution center from EB. The lease has a two year
term and provides EBOA with an option to purchase the property for $6.7 million,
EB's cost of acquisition. The monthly rent pursuant to such lease is $50,000.
See "Reorganization."
TRADEMARKS/REGISTRATIONS
Pursuant to the Reorganization, the Company acquired from EB the Electronics
Boutique-Registered Trademark-, EBX-Registered Trademark- and Stop 'N Save
Software-Registered Trademark- trademarks as well as other registered trademarks
and service marks, both in the United States and in certain foreign
jurisdictions. See "Reorganization."
The Company believes its marks are valuable and, accordingly, intends to
maintain its marks and the related registrations. The Company is not aware of
any pending claims of infringement or other challenges to the Company's right to
use its marks in the United States or elsewhere. The Company has no patents,
licenses, franchises or other concessions which are considered material to its
operations.
ASSOCIATES
As of June 12, 1998, the Company had approximately 3,100 non-seasonal
associates, of which approximately 1,700 were employed on a part-time basis. In
addition, during the 1997 peak holiday shopping season, the Company hired
approximately 650 temporary associates. The Company believes that
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its relationship with its associates is very good. None of the Company's
associates is represented by a labor union or is a member of a collective
bargaining unit.
LEGAL PROCEEDINGS
The Company is involved from time to time in legal proceedings arising in
the ordinary course of its business. In the opinion of management, no pending
proceedings will have a material adverse effect on the Company's results of
operations or financial condition.
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<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The Company's executive officers and directors are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
James J. Kim......................................... 62 Chairman of the Board
Joseph J. Firestone.................................. 66 President, Chief Executive Officer and Director
Jeffrey W. Griffiths................................. 47 Senior Vice President of Merchandising and
Distribution
John R. Panichello................................... 36 Senior Vice President and Chief Financial Officer
Dean S. Adler........................................ 41 Director
Susan Y. Kim......................................... 35 Director
Louis J. Siana....................................... 66 Director
</TABLE>
James J. Kim. Mr. Kim has served as the Company's Chairman and a Class III
Director since March 1998. Mr. Kim founded EB in 1977 and has served as its
Chairman since its inception. Mr. Kim has served as Chairman and Chief Executive
Officer of Amkor Technology, Inc. ("Amkor") and Amkor Electronics, Inc. ("AEI")
since September 1997 and 1968, respectively. In April 1998, AEI merged with and
into Amkor. Amkor is a semiconductor packaging and test service company. Mr. Kim
also serves as the Chairman of the Anam group of companies, which consists
principally of companies in South Korea in the electronics industries. Mr. Kim
also serves as the Chairman and Chief Executive Officer of Forte Systems, Inc.,
("Forte"), a company which provides information technology services, and is a
director of CFM Technologies, Inc., a manufacturer of equipment used in the
manufacturing process of semiconductors and flat panel displays.
Joseph J. Firestone. Mr. Firestone has served as the President, Chief
Executive Officer and a Class III Director of the Company since March 1998. Mr.
Firestone has served as the President of EB since February 1984, and the
President and Chief Executive Officer of EB since February 1995. Mr. Firestone
has served as the non-executive Chairman of EB-UK since November 1995. Mr.
Firestone also serves on the Executive Advisory Board of the Center for
Retailing Education and Research of the University of Florida and as a Director
of the National Retail Federation. Mr. Firestone earned a B.S. degree in
Business and an M.B.A. degree from Long Island University.
Jeffrey W. Griffiths. Mr. Griffiths has served as the Company's Senior Vice
President of Merchandising and Distribution since March 1998. Mr. Griffiths has
served as EB's Senior Vice President of Merchandising and Distribution since
March 1996. From March 1987 to February 1996, Mr. Griffiths served as EB's Vice
President of Merchandising and, from April 1984 to February 1987, he served as
the Merchandise Manager of EB. Mr. Griffiths serves as the Chairman of the
Interactive Entertainment Merchants Association. Mr. Griffiths earned a B.A.
degree in History from Albright College and an M.B.A. degree from Temple
University.
John R. Panichello. Mr. Panichello has served as the Senior Vice President
and Chief Financial Officer of the Company since March 1998. Mr. Panichello has
served as the Senior Vice President of Finance of EB and the President of EB's
BC Collectables division since March 1997. From March 1996 to February 1997, Mr.
Panichello served as EB's Senior Vice President of Finance and, from June 1994
to February 1996, he served as the Vice President and Treasurer of EB. Mr.
Panichello served as the President and Chief Executive Officer of Panichello &
Company, a certified public accounting firm, from May 1990 to May 1994. Mr.
Panichello has served as a director of EB-UK since May 1995. Mr. Panichello
earned a B.S. degree in Accounting from West Chester University and an M.B.A.
degree in Finance from Drexel University. 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.
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<PAGE>
Dean S. Adler. Mr. Adler has served as a Class II Director of the Company
since March 1998. In March 1997, Mr. Adler formed Lubert/Adler Partners, LP, a
limited partnership investing primarily in real estate and real estate-related
ventures. For ten years prior thereto, Mr. Adler was a principal and co-head of
the private equity group of CMS Companies, which specialized in acquiring
operating businesses and real estate within the private equity market. Mr. Adler
was also an instructor at The Wharton School of the University of Pennsylvania.
Mr. Adler serves on the Boards of Directors of US Franchise Systems, Inc., Trans
World Entertainment Corporation, and Developers Diversified Realty Corporation.
Mr. Adler earned a B.S. degree in Finance from The Wharton School of the
University of Pennsylvania and a J.D. degree from the University of Pennsylvania
Law School.
Susan Y. Kim. Ms. Kim has served as a Class I Director of the Company since
March 1998. Ms. Kim served as a Senior District Manager of EB from 1991 to 1992,
as EB's Personnel Manager from 1989 to 1991, as a Buyer for EB from 1986 to
1989, and as a Field Manager for EB from 1985 to 1986. Ms. Kim serves as a
Director of EB, AEI and Forte. Ms. Kim earned a B.A. degree in Sociology from
Hamilton College. Ms. Kim is the daughter of James J. Kim and the wife of John
R. Panichello.
Louis J. Siana. Mr. Siana has served as a Class II Director of the Company
since March 1998. Mr. Siana is a certified public accountant and a senior
partner in the accounting firm of Siana, Carr & O'Conner LLP. Mr. Siana earned a
B.S. degree in Accounting from LaSalle University.
Executive officers are elected by, and serve at the discretion of, the Board
of Directors.
TERMS OF OFFICE AND BOARD COMMITTEES
The Company's Certificate of Incorporation provides that directors of the
Company are divided into three classes, as nearly equal in number as possible.
The initial term of office of the Class I Directors expires on the day of the
first annual meeting of stockholders following the end of 1998; the initial term
of office of the Class II Directors expires on the day of the annual meeting of
stockholders following the end of 1999; and the initial term of office of the
Class III Directors expires on the day of the annual meeting of stockholders
following the end of 2000. At each annual meeting of stockholders, directors
elected to succeed those directors whose terms expire shall be elected for a
term of office to expire at the third succeeding annual meeting of stockholders
after their election. Thus, directors stand for election only once in three
years. Ms. Kim serves as a Class I director, Messrs. Adler and Siana serves as a
Class II directors, and Messrs. Kim and Firestone serve as Class III directors.
The Board of Directors will establish, effective upon completion of the
Offering, Audit and Compensation Committees. The members of each Committee are
expected to be determined at the first meeting of the Board of Directors
following completion of the Offering. All of the members of the Audit Committee
and at least a majority of the members of the Compensation Committee will be
non-employee directors.
The functions of the Audit Committee will be to recommend annually to the
Board of Directors the appointment of the independent public accountants of the
Company, discuss and review the scope and the fees of the prospective annual
audit, to review the results thereof with the independent public accountants,
review and approve non-audit services of the independent public accountants,
review compliance with existing major accounting and financial policies of the
Company, review the adequacy of the financial organization of the Company,
review management's procedures and policies relative to the adequacy of the
Company's internal accounting control, and compliance with federal and state
laws relating to accounting practices and review and approve (with the
concurrence of a majority of the disinterested Directors of the Company)
transactions, if any, with affiliated parties.
The functions of the Compensation Committee will be to review and approve
annual salaries and bonuses for all officers, review, approve and recommend to
the Board of Directors the terms and conditions of the Equity Participation Plan
or changes thereto.
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<PAGE>
DIRECTOR COMPENSATION
Upon completion of the Offering, each director who is not an employee of the
Company will receive $1,500 for each meeting of the Board of Directors attended
and for each committee meeting attended, as well as reimbursement of all
reasonable out-of-pocket expenses incurred in attending such meetings. In
consideration for their agreeing to serve as directors of the Company prior to
the Offering, Messrs. Adler and Siana will each be granted options under the
Equity Participation Plan to purchase 15,000 shares of Common Stock at a price
equal to the per share offering price. Such options will vest equally over three
years (the "Vesting Period"). In the event that Mr. Adler or Mr. Siana is no
longer on the Board at the end of the Vesting Period, their options will be
cancelled to the extent not otherwise vested. The Company intends to grant
annually, commencing with the 1999 Annual Meeting of Shareholders, to each non-
employee director (other than Messrs. Adler and Siana until after the Vesting
Period has expired) an option to purchase 2,500 shares of Common Stock at the
"fair market value" (as that term is defined in the Company's Equity
Participation Plan) of such Common Stock on the date of grant. Prior to
completion of the Offering, the Directors were not compensated for their
services.
EXECUTIVE COMPENSATION
The following table sets forth certain information concerning the
compensation earned by the Company's President and Chief Executive Officer and
the other executive officers of the Company whose salary and bonus was in excess
of $100,000 (the "Named Officers") for 1997:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------------------- ALL OTHER
NAME AND POSITION SALARY BONUS OTHER (1) COMPENSATION
- --------------------------------------------------------------- ---------- ---------- ------------- -------------
<S> <C> <C> <C> <C>
Joseph J. Firestone
President, Chief Executive Officer
and Director............................................... $ 397,159 $ 200,000 -- $ 102,000(2)
Jeffrey W. Griffiths
Senior Vice President of Merchandising and Distribution...... $ 218,110 $ 102,500 -- $ 2,000(3)
John R. Panichello
Senior Vice President and Chief
Financial Officer.......................................... $ 169,262 $ 75,000 -- --
</TABLE>
- ------------------------
(1) Does not include perquisites and other personal benefits, securities or
property if the aggregate amount of such compensation for each of the
persons listed did not exceed the lesser of (i) $50,000 or (ii) ten percent
of the combined salary and bonus for such person in 1997.
(2) Consists of $100,000 of deferred compensation and the Company's $2,000
matching contribution pursuant to its 401(k) defined contribution plan.
(3) Consists of the Company's $2,000 matching contribution pursuant to its
401(k) defined contribution plan.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with Messrs. Firestone,
Griffiths and Panichello providing for their employment as Chief Executive
Officer, Senior Vice President of Merchandising and Distribution and Senior Vice
President and Chief Financial Officer, respectively. The agreements are each for
a period of three years and, in some cases, may be extended automatically for
additional one year terms, unless terminated by either party in accordance with
their terms. The agreements provide for compensation consisting of base salaries
of $500,000, $242,375 and $181,500 for
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<PAGE>
Messrs. Firestone, Griffiths and Panichello, respectively and certain fringe and
other employee benefits that are made available to the senior executives of the
Company. Immediately prior to completion of the Offering, Messrs. Firestone,
Griffiths and Panichello will receive grants under the 1998 Equity Participation
Plan of options, which vest equally over three years, to purchase 375,000
shares, 131,250 shares and 112,500 shares, respectively, of Common Stock (at an
assumed initial public offering price of $16.00). In the event that employment
is terminated for any reason other than death, disability or "cause" (as defined
in the agreement), the executive is entitled to receive his then current base
salary for the greater of his remaining term under the employment agreement or a
one year period. The agreement also limits certain severance payments to an
amount equal to $100 less than the maximum that could be paid to the executive
and deducted by the Company under Section 280G of the Code in the event of
termination of employment for any reason other than death, disability or
"cause," or is related to a "change in control." In the event of disability, the
agreements provide for the continuation of the executive's compensation for a
period of one year, or, if greater, the remaining term of the agreement.
EQUITY PARTICIPATION PLAN
Prior to the completion of the Offering, the Board of Directors will adopt
and approve the Equity Participation Plan and reserve 2,100,000 shares of Common
Stock for stock options and other stock awards to employees of the Company and
its subsidiaries and other eligible participants. The principal purpose of the
Equity Participation Plan is to provide incentives for officers, employees and
consultants of the Company and its subsidiaries through granting of options,
restricted stock and other awards (collectively, "Awards"), thereby stimulating
their personal and active interest in the Company's development and financial
success, and inducing them to remain in the Company's employ. In addition to
Awards made to officers, employees or consultants of the Company, the Equity
Participation Plan permits the granting of stock options ("Director Options") to
non-employee directors ("Independent Directors").
The Compensation Committee of the Board of Directors (the "Compensation
Committee") will administer the Equity Participation Plan with respect to grants
and Awards to officers, employees or consultants and the full Board of Directors
will administer the Equity Participation Plan with respect to grants of Director
Options to Independent Directors. The Compensation Committee will consist of at
least two (2) members of the Board, each of whom is a "non-employee director"
for purposes of Rule 16b-3 under the Exchange Act and an "outside director" for
the purposes of Section 162(m) of the Code. The Equity Participation Plan
provides that the Compensation Committee may grant or issue stock options, stock
appreciation rights, restricted stock, deferred stock, dividend equivalents,
performance awards, stock payments and other stock related benefits, or any
combination thereof. The Compensation Committee may grant performance based
awards on an individual or group basis. Generally, these Awards will be based
upon specific performance targets and may be paid in cash, Common Stock or a
combination of both.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
To date, executive compensation has been determined by the Company's Chief
Executive Officer, whose compensation has been determined by Mr. Kim. Shortly
after completion of the Offering, the Company intends to establish a
Compensation Committee of the Board of Directors, a majority of whom will be
independent directors.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION MATTERS
The Company has adopted provisions in its Certificate of Incorporation that
eliminate to the fullest extent permissible under Delaware law the liability of
its directors to the Company for monetary damages. Such limitation of liability
does not affect the availability of equitable remedies such as injunctive
relief. The Certificate of Incorporation provides that the Company shall
indemnify its directors and officers, and may indemnify its other employees and
agents, to the fullest extent permitted by Delaware law, including
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<PAGE>
in circumstances in which indemnification is otherwise discretionary under
Delaware law. The Company has entered into indemnification agreements with its
officers and directors containing provisions that may require the Company, among
other things, to indemnify the officers and directors against certain
liabilities that may arise by reason of their status or service as directors or
officers (other than liabilities arising from willful misconduct of a culpable
nature) and to advance their expenses incurred as a result of any proceeding
against them as to which they could be indemnified.
There is no currently pending litigation or proceeding involving a director,
officer, employee or other agent of the Company in which indemnification would
be required or permitted.
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<PAGE>
CERTAIN TRANSACTIONS
In connection with the Reorganization, EB transferred certain of its assets
and all of its liabilities to EBOA and its intangible assets to Elbo.
Immediately prior to the Offering, EB will transfer the Operating Shares and its
shares of EB-UK capital stock to EB Nevada, who in turn will transfer the
Operating Shares to the Company in exchange for 15,794,100 shares of Common
Stock. The Company will also acquire, pursuant to the Reorganization, 99.99% of
the outstanding partnership interests of EB Services from the Kim Shareholders
and EB Services Corp. in exchange for an aggregate of 100 shares of Common
Stock. Accordingly, the Company will be entitled to the benefits under the UK
Services Agreement, while EB will continue to be a party to the agreement, which
will continue in accordance with its original terms. The Company will also enter
into a registration rights agreement with EB Nevada. See "Description of Capital
Stock--Registration Rights."
In September, 1993, EB entered into a joint venture agreement with Eden
Electronics, Inc. ("Eden"), a Canadian corporation, with respect to EB Canada.
EB Canada was created in order to operate electronic game stores in Canada. In
1996, EB, AEI and Anam Industrial Co., Inc. ("Anam"), a South Korean corporation
of which the Kim Shareholders are stockholders, guaranteed the obligations of EB
Canada under a $4.0 million term loan facility from Cho Hung Bank of Canada. The
term loan facility matures on September 1, 2002 and bears interest at the bank's
prime rate plus 0.125%. In 1997, EB purchased Eden's 50% percent interest in EB
Canada for $727,000. In 1997, EB, AEI and Anam guaranteed the obligations of EB
Canada under a $1.0 million revolving credit facility from Cho Hung Bank of
Canada. The revolving credit facility expires on November 5, 1998, bears
interest at the bank's prime rate plus 0.125% and is available to fund EB
Canada's working capital needs. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
In 1995, EB Int'l, a company then owned by John R. Panichello, EB's Senior
Vice President and Chief Financial Officer and the son-in-law of Mr. James J.
Kim and husband of Ms. Susan Y. Kim, entered into a joint venture agreement with
Ssangyong Corporation, a South Korean corporation ("Ssangyong"), and Fine Land
Enterprises Ltd., a Hong Kong corporation ("Fine Land"), to operate electronic
game stores in South Korea ("EB Korea"). To fund initial operations, EB
contributed $1.0 million on behalf of EB Int'l, Ssangyong contributed $938,000,
and Fine Land contributed $62,000 to EB Korea. In 1997, EB Int'l purchased
Ssangyong's 46.9% joint venture interest and Fine Land's 3.1% joint venture
interest for a total of $611,000, which funds were advanced to EB Int'l by EB.
In January 1998, EB purchased all of the outstanding shares of capital stock of
EB Int'l from Mr. Panichello for $1,000, which amount represents Mr.
Panichello's capital contribution to EB Int'l. See Note 4 to the Consolidated
and Combined Financial Statements.
EB entered into the UK Services Agreement in 1995, and management agreements
with EB Canada in 1993, EB Korea in 1995, and Borders Group, Inc. in 1993,
pursuant to which the Company provides management, administrative and
advertising assistance in exchange for the payment of management fees: (i) by
EB-UK equal to 1.0% of net sales, plus a bonus calculated on the basis of net
income in excess of a pre-established target set by EB-UK, (ii) by EB Canada
equal to 5.0% of the first $10.0 million of net sales and 4.0% of any net sales
in excess of $10.0 million, (iii) by EB Korea equal to 4.0% of annual net sales
subsequent to April 1997 and (iv) by Borders Group, Inc. equal to a fixed dollar
amount per store. See "Business--Management Services." In 1997, EB assigned each
of the aforementioned agreements to EB Services. Management fees aggregating
$1.9 million, $2.5 million and $4.8 million were earned by EB and EB Services
during 1995, 1996 and 1997, respectively. The management fees paid by EB Canada
and EB Korea will be eliminated in consolidation.
Pursuant to the Reorganization, on May 31, 1998, EBOA, an operating
subsidiary of the Company, joined EB as a party to the Fleet loan documents and
entered into a lease agreement with EB, pursuant to which EBOA leases the West
Chester headquarters and primary distribution center from EB. The lease
45
<PAGE>
has a two year term and provides EBOA with an option to purchase the property
for $6.7 million, EB's cost of acquisition. The monthly rent pursuant to such
lease is $50,000. See "Reorganization."
Prior to and in connection with the Reorganization, certain assets have been
or will be paid to or retained by EB and the Kim Shareholders. In March 1998, EB
and EB Services paid a distribution of $13.9 million to the Kim Shareholders.
Immediately prior to the completion of the Reorganization, EB Services intends
to pay a distribution of approximately $6.1 million to the Kim Shareholders.
Pursuant to the Reorganization, EB, which is wholly owned by the Kim
Shareholders, will retain (i) the shares of EB-UK capital stock, (ii) the West
Chester distribution center and headquarters (which is valued at $6.7 million),
(iii) approximately $17.5 million of cash, accounts receivable and the cash
surrender value of certain split-dollar life insurance policies, and (iv)
approximately $7.7 million of intercompany receivables. See "Pro Forma
Consolidated Balance Sheet."
In June 1998, EB loaned $7.0 million to James J. Kim, who in turn loaned
such funds to the Company for working capital purposes. The demand notes
reflecting such loans bear interest at the highest prime rate as published in
the Wall Street Journal. The Company intends to use $7.0 million of its net
proceeds of the Offering to repay this obligation to Mr. Kim.
The Company has a policy to the effect that any future transactions between
it and any of its officers, directors, principal stockholders or the affiliates
of the foregoing persons be on terms no less favorable to the Company than could
reasonably be obtained in arm's length transactions with independent third
parties, and that any such transactions also be approved by the members of the
Audit Committee who are disinterested in the transaction.
46
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Common Stock outstanding as of the date of this
Prospectus, and as adjusted to reflect the sale of the shares of Common Stock
offered hereby, by (i) each director of the Company, (ii) each person who is
known by the Company to beneficially own 5.0% or more of the outstanding shares
of Common Stock, (iii) the Named Officers, (iv) the Selling Shareholder, and (v)
all of the Company's executive officers and directors as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
THE OFFERING (2) SHARES THE OFFERING
----------------------- BEING -----------------------
NAME AND ADDRESS OF BENEFICIAL OWNER (1) NUMBER PERCENT OFFERED NUMBER PERCENT
- ------------------------------------------------------ ------------ --------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C>
EB Nevada, Inc. (3)(4)................................ 15,794,100 100.0% 1,875,000 13,919,100 69.0%
2255-A Renaissance Drive, Suite 4
Las Vegas, Nevada 89119
James J. and Agnes C. Kim (3)(5)...................... 15,794,200 100.0% 1,875,000 13,919,200 69.0%
931 South Matlack Street
West Chester, Pennsylvania 19382
Joseph J. Firestone (6)............................... -- -- -- 375,000 1.9%
John R. Panichello (5)(6)............................. -- -- -- 112,500 *
Jeffrey W. Griffiths (6).............................. -- -- -- 131,250 *
Dean S. Adler (6)..................................... -- -- -- 15,000 *
Susan Y. Kim (3)(5)................................... -- -- -- -- --
Louis J. Siana (6).................................... -- -- -- 15,000 *
All directors and executive officers%
as a group (7 persons) (6)(7)....................... -- -- -- 648,750 3.2
</TABLE>
- ------------------------
* Less than 1.0%.
(1) Unless otherwise noted, the Company believes that all persons named in the
above table have sole voting and investment power with respect to the shares
beneficially owned by them.
(2) All share information is calculated based upon an assumed initial public
offering price of $16.00 per share.
(3) EB Nevada is a wholly-owned subsidiary of EB, all of the outstanding capital
stock of which is owned by the Kim Shareholders, which are James J. Kim,
Agnes C. Kim and the Kim Trusts, which are the David D. Kim Trust of
December 31, 1987, the John T. Kim Trust of December 31, 1987 and the Susan
Y. Kim Trust of December 31, 1987. Each of the Kim Trusts has in common
Susan Y. Kim and John F.A. Earley as co-trustees, in addition to a third
trustee (John T. Kim in the case of the Susan Y. Kim trust and the John T.
Kim trust and David D. Kim in the case of the David D. Kim trust) (the
trustees of each trust may be deemed to be the beneficial owners of the
shares held by such trust). In addition, the trust agreement for each of
these trusts encourages the trustees of the trusts to vote the shares of
Common Stock held by them, in their discretion, in concert with James Kim's
family. Accordingly, the trusts, together with their respective trustees and
James J. and Agnes C. Kim, may be considered a "group" under Section 13(d)
of the Exchange Act. This group may be deemed to have beneficial ownership
of the shares owned by EB Nevada.
(4) If the overallotment option is exercised in full, the number of shares being
offered would be 2,812,500 and the number and percent of shares beneficially
owned after the Offering would be 12,981,600 and 64.4%, respectively.
(5) James J. Kim and Agnes C. Kim are the parents of Susan Y. Kim. John R.
Panichello and Susan Y. Kim are husband and wife.
(6) Represents (or otherwise includes) shares of Common Stock which may be
acquired upon the exercise of options to be granted by the Company under the
Equity Participation Plan.
(7) Excludes shares which may be deemed to be beneficially owned by James J.
Kim.
47
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 100,000,000 shares of
Common Stock and 25,000,000 shares of preferred stock, par value $.01 per share
(the "Preferred Stock"), none of which shares of Preferred Stock are issued and
outstanding.
The following description of the Company's capital stock does not purport to
be complete and is subject to and qualified in its entirety by the Certificate
of Incorporation and the Bylaws, which are included as exhibits to the
Registration Statement of which this Prospectus forms a part.
COMMON STOCK
Upon completion of the Reorganization, there will be 15,794,200 shares of
Common Stock outstanding, substantially all of which will be beneficially owned
by EB Nevada.
Holders of Common Stock are entitled to one vote per share on all matters to
be voted upon by the stockholders. Holders of Common Stock do not have
cumulative voting rights, and, therefore, holders of a majority of the shares
voting for the election of directors can elect all of the directors. In such
event, the holders of the remaining shares will not be able to elect any
directors. See "Risk Factors--Anti-Takeover Effects of Delaware Law and Certain
Charter and Bylaw Provisions."
Holders of the Common Stock are entitled to receive such dividends as may be
declared from time to time by the Board of Directors out of funds legally
available therefor, subject to the terms of any existing or future agreements
between the Company and its debtholders. The Company has never declared or paid
cash dividends on its capital stock, expects to retain future earnings, if any,
for business use, and does not anticipate declaring or paying any cash dividends
on shares of its Common Stock in the foreseeable future. See "Dividend Policy."
In the event of the liquidation, dissolution or winding up of the Company, the
holders of Common Stock are entitled to share ratably in all assets legally
available for distribution after payment of all debts and other liabilities and
subject to the prior rights of any holders of Preferred Stock then outstanding.
PREFERRED STOCK
The Company's Board of Directors is authorized to issue 25,000,000 shares of
Preferred Stock in one or more series and to fix the price, rights, preferences,
privileges and restrictions thereof, including dividend rights, dividend rates,
conversion rights, voting rights, terms of redemption, redemption prices,
liquidation preferences and the number of shares constituting a series or the
designation of such series, without any further vote or action by the Company's
stockholders. The issuance of Preferred Stock, while providing desirable
flexibility in connection with possible acquisitions and other corporate
purposes, could have the effect of delaying, deferring or making more difficult
a change in control of the Company and may adversely affect the market price of,
and the voting and other rights of, the holders of Common Stock. The issuance of
Preferred Stock with voting and conversion rights may adversely affect the
voting power of the holders of Common Stock, including the loss of voting
control to others. The Company has no current plans to issue any shares of
Preferred Stock and no shares are currently outstanding.
CERTAIN CERTIFICATE OF INCORPORATION AND BYLAW PROVISIONS
Set forth below is a summary of certain provisions of the Company's
Certificate of Incorporation and Bylaws, which could be deemed to have an
anti-takeover effect. These provisions are intended to enhance the likelihood of
continuity and stability in the composition of the Board of Directors and in the
policies formulated by the Board of Directors and to discourage an unsolicited
takeover of the Company if the Board of Directors determines that such takeover
is not in the best interests of the Company and its stockholders. However, these
provisions could also have the effect of discouraging certain attempts to
acquire the Company or remove incumbent management even if some or a majority of
stockholders
48
<PAGE>
deemed such an attempt to be in their best interests. Insofar as EB Nevada and
the Kim Shareholders will retain a substantial percentage of the outstanding
Common Stock of the Company after the Offering, the Company is not at present
expected to be vulnerable to a takeover without the approval of EB Nevada and
the Kim Shareholders.
The Company's Certificate of Incorporation provides for a classified Board
consisting of three classes as nearly equal in size as the then authorized
number of directors constituting the Board of Directors permits. At each annual
meeting of stockholders, the class of directors to be elected at such meeting
will be elected for a three-year term and the directors in the other two classes
will continue in office. Each class shall hold office until the date of the
third annual meeting for the election of directors following the annual meeting
at which such director was elected, except that the initial terms of Class I,
Class II and Class III expire on the date of the annual meeting in 1999, 2000 or
2001, respectively. As a result, approximately one-third of the Board will be
elected each year. Under the Delaware General Corporation Law, in the case of a
corporation having a classified board, stockholders may remove a director only
for cause. This provision, when coupled with provisions of the Certificate of
Incorporation and Bylaws authorizing the Board to fill vacant directorships,
precludes a stockholder from removing incumbent directors without cause and
simultaneously gaining control of the Board of Directors by filling the
vacancies created by such removal with its own nominees.
The Bylaws establish an advance notice procedure for the nomination, other
than by or at the direction of the Board, of candidates for election as
directors as well as for other stockholder proposals to be considered at annual
meetings of stockholders. In general, notice must be received by the Company not
less than 60 days nor more than 90 days prior to the date of the annual meeting
and must contain certain specified information concerning the persons to be
nominated or the matters to be brought before the meeting and concerning the
stockholder submitting the proposal.
The Certificate of Incorporation provides that no action may be taken by
stockholders except at an annual or special meeting of stockholders and
prohibits action by written consent in lieu of a meeting. The Certificate of
Incorporation also authorizes the officers and directors of the Company, when
exercising their respective powers, to consider the interests of other
constituencies, including the Company's employees, suppliers, creditors and
customers. The Certificate of Incorporation also provides that special meetings
of stockholders of the Company may be called only by the Chairman of the Board,
the Chief Executive Officer, the President or by a majority of the members of
the Board. This provision will make it more difficult for stockholders to take
action opposed by the Board. The Certificate of Incorporation also provides that
the stockholders may not amend the Bylaws or the aforementioned provisions of
the Certificate of Incorporation without the approval of two-thirds of the
outstanding capital stock entitled to vote.
EFFECT OF DELAWARE ANTI-TAKEOVER STATUTE
The Company is subject to Section 203 of the Delaware General Corporation
Law (the "Anti-takeover Law"), which regulates corporate acquisitions. The
Anti-takeover Law prevents certain Delaware corporations, including those whose
securities are included for quotation in The Nasdaq National Market, from
engaging, under certain circumstances, in a "business combination" with any
"interested stockholder" for three years following the date that such
stockholder became an interested stockholder. For purposes of the Anti-takeover
Law, a "business combination" includes, among other things, a merger or
consolidation involving the Company and the interested stockholder and the sale
of more than 10% of the Company's assets. In general, the Anti-takeover Law
defines an "interested stockholder" as an entity or person beneficially owning
15% or more of the outstanding voting stock of the Company and any entity or
person affiliated with or controlling or controlled by such entity or person. A
Delaware corporation may "opt out" of the Anti-takeover Law with an express
provision in its original certificate of incorporation or an express provision
in its certificate of incorporation or bylaws resulting from amendments approved
by the holders
49
<PAGE>
of at least a majority of the Company's outstanding voting shares. The Company
has not "opted out" of the provisions of the Anti-takeover Law. See "Risk
Factors."
REGISTRATION RIGHTS
Pursuant to a registration rights agreement between the Company and EB
Nevada, EB Nevada was granted the right to demand that the Company register any
or all of the 13,919,100 shares of Common Stock held by EB Nevada after
completion of the Offering on up to three occasions, at any time commencing 360
days after the effective date of this Prospectus. In addition, EB Nevada has
certain "piggy-back" registration rights with respect to such shares of Common
Stock. These registrations rights expire four years after the closing of the
Offering.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is First Chicago Trust
Company of New York, Jersey City, New Jersey.
50
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have 20,169,200 shares of
Common Stock outstanding. Of those shares, a total of 6,250,000 (7,187,500 if
the Underwriters' over-allotment option is exercised in full) will be freely
tradeable without restriction or further registration under the Securities Act,
unless purchased or held by "affiliates" of the Company as that term is defined
in Rule 144. Substantially all of the remaining shares are held by EB Nevada,
which is an "affiliate" of the Company.
In general, under Rule 144 as currently in effect, any affiliate of the
Company who has beneficially owned restricted securities for at least one year
would be entitled to sell within any three-month period commencing 90 days after
the date of this Prospectus a number of shares that does not exceed the greater
of 1.0% of the then outstanding shares of Common Stock (approximately 201,692
shares based upon the number of shares assumed to be outstanding after the
Offering) or the reported average weekly trading volume during the four weeks
preceding the sale. Sales under Rule 144 are also subject to certain manner of
sale restrictions and notice requirements and to the availability of current
public information concerning the Company. All shares of Common Stock held by
affiliates of the Company (including EB Nevada ) will be eligible for sale
commencing one year after the date of this Prospectus pursuant to Rule 144,
subject to the restrictions under Rule 144 referred to above and, as described
below, subject to the agreement of certain holders of Common Stock to certain
restrictions on their ability to sell Common Stock for a period of 360 days
following the consummation of the Offering. See "Underwriting." EB Nevada is
entitled to certain rights with respect to the registration of such shares under
the Securities Act. See "Description of Capital Stock--Registration Rights."
Pursuant to certain lock-up agreements, the Company, its executive officers
and directors, the Kim Shareholders and EB Nevada, have agreed that they will
not, without the prior written consent of Prudential Securities Incorporated, on
behalf of the Underwriters, directly or indirectly, offer, sell, offer to sell,
contract to sell, pledge, grant any option to purchase or otherwise sell or
dispose (or announce any offer, sale, offer of sale, contract of sale, pledge,
grant of any option to purchase or other sale or disposition) of any shares of
Common Stock or any securities convertible into, or exercisable or exchangeable
for, any shares of Common Stock, or other similar securities of the Company for
a period of 360 days from the date of this Prospectus, except that such
agreements do not prevent the Company from granting additional options under the
Equity Participation Plan or from issuing shares pursuant to the Equity
Participation Plan. After such 360 day period, this restriction will expire and
shares permitted to be sold under Rule 144 will be eligible for sale. Prudential
Securities Incorporated may, in its sole discretion, at any time and without
notice, release all or any portion of the securities subject to such lock-up
agreements.
Within 90 days after the date of this Prospectus, the Company intends to
file a Registration Statement on Form S-8 covering an aggregate of approximately
2,100,000 shares of Common Stock (including the 1,425,000 shares of Common Stock
which will then be subject to outstanding options) that have been reserved for
issuance under the Equity Participation Plan. Shares of Common Stock issued upon
exercise of options after the effective date of the Form S-8 will be available
for sale in the public market, subject to Rule 144 volume limitations applicable
to affiliates of the Company and to the lock-up agreements.
Prior to this Offering, there has been no public market for the Common
Stock, and no predictions can be made with respect to the effect, if any, that
future sales of shares, or the availability of shares for future sale, will have
on the prevailing market price for the Common Stock. Sales of substantial
amounts of Common Stock in the public market following the Offering, or the
perception that such sales may occur, could adversely affect the prevailing
market prices for the Common Stock and impair the Company's ability to raise
capital through the sale of equity securities. See "Risk Factors--Shares
Eligible for Future Sale."
51
<PAGE>
UNDERWRITING
The underwriters named below (the "Underwriters"), for whom Prudential
Securities Incorporated and Salomon Brothers Inc are acting as representatives
(the "Representatives"), have severally agreed, subject to the terms and
conditions contained in the underwiting agreement (the "Underwriting
Agreement"), to purchase from the Company and the Selling Shareholder the number
of shares of Common Stock set forth opposite their respective names.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
Prudential Securities Incorporated...............................................
Salomon Brothers Inc.............................................................
----------
Total............................................................................ 6,250,000
----------
----------
</TABLE>
The Company and the Selling Shareholder are obligated to sell, and the
Underwriters are obligated to purchase, all the shares of Common Stock offered
hereby, if any are purchased.
The Underwriters, through their Representatives, have advised the Company
and the Selling Shareholder that they propose to offer the Common Stock at the
initial public offering price set forth on the cover page of this Prospectus;
that the Underwriters may allow to selected dealers a concession of $
per share; and that such dealers may re-allow a concession of $ per
share to certain other dealers. After the public offering, the initial public
offering price and the concessions may be changed by the Representatives.
The Selling Shareholder has granted the Underwriters an over-allotment
option, exercisable for 30 days from the date of this Prospectus, to purchase in
the aggregate up to 937,500 additional shares of Common Stock at the initial
public offering price, less underwriting discounts and commissions, as set forth
on the cover page of this Prospectus. The Underwriters may exercise such option
solely for the purpose of covering over-allotments incurred in the sale of the
shares of Common Stock offered hereby. To the extent such option to purchase is
exercised, each Underwriter will become obligated, subject to certain
conditions, to purchase approximately the same percentage of such additional
shares as the number set forth next to such Underwriter's name in the preceding
table bears to 6,250,000.
The Underwriters have informed the Company that they do not intend to
confirm sales to any accounts over which they exercise authority.
The Company, the Kim Shareholders and the Selling Shareholder have agreed to
indemnify the several Underwriters and contribute to losses arising out of
certain liabilities, including liabilities under the Securities Act.
The Company, its executive officers and directors, the Kim Shareholders and
EB Nevada have agreed not to, directly or indirectly, offer, sell, offer to
sell, contract to sell, pledge, grant any option to purchase or otherwise sell
or dispose (or announce any offer, sale, offer of sale, contract of sale,
pledge, grant of any option to purchase or other sale or disposition) of any
shares of Common Stock or other capital stock of the Company or any securities
convertible into, or exercisable or exchangeable for, any shares of Common Stock
or other capital stock of the Company or any right to purchase or acquire Common
Stock or other capital stock of the Company for a period of 360 days after the
date of this Prospectus without the prior written consent of Prudential
Securities Incorporated, on behalf of the Underwriters, except for options
granted pursuant to the Equity Participation Plan. Prudential Securities
Incorporated may, in its sole discretion, at any time and without prior notice,
release all shares or any portion thereof subject to such lock-up agreements.
52
<PAGE>
Prior to the Offering, there has been no public market for the Common Stock.
Consequently, the initial public offering price for the Common Stock will be
determined through negotiations among the Company, the Selling Shareholder and
the Underwriters. Among the factors to be considered in making such
determination will be prevailing market conditions, the Company's financial and
operating history and condition, its prospects and the prospects of the industry
in general, the management of the Company, and the market prices of securities
for companies in businesses similar to that of the Company.
In connection with the Offering, certain Underwriters (and selling group
members, if any) and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M, pursuant to which such persons may bid for or
purchase Common Stock for the purpose of stabilizing its market price. The
Underwriters also may create a short position for the account of the
Underwriters by selling more Common Stock in connection with the Offering than
they are committed to purchase from the Selling Shareholder, and in such case
may purchase Common Stock in the open market following completion of the
Offering to cover all or a portion of such short position. The Underwriters may
also cover all or a portion of such short position, up to 937,500 shares of
Common Stock, by exercising the Underwriters' over-allotment option referred to
previously. In addition, Prudential Securities Incorporated, on behalf of the
Underwriters, may impose "penalty bids" under contractual arrangements with the
Underwriters whereby it may reclaim from an Underwriter (or any dealer
participating in the Offering) for the account of the other Underwriters, the
selling concession with respect to Common Stock that is distributed in the
Offering but subsequently purchased for the account of the Underwriters in the
open market. Any of the transactions described in this paragraph may result in
the maintenance of the price for the Common Stock at a level above that which
might otherwise prevail in the open market. None of the transactions described
in this paragraph are required and, if they are undertaken, then they may be
discontinued at any time.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Klehr, Harrison, Harvey, Branzburg & Ellers LLP,
Philadelphia, Pennsylvania, and for the Underwriters by King & Spalding, New
York, New York.
EXPERTS
The financial statements as of February 1, 1997 and January 31, 1998 and for
the fiscal years ended February 3, 1996, February 1, 1997 and January 31, 1998
included in this Prospectus have been so included in reliance on the report of
KPMG Peat Marwick LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement of Form
S-1 under the Securities Act with respect to the Company's Common Stock offered
hereby. This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. Statements
contained in the Prospectus as to the contents of any contract or other document
referred to are not necessarily complete and in each instance reference is made
to the Registration Statement and the exhibits and schedules thereto. The
information so omitted, including exhibits and schedules, may be obtained from
the Commission at its principal office in Washington, D.C. upon the payment of
the prescribed fees, or may be examined without charge at the Public Reference
Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549-1004,
or at the following regional offices of the Commission: 7 World Trade Center,
Suite 1300, New York, New York 10048; and Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511. Such materials also may be
accessed electronically by means of the Commission's home page on the Internet
at http://www.sec.gov.
The Company intends to furnish its stockholders with annual reports
containing financial statements audited by independent accountants.
53
<PAGE>
THE ELECTRONICS BOUTIQUE GROUP
INDEX TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE(S)
-----------
<S> <C>
Independent Auditors' Report............................................................................. F-2
FINANCIAL STATEMENTS
Consolidated and Combined Balance Sheets............................................................... F-3
Consolidated and Combined Statements of Income......................................................... F-5
Consolidated and Combined Statements of Stockholders' Equity........................................... F-6
Consolidated and Combined Statements of Cash Flows..................................................... F-7
Notes to Consolidated and Combined Financial Statements................................................ F-8
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
Pro Forma Consolidated Statement of Income for the Year ended January 31, 1998......................... F-18
Pro Forma Consolidated Statement of Income for the Thirteen Weeks ended May 2, 1998.................... F-19
Pro Forma Consolidated Balance Sheet as of May 2, 1998................................................. F-20
Notes to the Unaudited Pro Forma Consolidated Financial Statements..................................... F-22
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors of
The Electronics Boutique, Inc. and
Partners of EB Services Company LLP:
We have audited the accompanying consolidated and combined balance sheets of
The Electronics Boutique Group as of February 1, 1997 and January 31, 1998, and
the related consolidated and combined statements of income, stockholders' equity
and cash flows for each of the years in the three-year period ended January 31,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated and combined financial statements referred
to above present fairly, in all material respects, the financial position of The
Electronics Boutique Group as of February 1, 1997 and January 31, 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended January 31, 1998, in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick LLP
Philadelphia, PA
May 7, 1998
F-2
<PAGE>
THE ELECTRONICS BOUTIQUE GROUP
CONSOLIDATED AND COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
FEBRUARY 1, JANUARY 31, MAY 2,
1997 1998 1998
-------------- -------------- --------------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents..................................... $ 44,727,846 $ 20,639,610 $ 9,264,474
Account receivable:
Trade and vendors........................................... 2,469,164 2,618,382 3,060,155
Other....................................................... 1,784,902 1,754,691 3,567,108
Due from affiliates (notes 6 and 7)........................... 3,045,224 2,890,554 2,585,544
Merchandise inventories....................................... 47,239,297 52,973,314 58,765,612
Prepaid expenses.............................................. 2,681,965 2,837,647 3,172,832
-------------- -------------- --------------
Total current assets............................................ 101,948,398 83,714,198 80,415,725
-------------- -------------- --------------
Property and equipment:
Leasehold improvements........................................ 34,783,005 40,226,726 40,643,655
Fixtures and equipment........................................ 18,161,153 24,884,217 25,583,252
Building...................................................... -- 6,200,950 6,200,950
Land.......................................................... -- 632,806 632,806
Construction in progress...................................... 207,307 556,663 945,906
-------------- -------------- --------------
53,151,465 72,501,362 74,006,569
Less accumulated depreciation and amortization................ 26,725,475 32,535,305 33,089,952
-------------- -------------- --------------
Net property and equipment...................................... 26,425,990 39,966,057 40,916,617
-------------- -------------- --------------
Investment in affiliated companies (notes 4, 6 and 7)........... 6,813,303 11,025,345 10,945,058
Goodwill and other intangible assets, net of accumulated
amortization of $261,946, $120,151 and $217,741 as of February
1, 1997, January 31, 1998 and May 2, 1998, respectively....... 340,866 2,190,766 2,199,425
Other assets.................................................... 3,715,765 5,894,374 6,219,484
-------------- -------------- --------------
Total assets.................................................... $ 139,244,322 $ 142,790,740 $ 140,696,309
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
See accompanying notes to consolidated and combined financial statements.
F-3
<PAGE>
THE ELECTRONICS BOUTIQUE GROUP
CONSOLIDATED AND COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
FEBRUARY 1, JANUARY 31, MAY 2,
1997 1998 1998
-------------- -------------- --------------
<S> <C> <C> <C>
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving credit facility (note 2)................................. $ -- $ -- $ 21,028,034
Current portion of long-term debt (note 2)......................... 6,599,996 2,400,396 900,396
Accounts payable................................................... 71,031,406 83,713,983 84,317,275
Accrued expenses................................................... 11,985,246 14,545,119 11,383,614
Due to affiliate (note 4).......................................... 1,981,194 -- 489
Income taxes payable............................................... 457,764 782,988 561,730
-------------- -------------- --------------
Total current liabilities............................................ 92,055,606 101,442,486 118,191,538
-------------- -------------- --------------
Long-term liabilities:
Notes payable (note 2)............................................. 24,208,345 10,541,149 2,749,350
Deferred rent...................................................... 2,623,537 2,408,579 2,282,561
-------------- -------------- --------------
26,831,882 12,949,728 5,031,911
-------------- -------------- --------------
Total liabilities.................................................... 118,887,488 114,392,214 123,223,449
-------------- -------------- --------------
Commitments (note 3)
Stockholders' equity (note 9):
Preferred stock -- authorized 200,000 shares; $100.00 par value; no
shares issued and outstanding.................................... -- -- --
Common stock:
Class A -- authorized 5,000 shares; $.10 par value; issued and
outstanding 1,900 shares....................................... 190 190 190
Class B -- authorized 25,000 shares; $.10 par value; issued and
outstanding 21,000 shares...................................... 2,100 2,100 2,100
Partners' capital of EB Services Company LLP....................... -- 1,000 1,000
Additional paid-in capital......................................... 7,584,365 7,584,365 7,584,365
Accumulated other comprehensive expense............................ -- (1,023,493) (907,833)
Retained earnings.................................................. 12,770,179 21,834,364 10,793,038
-------------- -------------- --------------
Total stockholders' equity........................................... 20,356,834 28,398,526 17,472,860
-------------- -------------- --------------
Total liabilities and stockholders' equity........................... $ 139,244,322 $ 142,790,740 $ 140,696,309
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
F-4
<PAGE>
THE ELECTRONICS BOUTIQUE GROUP
CONSOLIDATED AND COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED THIRTEEN WEEKS ENDED
------------------------------------- ------------------------
FEBRUARY 3, FEBRUARY 1, JANUARY 31, MAY 3, MAY 2,
1996 1997 1998 1997 1998
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Net sales................................... $268,955,902 $337,058,946 $449,179,603 $83,687,709 $106,729,814
Management fees............................. 1,905,449 2,526,107 4,791,553 487,887 571,367
----------- ----------- ----------- ----------- -----------
Total revenues...................... 270,861,351 339,585,053 453,971,156 84,175,596 107,301,181
----------- ----------- ----------- ----------- -----------
Costs and expenses:
Costs of merchandise sold, including
freight................................. 199,225,558 252,812,925 338,497,642 61,941,225 79,519,589
Selling, general and administrative (notes
4 and 5)................................ 58,989,271 69,827,537 87,002,305 18,200,582 22,270,148
Depreciation and amortization (notes 6 and
7)...................................... 6,047,306 6,615,268 7,996,506 1,874,556 2,253,768
----------- ----------- ----------- ----------- -----------
264,262,135 329,255,730 433,496,453 82,016,363 104,043,505
Operating income............................ 6,599,216 10,329,323 20,474,703 2,159,233 3,257,676
Equity in earnings (loss) of affiliates (1,319,417) (573,462) 2,902,780 (80,287) (80,287)
Interest expense, net of interest income of
$819,870, $1,121,562, and $1,217,337 in
1996, 1997 and 1998, and $509,848 and
$337,241 in the thirteen weeks ended May
3, 1997 and May 2, 1998, respectively..... 1,818,105 1,298,296 1,380,046 294,376 213,870
Preacquisition loss of subsidiaries......... -- -- 913,028 296,033 --
----------- ----------- ----------- ----------- -----------
Income before income taxes.................. 3,461,694 8,457,565 22,910,465 2,080,603 2,963,519
Income taxes................................ 280,000 550,000 846,280 77,700 113,300
----------- ----------- ----------- ----------- -----------
Net income.................................. $ 3,181,694 $ 7,907,565 $22,064,185 $ 2,002,903 $ 2,850,219
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Net income per share (note 13).............. $ 0.20 $ 0.50 $ 1.40 $ 0.13 $ 0.18
Supplemental historical pro forma data
(unaudited) (note13):
Income before income taxes.................. $ 3,461,694 $ 8,457,565 $22,910,465 $ 2,080,603 $ 2,963,519
Supplemental historical pro forma income
taxes..................................... 1,604,962 3,513,265 9,415,631 855,128 1,160,493
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Supplemental historical pro forma net
income.................................... $ 1,856,732 $ 4,944,300 $13,494,834 $ 1,225,475 $ 1,803,026
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Supplemental historical pro forma net income
per share................................. $ 0.12 $ 0.31 $ 0.85 $ 0.08 $ 0.11
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Supplemental historical pro forma weighted
average shares outstanding................ 15,794,200 15,794,200 15,794,200 15,794,200 15,794,200
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Pro forma data (unaudited) (note 13):
Pro forma income before income taxes........ $19,909,360 $ 2,945,481
Pro forma income taxes...................... 8,182,750 1,154,628
----------- -----------
Pro forma net income........................ $11,726,610 $ 1,790,853
----------- -----------
----------- -----------
Pro forma net income per share.............. $ 0.74 $ 0.11
----------- -----------
----------- -----------
Pro forma weighted average shares
outstanding............................... 15,794,200 15,794,200
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to consolidated and combined financial statements.
F-5
<PAGE>
THE ELECTRONICS BOUTIQUE GROUP
CONSOLIDATED AND COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PARTNERS' CAPITAL ADDITIONAL
PREFERRED CLASS A CLASS B OF EB SERVICES PAID-IN
STOCK COMMON STOCK COMMON STOCK COMPANY LLP CAPITAL
------------------------ ------------------------ ------------------------ ------------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
----------- ----------- ----------- ----------- ----------- -----------
Balance, January 29,
1995............... -- $ -- 1,900 $ 190 21,000 $ 2,100 $ -- $7,584,365
Net income........... -- -- -- -- -- -- -- --
Distributions........ -- -- -- -- -- -- -- --
----- ----------- ----- ----------- ----------- ----------- ------ ----------
Balance, February 3,
1996............... -- -- 1,900 190 21,000 2,100 -- 7,584,365
Net income........... -- -- -- -- -- -- -- --
Distributions........ -- -- -- -- -- -- -- --
----- ----------- ----- ----------- ----------- ----------- ------ ----------
Balance, February 1,
1997............... -- -- 1,900 190 21,000 2,100 -- 7,584,365
Net income........... -- -- -- -- -- -- -- --
Distributions........ -- -- -- -- -- -- -- --
Capital
contribution....... -- -- -- -- -- -- 1,000 --
Accumulated other
comprehensive
expense............ -- -- -- -- -- -- -- --
----- ----------- ----- ----------- ----------- ----------- ------ ----------
Balance, January 31,
1998............... -- $ -- 1,900 $ 190 21,000 $ 2,100 $ 1,000 $7,584,365
Net income
(unaudited)........ -- -- -- -- -- -- -- --
Distributions
(unaudited)........ -- -- -- -- -- -- -- --
Accumulated other
comprehensive
expense
(unaudited)........ -- -- -- -- -- -- -- --
----- ----------- ----- ----------- ----------- ----------- ------ ----------
Balance, May 2, 1998
(unaudited)........ -- $ -- 1,900 $ 190 21,000 $ 2,100 $ 1,000 $7,584,365
----- ----------- ----- ----------- ----------- ----------- ------ ----------
----- ----------- ----- ----------- ----------- ----------- ------ ----------
<CAPTION>
FOREIGN
CURRENCY TOTAL
TRANSLATION RETAINED STOCKHOLDERS'
ADJUSTMENT EARNINGS EQUITY
----------- ------------ ------------
<S> <C> <C> <C>
Balance, January 29,
1995............... $ -- $ 8,480,920 $16,067,575
Net income........... -- 3,181,694 3,181,694
Distributions........ -- (1,800,000) (1,800,000)
----------- ------------ ------------
Balance, February 3,
1996............... -- 9,862,614 17,449,269
Net income........... -- 7,907,565 7,907,565
Distributions........ -- (5,000,000) (5,000,000)
----------- ------------ ------------
Balance, February 1,
1997............... -- 12,770,179 20,350,834
Net income........... -- 22,064,185 22,064,185
Distributions........ -- (13,000,000) (13,000,000)
Capital
contribution....... -- -- 1,000
Accumulated other
comprehensive
expense............ (1,023,493) -- (1,023,493)
----------- ------------ ------------
Balance, January 31,
1998............... $(1,023,493) $ 21,834,364 $28,398,526
Net income
(unaudited)........ -- 2,850,219 2,850,219
Distributions
(unaudited)........ -- (13,891,545) (13,891,545)
Accumulated other
comprehensive
expense
(unaudited)........ 115,660 -- 115,660
----------- ------------ ------------
Balance, May 2, 1998
(unaudited)........ $ (907,833) $ 10,793,038 $17,472,860
----------- ------------ ------------
----------- ------------ ------------
</TABLE>
See accompanying notes to consolidated and combined financial statements.
F-6
<PAGE>
THE ELECTRONICS BOUTIQUE GROUP
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED THIRTEEN WEEKS ENDED
------------------------------------- ------------------------
FEBRUARY 3, FEBRUARY 1, JANUARY 31, MAY 3, MAY 2,
1996 1997 1998 1997 1998
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Cash flows from operating activities:
Net income.................................. $ 3,181,694 $ 7,907,565 $22,064,185 $ 2,002,903 $ 2,850,219
Adjustments to reconcile net income to cash
provided by operating activities,
excluding the effects of acquisitions:
Depreciation of property and equipment.... 5,984,652 6,555,142 7,571,301 1,779,999 2,156,177
Amortization of other assets.............. 62,654 60,126 425,205 94,587 177,878
Loss on disposal of property and
equipment............................... 126,226 1,170,182 620,916 146,492 72,844
Equity in (earnings) loss of affiliates... 832,088 126,975 (2,902,780) -- --
Loss in investment in affiliated
companies............................... 487,329 446,487 -- 296,033 --
Changes in assets and liabilities:
Decrease (increase) in:
Accounts receivable................... 832,871 (471,533) 385,737 (2,767,253) (2,254,190)
Due from affiliates................... (2,279,807) (688,891) (2,142,774) (343,453) (305,010)
Merchandise inventories............... (1,248,652) (5,646,658) 95,212 2,196,846 (5,792,298)
Prepaid expenses...................... (594,187) 2,279 (27,311) 169 (335,185)
Other long-term assets................ (1,871,307) 173,570 (1,641,573) (559,687) (440,682)
(Decrease) increase in:
Accounts payable...................... 4,831,833 21,806,206 8,348,016 (13,743,245) 603,292
Accrued expenses...................... 1,082,117 4,832,902 1,619,154 (4,124,085) (3,161,505)
Due to affiliate...................... 1,078,808 402,478 (1,981,194) 1,988 489
Income taxes payable.................. (152,377) 455,187 213,047 (363,779) (221,258)
Deferred rent......................... (15,872) (74,711) (368,059) (108,822) (126,018)
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in) operating
activities.................................. 12,338,070 37,057,306 32,279,082 (15,491,307) (6,775,247)
----------- ----------- ----------- ----------- -----------
Cash flows used in investing activities:
Purchases of property and equipment......... (6,760,191) (8,610,265) (18,470,432) (1,869,739) (3,142,589)
Proceeds from disposition of assets......... 5,994 275,722 12,455 1,306 4,454
Net cash from business acquired............. -- -- 2,922,411 -- --
Purchase of investment securities in
affiliate................................. (9,340,598) -- (2,215,933) -- --
----------- ----------- ----------- ----------- -----------
Net cash used in investing activities......... (16,094,795) (8,334,543) (17,751,499) (1,868,433) (3,138,135)
----------- ----------- ----------- ----------- -----------
Cash flows from financing activities:
Distributions............................... (1,800,000) (5,000,000) (13,000,000) (1,000,000) (13,891,545)
Net proceeds from (payments under) revolving
credit facility........................... 10,000,000 (10,000,000) -- 1,455,222 21,437,687
Proceeds from long-term debt................ 500,000 25,000,000 -- -- --
Repayment of long-term debt................. (6,091,663) (1,599,996) (24,514,276) (24,999) (9,291,799)
Capital contribution........................ -- -- 1,000 -- --
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in) financing
activities.................................. 2,608,337 8,400,004 (37,513,276) 430,233 (1,745,657)
----------- ----------- ----------- ----------- -----------
Effects of exchange rates on cash............. -- -- (1,102,543) -- 283,903
Net increase (decrease) in cash and cash
equivalents................................. (1,148,388) 37,122,767 (24,088,236) (16,929,517) (11,375,136)
Cash and cash equivalents, beginning of
period...................................... 8,753,467 7,605,079 44,727,846 44,727,846 20,639,610
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents, end of period...... $ 7,605,079 $44,727,846 $20,639,610 $27,798,329 $ 9,264,474
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest.................................. $ 1,820,492 $ 2,970,932 $ 2,714,593 $ 769,699 $ 261,216
Income taxes.............................. $ 432,377 $ 89,659 $ 672,842 $ 377,106 $ 328,629
</TABLE>
See accompanying notes to consolidated and combined financial statements.
F-7
<PAGE>
THE ELECTRONICS BOUTIQUE GROUP
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Electronics Boutique, Inc. and its subsidiaries (collectively, "EB") are
among the world's largest specialty retailers of electronic games. EB's primary
products are video games and personal computer entertainment software, supported
by the sale of video game hardware, PC productivity software and accessories.
EB's subsidiaries include Electronics Boutique Canada, Inc. ("EB Canada"), EB
International, Inc., Electronics Boutique Korea, Inc. and Electronics Boutique
Australia Pty, Ltd. EB Services Company LLP ("EB Services") provides consulting,
management, administrative and advertising assistance under various management
service contracts. Within these consolidated and combined financial statements,
EB and EB Services are collectively referred to as the EB Group.
The EB Group had 360, 405 and 414 (unaudited) operating retail stores
throughout the United States and Puerto Rico at February 1, 1997, January 31,
1998 and May 2, 1998 (unaudited), respectively. In addition, it operated 27
stores in Canada, 5 in South Korea at January 31, 1998 and May 2, 1998
(unaudited) and 15 and 19 (unaudited) stores in Australia at January 31, 1998
and May 2, 1998 (unaudited), respectively. The EB Group also operates a mail
order business and sells product via the World Wide Web. Approximately 30%, 36%
and 28% of the EB Group's 1996, 1997, and the thirteen weeks ended May 2, 1998
sales, respectively, were generated from merchandise purchased from its three
largest vendors.
FISCAL YEAR-END
The fiscal year of the EB Group ends on the Saturday nearest January 31.
Accordingly, the financial statements for the years ended February 3, 1996
("1995") included 53 weeks of operations and the years ended February 1, 1997
("1996") and January 31, 1998 ("1997") included 52 weeks of operations.
PRINCIPLES OF CONSOLIDATION AND COMBINATION
The consolidated and combined financial statements include the accounts of
EB and EB Services. Significant intercompany accounts and transactions have been
eliminated in consolidation and combination.
REVENUE RECOGNITION
Retail sales are recognized as revenue at point of sale. Mail order and
internet sales are recognized as revenue upon shipment. Management fees are
recognized in the period that related services are provided. Sales are recorded
net of estimated allowance for sales returns and allowances.
CASH AND CASH EQUIVALENTS
EB Group considers all highly liquid investments with original maturities of
three months or less to be cash equivalents for cash flow purposes.
MERCHANDISE INVENTORIES
Merchandise is valued at the lower of cost or market. Cost is determined
principally by a weighted-average method.
F-8
<PAGE>
THE ELECTRONICS BOUTIQUE GROUP
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost and depreciated or amortized over
the estimated useful life of the asset using the straight-line method. The
estimated useful lives are as follows:
<TABLE>
<S> <C>
Leasehold improvements............... Lesser of 10 years or the lease term
Fixtures and equipment............... 5 years
Transportation equipment............. 3 years
Building............................. 30 years
</TABLE>
Included in selling, general and administrative costs for 1995, 1996, 1997
and the thirteen weeks ended May 2, 1998, are losses of $125,000, $1,170,000,
$556,000 and $69,000 (unaudited), respectively, primarily related to the
write-off of the net book value of property and equipment associated with the
closing of five stores in 1995, nine stores in each of 1996 and 1997 and three
stores in the thirteen weeks ended May 2, 1998 (unaudited) and the remodeling of
several stores each year.
DEFERRED REVENUE
The EB Group defers revenue related to the sale of frequent buyer cards
which entitle the cardholder to receive discounts on purchases for one year from
the date of purchase. Revenue is recognized over the one year period the card is
valid based on expected usage.
Amounts received under the EB Group's pre-sell program are recorded as a
liability. Revenue is recognized when the customer receives the related product.
Certain affinity programs include promotional gifts to customers that are
supplied by vendors at no cost to the EB Group.
GOODWILL AND OTHER INTANGIBLES
Costs in excess of fair value of net assets acquired are being amortized on
a straight-line basis over periods of up to ten years. The EB Group assesses the
recoverability of goodwill and other intangibles by determining whether the
remaining balance can be recovered through projected cash flows.
OTHER ASSETS
Other assets consist principally of life insurance programs for certain key
executives and security deposits.
COMPUTER SOFTWARE COSTS
The EB Group capitalizes significant costs to acquire management information
systems software and significant external costs of system improvements as
incurred. Computer software costs are amortized over estimated useful lives of
three to five years.
RETAINED EARNINGS
Retained earnings, which represent undistributed earnings of Electronics
Boutique Plc, totaled approximately $1,900,000 at January 31, 1998 and May 2,
1998 (unaudited).
F-9
<PAGE>
THE ELECTRONICS BOUTIQUE GROUP
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LEASING EXPENSES
The EB Group recognizes lease expense on a straight-line basis over the term
of the lease when lease agreements provide for increasing fixed rentals. The
difference between lease expense recognized and actual payments made is included
in deferred rent and prepaid expenses on the balance sheet.
PREOPENING COSTS AND ADVERTISING EXPENSE
Preopening and start-up costs for new stores are charged to operations as
incurred. Costs of advertising and sales promotion programs are charged to
operations, offset by vendor reimbursements, as incurred.
VENDOR PROGRAMS
The EB Group receives manufacturer reimbursements for certain training,
promotional and marketing activities that offset the expenses of these
activities. The expenses and reimbursements are reflected in selling, general
and administrative expenses, as incurred or received.
FOREIGN CURRENCY
The accounts of the foreign subsidiaries are translated in accordance with
Statement of Financial Accounting Standard No. 52, Foreign Currency Translation,
which requires that assets and liabilities of international operations be
translated using the exchange rate in effect at the balance sheet date. The
results of operations are translated using an average exchange rate for the
year. The effects of rate fluctuations in translating assets and liabilities of
international operations into U.S. dollars are accumulated and reflected as a
foreign currency translation adjustment in the statements of stockholders'
equity. Transaction gains and losses are included in net income.
Since substantially all of the EB Group's operations are domestic, it
currently does not hedge currency exchange rate risk and does not believe that
currency exchange rate fluctuations would have a material adverse effect on its
results of operations and financial condition.
INCOME TAXES
Federal income taxes are payable personally by the stockholders of EB
pursuant to an election by EB under Subchapter "S" of the Internal Revenue Code
and by the partners of EB Services. Accordingly, no provision has been made for
federal income taxes on taxable income of EB or EB Services. EB elected
Subchapter "S" status for some states while remaining subject to corporate tax
in other states and, as a result, has provided for certain state income taxes.
In accordance with the terms of EB's loan agreements, EB may declare
dividends to its stockholders to pay their personal tax liabilities. EB made
distributions of $1,800,000, $5,000,000, $12,000,000 and $13,892,000 (unaudited)
to its stockholders for taxes in 1995, 1996, 1997 and the thirteen weeks ended
May 2, 1998, respectively. EB Services made a $1,000,000 distribution to its
partners in 1997.
The tax basis of the assets and liabilities exceeded their financial
reporting basis by approximately $18,200,000 at February 1, 1997, $19,737,000 at
January 31, 1998 and $20,332,000 at May 2, 1998, primarily due to differences
relating to depreciation, deferred rent, and other nondeductible expenses. State
tax provisions have been recorded in the accompanying financial statements based
on taxable income. This has
F-10
<PAGE>
THE ELECTRONICS BOUTIQUE GROUP
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
resulted in an effective state income tax rate in excess of the statutory state
rates. EB's foreign subsidiaries had net operating losses of approximately
$4,600,000 (unaudited) at May 2, 1998 available to offset future taxable foreign
earnings. No benefit has been reflected in the consolidated and combined
financial statements for such operating losses as a valuation allowance has been
provided.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The EB Group's financial instruments are accounts receivable, accounts
payable, long-term debt, and certain long-term investments. The carrying value
of accounts receivable and accounts payable approximates fair value due to the
short maturity of these instruments. The carrying value of long-term debt
approximates fair value based on current rates available to the EB Group for
debt with similar maturities. The carrying value of life insurance policies
included in other assets approximates fair value based on estimates received
from insurance companies.
(2) DEBT
The EB Group had available a revolving credit facility allowing for maximum
borrowings of $17,000,000 at February 1, 1997 and January 31, 1998. There were
no outstanding amounts at February 1, 1997 and January 31, 1998 on this
facility. The EB Group has a second revolving credit facility allowing for
maximum borrowings of $1,000,000 at January 31, 1998. There was no outstanding
balance at January 31, 1998 on this facility. The EB Group has available a
revolving credit facility with Fleet allowing for maximum borrowings of
$50,000,000 at May 2, 1998. There was $20,959,000 (unaudited) outstanding on
this facility at May 2, 1998.
F-11
<PAGE>
THE ELECTRONICS BOUTIQUE GROUP
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
(2) DEBT (CONTINUED)
Long-term debt at February 1, 1997, January 31, 1998 and May 2, 1998 is
summarized as follows:
<TABLE>
<CAPTION>
FEBRUARY 1, JANUARY 31, MAY 2,
1997 1998 1998
------------- ------------- -------------
<S> <C> <C> <C>
(UNAUDITED)
Bank term loan; interest payable monthly at the bank's prime rate
(8.50% at January 31, 1998). Principal payments of $500,000
payable semi-annually, with the balance payable July 31, 1999..... $ 6,000,000 $ 5,000,000 $ --
Bank term loan; interest payable monthly at the bank's prime rate
(8.50% at January 31, 1998). Five semi-annual principal payments
of $250,000 on every July 1 and February 1, commencing on July 1,
1996 and continuing through July 1, 1998, with the balance payable
January 31, 1999.................................................. 4,500,000 4,000,000 --
Term loan; interest payable quarterly at the average LIBOR rate for
a three-month period, plus 1.5% (7% at February 1, 1997).
Principal payments of $833,333 payable monthly beginning October
1, 1998 with the balance payable September 30, 2000............... 20,000,000 -- --
Promissory note, maturing on February 1, 2000 with interest and
principal payable monthly at 6.00%................................ 308,341 208,345 183,346
Bank term loan; interest payable monthly at the U.S. prime rate plus
0.125% (8.625% at January 31, 1998). Principal payments of
$66,700, payable monthly beginning October, 1997 with the balance
payable on September 1, 2002...................................... -- 3,733,200 3,466,400
------------- ------------- -------------
30,808,341 12,941,545 3,649,746
Less current installments........................................... 6,599,996 2,400,396 900,396
------------- ------------- -------------
$ 24,208,345 $ 10,541,149 $ 2,749,350
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
Certain of the EB Group's revolving credit agreement and term loans are
guaranteed by a company affiliated through common ownership, and a stockholder,
and are secured by all of the EB Group's assets. The revolving credit agreement
and term loans contain restrictive covenants regarding transactions with
affiliates, the payment of dividends, and other financial and nonfinancial
matters.
Scheduled repayments of long-term debt as of January 31, 1998 are as
follows:
<TABLE>
<CAPTION>
AMOUNT
-------------
<S> <C>
1998........................................................................... $ 2,400,396
1999........................................................................... 8,400,396
2000........................................................................... 808,753
2001........................................................................... 800,400
2002........................................................................... 531,600
-------------
$ 12,941,545
-------------
-------------
</TABLE>
F-12
<PAGE>
THE ELECTRONICS BOUTIQUE GROUP
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
(3) COMMITMENTS
LEASE COMMITMENTS
At January 31, 1998, the future annual minimum lease payments under
operating leases for the following five fiscal years and thereafter were as
follows:
<TABLE>
<CAPTION>
RETAIL
STORE DISTRIBUTION TOTAL LEASE
LOCATIONS FACILITIES COMMITMENTS
-------------- ----------- --------------
<S> <C> <C> <C>
1998............................................................... $ 20,327,567 $ 128,764 $ 20,456,331
1999............................................................... 19,131,737 109,358 19,241,095
2000............................................................... 17,179,036 112,617 17,291,653
2001............................................................... 15,552,449 115,104 15,667,553
2002............................................................... 13,656,361 51,620 13,707,981
Thereafter......................................................... 35,264,546 -- 35,264,546
-------------- ----------- --------------
$ 121,111,696 $ 517,463 $ 121,629,159
-------------- ----------- --------------
-------------- ----------- --------------
</TABLE>
The total future minimum lease payments include lease commitments for new
retail locations not in operation at January 31, 1998, and exclude contingent
rentals based upon sales volume and owner expense reimbursements. Contingent
rentals were approximately $3,640,000, $5,422,000, $8,132,000 and $919,000
(unaudited) in 1995, 1996, 1997 and the thirteen weeks ended May 2, 1998,
respectively.
The terms of the operating leases for the retail locations provide that, in
addition to the minimum lease payments, the EB Group is required to pay
additional rent to the extent retail sales, as defined, exceed amounts set forth
in the lease agreements and to reimburse the landlord for the EB Group's
proportionate share of the landlord's costs and expenses incurred in the
maintenance and operation of the shopping mall. Rent expense, including
contingent rental amounts, was approximately $25,104,000, $28,448,000,
$35,138,000 and $9,219,000 (unaudited) in 1995, 1996, 1997 and the thirteen
weeks ended May 2, 1998, respectively.
Certain of the EB Group's lease agreements provide for varying lease
payments over the life of the leases. For financial statement purposes, rental
expense is recognized on a straight-line basis over the original term of the
agreements. Actual lease payments are greater than (less than) the rental
expense reflected in the statements of operations by approximately ($210,000),
($70,000), $139,000 and ($126,000) (unaudited) for years 1995, 1996, 1997 and
the thirteen weeks ended May 2, 1998, respectively.
(4) RELATED-PARTY TRANSACTIONS
INVESTMENT IN EB INTERNATIONAL
As of February 1, 1997, the EB Group had amounts due from an affiliated
company (EB International, Inc.) that was wholly-owned by a member of senior
management acting on behalf of EB. The amounts advanced to EB International,
Inc., were used to acquire a 50% interest in a joint venture which operates a
chain of retail stores that sells computer software, video games, accessories,
and supplies in South Korea. The amounts advanced for investment in the joint
venture totaling $1,136,000 have been included in the balance sheet as
investment in affiliated companies. Prior to 1997, the investment in the joint
venture was accounted for under the equity method of accounting and,
accordingly, the EB Group's proportionate interest in net income and losses has
been reflected in the statements of income. In 1997 EB International acquired
the remaining 50% interest in the joint venture with $611,000 of additional
funds
F-13
<PAGE>
THE ELECTRONICS BOUTIQUE GROUP
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
(4) RELATED-PARTY TRANSACTIONS (CONTINUED)
provided by EB. The fair value of assets acquired totaled $3,579,000, while
liabilities assumed totaled $3,497,000 resulting in goodwill of $529,000 that is
being amortized over the expected period of benefit of ten years. Additionally
in 1997, EB formally acquired 100% of the capital stock in EB International,
whose sole activities were related to the joint venture, from the member of
senior management for a nominal amount. The EB Group has consolidated the
results of operations of the joint venture since the beginning of 1997. The
$677,000 loss of the joint venture prior to the acquisition of the remaining 50%
by EB in 1997 has been included in preacquisition loss of subsidiaries on the
consolidated and combined statement of income. The pro forma effect of the
acquisition is not material to 1996.
LOANS AND ADVANCES FROM AFFILIATES
During 1995 and 1996, the EB Group borrowed varying amounts from a company
affiliated through common ownership. The advances bear interest at the prime
rate plus 0.25% (8.50% at February 1, 1997). The EB Group had no outstanding
borrowings from affiliates at February 1, 1997, January 31, 1998 and May 2, 1998
(unaudited). Interest expense on affiliate borrowings was approximately $858,000
and $250,000 for 1995 and 1996, respectively, and $0 for 1997 and the thirteen
weeks ended May 2, 1998.
TRANSACTIONS WITH AFFILIATES
Insurance and other expenses are paid to an affiliated company through
intercompany billings. The amount of these expenses was approximately $721,000,
$575,000, $431,000 and $7,000 (unaudited) for 1995, 1996, 1997 and the thirteen
weeks ended May 2, 1998, respectively, and is included in selling, general and
administrative expenses.
Equity in earnings (loss) of affiliates includes the following:
<TABLE>
<CAPTION>
YEARS ENDED
----------------------------------------
<S> <C> <C> <C>
FEBRUARY 3, FEBRUARY 1, JANUARY 31,
1996 1997 1998
------------- ----------- ------------
EB International, Inc............................... $ 79,156 $ (373,031) $ --
EB Canada........................................... (566,485) (73,456) --
Electronics Boutique Plc............................ (832,088) (126,975) 2,902,780
------------- ----------- ------------
$ (1,319,417) $ (573,462) $ 2,902,780
------------- ----------- ------------
------------- ----------- ------------
</TABLE>
(5) CONSULTING AGREEMENT
In July 1993, the EB Group entered into a consulting agreement with a
business that owns and operates retail stores. The EB Group provides consulting,
management, administrative, marketing, and advertising assistance to this retail
business. The EB Group received $744,000, $641,000, $633,000 and $128,000
(unaudited) during 1995, 1996, 1997 and the thirteen weeks ended May 2, 1998,
respectively, as reimbursement for incremental costs incurred based on a formula
as defined. Amounts owed to the EB Group for these items and trade credit at
February 1, 1997, January 31, 1998 and May 2, 1998, are included in accounts
receivable. Reimbursements offset selling, general and administrative expenses.
Based on certain performance criteria as defined, the EB Group can also earn a
performance fee. No performance fee was earned during 1995, 1996, 1997 and the
thirteen weeks ended May 2, 1998.
F-14
<PAGE>
THE ELECTRONICS BOUTIQUE GROUP
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
(6) EB CANADA
In September 1993, EB advanced funds to obtain a 50% interest in a Canadian
corporation ("EB Canada") formed for the purpose of selling computer, video
games and hand-held entertainment hardware, software, and related peripherals
and accessories in shopping malls throughout Canada.
During 1995, EB exchanged the principal amount of an outstanding shareholder
note receivable and accrued interest for 286 shares of nonvoting cumulative
preferred stock of EB Canada. The exchange of the shareholder notes receivable
for the preferred stock had no impact on the results of operations of the EB
Group.
EB had a security interest in certain assets of EB Canada to secure the
payment of all management fees, interest, and receivables associated with the
sale of merchandise by EB to EB Canada. At February 1, 1997, EB Canada owed EB
approximately $2,017,000 for trade credit, management fees, and other expenses,
which is included in due from affiliates.
EB purchased the remaining 50% of EB Canada in October 1997 for $727,000,
resulting in goodwill of $1,180,000 which is being amortized over the expected
period of benefit of ten years, and now owns 100% of EB Canada. The fair value
of assets acquired totaled $3,879,000, while liabilities assumed totaled
$4,332,000 resulting in goodwill of $1,180,000. The EB Group has consolidated
the results of operations of EB Canada since the beginning of 1997. The $236,000
loss in EB Canada prior to the acquisition of the remaining 50% by EB in 1997
has been included in preacquisition loss of subsidiaries on the consolidated and
combined statement of income. The proforma effect of the acquisition is not
material to 1996. Prior to 1997, the investment in EB Canada was accounted for
under the equity method of accounting and, accordingly, the EB Group's
proportionate interest in net income and losses has been reflected in the
statements of income. The EB Group has recorded losses in excess of its
investment in EB Canada prior to the acquisition of the remaining 50% of
approximately $1,300,000 which is included in investment in affiliated companies
as of February 1, 1997.
(7) INVESTMENT IN AFFILIATED COMPANY
In 1995, the EB Group acquired 25 percent of the outstanding shares of
Electronics Boutique Plc (formerly Rhino Group Plc). The EB Group accounts for
the investment in Electronics Boutique Plc under the equity method, which
requires the EB Group to recognize goodwill and 25 percent of the results of
operations of Electronics Boutique plc from the date of acquisition in 1995.
The goodwill is being amortized over the expected period of benefit of 10
years. The $3,200,000 of goodwill from this transaction resulted in amortization
expense of $133,000 in 1995 and $321,000 in each of 1996 and 1997, and $80,000
(unaudited) in the thirteen weeks ended May 2, 1998. The carrying value of the
investment exceeds the EB Group's 25 percent share of the underlying net assets
of Electronics Boutique Plc by the amount of goodwill.
At February 1, 1997, January 31, 1998 and May 2, 1998, the fair market value
of the investment was $21,691,000, $52,615,000 and $99,667,000 (unaudited),
based on the closing market price quotation of the London Stock Exchange.
In 1995, the EB Group entered into a services agreement with Electronics
Boutique Plc to provide consulting, management, training, and advertising
assistance. The agreement provides for a fee to be paid to the EB Group based on
a formula of 1% of adjusted sales and if budgeted profits are exceeded for the
year, a bonus equal to 25% of such excess. For the year ended January 31, 1998,
a bonus was earned in the
F-15
<PAGE>
THE ELECTRONICS BOUTIQUE GROUP
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
(7) INVESTMENT IN AFFILIATED COMPANY (CONTINUED)
amount of $2,206,000. The management fee receivable, which is included in due
from affiliates, was $397,000 $2,826,000 and $2,361,000 (unaudited) at February
1, 1997, January 31, 1998 and May 2, 1998 (unaudited). Included in management
fees for 1995, 1996, 1997 and the thirteen weeks ended May 2, 1998 was $577,000,
$1,092,000, $1,953,000 and $443,000 (unaudited), respectively. Additionally, the
agreement provides that the EB Group is to be reimbursed by Electronics Boutique
Plc for all reasonable travel and subsistence expenses incurred by employees of
the EB Group during their performance of the agreement. At February 1, 1997,
January 31, 1998 and May 2, 1998, these amounts were $435,000, $52,000 and
$219,000 (unaudited), respectively, and are included in due from affiliates.
Summary financial information for Electronics Boutique Plc, a UK company, as
of and for the years ended February 3, 1996, February 1, 1997 and January 31,
1998, are as follows:
<TABLE>
<CAPTION>
FEBRUARY 3 FEBRUARY 1 JANUARY 31
1996 1997 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Current Assets.................................................. $ 26,061,000 $ 29,486,000 $ 49,404,000
Current Liabilities............................................. 17,816,000 22,201,000 31,338,000
-------------- -------------- --------------
Working Capital................................................. 8,245,000 7,285,000 18,016,000
Property, Plant, and Equipment, Net............................. 11,768,000 13,698,000 15,987,000
-------------- -------------- --------------
Other Assets.................................................... 81,000 80,000 --
Long-Term Debt.................................................. 3,476,000 2,086,000 1,825,000
-------------- -------------- --------------
Stockholders' equity............................................ $ 16,618,000 $ 18,977,000 $ 32,178,000
Sales........................................................... $ 93,244,000 $ 116,341,000 $ 203,596,000
-------------- -------------- --------------
-------------- -------------- --------------
Net income (loss)............................................... $ (13,337,000) $ 777,000 $ 12,895,000
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
The summary balance sheet amounts have been converted from UK pounds to U.S.
dollars at year-end published exchange rates. Summary income statement amounts
have been converted using average exchange rates prevailing during the
respective periods.
(8) EMPLOYEES' RETIREMENT PLAN
The EB Group provides employees with retirement benefits under a 401(k)
salary reduction plan. Generally, employees are eligible to participate in the
plan after attaining age 21 and completing one year of service. Eligible
employees may contribute up to 17% of their compensation to the plan. EB Group
contributions are at the EB Group's discretion and may not exceed 15% of an
eligible employee's compensation. EB Group contributions to the plan are fully
vested for eligible employees with five years or more of service. EB Group
contributions under this plan were approximately $235,000, $357,000, $302,000
and $109,000 (unaudited) in 1995, 1996, 1997 and the thirteen weeks ended May 2,
1998, respectively.
(9) STOCKHOLDERS' EQUITY
The capital structure of the EB consists of two classes of common stock,
Class A and Class B. The rights, duties and privileges of the Class A and Class
B common stock are identical in all aspects except that the Class A shares have
voting rights and Class B shares have no voting rights. In addition, preferred
stock is authorized that contains a 10% non-cumulative dividend and is
non-participating, non-convertible,
F-16
<PAGE>
THE ELECTRONICS BOUTIQUE GROUP
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
(9) STOCKHOLDERS' EQUITY (CONTINUED)
non-redeemable and preferred as to the rights of the holders of the Class A and
Class B common stock in the event of the liquidation of EB.
(10) COMPREHENSIVE INCOME
Effective February 1, 1998, the Company 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:
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
--------------------------
MAY 2, 1998 MAY 3, 1997
------------ ------------
<S> <C> <C>
Net income.................................................... $2,850,219 $2,080,603
Foreign currency translation adjustment....................... 115,660 (408,324)
------------ ------------
Comprehensive income.......................................... $2,965,879 $1,672,279
------------ ------------
------------ ------------
</TABLE>
(11) SUBSEQUENT EVENTS
In March 1998, EB Holdings' Board of Directors authorized the filing of a
Registration Statement on Form S-1 in connection with a planned initial public
offering of EB Holdings' common stock.
On March 16, 1998, EB entered into a credit agreement with Fleet, pursuant
to which Fleet agreed to make available to EB an asset based revolving credit
and term loan facility in an amount up to $50,000,000. The revolving credit
facility expires and the term loan, if borrowed, is repayable on March 16, 2001.
Interest accrues on borrowings at a per annum rate equal to either LIBOR plus
250 basis points or Fleet's base rate of interest, at EB's option. The revolving
credit and term loan facilities are secured by accounts receivable, inventory,
and equipment, and the term loan facility is also secured by the Company's West
Chester, Pennsylvania property. The Company intends to use a portion of its net
proceeds of the Offering to repay its obligations to Fleet.
(12) EQUITY PARTICIPATION PLAN (UNAUDITED)
Immediately prior to the completion of the Offering, EB Holdings will
establish an equity participation plan pursuant to which 2,100,000 shares of
common stock will be reserved for future issuance upon the exercise of stock
options granted to employees, consultants and directors. The options will be
issued at fair value and will vest over the period determined by EB Holdings'
Compensation Committee.
(13) PRO FORMA AND SUPPLEMENTAL HISTORICAL PRO FORMA DATA (UNAUDITED)
Net income per share is based on The EB Group's net income as an "S"
corporation.
Pro forma data reflects the pro forma adjustments described in the notes to
the Unaudited Pro Forma Consolidated Financial Statements on pages F-23 to F-25.
Supplemental historical pro forma data is based on historical income before
income taxes of The EB Group, which includes The EB Group's earnings or loss
from its investment in Electronics Boutique Plc.
F-17
<PAGE>
THE ELECTRONICS BOUTIQUE GROUP
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
(13) PRO FORMA AND SUPPLEMENTAL HISTORICAL PRO FORMA DATA (UNAUDITED)
(CONTINUED)
This investment will not be contributed by The EB Group to EB Holdings and its
subsidiaries as part of the reorganization transactions and, therefore, will not
contribute to EB Holdings' income.
Historical, pro forma and supplemental historical pro forma income per share
are calculated using the weighted average number of shares of common stock
outstanding during the period, which is based on the number of shares of common
stock of EB Holdings that will be outstanding upon the completion of the
reorganization transactions, but before the issuance of any shares in the public
offering.
Supplemental historical pro forma income taxes are based on the historical
income before income taxes calculated as if The EB Group were taxed as a "C"
corporation. The difference between the federal statutory income tax rate and
the supplemental historical pro forma income tax rate is as follows:
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
YEARS ENDED
------------------------------------- --------------------
FEBRUARY 3, FEBRUARY 1, JANUARY 31, MAY 3, MAY 2,
1996 1997 1998 1997 1998
----------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C>
Federal statutory tax rate........................... 34.00% 34.00% 35.00% 35.00% 35.00%
State income taxes, net of federal benefit........... 5.98 5.36 3.74 3.74 3.55
Loss of foreign subsidiaries......................... 4.78 1.80 0.51 0.51 --
Other................................................ 1.60 0.38 1.85 1.85 0.61
----------- ----------- ----------- --------- ---------
Supplemental historical pro forma income tax rate.... 46.36% 41.54% 41.10% 41.10% 39.16%
----------- ----------- ----------- --------- ---------
----------- ----------- ----------- --------- ---------
</TABLE>
F-18
<PAGE>
ELECTRONICS BOUTIQUE HOLDINGS CORP.
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED JANUARY 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
ACTUAL ADJUSTMENTS PRO FORMA
-------------- ------------- --------------
<S> <C> <C> <C>
Net sales..................................................... $ 449,179,603 $ -- $ 449,179,603
Management fees............................................... 4,791,353 -- 4,791,353
-------------- ------------- --------------
Total revenues.......................................... 453,971,156 -- 453,971,156
-------------- ------------- --------------
Costs and expenses
Costs of merchandise sold, including freight................ 338,497,642 -- 338,497,642
Selling, general and administrative......................... 87,002,305 150,000(a) 87,152,305
Depreciation and amortization............................... 7,996,506 (51,675 (b) 7,944,831
-------------- ------------- --------------
433,496,453 98,325 433,594,778
Operating income.............................................. 20,474,703 98,325 20,376,378
Equity in earnings of affiliates.............................. 2,902,780 2,902,780(c) --
Interest expense, net of interest income...................... 1,380,046 -- 1,380,046
Preacquisition loss of subsidiaries........................... 913,028 -- 913,028
-------------- ------------- --------------
Income before income taxes.................................... 22,910,465 3,001,105 19,909,360
Income taxes.................................................. 846,280 7,336,470(d) 8,182,750
-------------- ------------- --------------
Net income.................................................... $ 22,064,185 $ 10,740,633 $ 11,726,610
-------------- ------------- --------------
-------------- ------------- --------------
Pro forma net income per share................................ $ 0.74
Pro forma weighted average shares outstanding................. 15,794,200
</TABLE>
F-19
<PAGE>
ELECTRONICS BOUTIQUE HOLDINGS CORP.
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE THIRTEEN WEEKS ENDED MAY 2, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
ACTUAL ADJUSTMENTS PRO FORMA
-------------- ------------- --------------
<S> <C> <C> <C>
Net sales....................................................... $ 106,729,814 $ -- $ 106,729,814
Management fees................................................. 571,367 -- 571,367
-------------- ------------- --------------
Total revenues.............................................. 107,301,181 -- 107,301,181
-------------- ------------- --------------
Costs and expenses:
Costs of merchandise sold, including freight 79,519,589 -- 79,519,589
Selling, general and administrative........................... 22,270,148 150,000(a) 22,420,148
Depreciation and amortization................................. 2,253,768 (51,675 (b) 2,202,093
-------------- ------------- --------------
Operating income................................................ 3,257,676 98,325 3,159,351
Equity in loss of affiliates (80,287) (80,287 (c) --
Interest expense. net of interest income........................ 213,870 -- 213,870
-------------- ------------- --------------
Income before income taxes...................................... 2,963,519 18,038 2,945,481
Income taxes.................................................... 113,300 1,041,328(d) 1,154,628
-------------- ------------- --------------
Net income...................................................... $ 2,850,219 $ 1,059,366 $ 1,790,853
-------------- ------------- --------------
-------------- ------------- --------------
Pro forma net income per share.................................. $ 0.11
Pro forma weighted average
shares outstanding............................................ 15,794,200
</TABLE>
F-20
<PAGE>
ELECTRONICS BOUTIQUE HOLDINGS CORP.
PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF MAY 2, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
ACTUAL ADJUSTMENTS PRO FORMA
-------------- -------------- --------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $ 9,264,474 $ (8,139,347 (e) $ 1,125,127
Account receivable:
Trade and vendors................................... 3,060,155 (1,773,476 (e) 1,286,679
Other............................................... 3,567,108 (3,567,108 (e) --
Due from affiliates................................... 2,585,544 (218,953 (e) 2,366,591
Merchandise inventories............................... 58,765,612 -- 58,765,612
Deferred tax asset.................................... -- 3,011,000(f) 3,011,000
Prepaid expenses...................................... 3,172,832 -- 3,172,832
-------------- -------------- --------------
Total current assets.................................... 80,415,725 (10,687,884) 69,727,841
-------------- -------------- --------------
Property and equipment:
Leasehold improvements................................ 40,643,655 -- 40,643,655
Fixtures and equipment................................ 25,583,252 -- 25,583,252
Building.............................................. 6,200,950 (6,200,950 (e) --
Land.................................................. 632,806 (632,806 (e) --
Construction in progress.............................. 945,906 -- 945,906
-------------- -------------- --------------
74,006,569 (6,833,756) 67,172,813
Less accumulated depreciation and amortization........ 33,089,952 (103,349 (e) 32,986,603
-------------- -------------- --------------
Net property and equipment.............................. 40,916,617 (6,730,407) 34,186,210
-------------- -------------- --------------
Investment in affiliated companies...................... 10,945,058 (10,945,058 (g) --
Goodwill and other intangible assets, net of accumulated
amortization........................................... 2,199,425 -- 2,199,425
Deferred tax asset...................................... -- 4,817,000(f) 4,817,000
Other assets............................................ 6,219,484 (3,972,082 (e) 2,247,402
-------------- -------------- --------------
Total assets............................................ $ 140,696,309 $ (27,518,431) $ 113,177,878
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
F-21
<PAGE>
ELECTRONICS BOUTIQUE HOLDINGS CORP.
PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF MAY 2, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
ACTUAL ADJUSTMENTS PRO FORMA
-------------- -------------- --------------
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving credit facility...................................... $ 21,028,034 $ -- $ 21,028,034
Current portion of long-term debt.............................. 900,396 -- 900,396
Accounts payable............................................... 84,317,275 -- 84,317,275
Accrued expenses............................................... 11,383,614 -- 11,383,614
Due to affiliate............................................... 489 7,487,617(h) 7,488,106
Income taxes payable........................................... 561,730 -- 561,730
Distribution payable........................................... -- 6,100,000(i) 6,100,000
-------------- -------------- --------------
Total current liabilities........................................ 118,191,538 13,587,617 131,779,155
-------------- -------------- --------------
Long-term liabilities:
Notes payable.................................................. 2,749,350 -- 2,749,350
Deferred rent.................................................. 2,282,561 -- 2,282,561
-------------- -------------- --------------
5,031,911 -- 5,031,911
-------------- -------------- --------------
Total liabilities................................................ 123,223,449 13,587,617 136,811,066
-------------- -------------- --------------
Commitments
Stockholders' equity (deficit):
Preferred stock -- authorized 200,000 shares; $100.00 par
value; no shares issued and outstanding...................... -- -- --
Common stock:
Class A -- authorized 5,000 shares; $.10 par value; issued
and outstanding 1,900 shares............................... 190 (190 (j) --
Class B -- authorized 25,000 shares; $.10 par value; issued
and outstanding 21,000 shares.............................. 2,100 (2,100 (j) --
Common stock -- authorized 100,000,000 shares; $.01 par value;
pro forma issued and outstanding 15,794,200.................. -- 157,942(j) 157,942
Partners' capital of EB Services Company LLP................... 1,000 -- --
Additional paid-in capital..................................... 7,584,365 (30,467,662 (k) (22,883,297)
Accumulated other comprehensive expense........................ (907,833) -- (907,833)
Retained earnings (deficit).................................... 10,793,038 (10,793,038 (k) --
-------------- -------------- --------------
Total stockholders' equity (deficit)............................. 17,472,860 (41,106,048) (23,633,188)
-------------- -------------- --------------
Total liabilities and stockholders' equity....................... $ 140,696,309 ($ 27,518,431) $ 113,177,878
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
F-22
<PAGE>
ELECTRONICS BOUTIQUE HOLDINGS CORP.
NOTES TO THE UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
In contemplation of the public offering, a series of reorganization
transactions that are described in the "Reorganization" section of the
prospectus have occurred or will occur. Upon completion and as a result of the
reorganization transactions, certain assets will be retained by The Electronics
Boutique, Inc. (EB) and, therefore, will not be included in the consolidated
balance sheet of Electronics Boutique Holdings Corp. and its subsidiaries at the
time of the consummation of the offering. EB will retain the West Chester
distribution center and headquarters; cash, receivables and other assets
representing the undistributed previously taxed S Corporation earnings,
undistributed C Corporation earnings from years prior to 1988 and additional
paid in capital of EB; and shares of Electronics Boutique plc. In addition,
pursuant to the Reorganization, EB will acquire 99.99% of the outstanding
partnership interests of EB Services Company LLP. Accordingly, EB Holdings will
be entitled to the benefits under the Services Agreement with Electronics
Boutique plc, while EB will continue to be a party to the agreement, which will
continue in accordance with its terms.
The Reorganization is structured to allow the shareholders of EB to retain
both the Company's previously taxed earnings, which exceed book earnings due to
timing differences, and the shares of EB-UK capital stock. As a result, the
Company's stockholder's equity account after the Reorganization and prior to the
completion of the Offering will reflect a deficit of approximately $23.6
million. The sale by the Company of the 4,375,000 shares of Common Stock offered
hereby (at an assumed initial public offering price of $16.00 per share) will
restore the Company's stockholder's equity account to a positive balance of
approximately $40.4 million.
Prior to the offering EB has been taxed as an S Corporation for federal and
certain state income tax purposes resulting in taxable income being passed
through to its shareholders. Additionally, EB Services Company LLP, which will
become 99.99% owned by EB Holdings in connection with the reorganization, has
been taxed as a partnership with its taxable income being passed through to its
partners, EB Services Company LLP plans to distribute its previously taxed but
undistributed earnings to its partners prior to or contemporaneously with the
public offering. Subsequent to the public offering, EB Holdings and its
subsidiaries will be subject to tax as a C Corporation.
The pro forma data presented in the unaudited pro forma consolidated
financial statements are included in order to illustrate the effect on the
financial statements of The Electronics Boutique Group of the reorganization
transactions described above as if such transactions occurred on May 2, 1998 as
they relate to the pro forma balance sheet and as of February 2, 1997 and
February 1, 1998 as they relate to the pro forma statements of income for the
fiscal year ended January 31, 1998 and the thirteen weeks ended May 2, 1998,
respectively. The pro forma information is based on the historical financial
statements of The Electronics Boutique Group. In the opinion of management, all
adjustments have been made that are necessary to present fairly the pro forma
data. The unaudited pro forma consolidated financial statements do not include
the effect of issuance of shares upon the consummation of the public offering
contemplated in this prospectus.
The pro forma consolidated financial statements should be read in
conjunction with the audited consolidated and combined financial statements of
The Electronics Boutique Group and the notes thereto. The pro forma consolidated
statement of income data are not necessarily indicative of the results that
would have been reported had such events actually occurred on the date
specified, nor are they indicative of future results.
Pro forma adjustments for the unaudited pro forma consolidated statements of
income for the year ended January 31, 1998 and the thirteen weeks ended May 2,
1998 are as follows:
F-23
<PAGE>
(a) Represents lease expense for the three months for the West Chester
distribution center and headquarters which were purchased by EB in October
1997. The West Chester distribution center and headquarters are being
retained by EB.
(b) Represents reduction in depreciation expense for three months for the
West Chester distribution center and headquarters which were purchased in
October 1997 by EB. The West Chester distribution center and headquarters
are being retained by EB.
(c) Represents elimination of the equity in earnings (loss) of investment in
Electronics Boutique Plc and goodwill amortization as EB is retaining its
shares of Electronics Boutique Plc.
(d) Represents adjustment to record income taxes as if EB and EB Services
Company LLP had been taxed as a C Corporation for federal and state income
taxes purposes. The difference between the federal statutory income tax rate
and the pro forma income tax rate was as follows:
<TABLE>
<CAPTION>
YEAR ENDED THIRTEEN WEEKS
JANUARY 31, 1998 ENDED MAY 2, 1998
------------------- ---------------------
<S> <C> <C>
Federal statutory tax rate............................... 35.0% 35.0%
State income taxes, net of federal benefit............... 3.7 3.6
Loss of foreign subsidiaries............................. 0.5 --
Other.................................................... 1.9 0.6
--- ---
Pro forma income tax rate................................ 41.1% 39.2%
--- ---
--- ---
</TABLE>
Pro forma adjustments for the unaudited pro forma consolidated balance sheet
as of May 2, 1998 are as follows:
(e) Represents elimination of assets retained by EB representing
undistributed previously taxed S Corporation earnings, additional paid in
capital, and undistributed C corporation earnings from years prior to 1988
of EB.
(f) Represents effect of cumulative differences between the financial
reporting and income tax basis of certain assets and liabilities as a result
of the creation of EB Holdings as a C Corporation for federal and state
income tax purposes, whereas EB was an S Corporation for federal and certain
state tax purposes and EB Services Company LLP was a partnership for federal
and state tax purposes. The significant items comprising EB Holdings' pro
forma net deferred income tax assets and liabilities as of May 2, 1998 are
temporary differences relating to the following:
<TABLE>
<S> <C>
Deferred tax assets:
Inventory capitalized costs................................... $1,565,000
Accrued expenses.............................................. 1,446,000
Fixed assets.................................................. 3,858,000
Deferred rent................................................. 847,000
Amortization of goodwill...................................... 112,000
Foreign net operating loss carryforward....................... 1,622,000
----------
Total gross deferred tax asset................................ 9,450,000
Valuation allowance........................................... (1,622,000)
----------
Deferred tax assets........................................... $7,828,000
----------
----------
</TABLE>
Since EB Holdings does not intend to repatriate the earnings of its foreign
subsidiaries, no U.S. deferred income taxes have been recorded on such
amounts.
(g) Represents the elimination of the investment in Electronics Boutique Plc
as EB will retain its shares of Electronics Boutique Plc.
F-24
<PAGE>
(h) Represents payable to EB by EB Holdings for receivables that will be
retained by EB representing undistributed previously taxed S Corporation
earnings, additional paid in capital, and undistributed C corporation
earnings from years prior to 1988 of EB. These were previously intercompany
receivables eliminated in the consolidated and combined financial statements
of the EB Group.
(i) Represents estimated distribution of previously taxed partnership
earnings to the partners of EB Services Company LLP.
(j) Represents adjustment to reflect common stock of EB Holdings outstanding
upon the reorganization transactions.
(k) Represents the elimination of retained earnings and additional paid in
capital as a result of the reorganization transactions.
F-25
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, THE SELLING SHAREHOLDER OR ANY OF THE UNDERWRITERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY
OFFER TO BUY ANY SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF.
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
------------------------
<TABLE>
<S> <C>
TABLE OF CONTENTS
PAGE
----
Prospectus Summary........................ 3
Risk Factors.............................. 7
Reorganization............................ 12
Use of Proceeds........................... 15
Dividend Policy........................... 15
Capitalization............................ 16
Dilution.................................. 17
Selected Consolidated and Combined
Financial and Operating Data............ 18
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. 20
Business.................................. 27
Management................................ 40
Certain Transactions...................... 45
Principal and Selling Shareholders........ 47
Description of Capital Stock.............. 48
Shares Eligible for Future Sale........... 51
Underwriting.............................. 52
Legal Matters............................. 53
Experts................................... 53
Additional Information.................... 53
Index to Consolidated and Combined
Financial Statements.................... F-1
</TABLE>
6,250,000 Shares
[LOGO]
Common Stock
------------------
P R O S P E C T U S
------------------
PRUDENTIAL SECURITIES INCORPORATED
SALOMON SMITH BARNEY
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses expected to be incurred
in connection with the Offering. All amounts are estimates except the Commission
Registration Fee, the NASD Filing Fee and the NASDAQ National Market Fee.
<TABLE>
<S> <C>
Commission Registration Fee..................................................... $ 43,255
NASD Filing Fee................................................................. 15,163
NASDAQ National Market Fee...................................................... 94,000
EDGAR and Printing Expenses..................................................... 150,000
Legal Fees and Expenses......................................................... 500,000
Accounting Fees and Expenses.................................................... 250,000
Blue Sky Fees and Expenses...................................................... 5,000
Transfer Agent's Fees and Expenses.............................................. 10,000
Directors and Officers Insurance Premiums....................................... 100,000
Miscellaneous Expenses.......................................................... 14,327
---------
Total........................................................................... $1,225,000
---------
---------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law permits a corporation to
include in its charter documents, and in agreements between the corporation and
its directors and officers, provisions expanding the scope of indemnification
beyond that specifically provided by the current law.
The Company's Certificate of Incorporation provides for the indemnification
of directors to the fullest extent permissible under Delaware Law.
The Company's Bylaws provide for the indemnification of officers, directors
and third parties acting on behalf of the Company if such person acted in good
faith and in a manner reasonably believed to be in and not opposed to the best
interest of the Company, and, with respect to any criminal action or proceeding,
the indemnified party had no reason to believe his conduct was unlawful.
The Company has entered into indemnification agreements with its directors
and executive officers in addition to the indemnification provided for in the
Company's Bylaws, and intends to enter into indemnification agreements with any
new directors and executive officers in the future.
The form of Underwriting Agreement filed as an Exhibit hereto provides for
the indemnification of the Company's directors and officers in certain
circumstances as provided therein.
The Company intends to procure insurance, which would afford officers and
directors insurance coverage for losses arising from claims based on breaches of
duty, negligence, error and other wrongful acts, including liabilities under the
Securities Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In 1998, an aggregate of 100 shares of Common Stock were issued to the
Kim Shareholders and EB Services Corp. in exchange for 99.99% of the outstanding
partnership interests of EB Services, and 15,794,100 shares of common stock were
issued to EB Nevada in exchange for the Operating Shares. Such issuances were
made pursuant to the exemption from registration under Section 4(2) of the
Securities Act. See "Reorganization."
II-1
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
<TABLE>
<S> <C> <C>
1.1 Form of Underwriting Agreement
* 3.1 Certificate of Incorporation of the Company
* 3.2 Bylaws of the Company
* 4.1 Specimen Stock Certificate
5.1 Opinion of Klehr, Harrison, Harvey, Branzburg & Ellers LLP
* 10.2 Form of Indemnification Agreement for Directors and Officers of the Company
* 10.3 Form of 1998 Equity Participation Plan of the Company
* 10.4 Services Agreement, dated October 13, 1995, by and between EB and EB-UK (f/k/a
Rhino Group Plc)
* 10.5 Loan and Security Agreement, dated March 16, 1998, by and between EB and Fleet
Capital Corporation
10.6 Joinder Agreement by and between EBOA and Fleet Capital Corporation
* 10.7 Form of Employment Agreement by and between the Company and Joseph J. Firestone
* 10.8 Form of Employment Agreement by and between the Company and John R. Panichello
* 10.9 Form of Employment Agreement by and between the Company and Jeffrey W. Griffiths
* 10.10 Assignment, Bill of Sale, and Assumption Agreement, dated May 31, 1998, by and
between EB and EBOA
* 10.11 Form of Registration Rights Agreement between the Company and EB Nevada
* 10.12 Form of Demand Note by and between James J. Kim and EBOA
* 10.13 Assignment of Trademarks, dated May 31, 1998, by and between EB and Elbo
10.14 Addendum to Assignment of Trademarks by and between EB and Elbo
10.15 Form of Agreement of Lease by and between EB and EBOA
10.16 Agreement and Bill of Sale, dated as of July 13, 1998, by and between the Company
and
</TABLE>
II-2
<PAGE>
<TABLE>
<S> <C> <C>
EB Nevada
10.17 Agreement and Consent to Assignment and Assumption of Partnership Interests,
dated as of July 13, 1998
** 11.1 Statement re computation of per share earnings
** 12.1 Statement re computation of ratios
21.1 Subsidiaries of the Company
23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of Klehr, Harrison, Harvey, Branzburg & Ellers LLP (included in Exhibit
5.1)
* 25.1 Powers of Attorney
* 27.1 Financial Data Schedule
</TABLE>
- ------------------------
* Previously filed
** Not applicable
II-3
<PAGE>
(b) Consolidated Financial Statement Schedules
None
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The Registrant further undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial BONA FIDE offering thereof.
The Registrant undertakes to provide to the underwriter at the closing
specified in the underwriting agreement certificates in such denominations and
registered in such names as required by the underwriter to permit prompt
delivery to each purchaser.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the Borough of West Chester,
Commonwealth of Pennsylvania, on July 21, 1998.
ELECTRONICS BOUTIQUE HOLDINGS CORP.
By: /s/ JOSEPH J. FIRESTONE
-----------------------------------------
Joseph J. Firestone,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below on July 21, 1998 by the following
persons in the capacities indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------------------------------ ------------------------------------------------------
<C> <S>
/s/ JAMES J. KIM* Chairman of the Board
-------------------------------------------
James J. Kim
/s/ JOSEPH J. FIRESTONE President, Chief Executive Officer and Director
------------------------------------------- (Principal Executive Officer)
Joseph J. Firestone
/s/ DEAN S. ADLER* Director
-------------------------------------------
Dean S. Adler
/s/ SUSAN Y. KIM* Director
-------------------------------------------
Susan Y. Kim
/s/ LOUIS J. SIANA* Director
-------------------------------------------
Louis J. Siana
/s/ JOHN R. PANICHELLO* Senior Vice President and Chief Financial Officer
------------------------------------------- (Principal Financial and Accounting Officer)
John R. Panichello
</TABLE>
*By: /s/ JOSEPH J. FIRESTONE
-------------------------
Joseph J. Firestone
(ATTORNEY-IN-FACT)
II-4
<PAGE>
Exhibit 1.1
K&S DRAFT
07/21/98
ELECTRONICS BOUTIQUE HOLDINGS CORP.
6,250,000(1)
Common Stock
UNDERWRITING AGREEMENT
July __, 1998
PRUDENTIAL SECURITIES INCORPORATED
SMITH BARNEY INC.
As Representatives of the several Underwriters
c/o Prudential Securities Incorporated
One New York Plaza
New York, New York 10292
Dear Ladies and Gentlemen:
Electronics Boutique Holdings Corp., a Delaware corporation (the
"Company"), and EB Nevada Inc., the Company's parent and the selling
securityholder (the "Selling Securityholder"), hereby confirm their agreement
with the several underwriters named in Schedule 1 hereto (the "Underwriters"),
for whom you have been duly authorized to act as representatives (in such
capacities, the "Representatives"), as set forth below. If you are the only
Underwriters, all references herein to the Representatives shall be deemed to be
to the Underwriters.
1. Securities. Subject to the terms and conditions herein contained,
the Company and the Selling Securityholder propose to issue and sell to the
several Underwriters an aggregate of 6,250,000 shares (the "Firm Securities") of
the Company's common stock, par value $.01 per share ("Common Stock"), of which
4,375,000 shares will be issued and sold by the Company
- -----------------------
(1) Plus an option to purchase from the Selling Securityholder up to
937,500 additional shares to cover over-allotments.
<PAGE>
(the "Company's Firm Securities") and 1,875,000 shares will be sold by the
Selling Securityholder (the "Selling Securityholder's Firm Securities"). The
Selling Securityholder also proposes to sell to the several Underwriters not
more than 937,500 additional shares of Common Stock if requested by the
Representatives as provided in Section 3 of this Agreement. Any and all
shares of Common Stock to be purchased by the Underwriters pursuant to such
option are referred to herein as the "Option Securities," and the Firm
Securities and any Option Securities are collectively referred to herein as
the "Securities."
Reorganization. On or as of May 31, 1998, The Electronics Boutique,
Inc. ("EB") (i) transferred certain assets, including its leases, leasehold
improvements, inventory, employee contracts, fixed assets and prepaid expenses,
subject to all of its liabilities, to Electronics Boutique of America Inc.
("EBOA") in exchange for all of the outstanding shares of capital stock of EBOA,
(ii) entered into a two-year lease with EBOA for the West Chester, Pennsylvania
distribution center and headquarters (the "Distribution Center"), which lease
grants EBOA an option to purchase the Distribution Center for $6.7 million and
(iii) assigned its intangible assets, including trademark and tradenames, to
Elbo Inc. ("Elbo") in exchange for all of the outstanding shares of capital
stock of Elbo. EB retained (i) all of the outstanding shares of capital stock of
EBOA, Elbo, EB International, Inc. and Electronics Boutique of Canada, Inc.
(collectively, the "Operating Shares"), (ii) its shares of Electronics Boutique
plc ("EB-UK"), an affiliate of the Company organized under the laws of the
United Kingdom, (iii) the Distribution Center and (iv) $17.5 million of cash,
accounts receivable and cash surrendered value of certain split-dollar life
insurance policies.
Immediately prior to completion of the sale of the Securities, (i) EB
will transfer the Operating Shares and its shares of EB-UK to the Selling
Securityholder in exchange for all of the outstanding shares of capital stock of
the Selling Securityholder, (ii) the Selling Securityholder will contribute the
Operating Shares to the Company in exchange for 15,794,100 shares of Common
Stock and (iii) the Company will acquire from the Kim Shareholders (as defined
in the Prospectus) and EB Services Corp. ("EB Services Corp."), for an aggregate
of 100 shares of Common Stock, 99.99% of the outstanding partnership interests
of EB Services Company, LLP ("EB Services"), with EB Services Corp. retaining a
0.01% general partnership interest. The transactions described in this and the
preceding paragraph (collectively, the "Reorganization") have been or will be
made pursuant to the terms of certain contribution, assignment and exchange
agreements (collectively, the "Reorganization Agreements") among EB, EBOA, Elbo,
EB Services Corp., EB Services, the Selling Securityholder (collectively, the
"Affiliated Entities") and the Kim Shareholders.
2. Representations and Warranties of the Company.
(a) The Company represents and warrants to, and agrees with, each of
the several Underwriters and the Selling Securityholder that:
-2-
<PAGE>
(i) A registration statement on Form S-1 (File No. 333-48523)
with respect to the Securities, including a prospectus subject to
completion, has been filed by the Company with the Securities and
Exchange Commission (the "Commission") under the Securities Act of
1933, as amended (the "Act"), and one or more amendments to such
registration statement may have been so filed. After the execution of
this Agreement, the Company will file with the Commission either (A) if
such registration statement, as it may have been amended, has been
declared by the Commission to be effective under the Act, either (1) if
the Company relies on Rule 434 under the Act, a Term Sheet (as
hereinafter defined) relating to the Securities, that shall identify
the Preliminary Prospectus (as hereinafter defined) that it supplements
containing such information as is required or permitted by Rules 434,
430A and 424(b) under the Act or (2) if the Company does not rely on
Rule 434 under the Act, a prospectus in the form most recently included
in an amendment to such registration statement (or, if no such
amendment shall have been filed, in such registration statement), with
such changes or insertions as are required by Rule 430A under the Act
or permitted by Rule 424(b) under the Act, and in the case of either
clause (A)(1) or (A)(2) of this sentence as have been provided to and
approved by the Representatives prior to the execution of this
Agreement, or (B) if such registration statement, as it may have been
amended, has not been declared by the Commission to be effective under
the Act, an amendment to such registration statement, including a form
of prospectus, a copy of which amendment has been furnished to and
approved by the Representatives prior to the execution of this
Agreement. The Company may also file a related registration statement
with the Commission pursuant to Rule 462(b) under the Act for the
purpose of registering certain additional Securities, which
registration shall be effective upon filing with the Commission. As
used in this Agreement, the term "Original Registration Statement"
means the registration statement initially filed relating to the
Securities, as amended at the time when it was or is declared
effective, including all financial schedules and exhibits thereto and
including any information omitted therefrom pursuant to Rule 430A under
the Act and included in the Prospectus (as hereinafter defined); the
term "Rule 462(b) Registration Statement" means any registration
statement filed with the Commission pursuant to Rule 462(b) under the
Act (including the Registration Statement and any Preliminary
Prospectus or Prospectus incorporated therein at the time such
Registration Statement becomes effective); the term "Registration
Statement" includes both the Original Registration Statement and any
Rule 462(b) Registration Statement; the term "Preliminary Prospectus"
means each prospectus subject to completion filed with the Registration
Statement or any amendment thereto (including the prospectus subject to
completion, if any, included in the Registration Statement or any
amendment thereto at the time it was or is declared effective); the
term "Prospectus" means:
(A) If the Company relies on Rule 434 under the Act,
the Term Sheet relating to the Securities that is first filed
pursuant to Rule 424(b)(7) under the Act, together with the
Preliminary Prospectus identified therein that such Term Sheet
supplements;
-3-
<PAGE>
(B) if the Company does not rely on Rule 434 under
the Act, the prospectus first filed with the Commission
pursuant to Rule 424(b) under the Act; or
(C) if the Company does not rely on Rule 434 under
the Act and if no prospectus is required to be filed pursuant
to Rule 424(b) under the Act, the prospectus included in the
Registration Statement,
and the term "Term Sheet" means any term sheet that satisfies the
requirements of Rule 434 under the Act. Any reference herein to the
"date" of a Prospectus that includes a Term Sheet shall mean the date
of such Term Sheet.
(ii) The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus. When any Preliminary
Prospectus dated July 6, 1998 or any later date was filed with the
Commission it (A) contained all statements required to be stated
therein in accordance with, and complied in all material respects with
the requirements of, the Act and the rules and regulations of the
Commission thereunder and (B) did not include any untrue statement of a
material fact or omit to state any material fact necessary in order to
make the statements therein, in the light of the circumstances under
which they were made, not misleading. When the Registration Statement
or any amendment thereto was or is declared effective, it (A) contained
or will contain all statements required to be stated therein in
accordance with, and complied or will comply in all material respects
with the requirements of the Act and the rules and regulations of the
Commission thereunder and (B) did not or will not include any untrue
statement of a material fact or omit to state any material fact
necessary to make the statements therein not misleading. When the
Prospectus or any Term Sheet that is a part thereof or any amendment or
supplement to the Prospectus is filed with the Commission pursuant to
Rule 424(b) (or, if the Prospectus or part thereof or such amendment or
supplement is not required to be so filed, when the Registration
Statement or the amendment thereto containing such amendment or
supplement to the Prospectus was or is declared effective) and on the
Firm Closing Date and any Option Closing Date (both as hereinafter
defined), the Prospectus, as amended or supplemented at any such time,
(A) contained or will contain all statements required to be stated
therein in accordance with, and complied or will comply in all material
respects with the requirements of, the Act and the respective rules and
regulations of the Commission thereunder and (B) did not or will not
include any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading.
The foregoing provisions of this paragraph (ii) do not apply to
statements or omissions made in any Preliminary Prospectus, the
Registration Statement or any amendment thereto or the Prospectus or
any amendment or supplement thereto in reliance upon and in conformity
with written information furnished to the Company by any Underwriter
through the Representatives specifically for use therein.
-4-
<PAGE>
(iii) If the Company has elected to rely on Rule 462(b) and
the Rule 462(b) Registration Statement has not been declared effective
(A) the Company has filed a Rule 462(b) Registration Statement in
compliance with and that is effective upon filing pursuant to Rule
462(b) and has received confirmation of its receipt and (B) the Company
has given irrevocable instructions for transmission of the applicable
filing fee in connection with the filing of the Rule 462(b)
Registration Statement, in compliance with Rule 111 promulgated under
the Act or the Commission has received payment of such filing fee.
(iv) The Company and each of its subsidiaries and Affiliated
Entities have been duly organized and are validly existing as
corporations under the laws of their respective jurisdictions and are
duly qualified to transact business as foreign corporations and are in
good standing under the laws of all other jurisdictions where the
ownership or leasing of their respective properties or the conduct of
their respective businesses requires such qualification, except where
the failure to be so qualified does not amount to a material liability
or disability to the Company and each of its subsidiaries, taken as a
whole.
(v) Except as otherwise described in the Registration
Statement and the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus) the Company and each
of its subsidiaries have full power (corporate and other) to own or
lease their respective properties and conduct their respective
businesses, and the Company has full power (corporate and other) to
enter into this Agreement and to carry out all the terms and provisions
hereof to be carried out by it.
(vi) The Company has an authorized, issued and outstanding
capitalization as set forth in the Prospectus (or, if the Prospectus is
not in existence, the most recent Preliminary Prospectus). All of the
issued shares of capital stock of the Company (including but not
limited to the Securities being sold by the Selling Securityholder)
have been duly authorized and validly issued and are fully paid and
nonassessable. The Firm Securities and Option Securities have been duly
authorized and at the Firm Closing Date or the related Option Closing
Date (as the case may be), after payment therefor in accordance
herewith, will be validly issued, fully paid and nonassessable. No
holders of outstanding shares of capital stock of the Company are
entitled as such to any preemptive or other rights to subscribe for any
of the Securities, and no holder of securities of the Company has any
right which has not been fully exercised or waived to require the
Company to register the offer or sale of any securities owned by such
holder under the Act in the public contemplated by this Agreement.
(vii) The issued and outstanding shares of capital stock of
each of the Company's subsidiaries have been duly authorized and
validly issued and are fully paid and nonassessable and are owned
beneficially by the Company free and clear of security interests,
liens, encumbrances or claims.
-5-
<PAGE>
(viii) Except for the shares of capital stock of each of the
subsidiaries listed on Exhibit 21.1 to the Registration Statement, the
Company does not, directly or indirectly, own any shares of stock or
any other equity securities of any corporation or have any equity
interest in any firm, partnership, association or other entity, except
as described in or contemplated by the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary
Prospectus).
(ix) The capital stock of the Company conforms to the
description thereof contained in the Prospectus or, if the Prospectus
is not in existence, the most recent Preliminary Prospectus.
(x) The consolidated financial statements and schedules of the
Company and its consolidated subsidiaries included in the Registration
Statement and the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus) fairly present the
financial position of the Company and its consolidated subsidiaries and
the results of operations and changes in financial condition as of the
dates and periods therein specified. Such financial statements and
schedules have been prepared in accordance with generally accepted
accounting principles consistently applied throughout the periods
involved (except as otherwise noted therein). The selected consolidated
financial data set forth under the caption "Selected Consolidated
Financial and Operating Data" in the Prospectus (or, if the Prospectus
is not in existence, the most recent Preliminary Prospectus) fairly
present, on the basis stated in the Prospectus (or such Preliminary
Prospectus), the information included therein.
(xi) KPMG Peat Marwick LLP, who have audited certain financial
statements of the Company and its consolidated subsidiaries and
delivered their report with respect to the audited consolidated and
combined financial statements and schedules included in the
Registration Statement and the Prospectus (or, if the Prospectus is not
in existence, the most recent Preliminary Prospectus), are independent
public accountants as required by the Act and the applicable rules and
regulations thereunder.
(xii) The execution and delivery of this Agreement have been
duly authorized by the Company, and this Agreement has been duly
executed and delivered by the Company and is the valid and binding
agreement of the Company, enforceable against the Company in accordance
with its terms, except as such enforceability may be limited by
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium
or similar laws affecting the rights and remedies of creditors
generally and subject to general principles of equity whether in a
court of law or equity.
(xiii) The execution and delivery of the Reorganization
Agreements to which the Company and the Affiliated Entities are parties
have been duly authorized by the Company and the Affiliated Entities,
as the case may be, and the Reorganization Agreements have been duly
executed and delivered by the Company, the Affiliated
-6-
<PAGE>
Entities and the Kim Shareholders and are the valid and binding
agreements of the Company, the Affiliated Entities and the Kim
Shareholders, enforceable against the Company, the Affiliated Entities
and the Kim Shareholders in accordance with their respective terms ,
except as such enforceability may be limited by bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium or similar
laws affecting the rights and remedies of creditors generally and
subject to general principles of equity whether in a court of law or
equity. The Reorganization has been consummated on the terms and
conditions set forth in the Prospectus.
(xiv) No legal or governmental proceedings are pending to
which the Company or any of its subsidiaries is a party or to which the
property of the Company or any of its subsidiaries is subject that are
required to be described in the Registration Statement or the
Prospectus and are not described therein (or, if the Prospectus is not
in existence, the most recent Preliminary Prospectus), and, no such
proceedings have been threatened against the Company or any of its
subsidiaries or with respect to any of its properties; and no contract
or other document is required to be described in the Registration
Statement or the Prospectus or to be filed as an exhibit to the
Registration Statement that is not described therein (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus)
or filed as required.
(xv) The issuance, offering and sale of the Securities being
issued and sold by the Company to the Underwriters pursuant to this
Agreement, the compliance by the Company with the other provisions of
this Agreement and the consummation of the other transactions
contemplated hereby and the consummation by the Company and the
Affiliated Entities of the Reorganization do not (A) require the
consent, approval, authorization, registration or qualification of or
with any governmental authority, except such as have been obtained,
such as may be required under state securities or blue sky laws and, if
the registration statement filed with respect to the Securities (as
amended) is not effective under the Act as of the time of the execution
hereof, such as may be required (and shall be obtained as provided in
this Agreement) under the Act or (B) except as otherwise described in
the Registration Statement or the Prospectus (or, if the Prospectus is
not in existence, the most recent Preliminary Prospectus), conflict
with or result in a breach or violation of any terms and provisions of,
or constitute a default under, any indenture, mortgage, deed of trust,
lease or other agreement or instrument to which the Company or any of
its subsidiaries is a party or by which the Company or any of its
subsidiaries or any of its properties are bound, or the charter
documents or bylaws of the Company or any of its subsidiaries or any
statute or any judgment, decree, order, rule or regulation of any court
or other governmental authority or any arbitrator applicable to the
Company or any of its subsidiaries, except, with respect to the
Reorganization, any such conflict, breach, violation or default that
would not have a material adverse effect on the condition (financial or
otherwise), management, business prospects, net worth or results of
operations of the Company and its subsidiaries.
-7-
<PAGE>
(xvi) Subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus
(or, if the Prospectus is not in existence, the most recent Preliminary
Prospectus), (A) neither the Company nor any of its subsidiaries has
sustained any material loss or interference with its business or
properties from fire, flood, hurricane, accident or other calamity,
whether or not covered by insurance, or from any labor dispute or any
legal or governmental proceeding and there has not been any material
adverse change, or any development involving a prospective material
adverse change, in the condition (financial or otherwise), management,
business prospects, net worth or results of operations of the Company
or any of its subsidiaries; (B) neither the Company nor its
subsidiaries, if applicable, has incurred any material liability or
obligation, direct or contingent, nor entered into any material
transaction, not in the ordinary course of business; (C) neither the
Company nor any of its subsidiaries has purchased any of its
outstanding capital stock, or declared, paid or otherwise made any
dividend or distribution of any kind on its capital stock; and (D)
there has not been any material change in the capital stock, short-term
debt or long-term debt of the Company and its consolidated
subsidiaries, except in each case of this paragraph (xvi) as described
in or contemplated by the Prospectus or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus.
(xvii) The Company has not, directly or indirectly, (A) taken
any action designed to cause or to result in, or that has constituted
or which might reasonably be expected to constitute, the stabilization
or manipulation of the price of any security of the Company to
facilitate the sale or resale of the Securities or (B) since the filing
of the Registration Statement (1) sold, bid for, purchased or paid
anyone any compensation for soliciting purchases of, the Securities or
(2) paid or agreed to pay to any person any compensation for soliciting
another to purchase any other securities of the Company (except for the
sale of Securities by the Selling Securityholder under this Agreement).
(xviii) The Company and each of its subsidiaries have good and
marketable title in fee simple to all items of real property and
marketable title to all personal property owned by each of them, in
each case free and clear of any security interests, liens,
encumbrances, claims and other defects, except such as do not
materially and adversely affect the value of such property and do not
interfere with the use made or proposed to be made of such property by
the Company or any such subsidiary and any real property and buildings
held under lease by the Company or any such subsidiary are held under
valid, subsisting and enforceable leases, with such exceptions as are
not material and do not interfere with the use made or proposed to be
made of such property and buildings by the Company or any such
subsidiary, in each case of this paragraph (xviii) except as described
in or contemplated by the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus).
(xix) No labor dispute with the employees of the Company or
any of its subsidiaries exists or, to the best of the Company's
knowledge, is threatened or imminent
-8-
<PAGE>
that would have a material adverse effect on the condition (financial
or otherwise), management, business prospects, net worth or results of
operations of the Company and its subsidiaries, except as described in
or contemplated by the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus).
(xx) The Company and its subsidiaries own or possess, or can
acquire on reasonable terms, all material patents, patent applications,
trademarks, service marks, trade names, licenses, copyrights and
proprietary or other confidential information currently used by them in
connection with their respective businesses, and neither the Company
nor any such subsidiary has received any notice of, or has any
reasonable belief that its use constitutes, an infringement of or
conflict with asserted rights of any third party with respect to any of
the foregoing which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would have a material adverse
effect on the condition (financial or otherwise), management, business
prospects, net worth or results of operations of the Company or such
subsidiary, except as described in or contemplated by the Prospectus
(or, if the Prospectus is not in existence, the most recent Preliminary
Prospectus).
(xxi) The Company and each of its subsidiaries are insured by
insurers of recognized financial responsibility against such losses and
risks and in such amounts as are prudent and customary in the business
in which they are engaged; neither the Company nor any such subsidiary
has been refused any insurance coverage sought or applied for; and the
neither Company nor any such subsidiary has reason to believe that it
will not be able to renew its existing insurance coverage as and when
such coverage expires or to obtain similar coverage from similar
insurers as may be necessary to continue its business at a cost that
would not have a material adverse effect on the condition (financial or
otherwise), management, business prospects, net worth or results of
operations of the Company and its subsidiaries, except as described in
or contemplated by the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus).
(xxii) The Company and its subsidiaries possess all
certificates, authorizations and permits issued by the appropriate
federal, state or foreign regulatory authorities necessary to conduct
its business except where failure to possess such certificates,
authorizations and permits would not have a material adverse effect on
the condition (financial or otherwise), management, business prospects,
net worth or results of operations of the Company or any of its
subsidiaries, and neither the Company nor any such subsidiary has
received any notice of proceedings relating to the revocation or
modification of any such certificate, authorization or permit which,
singly or in the aggregate, if the subject of an unfavorable decision,
ruling or finding, would have a material adverse effect on the
condition (financial or otherwise), management, business prospects, net
worth or results of operations of the Company and its subsidiaries,
except
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<PAGE>
as described in or contemplated by the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary
Prospectus).
(xxiii) The Company will conduct its operations in a
manner that will not subject it to registration as an investment
company under the Investment Company Act of 1940, as amended (the
"Investment Company Act"), and consummation of the transactions herein
contemplated will not cause the Company to become an investment
company subject to registration under the Investment Company Act.
(xxiv) The Company and its subsidiaries have filed all
foreign, federal, state and local tax returns that are required to be
filed or have requested extensions thereof (except in any case in which
the failure so to file would not have a material adverse effect on the
condition (financial or otherwise), management, business prospects, net
worth or results of operations of the Company or any of its
subsidiaries and have paid all taxes required to be paid by them and
any other assessment, fine or penalty levied against them, to the
extent that any of the foregoing is due and payable, except for any
such assessment, fine or penalty that is currently being contested in
good faith or as described in or contemplated by the Prospectus (or, if
the Prospectus is not in existence, the most recent Preliminary
Prospectus) or except as would not otherwise have a material adverse
effect on the condition (financial or otherwise), management, business
prospects, net worth or results of operations of the Company and its
subsidiaries.
(xxv) Neither the Company nor any of its subsidiaries is in
violation of any federal or state law or regulation relating to (A) the
environment or hazardous or toxic substances or wastes, pollutants or
contaminants or to the storage, handling or transportation of hazardous
or toxic materials ("Environmental Laws") or (B) occupational safety
and health and the Company and its subsidiaries have received all
permits, licenses or other approvals required of it under applicable
federal and state Environmental Laws and occupational safety and health
laws and regulations to conduct their respective businesses, and the
Company and each such subsidiary is in compliance with all terms and
conditions of any such permit, license or approval, except for any such
violation of law or regulation, failure to receive required permits,
licenses or other approvals or failure to comply with the terms and
conditions of such permits, licenses or approvals which would not,
singly or in the aggregate, have a material adverse effect on the
condition (financial or otherwise), management, business prospects, net
worth or results of operations of the Company and its subsidiaries,
except as described in or contemplated by the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary
Prospectus). Neither the Company nor any of its subsidiaries has any
pending or, to the best of the Company's knowledge, threatened
environmental or occupational safety and health claims against it nor
are there circumstances with respect to any property or operations of
the Company or any such subsidiary that could reasonably be anticipated
to form the basis of a claim against the Company under any
Environmental Laws or occupational health and safety laws and
regulations which, singly
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<PAGE>
or in the aggregate, would have a material adverse effect on the
condition (financial or otherwise), management, business prospects,
net worth or results of operations of the Company and its
subsidiaries, except as described in or contemplated by the Prospectus
(or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus).
(xxvi) Each certificate signed by any officer of the Company
in his or her capacity as such and delivered to the Representatives or
counsel for the Underwriters shall be deemed to be a representation and
warranty by the Company to each Underwriter as to the matters covered
thereby.
(xxvii) The Company and each of its subsidiaries maintain a
system of internal accounting controls sufficient to provide reasonable
assurance that (A) transactions are executed in accordance with
management's general or specific authorizations; (B) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to
maintain asset accountability; (C) access to assets is permitted only
in accordance with management's general or specific authorization; and
(D) the recorded accountability for assets is compared with the
existing assets at reasonable intervals and appropriate action is taken
with respect to any differences.
(xxviii) Except as disclosed in the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary
Prospectus), no default exists, and no event has occurred which, with
notice or lapse of time or both, would constitute a default in the due
performance and observance of any term, covenant or condition of any
indenture, mortgage, deed of trust, lease or other agreement or
instrument to which the Company or any of its subsidiaries is a party
or by which the Company or any of its subsidiaries or any of their
respective properties is bound, except any such default that would not
have a material adverse effect on the condition (financial or
otherwise), management, business prospects, net worth or results of
operations of the Company and its subsidiaries.
(xxix) Except as disclosed in the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary
Prospectus), there are no outstanding (A) securities or obligations of
the Company or any of its subsidiaries convertible into or exchangeable
for any capital stock of the Company or any such subsidiary, (B)
warrants, rights or options to subscribe for or purchase from the
Company or any such subsidiary any such capital stock or any such
convertible or exchangeable securities or obligations or (C)
obligations of the Company or any such subsidiary to issue any shares
of capital stock, any such convertible or exchangeable securities or
obligations, or any such warrants, rights or options.
(xxx) The Company has not distributed and, prior to the later
of (A) the Firm Closing Date and (B) the completion of the distribution
of the Securities, will not distribute any offering material in
connection with the offering and sale of the Securities
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<PAGE>
other than the Registration Statement or any amendment thereto, any
Preliminary Prospectus or the Prospectus, or any materials, if any,
permitted by the Act.
(xxxi) The Company and its subsidiaries have complied with all
provisions of Section 517.075, Florida Statutes (Chapter 92-198, Laws
of Florida) to the extent such provisions are applicable to the Company
and its subsidiaries.
(xxxii) No subsidiary of the Company is currently prohibited,
directly or indirectly, from paying any dividends to the Company, from
making any other distribution on such subsidiary's capital stock, from
repaying to the Company any loans or advances to such subsidiary from
the Company or from transferring any of such subsidiary's property or
assets to the Company or any other subsidiary of the Company, except as
described in or contemplated by the Prospectus (or, if the Prospectus
is not in existence, the most recent Preliminary Prospectus).
(xxxiii) All offers and sales of the Company's capital stock
prior to the date hereof were at all relevant times exempt from the
registration requirements of the Act, and were the subject of an
available exemption from the registration requirements of all
applicable state securities or blue sky laws.
(b) The Selling Securityholder represents and warrants to, and agrees
with, each of the several Underwriters that:
(i) The Selling Securityholder has been duly organized and is
validly existing as a corporation under the laws of its jurisdiction of
incorporation and is duly qualified to transact business as a foreign
corporation and is in good standing under the laws of all other
jurisdictions where the ownership or leasing of its properties or the
conduct of its business requires such qualification, except where the
failure to be so qualified does not amount to a material liability or
disability to the Selling Securityholder.
(ii) Such Selling Securityholder has full power and authority
(corporate and other) to enter into this Agreement and to sell, assign,
transfer and deliver to the Underwriters the Securities to be sold by
such Selling Securityholder hereunder in accordance with the terms of
this Agreement; and this Agreement has been duly executed and delivered
by such Selling Securityholder and is the valid and binding agreement
of such Selling Securityholder, enforceable against such Selling
Securityholder in accordance with its terms, except as such
enforceability may be limited by bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium or similar laws affecting the
rights and remedies of creditors generally and subject to general
principles of equity whether in a court of law or equity.
-12-
<PAGE>
(iii) Such Selling Securityholder has full power and authority
(corporate and other) to enter into the Reorganization Agreements to
which it is a party; and such Reorganization Agreements have been duly
executed and delivered by such Selling Securityholder and are the valid
and binding agreements of such Selling Securityholder, enforceable
against such Selling Securityholder in accordance with their terms,
except as such enforceability may be limited by bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium or similar laws
affecting the rights and remedies of creditors generally and subject to
general principles of equity whether in a court of law or equity.
(iv) Such Selling Securityholder has duly executed and
delivered a power of attorney and custody agreement (with respect to
such Selling Securityholder, the "Custody Agreement") in the form
heretofore delivered to the Representatives, appointing James J. Kim,
Joseph J. Firestone, John R. Panichello, and each of them as such
Selling Securityholder's attorney-in-fact (the "Attorneys-in-Fact")
with authority to execute, deliver and perform this Agreement on behalf
of the Selling Securityholder and appointing First Chicago Trust
Company of New York, as custodian thereunder (the "Custodian").
Certificates in negotiable form, endorsed in blank or accompanied by
blank stock powers duly executed, with signatures appropriately
guaranteed, representing the Securities to be sold by such Selling
Securityholder hereunder have been deposited with the Custodian
pursuant to the Custody Agreement for the purpose of delivery pursuant
to this Agreement. Such Selling Securityholder has full power and
authority (corporate and other) to enter into the Custody Agreement and
to perform its obligations under the Custody Agreement. The Custody
Agreement has been duly executed and delivered by such Selling
Securityholder and, assuming due authorization, execution and delivery
by the Custodian, is the valid and binding agreement of such Selling
Securityholder, enforceable against such Selling Securityholder in
accordance with its terms, except as such enforceability may be limited
by bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium or similar laws affecting the rights and remedies of
creditors generally and subject to general principles of equity whether
in a court of law or equity.
(v) Such Selling Securityholder agrees that each of the
Securities represented by the certificates held in custody under the
Custody Agreement is subject to the interests of the Underwriters
hereunder, that the arrangements made for such custody, the appointment
of the Attorneys-in-Fact and the right, power and authority of the
Attorneys- in-Fact to execute and deliver this Agreement, to agree on
the price at which the Securities (including the Selling
Securityholder's Securities) are to be sold to the Underwriters, and to
carry out the terms of this Agreement, are to the extent provided in
the Custody Agreement irrevocable and that the obligations of the
Selling Securityholder hereunder shall not be terminated, except as
provided in this Agreement or the Custody Agreement, by any act of the
Selling Securityholder, by operation of law or otherwise.
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<PAGE>
(vi) Such Selling Securityholder is the lawful record and
beneficial owner of the Securities to be sold by such Selling
Securityholder hereunder and upon sale and delivery of, and payment
for, such Securities as provided herein, the Selling Securityholder
will convey good and marketable title to such Securities, free and
clear of any security interests, liens, encumbrances, claims or other
defects.
(vii) Such Selling Securityholder has not, directly or
indirectly, (A) taken any action designed to cause or result in, or
that has constituted or which might reasonably be expected to
constitute, the stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the
Securities or (B) since the filing of the Registration Statement (1)
sold, bid for, purchased or paid anyone any compensation for soliciting
purchases of, the Securities or (2) paid or agreed to pay to any person
any compensation for soliciting another to purchase any other
securities of the Company (except for the sale of Securities by such
Selling Securityholder under this Agreement).
(viii) The sale by such Selling Securityholder of Securities
pursuant hereto is not prompted by any adverse information concerning
the Company that is not set forth in the Registration Statement or the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus).
(ix) The sale of the Securities to the Underwriters by such
Selling Securityholder pursuant to this Agreement, the compliance by
such Selling Securityholder with the other provisions of this Agreement
and the Custody Agreement and the consummation of the other
transactions contemplated hereby and the consummation by such Selling
Securityholder of the transactions contemplated by the Reorganization
Agreements do not (A) require the consent, approval, authorization,
registration or qualification of or with any governmental authority,
except such as has been obtained, such as may be required under state
securities or blue sky laws and, if the registration statement filed
with respect to the Securities (as amended) is not effective under the
Act as of the time of execution hereof, such as may be required (and
shall be obtained as provided in this Agreement) under the Act or (B)
conflict with or result in a breach or violation of any of the terms
and provisions of, or constitute a default under any indenture,
mortgage, deed of trust, lease or other material agreement or
instrument to which such Selling Securityholder is a party or by which
such Selling Securityholder or any of such Selling Securityholder's
properties are bound, or any statute or any judgment, decree, order,
rule or regulation of any court or other governmental authority or any
arbitrator applicable to such Selling Securityholder.
(x) To the extent that any statements or omissions are made in
the Registration Statement, any Preliminary Prospectus or the
Prospectus or any amendment or supplement thereto in reliance upon and
in conformity with written information furnished to the Company by such
Selling Securityholder specifically for use therein,
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<PAGE>
such information in the Preliminary Prospectus, the Registration
Statement or the Prospectus and any amendments or supplements thereto,
when they become effective or are filed with the Commission, as the
case may be, did and will conform in all material respects to the
requirements of the Act and the rules and regulations of the
Commission thereunder and will not contain any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in the light of
the circumstances under which they are made, not misleading. Such
Selling Securityholder has reviewed the Prospectus (or if the
Prospectus is not in existence, the most recent Preliminary
Prospectus) and the Registration Statement, and the information
regarding such Selling Securityholder set forth therein under the
caption "Principal and Selling Shareholders" is complete and accurate.
(xi) Such Selling Securityholder has not distributed and,
prior to the later of (A) the Firm Closing Date and (B) the completion
of the distribution of the Securities, will not distribute any offering
material in connection with the offering and sale of the Securities
other than the Registration Statement or any amendment thereto, any
Preliminary Prospectus and the Prospectus or any supplement or
amendment thereto, or any materials, if any permitted by the Act.
3. Purchase, Sale and Delivery of the Securities.
(a) On the basis of the representations, warranties, agreements and
covenants herein contained and subject to the terms and conditions herein set
forth, the Company agrees to issue and sell to, and the Selling Securityholder
agree to sell to, each of the Underwriters, and each of the Underwriters,
severally and not jointly, agrees to purchase from the Company and the Selling
Securityholder at a purchase price of $_____ per share, the number of Firm
Securities set forth opposite the name of such Underwriter in Schedule 1 hereto.
The Company's Firm Securities shall consist of 4,375,000 shares of Common Stock
and the Selling Securityholder's Firm Securities shall consist of 1,875,000
shares of Common Stock. The number of Firm Securities to be purchased by each
Underwriter from the Company and each Selling Securityholder shall be as nearly
as practicable in the same proportion to the total number of Firm Securities
being sold by the Company and each Selling Securityholder (with the number of
shares to be sold by each Selling Securityholder being set forth opposite such
Selling Securityholder's name in Schedule 2 hereto) as the total number of Firm
Securities to be purchased by such Underwriter bears to the total number of Firm
Securities to be purchased by the Underwriters hereunder. One or more
certificates in definitive form for the Firm Securities that the several
Underwriters have agreed to purchase hereunder, and in such denomination or
denominations and registered in such name or names as the Representatives
request upon notice to the Company and the Selling Securityholder at least 48
hours prior to the Firm Closing Date, shall be delivered by or on behalf of the
Company and the Selling Securityholder to the Representatives for the respective
accounts of the Underwriters, against payment by or on behalf of the
Underwriters of the purchase price therefor by wire transfer payable in same-day
funds (the "Wired Funds") to the account of the Company in the case of the
Company's Firm Securities and to the order of the Custodian in the case of the
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<PAGE>
Selling Securityholder's Firm Securities. Such delivery of and payment for the
Firm Securities shall be made at the offices of King & Spalding, 1185 Avenue of
the Americas, New York, New York 10036-4003 at 9:30 A.M., New York City time, on
July___, 1998; or at such other place, time or date as the Representatives and
the Company may agree upon or as the Representatives may determine pursuant to
Section 9 hereof, such time and date of delivery against payment being herein
referred to as the "Firm Closing Date". The Company and the Selling
Securityholder will make such certificate or certificates for the Firm
Securities available for checking and packagingby the Representatives at the
offices of the Company's transfer agent or registrar or of Prudential Securities
Incorporated in New York, New York at least 24 hours prior to the Firm Closing
Date.
(b) For the purpose of covering any over-allotments in connection with
the distribution and sale of the Firm Securities as contemplated by the
Prospectus, the Selling Securityholder hereby grants to the several Underwriters
an option to purchase, severally and not jointly, the Option Securities. The
purchase price to be paid for any Option Securities shall be the same price per
share as the price per share for the Firm Securities set forth above in
paragraph (a) of this Section 3. The option granted hereby may be exercised as
to all or any part of the Option Securities from time to time within thirty days
after the date of the Prospectus (or, if such 30th day shall be a Saturday or
Sunday or a holiday, on the next business day thereafter when the Nasdaq Stock
Market's National Market (the "Nasdaq National Market") is open for trading).
The Underwriters shall not be under any obligation to purchase any of the Option
Securities prior to the exercise of such option. The Representatives may from
time to time exercise the option granted hereby by giving notice in writing or
by telephone (confirmed in writing) to the Selling Securityholder setting forth
the aggregate number of Option Securities as to which the several Underwriters
are then exercising the option and the date and time for delivery of and payment
for such Option Securities. Any such date of delivery shall be determined by the
Representatives but shall not be earlier than two business days or later than
five business days after such exercise of the option and, in any event, shall
not be earlier than the Firm Closing Date. The time and date set forth in such
notice, or such other time on such other date as the Representatives and the
Selling Securityholder may agree upon or as the Representatives may determine
pursuant to Section 9 hereof, is herein called the "Option Closing Date" with
respect to such Option Securities. Upon exercise of the option as provided
herein, the Selling Securityholder shall become obligated to sell to each of the
several Underwriters, and, subject to the terms and conditions herein set forth,
each of the Underwriters (severally and not jointly) shall become obligated to
purchase from the Company, the same percentage of the total number of the Option
Securities as to which the several Underwriters are then exercising the option
as such Underwriter is obligated to purchase of the aggregate number of Firm
Securities, as adjusted by the Representatives in such manner as they deem
advisable to avoid fractional shares. If the option is exercised as to all or
any portion of the Option Securities, one or more certificates in definitive
form for such Option Securities, and payment therefor, shall be delivered on the
related Option Closing Date in the manner, and upon the terms and conditions,
set forth in paragraph (a) of this Section 3 with respect to the sale of the
Firm Securities, except that reference therein to
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<PAGE>
the Firm Securities and the Firm Closing Date shall be deemed, for purposes of
this paragraph (b), to refer to such Option Securities and Option Closing Date,
respectively.
(c) The Company and the Selling Securityholder hereby acknowledge that the wire
transfer by or on behalf of the Underwriters of the purchase price for any
Securities does not constitute the closing of a purchase and sale of the
Securities. Only execution and delivery of a receipt for Securities by the
Underwriters indicates completion of the closing of a purchase of the Securities
from the Company and the Selling Securityholder. Furthermore, in the event that
the Underwriters wire funds to the Company and the Selling Securityholder prior
to the completion of the closing of a purchase of the Securities, the Company
and the Selling Security holder hereby acknowledge that until the Underwriters
execute and deliver a receipt for the Securities, by facsimile or otherwise, the
Company and the Selling Securityholder will not be entitled to the Wired Funds
and shall return the Wired Funds to the Underwriters as soon as practicable (by
wire transfer of same-day funds) upon demand. In the event that the closing of a
purchase of the Securities is not completed and the Wired Funds are not returned
by the Company and the Selling Securityholder to the Underwriters on the same
day the Wired Funds were received by the Company and the Selling Securityholder,
the Company and the Selling Securityholder agree to pay to the Underwriters in
respect of each day the Wired Funds are not returned by it, in same- day funds,
interest on the amount of Wired Funds in an amount representing the
Underwriters' cost of financing as reasonably determined by Prudential
Securities Incorporated. Upon satisfactory receipt of the Securities by the
Underwriters in accordance with all the terms of this Agreement and the
compliance by the Company and the Selling Securityholder with all terms of this
Agreement to be performed on or before the Closing Date, the Underwriters shall
execute the receipt described above for the Securities.
(d) It is understood that either of you, individually and not as one of
the Representatives, may (but shall not be obligated to) make payment on behalf
of any Underwriter or Underwriters for any of the Securities to be purchased by
such Underwriter or Underwriters. No such payment shall relieve such Underwriter
or Underwriters from any of its or their obligations hereunder.
4. Offering by the Underwriters. Upon your authorization of the release
of the Firm Securities, the several Underwriters propose to offer the Firm
Securities for sale to the public upon the terms set forth in the Prospectus.
5. Covenants of the Company and the Selling Securityholder.
(a) The Company covenants and agrees with each of the Underwriters
that:
(i) The Company will use its best efforts to cause the
Registration Statement, if not effective at the time of execution of
this Agreement, and any amendments thereto to become effective as
promptly as possible. If required, the Company will file the Prospectus
or any Term Sheet that constitutes a part thereof and any amendment or
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supplement thereto with the Commission in the manner and within the
time period required by Rules 434 and 424(b) under the Act. During any
time when a prospectus relating to the Securities is required to be
delivered under the Act, the Company (A) will comply with all
requirements imposed upon it by the Act and the rules and regulations
of the Commission thereunder to the extent necessary to permit the
continuance of sales of or dealings in the Securities in accordance
with the provisions hereof and of the Prospectus, as then amended or
supplemented, and (B) will not file with the Commission the
Prospectus, Term Sheet or the amendment referred to in the second
sentence of Section 2(a)(i) hereof, any amendment or supplement to
such Prospectus, Term Sheet or any amendment to the Registration
Statement or any Rule 462(b) Registration Statement of which the
Representatives previously have been advised and furnished with a copy
for a reasonable period of time prior to the proposed filing and as to
which filing the Representatives shall not have given their consent,
which consent shall not have been unreasonably withheld. The Company
will prepare and file with the Commission, in accordance with the
rules and regulations of the Commission, promptly upon request by the
Representatives or counsel for the Underwriters, any amendments to the
Registration Statement or any Rule 462(b) Registration Statement or
amendments or supplements to the Prospectus that may be necessary or
advisable in connection with the distribution of the Securities by the
several Underwriters, and will use its best efforts to cause any such
amendment to the Registration Statement to be declared effective by
the Commission as promptly as possible. The Company will advise the
Representatives, promptly after receiving notice thereof, of the time
when the Registration Statement or any amendment thereto has been
filed or declared effective or the Prospectus or any amendment or
supplement thereto has been filed and will provide evidence reasonably
satisfactory to the Representatives of each such filing or
effectiveness.
(ii) The Company will advise the Representatives, promptly
after receiving notice or obtaining knowledge thereof, of (A) the
issuance by the Commission of any stop order suspending the
effectiveness of the Original Registration Statement or any Rule 462(b)
Registration Statement or any amendment thereto or any order preventing
or suspending the use of any Preliminary Prospectus or the Prospectus
or any amendment or supplement thereto, (B) the suspension of the
qualification of the Securities for offering or sale in any
jurisdiction, (C) the institution, threatening or contemplation of any
proceeding for any such purpose or (D) any request made by the
Commission for amending the Original Registration Statement or any Rule
462(b) Registration Statement, for amending or supplementing any
Preliminary Prospectus or the Prospectus or for additional information.
The Company will use its best efforts to prevent the issuance of any
such stop order and, if any such stop order is issued, to obtain the
withdrawal thereof as promptly as possible.
(iii) The Company will arrange for the qualification of the
Securities for offering and sale under the securities or blue sky laws
of such jurisdictions as the Representatives may designate and will
continue such qualifications in effect for as long
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as may be necessary to complete the distribution of the Securities;
provided, however, that in connection therewith the Company shall not
be required to qualify as a foreign corporation or to execute a
general consent to service of process in any jurisdiction.
(iv) If, at any time prior to the later of (A) the final date when a
prospectus relating to the Securities is required to be delivered
under the Act or (B) the Option Closing Date, any event occurs as a
result of which the Prospectus, as then amended or supplemented, would
include any untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not
misleading, or if for any other reason it is necessary at any time to
amend or supplement the Prospectus to comply with the Act or the rules
or regulations of the Commission thereunder, the Company will promptly
notify the Representatives thereof and, subject to Section 5(a)(i)
hereof, will prepare and file with the Commission, at the Company's
expense, an amendment to the Registration Statement or an amendment or
supplement to the Prospectus that corrects such statement or omission
or effects such compliance.
(v) The Company will, without charge, provide (A) to each of
the Representatives and counsel for the Underwriters a signed copy of
the registration statement originally filed with respect to the
Securities and each amendment thereto and any Rule 462(b) Registration
Statement (in each case including exhibits thereto), (B) to each other
Underwriter, a conformed copy of such registration statement or any
Rule 462(b) Registration Statement and each amendment thereto (in each
case without exhibits thereto) and (C) so long as a prospectus relating
to the Securities is required to be delivered under the Act, as many
copies of each Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto as the Representatives may reasonably
request; without limiting the application of clause (C) of this
sentence, the Company, not later than (1) 6:00 PM, New York City time,
on the date of determination of the public offering price, if such
determination occurred at or prior to 10:00 AM, New York City time, on
such date or (2) 2:00 PM, New York City time, on the business day
following the date of determination of the public offering price, if
such determination occurred after 10:00 AM, New York City time, on such
date, will deliver to the Underwriters, without charge, as many copies
of the Prospectus and any amendment or supplement thereto as the
Representatives may reasonably request for purposes of confirming
orders that are expected to settle on the Firm Closing Date.
(vi) The Company, as soon as practicable, will make generally
available to its securityholders and to the Representatives a
consolidated earnings statement of the Company and its subsidiaries
that satisfies the provisions of Section 11(a) of the Act and Rule 158
thereunder.
(vii) The Company will apply the net proceeds from the sale of
the Securities as set forth under "Use of Proceeds" in the Prospectus.
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<PAGE>
(viii) The Company will not, directly or indirectly, without
the prior written consent of Prudential Securities Incorporated, on
behalf of the Underwriters, offer, sell, offer to sell, contract to
sell, pledge, grant any option to purchase or otherwise sell or
dispose (or announce any offer, sale, offer of sale, contract of
sale, pledge, grant of any option to purchase or other sale or
disposition) of any shares of Common Stock or any securities
convertible into, or exchangeable or exercisable for, shares of
Common Stock or other capital stock of the Company, or any right to
purchase or acquire Common Stock or other capital stock of the
Company for a period of 360 days after the date hereof, except (A)
pursuant to this Agreement and (B) for issuances of options
pursuant to stock option plans and employment agreements in
existence on the date hereof or as disclosed in the Prospectus (or
if the Prospectus is not in existence, the most recent Preliminary
Prospectus).
(ix) The Company will not, directly or indirectly, (A) take
any action designed to cause or to result in, or that has constituted
or which might reasonably be expected to constitute, the stabilization
or manipulation of the price of any security of the Company to
facilitate the sale or resale of the Securities or (B) (1) sell, bid
for, purchase, or pay anyone any compensation for soliciting purchases
of, the Securities or (2) pay or agree to pay to any person any
compensation for soliciting another to purchase any other securities of
the Company (except for the sale of Securities by the Selling
Securityholder under this Agreement).
(x) If at any time during the 25-day period after the
Registration Statement becomes effective or the period prior to the
Option Closing Date, any rumor, publication or event relating to or
affecting the Company or its subsidiaries shall occur as a result of
which in your reasonable opinion the market price of the Common Stock
has been or is likely to be materially affected (regardless of whether
such rumor, publication or event necessitates a supplement to or
amendment of the Prospectus), the Company will, after notice from you
advising the Company to the effect set forth above, forthwith prepare,
consult with you concerning the substance of, and disseminate a press
release or other public statement, reasonably satisfactory to you,
responding to or commenting on such rumor, publication or event.
(xi) The Company will obtain the agreements described in
Section 7(h) hereof from all persons other than the Selling
Securityholder prior to the Firm Closing Date.
(xii) The Company will cause the Securities to be issued and
sold by it to be duly included for quotation on the Nasdaq National
Market prior to the Firm Closing Date. The Company will ensure that the
Securities remain included for quotation on the Nasdaq National Market
or will be listed on a national exchange following the Firm Closing
Date for a period of at least two years.
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(xiii) During a period of five years from the effective date
of the Registration Statement, the Company will furnish to you and,
upon request, to each of the other Underwriters, without charge, (A)
copies of all reports or other communications (financial or other)
furnished to securityholders, (B) as soon as they are available, copies
of any reports and financial statements furnished to or filed with the
Commission or any national securities exchange and (C) such additional
publicly available information concerning the business and financial
condition of the Company and its subsidiaries, if any, as you may
reasonably request.
(xiv) If the Company elects to rely on Rule 462(b), the
Company shall both file a Rule 462(b) Registration Statement with the
Commission in compliance with Rule 462(b) and pay the applicable fees
in accordance with Rule 111 promulgated under the Act by the earlier of
(A) 10:00 P.M. Eastern time on the date of this Agreement and (B) the
time confirmations are sent or given, as specified by Rule 462(b)(2).
(b) The Selling Securityholder covenants and agrees with each of the
Underwriters that:
(i) Such Selling Securityholder will not, directly or
indirectly, without the prior written consent of Prudential Securities
Incorporated, on behalf of the Underwriters, offer, sell, offer to
sell, contract to sell, pledge, grant any option to purchase or
otherwise sell or dispose (or announce any offer, sale, offer of sale,
contract of sale, pledge, grant of any option to purchase or other sale
or disposition) of any shares of Common Stock or any securities
convertible into, or exchangeable or exercisable for, Common Stock or
other capital stock of the Company, or any right to purchase or acquire
Common Stock or other capital stock of the Company for a period of 360
days after the date hereof, except (A) pursuant to this Agreement or
(B) as consented to in writing by Prudential Securities Incorporated.
(ii) Such Selling Securityholder will not, directly or
indirectly, (A) take any action designed to cause or to result in, or
that has constituted or which might reasonably be expected to
constitute, the stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the
Securities or (B) (1) sell, bid for, purchase, or pay anyone any
compensation for soliciting purchases of, the Securities or (2) pay or
agree to pay to any person any compensation for soliciting another to
purchase any other securities of the Company (except for the sale of
Securities by the Selling Securityholder under this Agreement).
(iii) In order to document the Underwriters' compliance with
the reporting and withholding provisions of the Internal Revenue Code
of 1986, as amended, with respect to the transactions herein
contemplated, such Selling Securityholder agrees to deliver to the
Representatives prior to or on the Firm Closing Date a properly
completed and
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executed United States Treasury Department Form W-8 or W-9 (or other
applicable form or statement specified by the Treasury Department
regulations in lieu thereof).
6. Expenses. The Company will pay all costs and expenses incident to
the performance of the obligations of the Company and the Selling
Securityholder under this Agreement, whether or not the transactions
contemplated herein are consummated or this Agreement is terminated pursuant
to Section 12 hereof, including all costs and expenses incident to (a) the
printing or other production of documents with respect to the transactions,
including any costs of printing the registration statement originally filed
with respect to the Securities and any amendment thereto, any Rule 462(b)
Registration Statement, any Preliminary Prospectus and the Prospectus and any
amendment or supplement thereto, this Agreement and any blue sky memoranda,
(b) all arrangements relating to the delivery to the Underwriters of copies
of the foregoing documents, (c) the fees and disbursements of the counsel,
the accountants and any other experts or advisors retained by the Company,
(d) preparation, issuance and delivery to the Underwriters of any
certificates evidencing the Securities, including transfer agent's and
registrar's fees and the Custodian's fees, (e) the qualification of the
Securities under state securities and blue sky laws, including filing fees
and reasonable fees and disbursements of counsel for the Underwriters
relating thereto, (f) the filing fees of the Commission and the National
Association of Securities Dealers, Inc. relating to the Securities, (g) any
listing of the Securities on the Nasdaq National Market, (h) any meetings
with prospective investors in the Securities (other than as shall have been
specifically approved by the Representatives to be paid for by the
Underwriters) and (i) advertising relating to the offering of the Securities
(other than as shall have been specifically approved by the Representatives
to be paid for by the Underwriters). Any transfer taxes imposed on the sale
of the Securities to the several Underwriters will be paid by the Company and
the Selling Securityholder pro rata. If the sale of the Securities provided
for herein is not consummated because any condition to the obligations of the
Underwriters set forth in Section 7 hereof is not satisfied, because this
Agreement is terminated pursuant to Section 12 hereof (other than Section
12(a)(v) hereof) or because of any failure, refusal or inability on the part
of the Company or the Selling Securityholder to perform all obligations and
satisfy all conditions on its part to be performed or satisfied hereunder
other than by reason of a default by any of the Underwriters, the Company
will reimburse the Underwriters upon demand for all reasonable out-of-pocket
expenses (including reasonable counsel fees and disbursements) that shall
have been incurred by them in connection with the proposed purchase and sale
of the Securities. The Company and the Selling Securityholder shall not in
any event be liable to any of the Underwriters for the loss of anticipated
profits from the transactions covered by this Agreement.
7. Conditions of the Underwriters' Obligations. The obligations of the
several Underwriters to purchase and pay for the Firm Securities shall be
subject, in the Representatives' sole discretion, to the accuracy of the
representations and warranties of the Company and the Selling Securityholder
contained herein as of the date hereof and as of the Firm Closing Date, as if
made on and as of the Firm Closing Date, to the accuracy of the statements of
the Company's officers made pursuant to the provisions hereof, to the
performance by the Company and the
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Selling Securityholder of its covenants and agreements hereunder and to the
following additional conditions:
(a) If the Original Registration Statement or any amendment thereto
filed prior to the Firm Closing Date has not been declared effective as of
the time of execution hereof, the Original Registration Statement or such
amendment and, if the Company has elected to rely upon Rule 462(b), the
Rule 462(b) Registration Statement shall have been declared effective not
later than the earlier of (i) 11:00 A.M., New York time, on the date on
which the amendment to the registration statement originally filed with
respect to the Securities or to the Registration Statement, as the case may
be, containing information regarding the initial public offering price of
the Securities has been filed with the Commission and (ii) the time
confirmations are sent or given as specified by Rule 462(b)(2) or, with
respect to the Original Registration Statement, such later time and date as
shall have been consented to by the Representatives; if required, the
Prospectus or any Term Sheet that constitutes a part thereof and any
amendment or supplement thereto shall have been filed with the Commission
in the manner and within the time period required by Rules 434 and 424(b)
under the Act; no stop order suspending the effectiveness of the
Registration Statement or any amendment thereto shall have been issued, and
no proceedings for that purpose shall have been instituted or threatened
or, to the knowledge of the Company or the Representatives, shall be
contemplated by the Commission; and the Company shall have complied with
any request of the Commission for additional information (to be included in
the Registration Statement or the Prospectus or otherwise).
(b) The Representatives shall have received an opinion, dated the Firm
Closing Date, of Klehr, Harrison, Harvey, Branzburg & Ellers LLP, counsel
for the Company, to the effect that:
(i) The Company, EBOA and Elbo have been duly organized and are
validly existing as corporations in good standing under the laws of
their respective jurisdictions and are duly qualified to transact
business as foreign corporations and are in good standing under the
laws of all other jurisdictions where the ownership or leasing of
their respective properties or the conduct of their respective
businesses requires such qualification, except where the failure to be
so qualified would not have a material adverse effect on the condition
(financial or otherwise), management, business prospects, net worth or
results of operations of the Company and its subsidiaries.
(ii) Except as disclosed in the Prospectus, the Company and each
of the Company's domestic subsidiaries listed in Exhibit 21.1 to the
Registration Statement (the "Domestic Subsidiaries") have the
corporate power to own or lease their respective properties and
conduct their respective businesses as described in the Registration
Statement and the Prospectus, and the Company has the corporate
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power to enter into this Agreement and to carry out all the terms and
provisions hereof to be carried out by it.
(iii) The Company has an authorized, issued and outstanding
capitalization as set forth in the Prospectus; all of the issued
shares of capital stock of the Company (including but not limited to
the Securities being sold by the Selling Securityholder) have been
duly authorized and validly issued and are fully paid and
nonassessable, have been issued in compliance with all applicable
federal and state securities laws and were not issued in violation of
or subject to any statutory or, to such counsel's knowledge,
contractual preemptive rights or other rights to subscribe for or
purchase securities; the Securities being issued and sold by the
Company have been duly authorized by all necessary corporate action of
the Company and, when issued and delivered to and paid for by the
Underwriters pursuant to this Agreement, will be validly issued, fully
paid and nonassessable; the Securities have been duly listed for
trading on the Nasdaq National Market; no holders of outstanding
shares of capital stock of the Company are entitled as such to any
preemptive or other rights to subscribe for any of the Securities;
and, except as disclosed in the Prospectus, no holders of securities
of the Company are entitled to have such securities registered under
the Registration Statement.
(iv) (A) the issued and outstanding shares of capital stock of
each of the Domestic Subsidiaries have been duly authorized and
validly issued and are fully paid and nonassessable and, to the
knowledge of such counsel, are owned beneficially by the Company free
and clear of security interests, liens, encumbrances or claims and (B)
to the knowledge of such counsel, other than the subsidiaries and the
entities of the Company listed in exhibit 21.1 to the Registration
Statement (the "Subsidiaries"), the Company does not directly or
indirectly own any shares of stock or any other equity securities of
any corporation or have any direct or indirect equity interest in any
firm, partnership, association or other entity, which corporation,
firm, partnership, association or other entity would, individually or
when aggregated with all such other corporations, firms, partnerships,
associations or other entities, be considered a "significant
subsidiary" within the meaning of Rule 1-02 of Regulation S-X under
the Act.
(v) The capital stock of the Company conforms as to legal matters
in all material respects to the description thereof contained in the
Prospectus under the caption "Description of Capital Stock," and the
statements set forth under the headings "Reorganization" and "Business
- Legal Proceedings" in the Prospectus, insofar as such statements
constitute a summary of the legal matters, documents and proceedings
referred to therein, provide a fair summary of such legal matters,
documents and proceedings.
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(vi) The execution and delivery of this Agreement have been duly
authorized by all necessary corporate action of the Company, and this
Agreement has been duly executed and delivered by the Company.
(vii) The execution and delivery of the Reorganization Agreements
to which the Company and the Affiliated Entities are parties have been
duly authorized by the Company and the Affiliated Entities, as the
case may be, and the Reorganization Agreements have been duly executed
and delivered by the Company, the Affiliated Entities and the Kim
Shareholders and are the valid and binding agreements of the Company,
the Affiliated Entities and the Kim Shareholders, enforceable against
the Company, the Affiliated Entities and the Kim Shareholders in
accordance with their respective terms, except as such enforceability
may be limited by bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium or similar laws now or hereafter in effect
relating to creditors' rights generally and subject to general
principles of equity (regardless of whether enforceability is
considered in a proceeding at law or in equity). The Reorganization
has been consummated on the terms and conditions set forth in the
Prospectus.
(viii) To such counsel's knowledge, (A) no legal or governmental
proceedings are pending to which the Company or any of the
Subsidiaries is a party or to which the property of the Company or any
of the Subsidiaries is subject that are required to be described in
the Registration Statement or the Prospectus and are not described
therein, no such proceedings have been threatened against the Company
or any of the Subsidiaries or with respect to any of their respective
properties and (B) all contracts or other documents required by Item
601 of Regulation S-K to be filed as exhibits to the Registration
Statement have been so filed.
(ix) Except as disclosed in the Prospectus and except with
respect to the UK Services Agreement as to which such counsel need
express no opinion, the issuance, offering and sale of the Securities
being issued and sold by the Company to the Underwriters pursuant to
this Agreement, the compliance by the Company with the other
provisions of this Agreement and the consummation of the transactions
herein contemplated do not (A) require the consent, approval,
authorization, registration or qualification of or with any
governmental authority, except such as have been obtained and such as
may be required under state securities or blue sky laws or (B)
conflict with or result in a breach or violation of any of the terms
and provisions of, or constitute a default under, (1) any indenture,
mortgage, deed of trust, lease or other agreement or instrument filed
as an exhibit to the Registration Statement or any other material
agreement otherwise known to such counsel to which the Company or any
of the Subsidiaries is a party or by which the Company or any of the
Subsidiaries or any of their respective properties
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<PAGE>
are bound, (2) the charter documents or by-laws of the Company or any
of the Subsidiaries, or (3) any statute, rule or regulation, or any
judgment, decree or order of any court or other governmental authority
or any arbitrator known to such counsel, and applicable to the Company
or any of the Subsidiaries.
(x) To the knowledge of such counsel, (A) the Company and the
Subsidiaries possess all certificates, authorizations and permits
issued by the appropriate federal, state or foreign regulatory
authorities necessary to conduct their respective businesses, the
absence of which could have a material adverse effect on the condition
(financial or otherwise), management, business prospects, net worth or
results of operations of the Company and the Subsidiaries, and (B)
neither the Company nor any of the Subsidiaries has received any
notice of proceedings relating to the revocation or modification of
any such certificate, authorization or permit which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or
finding, would have a material adverse effect on the condition
(financial or otherwise), management, business prospects, net worth or
results of operations of the Company and the Subsidiaries, except, in
all cases, as described in or contemplated by the Prospectus.
(xi) The Registration Statement is effective under the Act; any
required filing of the Prospectus, or any Term Sheet that constitutes
a part thereof, pursuant to Rules 434 and 424(b) has been made in the
manner and within the time period required by Rules 434 and 424(b);
and, to such counsel's knowledge, no stop order suspending the
effectiveness of the Registration Statement or any amendment thereto
has been issued, and no proceedings for that purpose have been
instituted or, to the knowledge of such counsel, are contemplated or
threatened by the Commission.
(xii) The registration statement originally filed with respect to
the Securities and each amendment thereto, any Rule 462(b)
Registration Statement and the Prospectus (in each case other than the
financial statements and other financial information contained
therein, as to which such counsel need express no opinion) comply as
to form in all material respects with the applicable requirements of
the Act and the rules and regulations of the Commission thereunder.
(xiii) The Company is not an "investment company" under the
Investment Company Act, and consummation of the transactions herein
contemplated will not cause the Company to become an investment
company subject to registration under the Investment Company Act.
(xiv) To such counsel's knowledge, except as disclosed in the
Prospectus, there are no outstanding (A) securities or obligations of
the Company
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convertible into or exchangeable for any capital stock of the Company,
(B) warrants, rights or options to subscribe for or purchase from the
Company any such capital stock or any such convertible or exchangeable
securities or obligations, or (C) obligations of the Company to issue
any shares of capital stock, any such convertible or exchangeable
securities or obligations, or any such warrants, rights or options.
(xv) If the Company elects to rely on Rule 434, the Prospectus is
not "materially different," as such term is used in Rule 434, from the
prospectus included in the Registration Statement at the time of its
effectiveness or any effective post-effective amendment thereto
(including such information that is permitted to be omitted pursuant
to Rule 430A).
Such counsel shall also state that they have participated in
conferences with officers and representatives of the Company at which the
contents of the Prospectus and the Registration Statement and related
matters and documents were discussed. The limitations inherent in the
review of factual and other matters included in or contemplated by the
Prospectus and the Registration Statement and the character of
determinations involved in the registration process are such, however, that
such counsel does not make any warranty or representation concerning, or
assume any responsibility for, the accuracy, completeness or fairness of
the statements contained in the Prospectus and the Registration Statement
(other than as set forth in Section 7(b)(v) hereof). Based upon and subject
to the foregoing, nothing has come to such counsel's attention which would
lead them to believe that (A) the Registration Statement (other than the
financial statements, including the notes thereto, and schedules and other
financial and statistical data included therein, as to which they express
no belief nor render any opinion), as of its effective date, contained any
untrue statement of a material fact or omitted to state any material fact
required to be stated therein or necessary in order to make the statements
therein not misleading, and (B) the Prospectus (other than the financial
statements, including the notes thereto, and schedules and other financial
and statistical data included therein, as to which they express no belief
nor render any opinion), as of its date or the date of such opinion,
contained or contains any untrue statement of a material fact or omitted or
omits to state any material fact necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
In rendering any such opinion, such counsel may rely, as to matters of
fact, to the extent such counsel deems proper, on certificates of
responsible officers of the Company and public officials.
References to the Registration Statement and the Prospectus in this
paragraph (b) shall include any amendment or supplement thereto at the date
of such opinion.
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(c) The Representatives shall have received an opinion, dated the Firm
Closing Date, of Fladgate Fielder to the effect that:
(i) Except as disclosed in the Prospectus, the issuance, offering
and sale of the Securities being issued and sold by the Company to the
Underwriters pursuant to this Agreement, the compliance by the Company
with the other provisions of this Agreement and the consummation of
the other transactions herein contemplated do not conflict with or
result in a breach or violation of any of the terms and provisions of,
or constitute a default under, the UK Services Agreement.
(d) The Representatives shall have received an opinion, dated the
Firm Closing Date of, Klehr, Harrison, Harvey, Branzburg & Ellers LLP,
counsel for the Selling Securityholder, to the effect that:
(i) Such Selling Securityholder has been duly incorporated
and is validly existing as a corporation under the laws of its
jurisdiction of incorporation and has the corporate power to own,
lease and operate its properties and to execute, deliver and
perform this Agreement and the Custody Agreement.
(ii) Such Selling Securityholder has full corporate power
and authority to enter into this Agreement and the Custody
Agreement. Such Selling Securityholder has duly authorized,
executed and delivered this Agreement and the Custody Agreement,
and the Custody Agreement constitutes the valid and binding
agreement of such Selling Securityholder enforceable against such
Selling Securityholder in accordance with its respective terms,
except as such enforceability may be limited by bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium or
similar laws now or hereafter in effect relating to creditors'
rights generally and subject to general principles of equity
(regardless of whether enforceability is considered in a
proceeding at law or in equity).
(iii) Such Selling Securityholder has full corporate power
and authority to enter into the Reorganization Agreements to
which it is a party; and such Reorganization Agreements have been
duly executed and delivered by such Selling Securityholder and
are the valid and binding agreements of such Selling
Securityholder, except as such enforceability may be limited by
bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium or similar laws now or hereafter in effect relating to
creditors' rights generally and subject to general principles of
equity (regardless of whether enforceability is considered in a
proceeding at law or in equity).
(iv) Immediately prior to the delivery of the Securities
being sold by such Selling Securityholder, such Selling
Securityholder was the sole registered
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owner of such Securities and, upon registration of such
Securities in the names of the purchasers thereof or their
nominees, assuming that such purchasers purchased such Securities
in good faith without notice of any adverse claims as defined in
Section 8-102 of the Uniform Commercial Code in effect in the
state of New York, such purchasers will have acquired all the
rights of such Selling Securityholder in such Securities free of
any adverse claim, any lien in favor of the Company or
restrictions on transfer imposed by the Company.
(v) Except as disclosed in the Prospectus and except with
respect to the UK Services Agreement as to which such counsel
need express no opinion, the sale of the Securities to the
Underwriters by such Selling Securityholder pursuant to this
Agreement, the compliance by the Selling Securityholder with
the other provisions of this Agreement and the Custody
Agreement and the consummation of the other transactions
herein contemplated do not (A) require the consent, approval,
authorization, registration or qualification of or with any
governmental authority, except such as has been obtained and
such as may be required under state securities or blue sky
laws or (B) conflict with or result in a breach or violation
of any of the terms and provisions of, or constitute a
default under any indenture, mortgage, deed of trust, lease
or other material agreement or instrument to which a Selling
Securityholder is a party or by which a Selling
Securityholder or any of such Selling Securityholder's
properties are bound, or any statute or any judgment, decree,
order, rule or regulation of any court or other governmental
authority or any arbitrator known to such counsel applicable
to such Selling Securityholder.
In rendering any such opinion, such counsel may rely, as to
matters of fact, to the extent such counsel deems proper, on
certificates of responsible officers of the Company, the Selling
Securityholder and public officials.
References to the Registration Statement and the Prospectus in
this paragraph (d) shall include any amendment or supplement thereto at
the date of such opinion.
(e) The Representatives shall have received an opinion, dated
the Firm Closing Date, of King & Spalding, counsel for the
Underwriters, with respect to the issuance and sale of the Firm
Securities, the Registration Statement, the Prospectus and such other
related matters as the Representatives may reasonably require, and the
Company shall have furnished to such counsel such documents as they may
reasonably request for the purpose of enabling them to pass upon such
matters.
(f) The Representatives shall have received from KPMG Peat
Marwick LLP a letter or letters dated, respectively, the date hereof
and the Firm Closing Date, in form and substance satisfactory to the
Representatives, to the effect that:
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(i) they are independent accountants with respect to the
Company and its consolidated subsidiaries within the meaning of
the Act and the applicable rules and regulations thereunder;
(ii) in their opinion, the audited consolidated and combined
financial statements and schedules of the Company included in the
Registration Statement and the Prospectus comply in form in all
material respects with the applicable accounting requirements of
the Act and the related published rules and regulations;
(iii) on the basis of (A) a reading of the interim
consolidated and combined financial data for the period from the
date of the latest balance sheet included in the Registration
Statement and the Prospectus to the date of the latest available
interim consolidated financial data, (B) a reading of the minute
books of the shareholders, the board of directors and any
committees thereof of the Company and its consolidated
subsidiaries, from February 1, 1998 through a date not more than
five days prior to the date of such letter, and (C) inquiries of
certain officials of the Company and its consolidated
subsidiaries who have responsibility for financial and accounting
matters, nothing came to their attention that caused them to
believe that:
(Y) at the date of the latest available interim
consolidated financial data and at a specific date not more
than five business days prior to the date of such letter,
there was any change in long-term or short-term debt of the
Company and its consolidated subsidiaries or any decreases
in net current assets (working capital) or shareholders'
equity of the Company and its consolidated subsidiaries, in
each case compared with amounts shown on the January 31,
1998 audited consolidated and combined balance sheet
included in the Registration Statement and the Prospectus,
or for the period from January 31, 1998 to such specified
date there were any decreases, as compared with the prior
comparable period, in net sales or income before income
taxes or total or per share amounts of net income of the
Company and its consolidated subsidiaries, except in all
instances for changes, decreases or increases set forth in
such letter; and
(iv) they have carried out certain specified procedures (as
requested by the Representatives), not constituting an audit,
with respect to certain amounts, percentages and financial
information that are derived from the general accounting records
of the Company and its consolidated subsidiaries and are included
in the Registration Statement and the Prospectus and have
compared such amounts, percentages and financial information with
such records of the Company and its consolidated subsidiaries and
with information derived from
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such records and have found them to be in agreement, excluding
any questions of legal interpretation.
In the event that the letters referred to above set forth any
such changes, decreases or increases, it shall be a further condition
to the obligations of the Underwriters that (A) such letters shall be
accompanied by a written explanation from the Company as to the
significance thereof, unless the Representatives deem such explanation
unnecessary, and (B) such changes, decreases or increases do not, in
the sole judgment of the Representatives, make it impractical or
inadvisable to proceed with the purchase and delivery of the
Securities as contemplated by the Registration Statement, as amended
as of the date hereof.
References to the Registration Statement and the Prospectus in
this paragraph (f) with respect to either letter referred to above
shall include any amendment or supplement thereto at the date of such
letter.
(g) The Representatives shall have received a certificate, dated
the Firm Closing Date, of the principal executive officer and the
principal financial or accounting officer of the Company to the effect
that:
(i) the representations and warranties of the Company in
this Agreement are true and correct as if made on and as of the
Firm Closing Date; the Registration Statement, as amended as of
the Firm Closing Date, does not include any untrue statement of a
material fact or omit to state any material fact necessary to
make the statements therein not misleading, and the Prospectus,
as amended or supplemented as of the Firm Closing Date, does not
include any untrue statement of a material fact or omit to state
any material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were
made, not misleading; and the Company has performed all covenants
and agreements and satisfied all conditions on its part to be
performed or satisfied at or prior to the Firm Closing Date;
(ii) no stop order suspending the effectiveness of the
Registration Statement or any amendment thereto has been issued,
and no proceedings for that purpose have been instituted or, to
the best of such officer's knowledge, are contemplated or
threatened by the Commission; and
(iii) subsequent to the respective dates as of which
information is given in the Registration Statement and the
Prospectus, (A) neither the Company nor any of its subsidiaries
has sustained any material loss or interference with its business
or properties from fire, flood, hurricane, accident or other
calamity, whether or not covered by insurance, or from any labor
dispute or any legal or governmental proceeding, and there has
not been any material adverse change, or
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any development involving a prospective material adverse change,
in the condition (financial or otherwise), management, business
prospects, net worth or results of operations of the Company or
its subsidiaries; (B) neither the Company nor any of its
subsidiaries has incurred any material liability or obligation,
direct or contingent, or entered into any material transaction
not in the ordinary course of business; (C) neither the Company
nor any of its subsidiaries has purchased any of its outstanding
capital stock, or declared, paid or otherwise made any dividend
or distribution of any kind on its capital stock; and (D) there
has not been any material change in the capital stock, short-term
debt or long-term debt of the Company and its consolidated
subsidiaries, except in each case as described in or contemplated
by the Prospectus (exclusive of any amendment or supplement
thereto).
(h) The Representatives shall have received from the Selling
Securityholder, the Kim Shareholders and each executive officer and
director of the Company an agreement to the effect that such person or
entity will not, directly or indirectly, without the prior written
consent of Prudential Securities Incorporated, on behalf of the
Underwriters, offer, sell, offer to sell, contract to sell, pledge,
grant any option to purchase or otherwise sell or dispose (or announce
any offer, sale, offer of sale, contract of sale, pledge, granted any
option to purchase or other sale or disposition) of any shares of
Common Stock or any securities convertible into, or exchangeable or
exercisable for, shares of Common Stock or other capital stock of the
Company, or any right to purchase or acquire Common Stock or other
capital stock of the Company for a period of 360 days after the date
of this Agreement, except (A) pursuant to this Agreement, (B) for
issuances of options pursuant to stock option plans and employment
agreements in existence on the date hereof and (C) pursuant to that
letter agreement, dated July __, 1998, between Prudential Securities
Incorporated and Mr. James J. Kim.
(i) On or before the Firm Closing Date, the Representatives and
counsel for the Underwriters shall have received such further
certificates, documents or other information as they may have
reasonably requested from the Company.
(j) Prior to the commencement of the offering of the Securities,
the Securities to be issued and sold by the Company shall have been
included for quotation on the Nasdaq National Market.
(k) The Underwriters shall have received a certificate from the
Selling Securityholder, signed by the Selling Securityholder, dated
the Firm Closing Date, to the effect that:
(i) the representations and warranties of the Selling
Securityholder in this Agreement are true and correct as if made
on and as of the Firm Closing Date;
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(ii) with respect to statements or omissions in (A) the
Registration Statement, as amended as of the Firm Closing Date,
made in reliance upon and in conformity with written information
furnished to the Company by the Selling Securityholder
specifically for use therein, the Registration Statement does not
include any untrue statement of a material fact or omit to state
any material fact necessary to make the statements therein not
misleading, and (B) the Prospectus, as amended or supplemented as
of the Firm Closing Date, made in reliance upon and in conformity
with written information furnished to the Company by the Selling
Securityholder specifically for use therein does not include any
untrue statement of a material fact or omit to state any material
fact necessary in order to make the statement therein, in the
light of the circumstances under which they were made, not
misleading; and
(iii) the Selling Securityholder has performed all covenants
and agreements on its part to be performed or satisfied at or
prior to the Firm Closing Date.
All opinions, certificates, letters and documents delivered pursuant to
this Agreement will comply with the provisions hereof only if they are
reasonably satisfactory in all material respects to the Representatives and
counsel for the Underwriters. The Company shall furnish to the Representatives
such conformed copies of such opinions, certificates, letters and documents in
such quantities as the Representatives and counsel for the Underwriters shall
reasonably request.
The respective obligations of the several Underwriters to purchase and
pay for any Option Securities shall be subject, in their discretion, to each of
the foregoing conditions to purchase the Firm Securities, except that all
references to the Firm Securities and the Firm Closing Date shall be deemed to
refer to such Option Securities and the related Option Closing Date,
respectively.
8. Indemnification and Contribution.
(a) Except as provided in Section 8(e), the Company, the Selling
Securityholder and the Kim Shareholders, jointly and severally, agree to
indemnify and hold harmless each Underwriter and each person, if any, who
controls any Underwriter within the meaning of Section 15 of the Act or Section
20 of the Securities and Exchange Act of 1934, as amended (the "Exchange Act"),
against any losses, claims, damages or liabilities, joint or several, to which
such Underwriter or such controlling person may become subject under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon:
(i) any untrue statement or alleged untrue statement made by
the Company in Section 2 of this Agreement,
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(ii) any untrue statement or alleged untrue statement of any
material fact contained in (A) the Registration Statement or any
amendment thereto, any Preliminary Prospectus or the Prospectus
or any amendment or supplement thereto or (B) any application or
other document, or any amendment or supplement thereto, executed
by the Company or based upon written information furnished by or
on behalf of the Company filed in any jurisdiction in order to
qualify the Securities under the securities or blue sky laws
thereof or filed with the Commission or any securities
association or securities exchange (each an "Application"),
(iii) the omission or alleged omission to state in the
Registration Statement or any amendment thereto, any Preliminary
Prospectus or the Prospectus or any amendment or supplement
thereto, or any Application a material fact required to be stated
therein or necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading,
or
(iv) any untrue statement or alleged untrue statement of any
material fact required to be stated in or necessary to make the
statements in any audio or visual materials provided by the
Company and used in connection with the marketing of the
Securities, in light of the circumstances under which they were
made, not misleading, including without limitation, slides,
videos, films and tape recordings, and will reimburse, as
incurred, each Underwriter and each such controlling person for
any legal or other expenses reasonably incurred by such
Underwriter or such controlling person in connection with
investigating, defending against or appearing as a third-party
witness in connection with any such loss, claim, damage,
liability or action; provided, however, that the Company, the
Selling Securityholder and the Kim Shareholders will not be
liable in any such case to the extent that any such loss, claim,
damage or liability arises out of or is based upon any untrue
statement or alleged untrue statement or omission or alleged
omission made in such Registration Statement or any amendment
thereto, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto or any Application in reliance
upon and in conformity with written information furnished to the
Company, the Selling Securityholder or the Kim Shareholders by
such Underwriter through the Representatives specifically for use
therein. This indemnity agreement will be in addition to any
liability which the Company, the Selling Securityholder or the
Kim Shareholders may otherwise have. The Company, the Selling
Securityholder and the Kim Shareholders will not, without the
prior written consent of the Underwriter or Underwriters
purchasing, in the aggregate, more than fifty percent (50%) of
the Securities, settle or compromise or consent to the entry of
any judgment in any pending or threatened claim, action, suit or
proceeding in respect of which indemnification may be sought
hereunder (whether or not any such Underwriter or any person who
controls any such Underwriter within the meaning of Section 15 of
the Act or Section 20 of the Exchange Act is a party to such
claim, action, suit or proceeding), unless such settlement,
compromise or consent includes an unconditional release of all of
the Underwriters and
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such controlling persons from all liability arising out of such claim,
action, suit or proceeding.
(b) Each Underwriter, severally and not jointly, will indemnify and
hold harmless the Company, each of its directors, each of its officers who
signed the Registration Statement, the Selling Securityholder, the Kim
Shareholders and each person, if any, who controls the Company within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act against
any losses, claims, damages or liabilities to which the Company or any such
director or officer of the Company, the Selling Securityholder, the Kim
Shareholders or any such controlling person of the Company or the Selling
Securityholder may become subject under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise
out of or are based upon (i) any untrue statement or alleged untrue statement
of any material fact contained in the Registration Statement or any amendment
thereto, any Preliminary Prospectus or the Prospectus or any amendment or
supplement thereto, or any Application or (ii) the omission or the alleged
omission to state therein a material fact required to be stated in the
Registration Statement or any amendment thereto, any Preliminary Prospectus
or the Prospectus or any amendment or supplement thereto, or any Application
necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in reliance upon and in
conformity with written information furnished to the Company by such
Underwriter through the Representatives specifically for use therein; and,
subject to the limitation set forth immediately preceding this clause, will
reimburse, as incurred, any legal or other expenses reasonably incurred by
the Company or any such director, officer or controlling person or the
Selling Securityholder or the Kim Shareholders in connection with
investigating or defending any such loss, claim, damage, liability or any
action in respect thereof. This indemnity agreement will be in addition to
any liability which such Underwriter may otherwise have.
(c) Promptly after receipt by an indemnified party under this
Section 8 of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying
party under this Section 8, notify the indemnifying party of the commencement
thereof; but the omission so to notify the indemnifying party will not
relieve it from any liability which it may have to any indemnified party
otherwise than under this Section 8. In case any such action is brought
against any indemnified party, and it notifies the indemnifying party of the
commencement thereof, the indemnifying party will be entitled to participate
therein and, to the extent that it may wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party; provided, however, that if
the defendants in any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably concluded
that there may be one or more legal defenses available to it and/or other
indemnified parties which are different from or additional to those available
to the indemnifying party, the indemnifying party shall not have the right to
direct the defense of such action on behalf of such indemnified party or
parties and such indemnified party or parties shall have the right to select
separate counsel to defend such ction on behalf of such indemnified party or
parties. After notice from
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the indemnifying party to such indemnified party of its election so to assume
the defense thereof and approval by such indemnified party of counsel
appointed to defend such action, the indemnifying party will not be liable to
such indemnified party under this Section 8 for any legal or other expenses,
other than reasonable costs of investigation, subsequently incurred by such
indemnified party in connection with the defense thereof, unless (i) the
indemnified party shall have employed separate counsel in accordance with the
proviso to the next preceding sentence (it being understood, however, that in
connection with such action the indemnifying party shall not be liable for
the expenses of more than one separate counsel (in addition to local counsel)
in any one action or separate but substantially similar actions in the same
jurisdiction arising out of the same general allegations or circumstances,
designated by the Representatives in the case of paragraph (a) of this
Section 8, representing the indemnified parties under such paragraph (a) who
are parties to such action or actions) or (ii) the indemnifying party does
not promptly retain counsel reasonably satisfactory to the indemnified party
or (iii) the indemnifying party has authorized the employment of counsel for
the indemnified party at the expense of the indemnifying party. After such
notice from the indemnifying party to such indemnified party, the
indemnifying party will not be liable for the costs and expenses of any
settlement of such action effected by such indemnified party without the
consent of the indemnifying party.
(d) In circumstances in which the indemnity agreement provided for
in the preceding paragraphs of this Section 8 is unavailable or insufficient,
for any reason, to hold harmless an indemnified party in respect of any
losses, claims, damages or liabilities (or actions in respect thereof), each
indemnifying party, in order to provide for just and equitable contribution,
shall contribute to the amount paid or payable by such indemnified party as a
result of such losses, claims, damages or liabilities (or actions in respect
thereof) in such proportion as is appropriate to reflect (i) the relative
benefits received by the indemnifying party or parties on the one hand and
the indemnified party on the other from the offering of the Securities or
(ii) if the allocation provided by the foregoing clause (i) is not permitted
by applicable law, not only such relative benefits but also the relative
fault of the indemnifying party or parties on the one hand and the
indemnified party on the other in connection with the statements or omissions
or alleged statements or omissions that resulted in such losses, claims,
damages or liabilities (or actions in respect thereof), as well as any other
relevant equitable considerations. The relative benefits received by the
Company, the Selling Securityholder and the Kim Shareholders on the one hand
and the Underwriters on the other shall be deemed to be in the same
proportion as the total proceeds from the offering (before deducting
expenses) received by the Company, the Selling Securityholder and the Kim
Shareholders bear to the total underwriting discounts and commissions
received by the Underwriters. The relative fault of the parties shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to
state a material fact relates to information supplied by the Company, the
Selling Securityholder or the Underwriters, the parties' relative intents,
knowledge, access to information and opportunity to correct or prevent such
statement or omission, and any other equitable considerations appropriate in
the circumstances. The Company, the Selling Securityholder and the
Underwriters agree that it would not be equitable if the amount of such
contribution were determined by pro rata or per capita allocation (even if the
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Underwriters were treated as one entity for such purpose) or by any other
method of allocation that does not take into account the equitable
considerations referred to above in this paragraph (d). Notwithstanding any
other provision of this paragraph (d), no Underwriter shall be obligated to
make contributions hereunder that in the aggregate exceed the total public
offering price of the Securities purchased by such Underwriter under this
Agreement, less the aggregate amount of any damages that such Underwriter has
otherwise been required to pay in respect of the same or any substantially
similar claim, and no person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Act) shall be entitled to contribution
from any person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations to contribute hereunder are several in proportion
to their respective underwriting obligations and not joint, and contributions
among Underwriters shall be governed by the provisions of the Prudential
Securities Incorporated Master Agreement Among Underwriters. For purposes of
this paragraph (d), each person, if any, who controls an Underwriter within
the meaning of Section 15 of the Act or Section 20 of the Exchange Act shall
have the same rights to contribution as such Underwriter, and each director
of the Company, each officer of the Company who signed the Registration
Statement and each person, if any, who controls the Company within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act, shall
have the same rights to contribution as the Company.
(e) Notwithstanding anything contained herein to the contrary, the
liability of the (i) Selling Securityholder under the indemnity and
contribution agreements contained in this Section 8 shall be limited to an
amount equal to the initial public offering price of the Securities to be
sold by such Selling Securityholder to the Underwriters less the amount of
the underwriting discount and commission paid thereon to the Underwriters by
the Selling Securityholder, and (ii) Kim Shareholders under the indemnity and
contribution agreements contained in this Section 8 shall be limited to an
amount that equals the sum of (A) the amounts distributed to the Kim
Shareholders in 1998, including any amounts to be distributed prior to
completion of the Reorganization, plus (B) the value of any assets retained
by EB pursuant to the Reorganization, as more fully described in "Certain
Transactions" of the Prospectus, plus (C) an amount equal to the proceeds
received by the Selling Securityholder in connection with the sale of the
Securities. The parties hereto agree that the amounts referred to in the
foregoing clauses (A) and (B) shall not exceed in the aggregate $50 million.
9. Default of Underwriters. If one or more Underwriters default in
their obligations to purchase Firm Securities or Option Securities hereunder
and the aggregate number of such Securities that such defaulting Underwriter
or Underwriters agreed but failed to purchase is ten percent or less of the
aggregate number of Firm Securities or Option Securities to be purchased by
all of the Underwriters at such time hereunder, the other Underwriters may
make arrangements satisfactory to the Representatives for the purchase of
such Securities by other persons (who may include one or more of the
non-defaulting Underwriters, including the Representatives), but if no such
arrangements are made by the Firm Closing Date or the related Option Closing
Date, as the case may be, the other Underwriters shall be obligated severally
in proportion to their respective commitments hereunder to purchase the Firm
Securities or Option
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Securities that such defaulting Underwriter or Underwriters agreed but failed
to purchase. If one or more Underwriters so default with respect to an
aggregate number of Securities that is more than ten percent of the aggregate
number of Firm Securities or Option Securities, as the case may be, to be
purchased by all of the Underwriters at such time hereunder, and if
arrangements satisfactory to the Representatives are not made within 36 hours
after such default for the purchase by other persons (who may include one or
more of the non-defaulting Underwriters, including the Representatives) of
the Securities with respect to which such default occurs, this Agreement will
terminate without liability on the part of any non-defaulting Underwriter or
the Company other than as provided in Section 11 hereof. Nothing contained
herein shall relieve a defaulting Underwriter of any liability it may have to
the Company or the Selling Securityholder for damages caused by its default.
In the event of any default by one or more Underwriters as described in this
Section 9, the Representatives shall have the right to postpone the Firm
Closing Date or the Option Closing Date, as the case may be, established as
provided in Section 3 hereof for not more than seven business days in order
that any necessary changes may be made in the arrangements or documents for
the purchase and delivery of the Firm Securities or Option Securities, as the
case may be. As used in this Agreement, the term "Underwriter" includes any
person substituted for an Underwriter under this Section 9. Nothing herein
shall relieve any defaulting Underwriter from liability for its default.
10. Default by Selling Securityholder. If on either the Firm Closing
Date or the Option Closing Date, the Selling Securityholder fails to sell the
Firm Securities or the Option Securities, whichever is applicable, that the
Selling Securityholder has agreed to sell on such date as set forth herein,
the Company agrees that it will sell that number of shares of Common Stock to
the Underwriters which represents either the Selling Securityholder's Firm
Securities or Option Securities, whichever is applicable, that the Selling
Securityholder has failed to so sell or such lesser number as may be
requested by you.
11. Survival. The respective representations, warranties, agreements,
covenants, indemnities and other statements of the Company and its officers,
the Selling Securityholder and the several Underwriters set forth in this
Agreement or made by or on behalf of them, respectively, pursuant to this
Agreement shall remain in full force and effect, regardless of (i) any
investigation made by or on behalf of the Company, any of its officers or
directors, the Selling Securityholder, any Underwriter or any controlling
person referred to in Section 8 hereof and (ii) delivery of and payment for
the Securities. The respective agreements, covenants, indemnities and other
statements set forth in Sections 6 and 8 hereof shall remain in full force
and effect, regardless of any termination or cancellation of this Agreement.
12. Termination.
(a) This Agreement may be terminated with respect to the Firm Securities
or any Option Securities in the sole discretion of the Representatives by
notice to the Company or the Selling Securityholder given prior to the Firm
Closing Date or the related Option Closing Date, respectively, in the event
that the Company or the Selling Securityholder shall have failed,
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refused or been unable to perform all obligations and satisfy all conditions
on their part to be performed or satisfied hereunder at or prior thereto or,
if at or prior to the Firm Closing Date or such Option Closing Date,
respectively,
(i) the Company or any of its subsidiaries shall have, in the
sole judgment of the Representatives, sustained any material loss or
interference with its business or properties from fire, flood,
hurricane, accident or other calamity, whether or not covered by
insurance, or from any labor dispute or any legal or governmental
proceeding or there shall have been any material adverse change, or any
development involving a prospective material adverse change (including
without limitation a change in management or control of the Company),
in the condition (financial or otherwise), management, business
prospects, net worth or results of operations of the Company and its
subsidiaries, except in each case as described in or contemplated by
the Prospectus (exclusive of any subsequent amendment or supplement
thereto);
(ii) trading in the Common Stock shall have been suspended by
the Commission or the Nasdaq National Market;
(iii) trading in securities generally on the Nasdaq National
Market shall have been suspended or minimum or maximum prices shall
have been established on any such exchange or market system;
(iv) a banking moratorium shall have been declared by New York
or United States authorities; or
(v) there shall have been (A) an outbreak or escalation of
hostilities between the United States and any foreign power, (B) an
outbreak or escalation of any other insurrection or armed conflict
involving the United States or (C) any other calamity or crisis or
material adverse change in general economic, political or financial
conditions having an effect on the United States financial markets
that, in the sole judgment of the Representatives, makes it impractical
or inadvisable to proceed with the public offering or the delivery of
the Securities as contemplated by the Registration Statement, as
amended as of the date hereof.
(b) Termination of this Agreement pursuant to this Section 12 shall be
without liability of any party to any other party except as provided in Section
11 hereof.
13. Information Supplied by Underwriters. The statements set forth in
the last paragraph on the front cover page and in the first, third and ninth
paragraphs under the heading "Underwriting" in any Preliminary Prospectus or the
Prospectus (to the extent such statements relate to the Underwriters) constitute
the only information furnished by any Underwriter through the Representatives to
the Company for the purposes of Sections 2(a)(ii) and 8 hereof. The Underwriters
confirm that such statements (to such extent) are correct.
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14. Notices. All communications hereunder shall be in writing and, if
sent to any of the Underwriters, shall be delivered or sent by mail, telex or
facsimile transmission and confirmed in writing to Prudential Securities
Incorporated, One New York Plaza, New York, New York 10292, Attention: Equity
Transactions Group; if sent to the Company, shall be delivered or sent by mail,
telex or facsimile transmission and confirmed in writing to the Company at 931
South Matlack Street, West Chester, Pennsylvania 19382, Attention: Chief
Executive Officer and President; if sent to the Selling Securityholder, shall be
delivered or sent by mail, telex or facsimile transmission and confirmed in
writing to the Selling Securityholder at 931 South Matlack Street, West Chester,
Pennsylvania 19382, Attention: President.
15. Successors. This Agreement shall inure to the benefit of and shall
be binding upon the several Underwriters, the Company, the
SellingSecurityholder, the Kim Shareholders and their respective successors and
legal representatives, and nothing expressed or mentioned in this Agreement is
intended or shall be construed to give any other person any legal or equitable
right, remedy or claim under or in respect of this Agreement, or any provisions
herein contained, this Agreement and all conditions and provisions hereof being
intended to be and being for the sole and exclusive benefit of such persons and
for the benefit of no other person except that (i) the indemnities of the
Company and the Selling Securityholder contained in Section 8 of this Agreement
shall also be for the benefit of any person or persons who control any
Underwriter within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act and (ii) the indemnities of the Underwriters contained in Section 8
of this Agreement shall also be for the benefit of the directors of the Company
and the Selling Securityholder, the officers of the Company who have signed the
Registration Statement and any person or persons who control the Company or the
Selling Securityholder within the meaning of Section 15 of the Act or Section 20
of the Exchange Act. No purchaser of Securities from any Underwriter shall be
deemed a successor because of such purchase.
16. Applicable Law. The validity and interpretation of this Agreement,
and the terms and conditions set forth herein, shall be governed by and
construed in accordance with the laws of the State of New York, without giving
effect to any provisions relating to conflicts of laws.
17. Consent to Jurisdiction and Service of Process. All judicial
proceedings arising out of or relating to this Agreement may be brought in any
state or federal court of competent jurisdiction in the State of New York, and
by execution and delivery of this Agreement, each Selling Securityholder accepts
for itself and in connection with its properties, generally and unconditionally,
the nonexclusive jurisdiction of the aforesaid courts and waives any defense of
forum non conveniens and irrevocably agrees to be bound by any judgment rendered
thereby in connection with this Agreement. The Selling Securityholder designates
and appoints _______________, and such other persons as may hereafter be
selected by the Selling Securityholder irrevocably agreeing in writing to so
serve, as its agent to receive on its behalf service of all process in any such
proceedings in any such court, such service being hereby acknowledged by the
Selling Securityholder to be effective and binding service in every respect. A
copy of any such process so served shall be mailed by registered mail to the
Selling
-40-
<PAGE>
Securityholder at the address provided in Section 14 hereof; provided, however,
that, unless otherwise provided by applicable law, any failure to mail such copy
shall not affect the validity of service of such process. If any agent appointed
by the Selling Securityholder refuses to accept service, the Selling
Securityholder hereby agrees that service of process sufficient for personal
jurisdiction in any action against the Selling Securityholder in the State of
New York may be made by registered or certified mail, return receipt requested,
to the Selling Securityholder at its address provided in Section 14 hereof, and
the Selling Securityholder hereby acknowledges that such service shall be
effective and binding in every respect. Nothing herein shall affect the right to
serve process in any other manner permitted by law or shall limit the right of
any Underwriter to bring proceedings against the Selling Securityholder in the
courts of any other jurisdiction.
18. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
<PAGE>
If the foregoing correctly sets forth our understanding, please
indicate your acceptance thereof in the space provided below for that purpose,
whereupon this letter shall constitute an agreement binding the Company and each
of the several Underwriters.
Very truly yours,
ELECTRONICS BOUTIQUE HOLDINGS CORP.
By:________________________________________
Name: Joseph J. Firestone
Title: President, Chief Executive Officer
EB NEVADA INC.
By:________________________________________
Name:
Title: Attorney-in-fact acting on behalf
of the Selling Securityholder
KIM SHAREHOLDERS
___________________________________________
Name: James J. Kim
___________________________________________
Name: Agnes C. Kim
<PAGE>
Trust of Susan Y. Kim
Dated December 31, 1987,
By:____________________________________
Name: Susan Y. Kim
Title: Trustee
By:____________________________________
Name: John T. Kim
Title: Trustee
By:____________________________________
Name: John F.A. Earley
Title: Trustee
Trust of David D. Kim
Dated December 31, 1987
By:____________________________________
Name: Susan Y. Kim
Title: Trustee
By:____________________________________
Name: David D. Kim
Title: Trustee
By:____________________________________
Name: John F.A. Earley
Title: Trustee
<PAGE>
Trust of John T. Kim
Dated December 31, 1987
By:____________________________________
Name: Susan Y. Kim
Title: Trustee
By:____________________________________
Name: John T. Kim
Title: Trustee
By:____________________________________
Name: John F.A. Earley
Title: Trustee
The foregoing Agreement is
hereby confirmed and accepted
as of the date first above
written.
PRUDENTIAL SECURITIES INCORPORATED
SMITH BARNEY INC.
By: PRUDENTIAL SECURITIES INCORPORATED
By: ____________________________________
Name: Jean-Claude Canfin
Title: Managing Director
For itself and on behalf of the Underwriters.
<PAGE>
SCHEDULE I
UNDERWRITERS
<TABLE>
<CAPTION>
Number of Firm
Securities
Underwriter to be Purchased
----------- ---------------
<S> <C>
Prudential Securities Incorporated...................
Smith Barney Inc.....................................
Total..........................................
---------------
---------------
</TABLE>
<PAGE>
June 19, 1998
Page 1
[Letterhead of Klehr, Harrison, Harvey, Branzburg & Ellers LLP]
July 22, 1998
Board of Directors
Electronics Boutique Holdings Corp.
931 South Matlack Street
West Chester, PA 19382
Dear Gentlemen:
As counsel to Electronics Boutique Holdings Corp., a Delaware corporation
(the "Company"), we have assisted in the preparation of the Company's
Registration Statement on Form S-1 (File No. 333-48523) (the Registration
Statement as amended at the time it becomes effective being referred to as the
"Registration Statement") filed with the Securities and Exchange Commission
under the Securities Act of 1933, as amended (the "Securities Act"), covering
6,250,000 shares of the Company's common stock, par value $.01 per share (the
"Common Stock"), comprised of (i) 4,375,000 shares of Common Stock to be sold by
the Company (the "Shares") to the underwriters for whom Prudential Securities
Incorporated and Salomon Smith Barney are acting as representatives
(collectively, the "Underwriters"), (ii) 1,875,000 shares of Common Stock to be
sold by EB Nevada Inc., the Company's parent (the "Selling Shareholder Shares")
and (iii) up to 937,500 shares of Common Stock (the "Optional Shares") which the
Underwriters will have a right to purchase from EB Nevada Inc. to cover
over-allotments, if any.
<PAGE>
June 19, 1998
Page 2
In connection therewith, we have examined the originals or copies, certified
or otherwise identified to our satisfaction, of (i) the Company's Certificate of
Incorporation and Bylaws; (ii) minutes and resolutions of the Company's Board of
Directors and stockholders; (iii) certificates issued by public officials; and
(iv) such other documents and corporate records relating to the Company and the
issuance and sale of the Shares, the Selling Shareholder Shares and Optional
Shares as we have deemed necessary as a basis for the opinion hereinafter set
forth.
In our examination of the foregoing documents, we have assumed: (i) the
genuineness of all signatures on originals and certified copies of documents;
and (ii) the authenticity of all documents submitted to us as originals as well
as the conformity to the originals of all documents submitted to us as
photostatic copies. As to any fact material to our opinion, we have relied, to
the extent we deem such reliance proper, upon representations of officers of the
Company.
Based upon the foregoing, we are of the opinion that the Shares, the Selling
Shareholder Shares and the Optional Shares to be sold to the Underwriters, when
issued and sold in accordance with and in the manner described in the plan of
distribution set forth in the Registration Statement, will be duly authorized,
validly issued, fully paid and non assessable.
We are members of the Bar of the Supreme Court of Pennsylvania and do not
opine as to the laws of any jurisdiction other than Pennsylvania and the General
Corporation Law of the State of Delaware; provided, however, that no opinion is
hereby rendered as to the state securities laws of either the Commonwealth of
Pennsylvania or the State of Delaware. We hereby consent to the reference to our
firm in the Registration Statement under the prospectus caption "Legal Matters"
and to the inclusion of this opinion as an exhibit to the Registration
Statement. In giving such consent, we do not admit hereby that we come within
the category of persons whose consent is required under Section 7 of the
Securities Act, or the rules and regulations promulgated thereunder.
Very truly yours,
/s/ Klehr, Harrison, Harvey,
Branzburg & Ellers LLP
<PAGE>
EXHIBIT 10.6
JOINDER TO LOAN AND SECURITY AGREEMENT
This Joinder to Loan and Security Agreement ("Joinder") is made this
___ day of June, 1998 by and among THE ELECTRONICS BOUTIQUE, INC. ("EB" or
the "Initial Borrower"), a Pennsylvania corporation and ELECTRONICS BOUTIQUE
OF AMERICA INC. ("EB America"), a Pennsylvania corporation and FLEET CAPITAL
CORPORATION ("Lender"), a Rhode Island Corporation.
BACKGROUND
A. EB and Lender are parties to a certain Loan and Security
Agreement dated March 16, 1998, as amended from time to time ("Loan
Agreement") pursuant to which the Initial Borrower established certain
financing arrangements with lender. The Loan Agreement and all instruments,
documents and agreements executed in connection therewith, or related
thereto, as amended from time to time, are referred to herein collectively as
the "Existing Loan Documents". All capitalized terms used herein without
further definition shall have the meanings ascribed thereto in the Loan
Agreement.
B. Pursuant to a certain Assignment, Bill of Sale and Assumption
Agreement dated as of May 31, 1998, all or substantially all of the assets of
EB were transferred to EB America. In recognition of the benefits and
privileges thereunder, EB America has requested that it be permitted to join
into the Existing Loan Documents as if it were an original signatory thereto
and the Initial Borrower and Lender have so consented subject to the terms
and conditions hereof.
NOW, THEREFORE, with the foregoing Background incorporated by
reference and made a part hereof and intending to be legally bound, the
parties agree as follows:
1. Joinder.
(a) Upon the effectiveness of this Joinder, EB America
joins in, assumes, adopts and becomes a Borrower under the Existing Loan
Documents. All references to Borrower contained in the Existing Loan
Documents are hereby deemed, for all purposes, to refer to and include EB
America as a Borrower and EB America hereby agrees to comply with all of the
terms, undertakings and conditions of the Existing Loan Documents as if it
was an original signatory thereto.
(b) Without limiting the generality of the provisions of
subparagraph (a) above, EB America is thereby liable, on a joint and several
basis, along with EB, for all Obligations incurred at any time by any one or
more Borrowers under the Existing Loan Documents, as amended hereby or as may
be hereafter amended, modified or supplemented.
2. Representations and Warranties. EB hereby reaffirms, and EB America
hereby represents and warrants that, except as set forth on Schedule "A" hereto,
as of the date hereof, all of the existing representations and warranties
contained in the Loan Agreement and the Existing Loan
<PAGE>
Documents are true and correct as of the date hereof.
3. Collateral. As security for payment of the Obligations, and
satisfaction by Borrowers of all covenants and undertakings contained in the
Loan Agreement and the Existing Loan Documents, EB America hereby assigns and
grants to Lender a continuing first lien on and security interest in, upon
and to all of its now owned or hereafter acquired, created or arising
Collateral, as defined and described in the Loan Agreement.
4. Effectiveness Conditions. This Joinder shall be effective and EB
America shall be deemed a Borrower under the Loan Agreement and the Existing
Loan Documents upon completion of the following conditions precedent (all
documents to be in form and substance satisfactory to Lender and Lender's
counsel):
a. Execution of this Joinder to Loan and Security Agreement.
b. Execution and delivery of an Allonge to Revolving Credit
Note.
c. Execution and filing of UCC-1 financing statements by EB
America in all jurisdictions which Lender may deem appropriate.
d. Certification and delivery of (i) the resolutions of EB
American's board of directors authorizing the execution of this Joinder, the
Allonge to be issued hereunder, and each document required to be delivered by
any section hereof and (ii) EB America's articles of incorporation and by-laws.
e. Execution and delivery of an Incumbency Certificate by EB
America identifying all Authorized Officers with specimen signatures.
f. Delivery of written opinions by EB America's independent
counsel addressed to Lender.
g. Execution and delivery of an Officer's Certificate of EB
America.
5. Ratification of Existing Loan Documents. Except as expressly set
forth herein, all of the terms and conditions of the Loan Agreement and the
Existing Loan Documents are hereby ratified and confirmed and continue
unchanged and in full force and effect. Borrowers each hereby confirm and
agree that all security interests and Liens granted to Lender continue in
full force and effect and shall continue to secure the Obligations. All
Collateral remains free and clear of any Liens other than Permitted Liens or
Liens in favor of Lender. Nothing herein contained is intended to in any
manner impair or limit the validity, priority, and extent of Lender's
existing security interest in and Liens upon the Collateral. All references
to the Loan Agreement shall mean the Loan Agreement as modified by this
Joinder.
2
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Joinder the day
and year first above written.
THE ELECTRONICS BOUTIQUE, INC.
BY:________________________________
ATTEST:____________________________
ELECTRONICS BOUTIQUE OF
AMERICA INC.
BY:________________________________
ATTEST:____________________________
FLEET CAPITAL CORPORATION
BY:________________________________
ATTEST:____________________________
3
<PAGE>
Exhibit 10.14
ADDENDUM TO ASSIGNMENT OF TRADEMARKS
THIS ADDENDUM TO ASSIGNMENT OF TRADEMARKS is made effective this 31st
day of May, 1998 by The Electronics Boutique, Inc., a Pennsylvania corporation
having a principal place of business at 1345 Enterprise Drive, Goshen Corporate
Park, West Chester, PA 19380 ("Assignor") to Elbo Inc., a Delaware corporation
("Assignee").
WHEREAS, Assignor adopted and used certain trademarks and registrations
set forth on Schedule A of the Assignment of this date, which are in use in the
United States and the Republic of Korea in connection with mail order and retail
store services involving electrical, electronics and computer related products
and accessories;
WHEREAS, by the Assignment of this date, Assignor transferred its
entire interest in the aforesaid certain United States and Republic of Korea
trademarks in connection with mail order and retail store services involving
electrical, electronics and computer related products and accessories, to
Assignee, intending that assignment to include all trademarks owned by Assignor
in return for all of Assignee's shares of common stock;
WHEREAS, Assignor has additional trademarks, applications and
registrations, a list of which is attached hereto in Schedule I, which are in
use in certain additional countries of the world in connection with mail order
and retail store services including electrical, electronic and computer products
and accessories (hereinafter the "additional trademarks");
WHEREAS, Assignor is required to transfer the additional trademarks to
Assignee as part of the original incorporation of Assignee under Section 351 of
the Internal Revenue Code.
NOW, THEREFORE, in consideration of Assignee's stock issued to Assignor
and for other
<PAGE>
valuable consideration, the receipt of which is hereby acknowledged, intending
to be legally bound,Assignor hereby sells, assigns, transfers and sets over to
Assignee the Assignor's entire right, title and interest in and to the
additional trademarks, along with the goodwill appurtenant thereto, and assigns
to and authorizes Assignee to file or prosecute in its name, applications, in
all countries, the same to be held and enjoyed by said Assignee, its successors,
assigns, nominees or legal representatives, to the full end of the term or terms
for which said additional trademarks, may be registered, as fully and entirely
as the same would have been held and enjoyed by Assignor had this assignment,
sale and transfer not been made; and
Assignor hereby covenants that it has the full right to convey the
entire interest herein assigned, and that it has not executed and will not
execute any agreement in conflict herewith, and it further covenants and agrees
that it will, each time request is made and without undue delay, execute and
deliver all such papers as may be necessary or desirable to perfect the title to
said additional trademarks to Assignee, its successors, assigns, nominees, or
legal representatives, and it agrees to communicate to Assignee or to its
nominee all known facts respecting said additional trademarks, to testify in any
legal proceedings, to sign all lawful papers, to make all rightful oaths, and
generally to do everything possible to aid said Assignee, its successors,
assigns, nominees, and legal representatives to obtain and enforce for their own
benefit proper protection for said additional trademarks.
Assignor hereby authorizes and requests any official of any country
whose duty it is to issue trademark registrations, to issue to said Assignee the
entire right, title and interest in any and all registrations, in accordance
with the terms of this Assignment.
2
<PAGE>
IN WITNESS WHEREOF, Assignor has hereunto set its hand as of the date
first set forth above.
THE ELECTRONICS BOUTIQUE, INC.
By: /s/Joseph J. Firestone
------------------------------
Joseph J. Firestone, President
3
<PAGE>
COMMONWEALTH OF PENNSYLVANIA :
: SS
COUNTY OF CHESTER :
On this ____ day of ___________, 1998, before me personally
came the above named Joseph J. Firestone to me personally known and known to
me to be the same individual who executed the foregoing assignment, and who
acknowledged to me that execution of the same was of that person's own free
will for the use and purposes therein set forth.
__________________________________________
Notary Public
4
<PAGE>
SCHEDULE I
EUROPE
(Covering Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland,
Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden, and the United Kingdom)
Mark Registration No.
Electronics Boutique Application No. 341,966 - Pending
EB Application No. 342,030 - Pending
UNITED KINGDOM
Mark Registration No.
Electronics Boutique 2,041,846
EB Application No. 2,040,726 - Pending
Electronics Boutique w/Logo 2,040,724
The Electronics Boutique 2,040,725
EBX Application No. 2,050,730 - Pending
Stop-N-Save Software 2,043,306
GERMANY
Mark Registration No.
Electronics EB Boutique 39542702.9
ITALY
Mark Registration No.
Electronics EB Boutique Application No. MI960005936 - Pending
<PAGE>
SWITZERLAND
Mark Registration No.
Electronics EB Boutique 435,837
BENELUX (Belgium, Netherland, Luxembourg)
Mark Registration No.
Electronics EB Boutique 590,761
DENMARK
Mark Registration No.
Electronics EB Boutique 02083/1997
IRELAND
Mark Registration No.
Electronics Boutique Application No. 96/5224 - Pending
Electronics Boutique w/EB Logo Application No. 96/5223 - Pending
EB Application No. 96/5222 - Pending
CHINA
Mark Registration No.
Electronics EB Boutique Application No. 9700112438 - Pending
JAPAN
<PAGE>
Mark Registration No.
Electronics EB Boutique Application No. 8-147580 - Pending
SOUTH AFRICA
Mark Registration No.
Electronics EB Boutique Application No. 95-14095 - Pending
ISRAEL
Mark Registration No.
Electronics EB Boutique Application No. 101,511 - Pending
BRAZIL
Mark Registration No.
EB Electronics Boutique Application No. 819171271 - Pending
Electronics EB Boutique Application No. 819171280 - Pending
CHILE
Mark Registration No.
Electronics EB Boutique Application No. 324,935 - Pending
AUSTRALIA
Electronics Boutique Pending
EB Electronics Boutique (Stylized) Pending
Electronics EB Boutique Pending
Electronics EB Boutique (Stylized) Pending
<PAGE>
Exhibit 10.15
AGREEMENT OF LEASE
BETWEEN
THE ELECTRONICS BOUTIQUE, INC.
(LANDLORD)
AND
ELECTRONICS BOUTIQUE OF AMERICA INC.
(TENANT)
DATED JULY __, 1998 AND EFFECTIVE AS OF MAY 31, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Section Page No.
<S> <C> <C>
1. DEMISED PREMISES.........................................................................................1
2. LEASE TERM...............................................................................................1
3. FIXED RENT...............................................................................................1
4. ADDITIONAL RENT..........................................................................................2
5. ABSOLUTE NET, NET, NET LEASE.............................................................................3
6. OPTION TO PURCHASE DEMISED PREMISES......................................................................4
7. USE OF DEMISED PREMISES..................................................................................8
8. CONDITION OF DEMISED PREMISES............................................................................8
9. ALTERATIONS OR IMPROVEMENTS BY TENANT....................................................................8
10. REPRESENTATIONS AND WARRANTIES OF LANDLORD...............................................................8
11. COVENANTS OF TENANT......................................................................................9
12. RULES AND REGULATIONS...................................................................................11
13. ASSIGNMENT AND SUBLETTING...............................................................................11
14. [INTENTIONALLY OMITTED].................................................................................13
15. EMINENT DOMAIN..........................................................................................13
16. CASUALTY DAMAGE.........................................................................................13
17. INSURANCE; INDEMNIFICATION OF LANDLORD; WAIVER OF
SUBROGATION............................................................................................15
18. INSPECTION; ACCESS; CHANGES IN BUILDING FACILITIES......................................................16
</TABLE>
(i)
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Section Page No.
<S> <C> <C>
19. DEFAULT.................................................................................................17
20. LANDLORD'S REMEDIES.....................................................................................18
21. LANDLORD'S RIGHT TO CURE TENANT'S DEFAULT...............................................................21
22. ESTOPPEL CERTIFICATE....................................................................................21
23. HOLDING OVER............................................................................................21
24. SURRENDER OF DEMISED PREMISES...........................................................................21
25. SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT...........................................................22
26. BROKERS.................................................................................................23
27. NOTICES.................................................................................................23
28. MISCELLANEOUS...........................................................................................23
</TABLE>
(ii)
<PAGE>
List of Exhibits
Exhibit "A": Legal Description of Land
Exhibit "B": Form of Tenant Estoppel Certificate and Statement
(iii)
<PAGE>
AGREEMENT OF LEASE
THIS AGREEMENT OF LEASE (this "Lease") is made this ____ day of July,
1998 and effective as of May 31, 1998, by and between THE ELECTRONICS BOUTIQUE,
INC., a Pennsylvania corporation ("Landlord") and ELECTRONICS BOUTIQUE OF
AMERICA INC., a Pennsylvania corporation ("Tenant").
Intending to be legally bound, Landlord and Tenant agree as set forth
below.
1. DEMISED PREMISES. Landlord, for the term and subject to the
provisions and conditions hereof, leases to Tenant, and Tenant rents from
Landlord, the tract of land known as 931 South Matlack Street, West Chester,
Pennsylvania 19382, which tract of land is described more particularly on
Exhibit "A" attached hereto and hereby made a part of this Lease (the "Lease"),
together with the building erected thereon containing approximately 140,000
rentable square feet (the "Building") and the paved parking and loading areas
and other improvements situate on the Land (the Land, Building and other
improvements sometimes hereinafter collectively being referred to as the
"Demised Premises").
2. LEASE TERM. The Lease Term (the "Lease Term") commenced on May 31,
1998 (the "Commencement Date"), and shall continue until May 31, 2000 unless
extended or sooner terminated as provided in this Lease.
3. FIXED RENT. Fixed rent (the "Fixed Rent") is payable by Tenant,
beginning on the Commencement Date in twenty-four (24) monthly installments of
Fifty Thousand Dollars ($50,000.00) each, representing one-twelfth (1/12th) of
the annual Fixed Rent (the "Annual Fixed Rent") of Six Hundred Thousand Dollars
($600,000.00).
Annual Fixed Rent is payable without prior notice or demand, and, except as set
forth in this Lease, without any setoff or deduction whatsoever, in advance, on
the first day of each month at such place as Landlord may direct, except that
the Fixed Rent for the first full month of the Lease Term will be paid on the
date of execution of this Lease. If the Lease Term commences on a day other than
the first day of a calendar month, Tenant shall pay to Landlord, on or before
the Commencement Date of the Lease Term, a pro rata portion of the monthly
installment of rent (including Fixed Rent and any Additional Rent (as defined in
Paragraph 4), such pro rata portion to be based on the actual number of calendar
days remaining in such partial month after the Commencement Date of the Lease
Term. If the Lease Term shall expire on other than the last day of a calendar
month, such monthly installment of Fixed Rent and Additional Rent shall be
prorated for each calendar day of such partial month. If any portion of Fixed
Rent, Additional Rent or any other sum payable to Landlord hereunder shall be
due and unpaid for more than ten (10) days, it shall thereafter bear interest at
a rate equal to five percent (5%) per annum greater than the highest prime rate
of interest announced from time to time by PNC Bank, National Association, (or
its successor) (the "Default Rate"), as the same may change from time to time,
from the due date until the date of payment thereof by
<PAGE>
Tenant provided, however, that nothing herein contained shall be construed or
implemented in such a manner as to allow Landlord to charge or receive interest
in excess of the maximum legal rate then allowed by law. Landlord and Tenant
understand and agree that memos written on rental checks or any other payment
forms delivered to Landlord do not and shall not, throughout the Lease Term
hereunder, constitute satisfaction of any current or outstanding debt of Tenant
pursuant to this Lease, and, provided further that any such memo shall not
preclude Landlord from recovering any balance of any sum or sums due under this
Lease. In addition, a letter or similar type statement accompanying any rental
check or payment form delivered to Landlord pursuant to this Lease shall also
have no force or effect under this Lease as such may relate to the satisfaction
of any debt of Tenant hereunder.
4. ADDITIONAL RENT.
4.1 As additional rent under this Lease ("Additional Rent"),
at least thirty (30) days before any fine, penalty, interest or other cost may
be added thereto for the non-payment thereof (or sooner if elsewhere herein
required), Tenant shall pay throughout the Lease Term all levies, taxes,
assessments, water and sewer rents and charges, liens, license and permit fees,
charges for public utilities and all other charges, imposed or charged by any
federal state or municipal government or public authority, or under any law,
ordinance or regulation thereof, or pursuant to any recorded covenants or
agreements (all of which hereinafter collectively are referred to as
"Impositions") upon or with respect to the Demised Premises, the Land or any
improvements made thereto, any part of the foregoing, and any appurtenances
thereto, or directly upon this Lease or the rent payable hereunder or amounts
payable by any subtenants or other occupants of the Premises, or upon this
transaction or any related documents to which Tenant is a party or successor in
interest, or against Landlord because of Landlord's estate or interest herein.
If Tenant is permitted by the assessing and collecting authorities and by all
mortgagees and elects to pay any Imposition in installments, Tenants shall
nevertheless pay all unpaid installments thereof prior to the expiration or
sooner termination of the Lease Term, whether or not such installments are then
due or payable. Tenant shall pay each of the Impositions, at Landlord's
election, to Landlord or directly to the government or other public authority
charged with the collection of such Impositions; and in the latter event, Tenant
shall furnish Landlord, not later than ten (10) days prior to the last day upon
which they may be paid without any fine, penalty, interest or cost, receipts or
other evidence satisfactory to Landlord of the payment of all such Impositions.
4.2 Nothing contained in this Lease shall be interpreted as
requiring Tenant to pay any income, excess profits, corporate capital stock, or
franchise tax imposed or assessed upon Landlord, unless such tax or any similar
tax is levied or assessed in lieu of all or any part of any imposition or an
increase in any Impositions. If under the requirements of any state or local law
with respect to such new method of taxation, Tenant is prohibited from paying
such new tax, Landlord may, at its election, terminate this Lease by giving
written notice thereof to Tenant; provided however, that Tenant may, within
fifteen (15) days of the date of such notice require Landlord to withdraw such
notice of termination if Tenant agrees to execute a new lease for the sole
purpose of
2
<PAGE>
placing Landlord in a financial position identical to the financial position of
Landlord pursuant to the terms of this Lease.
4.3 Notwithstanding the foregoing provisions of this Section
4, if required by any mortgagee, Landlord shall have the right to require Tenant
to pay to Landlord or to any mortgagee, at the time when the monthly installment
of minimum rent is payable, an amount equal to one-twelfth (1/12th) of the
annual Impositions as estimated by Landlord. If Landlord elects to have Tenant
make such payments, Tenant also shall pay to Landlord or to such mortgagee, as
the case may be, at least thirty (30) days before any fine, penalty, interest or
cost may be added thereto for the non-payment thereof, the amount by which the
Impositions becoming due exceed the monthly payments on account thereof
previously made by Tenant. The amounts paid by Tenant pursuant to this Section
4.3 shall be used to pay the Impositions but such amount shall not be deemed to
be trust funds and no interest shall be payable thereon.
4.4 Landlord may bring proceedings to contest the validity or
amount of any Imposition or to recover payments therefor. Tenant shall cooperate
with Landlord with respect to such proceedings to the extent reasonably
necessary and shall pay to Landlord all reasonable costs, fees and expenses
incurred in connection with such proceedings as additional rent promptly upon
being billed therefor.
4.5 Tenant, without postponement of payment, may bring
proceedings to contest the validity or amount of any Imposition or to recover
payments therefor, Tenant shall save Landlord harmless from all costs and
expenses in connection with such proceedings. Landlord shall cooperate with
Tenant with respect to such proceedings to the extent reasonably necessary, but
all costs, fees and expense incurred in connection with such proceedings shall
be borne by Tenant, Tenant shall give Landlord advance written notice of
Tenant's intention to take any such action.
4.6 Tenant will be responsible to pay, as Additional Rent, for
ad valorem taxes on its personal property and on the value of the leasehold
improvements in the Demised Premises (and if the taxing authorities do not
separately assess Tenant's leasehold improvements, Landlord may make a
reasonable allocation of impositions to such improvements).
4.7 If, upon expiration or termination of this Lease for any
cause, the amount of any Additional Rent due hereunder has not yet been
determined, an appropriate payment from Tenant to Landlord, or refund from
Landlord to Tenant, shall be made promptly after such determination.
5. ABSOLUTE NET, NET, NET LEASE. This Lease is what is commonly called
a "Net, Net, Net Lease". It is the intention of Landlord and Tenant that Fixed
Rent shall be absolutely net to Landlord and that all costs, expenses and
obligations of every kind relating directly or indirectly in any way, foreseen
and unforeseen, to the Tenant's use, occupancy and/or possession of the Demised
Premises, which may arise or become due during the Lease Term (including, but
not limited to, the hook-up and/or consumption of all utilities, the payment of
Additional Rent and
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payment for the insurance coverages required to be maintained by Tenant under
this Lease), shall be paid and/or performed by Tenant or, if and to the extent
paid, performed, or incurred by Landlord, reimbursed or paid to Landlord by
Tenant within thirty (30) days after being billed therefor. Landlord shall be
indemnified by Tenant against all such costs, expenses and obligations. Except
as set forth in this Lease, such Fixed Rent and all Additional Rent shall be
paid without abatement, diminution, reductions, deduction or setoff.
6. OPTION TO PURCHASE DEMISED PREMISES.
6.1 Landlord hereby grants to Tenant the exclusive right and
option to purchase the Demised Premises (the "Option") at any time during the
Lease Term for the purchase price of Six Million seven Hundred Thousand Dollars
($6,700,000.00) (the "Purchase Price"), subject to adjustment for settlement
prorations and upon the terms and conditions hereinafter set forth in this
Section 6. If Tenant desires to exercise the Option during the Lease Term,
Tenant shall notify Landlord in writing of its exercise of the Option (the
"Exercise Notice"). If Tenant fails to exercise the Option during the Lease Term
in accordance with this Lease, the Option shall lapse and terminate, and Tenant
shall have no further right to purchase the Demised Premises under this Lease or
otherwise, except as the parties may hereafter agree in writing.
6.2 Upon Tenant's receipt of the Exercise Notice, the
following terms and conditions of this Section 6.2 shall become and constitute
the agreement of Landlord to sell and Tenant to buy the Demised Premises:
(a) The purchase price for the Demised Premises shall be the
Purchase Price. The Purchase Price shall be paid by Tenant to Landlord at
settlement.
(b) In the event of a failure by Landlord to perform or comply
with any of the terms and provisions of this Section 6.2 to be performed and
complied with by Landlord within the time or times provided herein, upon five
(5) days' notice to Landlord, Tenant shall be repaid any moneys paid by Tenant
on account of the Purchase Price, and Tenant shall have all remedies available
to it under law and in equity (including, without limitation, specific
performance).
(c) Settlement on the purchase of the Demised Premises shall
be made at the offices of Klehr, Harrison, Harvey, Branzburg & Ellers LLP, 1401
Walnut Street, Philadelphia, Pennsylvania, 19102, within forty-five (45) days
after the date of the Exercise Notice, but in no event later than the date of
expiration of the Lease Term or the earlier termination of this Lease.
(d) (i) At settlement, title to the Demised Premises shall be
free and clear of all leases, liens, judgments, encumbrances, easements,
restrictions and objections, except existing building restrictions, ordinances,
easements of roads, easements visible upon the ground, privileges or rights of
utility or public service companies, and all other encumbrances and/or
restrictions recorded against the Land as of the date of execution of this
Lease. Except as set forth in this Section 6.2(d)(i), Landlord agrees not to
convey or encumber all or any portion of the Premises or
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any interest therein, or to encumber the Demised Premises with any judgments,
restrictions, easements or other objections without the prior written consent of
Tenant, which consent Tenant shall not unreasonably withhold, delay or
condition. Landlord may mortgage the Demised Premises without the consent of
Tenant, provided the mortgage and other instruments evidencing and/or securing
such financing expressly acknowledge and recognize the rights of Tenant set
forth in this Lease.
(ii) Excepting only as set forth in Section
6.2(d)(i) above, at settlement title to the Demised Premises shall be in fee
simple and insurable as good and marketable at regular rates by a title
insurance company selected by Tenant. Search and title insurance costs shall be
paid by Tenant.
(iii) In the event title in accordance with this
Section 6.2 cannot be conveyed by Landlord, Tenant shall have the option of
taking such title as Landlord can give, without abatement of the Purchase Price,
except as to monetary lien or liens, or, in the alternative, of terminating this
Agreement, in which latter event Tenant shall be repaid any money paid on
account of the Purchase Price, and all interest accrued thereon, and neither
party shall have any further rights, duties or obligations under this Agreement.
(iv) The Demised Premises shall be conveyed by
Landlord to Tenant at settlement by good and sufficient deed, containing a
special warranty only, prepared by Tenant and delivered to Landlord a reasonable
time prior to settlement.
(e) All times provided for in this Section 6 are and shall be
of the essence, and each extension of any such time or times shall continue to
be of the essence of this Agreement. Tender of an executed deed and of the
purchase money are hereby waived.
(f) At settlement, Landlord shall deliver to Tenant sole and
exclusive possession of the Demised Premises by delivery of the deed. At
settlement, Landlord and Tenant shall terminate this Lease in writing pursuant
to an agreement prepared by Landlord that shall contain customary releases and
indemnities in favor of Landlord.
(g) (i) Tenant shall be responsible for all Impositions for
all tax years during the Lease Term, and shall pay and discharge the same at or
before settlement. Landlord shall be responsible for all Impositions for all tax
years preceding the year in which the Lease Term commenced, and shall pay and
discharge the same at or before settlement. Impositions due for the current tax
year in which settlement is held shall be apportioned between the parties as of
the date of settlement on a tax year basis if and to the extent settlement is
held during the first tax year following commencement of the Lease Term. As used
in this Lease, "tax year" shall, in each instance, be deemed to be the fiscal
year used by the respective taxing or assessing authorities.
(ii) Tenant shall pay all of the real estate transfer
taxes imposed upon this transaction.
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(h) (i) Landlord represents and warrants to Tenant that, as
of the Commencement Date, Landlord has no knowledge or notice of any work being
done or about to be done, or of any assessment, violation or other notice issued
or about to be issued by any federal, state, municipal or public body or
authority, relating to, or with respect to or otherwise affecting the Demised
Premises or abutting streets. Landlord agrees to pay for all work done or
ordered to be done by or required in order to comply with the requirements of
any federal, state, municipal or public body or authority prior to the date of
this Lease, whether or not presently assessed or ordered to be done, on or with
respect to or otherwise affecting the Demised Premises or abutting streets, or
required in order to comply with any existing assessment, violation or similar
notice.
(ii) Landlord represents that the Demised Premises is
zoned I-2.
(iii) If required by law, Landlord shall deliver to
Tenant at or before settlement a certificate from the appropriate municipal
department or departments stating whether or not the Demised Premises is in
violation of the applicable zoning laws and ordinances and identifying any
outstanding notices of any uncorrected violations of the applicable zoning,
housing, building, safety or fire ordinances. The certificate shall be dated no
earlier than twenty (20) days prior to settlement.
(i) Subject to the other terms and conditions of this Lease,
Landlord shall assume the risk of loss by casualty or eminent domain after the
date of the Exercise Notice. Tenant shall continuously maintain insurance
coverage against loss from fire or other casualty, with all risk and extended
coverage endorsement, in an amount not less than the full replacement cost of
the Demised Premises, without co-insurance or deductible, and, effective as of
the Exercise Date, all such insurance coverages shall name Landlord as the
insured and Tenant as an additional insured thereunder. Loss or damage to the
Demised Premises as a result of the exercise of the power of eminent domain or
as a result of fire or casualty between the date of the Exercise Notice and the
time of settlement shall not, at Tenant's option, void or impair the Option, but
Tenant shall have the option to: (a) complete settlement and be entitled to the
eminent domain award or compensation and a credit for the proceeds of any
insurance received by Landlord on account of any such loss or damage, and to an
assignment of all claims to such compensation or award and on insurance
policies, provided such award, compensation or proceeds shall not exceed the
Purchase Price; or (b) terminate this Agreement and be entitled to a return of
any monies paid on account of the Purchase Price.
(j) The Demised Premises shall be conveyed upon exercise of
the Option in their "AS IS" "WHERE IS" condition, with no representation or
warranty being made by Landlord as to the physical or environmental condition of
the Demised Premises or the suitability or fitness of the Demised Premises for
Tenant's use.
(k) Landlord and Tenant each represents to the other party
that it has dealt with no other real estate broker, agent or finder in
connection with the Option. Each party hereby agrees to indemnify, defend and
hold harmless the other party from and against any and all losses, costs,
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damages, liabilities and expenses (including reasonable attorneys' fees) arising
as a result of a breach of the representations set forth in the preceding
sentence. This Section 6.2(k) shall survive settlement and shall not merge with
the deed.
(l) A memorandum of the Option may be filed in the office of
the Recorder of Deeds for Chester County by Landlord and Tenant.
(m) Except as set forth in this Section 6.2(m), the Option may
not be assigned, without Landlord's consent, may be withheld or granted by
Landlord in its sole discretion. The Option may be assigned by Tenant to any
Related Party (as defined in Section 13) without Landlord's consent, provided
that Tenant shall, notwithstanding any such assignment, remain liable for full
performance of Tenant's obligations under this Section 6.2.
(n) Subject to Section 6.2(m), this Section shall inure to the
benefit of and be binding upon Landlord and Tenant, and each of their successors
and assigns.
(o) This Section 6.2 constitutes the entire understanding
between the parties hereto concerning the right of Tenant to purchase the
Demised Premises, and all prior agreements, contracts and understandings between
the parties concerning the purchase of the Demised premises by Tenant are hereby
merged into this Section 6. The parties shall not be bound by any agreements,
understandings or conditions respecting the right of Tenant to purchase that
Demised Premises other than those expressly set forth in this Section 6.
(p) The Option may not be changed or amended orally. All
notices, demands and other communications concerning the Option shall be valid
only if given in writing and in the manner set forth in Section 27.
(q) In any proceeding to enforce the Option or obtain any
remedy provided for herein or otherwise permitted by law in connection with the
Option, Landlord and Tenant hereby knowingly, voluntarily and intentionally
waive trial by jury to the fullest extent permitted by law.
(r) The invalidity or unenforceability of any provision of
this Section 6 shall in no way affect the validity or enforceability of any
other provision of this Section 6.
(s) Failure to insist upon strict compliance with any of the
terms, covenants or conditions hereof shall not be deemed a waiver of such
terms, covenants or conditions, nor shall any waiver or relinquishment of any
right or power hereunder at one time or more times be deemed a waiver or
relinquishment of such right or power at any other time or times.
(t) The obligation of Landlord to complete settlement under
this Section 6 following Tenant's exercise of the Option is expressly
conditioned upon Tenant having performed and complied with all of the
agreements, undertakings and obligations that are required under this
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Lease to be performed or complied with by Tenant at or prior to the completion
of settlement under this Section 6 at no cost or expense to Landlord.
7. USE OF DEMISED PREMISES. Tenant covenants and agrees to use and
occupy the Demised Premises only as a private warehouse, general office and
other uses incidental to and associated with Tenant's business as a retailer of
video software and related products and only in conformity with the law, and for
no other purpose. In no event may Tenant use the Demised Premises or any portion
thereof for the display and retail sale of any products or for any other retail
business directly with the public. Tenant shall not use or permit any use of the
Demised Premises which creates any safety or environmental hazard, or which
would: (i) be dangerous to the Demised Premises, including the Building, or (ii)
cause any increase in the premium cost for any insurance which Landlord may then
have in effect with respect to the Building generally.
8. CONDITION OF DEMISED PREMISES. Tenant acknowledges that it has had
an opportunity to inspect the Demised Premises and hereby agrees to accept
possession of the Demised Premises in their "AS IS" "WHERE IS" condition as of
the Commencement Date, with no representation or warranty by Landlord as to the
physical or environmental condition of the Demised Premises or the suitability
or fitness of the Demised Premises for Tenant's use.
9. ALTERATIONS OR IMPROVEMENTS BY TENANT. Except as set forth in this
Section 9, during the Lease Term Tenant shall not make any alterations,
additions, improvements, redecorating or other changes to the Demised Premises
without the prior written approval of Landlord and then only in accordance with
plans and specifications previously approved in writing by Landlord and subject
to such conditions as Landlord may reasonably require, including, without
limitation, that Tenant be required to pay for any increased cost to Landlord
occasioned thereby or attributed thereto. Prior to the termination of this Lease
and without additional notice to Tenant by Landlord, Tenant shall either: (i)
remove any such alterations or additions and repair any damage to the Building
or the Demised Premises occasioned by their installation or removal and restore
the Demised Premises to substantially the same condition as existed prior to the
time when any such alterations or additions were made, or (ii) reimburse
Landlord for the cost of removing such alterations or additions and the
restoration of the Demised Premises. Landlord shall reasonably determine any
such cost as called for in clause (ii) above prior to the termination of this
Lease and Tenant shall reimburse Landlord within thirty (30) days of receipt of
such notice. Notwithstanding the foregoing provisions of this Section 9, Tenant
may, without Landlord's prior approval, make minor nonstructural interior
alterations or improvements to the Building which cost individually or in any
series of transactions no more than Twenty-Five Thousand Dollars ($25,000.00);
provided, however, that Tenant notifies Landlord of any such alteration or
improvement, which notice shall be accompanied by invoices showing the cost of
the work, and Tenant otherwise complies with this Lease, including the covenants
set forth in Section 11.
10. REPRESENTATIONS AND WARRANTIES OF LANDLORD. Landlord represents and
warrants, to its actual knowledge as of the Commencement Date, that the Building
has been completed in accordance with all applicable building codes and that
Landlord has received no notice
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of violations of laws, codes, ordinances or regulations affecting the Demised
Premises. In addition, to Landlord's actual knowledge as of the Commencement
Date, there are no Hazardous Substances (as defined in Section 11.8(a)) or
storage tanks at the Building.
11. COVENANTS OF TENANT. Tenant covenants that, at all times during the
Lease Term, Tenant will, at Tenant's sole cost, risk and expense:
11.1 Keep the Demised Premises (including the Building and the
mechanical, electrical, plumbing, drainage (storm water and sewage) and HVAC
systems serving the Building and/or other portions of the Demised Premises) in
good order, condition and repair, reasonable wear and tear and damage by insured
casualty excepted, and Tenant will promptly make all repairs necessary to and
maintain such good order, condition and repair, whether such repairs are
interior or exterior, structural or nonstructural, foreseen or unforeseen; it
being acknowledged and agreed by Tenant that the term "repairs" used in this
Section 11.1 and in other provisions of this Lease means and includes
restorations, replacements and renewals when necessary, and all materials and
equipment used and/or installed in connection with the performance of Tenant's
covenant set forth in this Section 11.1 and other obligations set forth in this
Lease shall be new and at least equal in quality and utility to those items
being repaired, replaced or renewed;
11.2 Surrender the Demised Premises at the expiration of the
Lease Term or earlier termination of this Lease in the same condition in which
Tenant has agreed to keep the same during the Lease Term;
11.3 Not place, erect, maintain or display any sign or other
marking of any kind whatsoever on the windows, doors or exterior walls of the
Building or upon the Land, except as may be approved by Landlord and, if
required under local ordinances, by local governing authorities, and not use or
place any curtains, blinds, drapes or coverings over any exterior windows or
upon the window surfaces which are visible from the outside of the Building
without the prior written consent of Landlord, which consent shall not be
unreasonably withheld;
11.4 Comply with all laws, codes, ordinances, orders,
enactments and regulations of any governmental authority relating or applicable
to the Demised Premises and/or Tenant's occupancy of the Demised Premises and
any covenants, easements and restrictions governing the Land or Building and
indemnify, defend and hold Landlord harmless from all consequences from its
failure to do so;
11.5 Promptly notify Landlord of any damage to or defects in
the Demised Premises, any notices of violation received by Tenant and of any
injuries to persons or property which occur therein or claims relating thereto;
11.6 Pay when due for any alterations, improvements or
additions to, and repairs, maintenance, restorations and replacements of all or
any part of the Demised Premises, and allow
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no mechanic's, materialmen's or other lien to attach to the Demised Premises
with respect to any of the foregoing;
11.7 Without the prior written consent of Landlord, not place
within the Demised Premises or bring into the Building any machinery or other
personalty having a weight in excess of the design capacity of the Building;
11.8 (a) Not use the Demised Premises for the generation, use,
manufacture, recycling, transportation, treatment, storage, discharge or
disposal of any hazardous, toxic or polluting substance or waste (including
petroleum products, asbestos containing materials, polychlorinated biphenyl
containing materials or equipment, and/or radioactive materials) (collectively,
"Hazardous Substances") or for any use which poses a risk of damage to the
environment or injury to natural persons and will not engage in any activity
which could subject Landlord to any liability under federal, state or local
environmental law, regulation, code, enactment, order or ordinance;
(b) Comply with all applicable environmental statutes,
rules, regulations, codes, enactments and orders of any federal, state or
municipal government in effect at any time during the term of this Lease; obtain
in its own name any and all environmental permits, registrations, licenses or
identification numbers necessary for its operations; and comply with all such
permits;
(c) Take no action (or not refuse to take any action)
which could result in a lien being imposed on the Demised Premises by the state
or federal government under any environmental statute;
(d) Not install, use, manufacture, generate, store,
transport, discharge or dispose of any Hazardous Substances or storage tanks at,
under or beneath the Demised Premises, or permit or suffer any of the foregoing
at the Demised Premises, without the prior written consent of Landlord.
(e) Take no action which could require Landlord to
include in the deed to the Land or the Building a notice of disposal/release of
Hazardous Substances at the site.
(f) Tenant hereby indemnifies and saves harmless Landlord
from any and all judgments, losses, costs, damages and expenses (including
fines, penalties, and reasonable attorneys' fees) resulting from any claim,
demand, liability, obligation, right or cause of action, including but not
limited to governmental action or other third party action (each, a "Claim" and
collectively, "Claims") that is asserted against Landlord or the Demised
Premises as a result of Tenant's breach of any representation, warranty, or
covenant set forth in this Lease; or arising out of the operations or activities
or presence of Tenant or any sublessee, agent, or representative of Tenant at
the Demised Premises; or arising from environmental conditions or violations at
the Demised Premises during the Lease Term including, without limitation, the
presence of Hazardous
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Substances at, on, or under the Demised Premises or the discharge or release of
hazardous, polluting, or toxic substances from the Demised Premises.
(g) Landlord hereby indemnifies and saves harmless Tenant
from any and all Claims (including, without limitation, governmental actions)
that are asserted against Tenant or the Demised Premises as a result of the
presence of Hazardous Substances at, on, or under the Demised Premises or the
release of Hazardous Substances from the Demised Premises arising prior to the
Lease Term.
(h) The indemnities, representations, warranties and
covenants contained in this Section 11.8 shall survive the expiration or earlier
termination of this Lease.
11.9 Comply with the rules and regulations referenced in
Section 12 below and with all reasonable changes and additions thereto upon
notice by Landlord to Tenant (such rules and regulations, together with all
changes and additions thereto, are deemed a part of this Lease); and
11.10 Comply with all reasonable recommendations of Landlord's
or Tenant's insurance carriers relating to layout, use, storage and/or disposal
of materials and maintenance, repair, replacement and/or restoration of the
Demised Premises.
12. RULES AND REGULATIONS. Landlord shall have the right to make such
reasonable rules and regulations (the "Rules and Regulations") as in the
judgment of Landlord may from time to time be needful for the safety,
appearance, care and cleanliness of the Building and for the preservation of
good order therein; provided, however, such Rules and Regulations shall not be
effective until Landlord delivers to Tenant a copy of the Rules and Regulations
or any amendments thereto, as the case may be, in the manner set forth in
Section 27 of this Lease.
13. ASSIGNMENT AND SUBLETTING.
13.1 Landlord's Consent. Except for a Permitted Transfer (as
defined in Section 13.2), Tenant shall neither assign this Lease or any interest
therein nor sublet the Demised Premises or any portion thereof without the prior
written consent of Landlord, which consent Landlord agrees shall not be
unreasonably withheld, conditioned or delayed.
13.2 Permitted Transactions.
(a) Tenant may assign this Lease or any interest therein
or sublet the Premises or any portion thereof, without the Landlord's consent,
to a Related Party (as defined below) (each, a "Permitted Transfer"); provided,
(i) Tenant shall remain liable for the performance by the
transferee-in-possession of Tenant's obligations under this Lease; (ii) the
transferee-in- possession shall assume, in writing, all obligations to be
performed by Tenant under this Lease from and after the effective date of such
Permitted Transfer; and (iii) the transferee-in-possession of this
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Lease shall have a net worth on the effective date of such Permitted Transfer
not less than Tenant's net worth immediately prior to completion of such
Permitted Transfer.
(b) (i) As used in this Lease, "Related Party" means
any of the following persons or entities: (A) a Successor to Tenant (as defined
below); (B) an Affiliate (as defined below) of Tenant or any Successor to
Tenant; or (C) all or any of the nominal or beneficial owners of the capital
stock or other ownership interests of (I) Tenant, (II) any Successor to Tenant
or (III) any Affiliate of Tenant or any Successor to Tenant, or any entity of
which at least fifty percent (50%) of the voting shares or other ownership
interests are owned nominally or beneficially by such stockholders or owners of
other ownership interests, as the case may be.
(ii) As used in this Lease, "Successor to Tenant" means
a successor to Tenant or to Tenant's successors and assigns, as the case may be,
by one of the following means: (A) merger, consolidation or otherwise by
operation of law; (B) acquisition of all or substantially all of the assets of
Tenant; (C) acquisition of all or substantially all of the issued and
outstanding shares of capital stock of Tenant; or (D) the transfer of capital
stock or other ownership interests in connection with a public offering
registered by the Securities Exchange Commission.
(iii) As used in this Lease, "Affiliate" means: (A) a
subsidiary or parent of Tenant or any Successor to Tenant; (B) a subsidiary of a
parent of Tenant or any Successor to Tenant; or (C) any other entity under
common ownership and management control with any of the foregoing. For the
purpose of defining "Affiliate" in the preceding sentence, "subsidiary" is
hereby defined as a corporation at least fifty percent (50%) of the voting
shares of which is owned by another corporation, which latter corporation is
hereby defined as a "parent."
13.3 Tenant's request for consent to any sublet or assignment
shall be in writing and shall contain the name, address, and description of the
business of the proposed assignee or subtenant, its most recent financial
statement and other evidence of financial responsibility, its intended use of
the Demised Premises, and the terms and conditions of the proposed assignment or
subletting.
13.4 Each assignee or other transferee of this Lease shall
assume and be deemed to have assumed this Lease and shall be and remain liable
jointly and severally with Tenant for all payments and for the due performance
of all terms, covenants, conditions and provisions herein contained on Tenant's
part to be observed and performed. No assignment shall be binding upon Landlord
unless the assignee shall deliver to Landlord an instrument in form and
substance satisfactory to Landlord containing a covenant of assumption by the
assignee, but the failure or refusal of assignee to execute and deliver the same
shall not release assignee from its liability as set forth herein. Any profit or
additional consideration or rent in excess of the Fixed Rent or Additional Rent
payable by Tenant hereunder which is payable to Tenant as a result of any
assignment or subletting shall be paid to Landlord as Additional Rent when
received by Tenant. All the foregoing notwithstanding, Tenant shall not enter
into any lease, sublease, license, concession or other agreement for the use,
occupancy or utilization of the Demised Premises or any portion thereof,
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which provides for a rental or other payment for such use, occupancy or
utilization based in whole or in part on the income or profits derived by any
person from the property leased, used, occupied or utilized (other than an
amount based on a fixed percentage or percentages of receipts or sales). Any
such purported lease, sublease, license, concession or other agreement shall be
absolutely void and ineffective as a conveyance of any right or interest in the
possession, use or occupancy of any part of the Demised Premises.
13.5 Any consent by Landlord hereunder shall not constitute a
waiver of strict future compliance by Tenant with the provisions of this Section
13 or a release of Tenant from the full performance by Tenant of any of the
terms, covenants, provisions, or conditions in this Lease contained.
14. [INTENTIONALLY OMITTED]
15. EMINENT DOMAIN. If the whole or more than twenty-five percent (25%)
of the Demised Premises (or use or occupancy of the Demised Premises) shall be
taken or condemned by any governmental or quasi-governmental authority for any
public or quasi-public use or purpose (including sale under threat of such a
taking), or if the owner elects to convey title to the condemnor by a deed in
lieu of condemnation, or if all or any portion of the Land or Building are so
taken, condemned or conveyed and as a result thereof, in Landlord's or Tenant's
reasonable judgment, the Demised Premises cannot be used for Tenant's permitted
use as set forth in this Lease, then this Lease shall cease and terminate as of
the date when title vests in such governmental or quasi-governmental authority
and the Fixed Rent and Additional Rent shall be abated on the date when such
title vests in such governmental or quasi-governmental authority. If less than
twenty-five percent (25%) of the Demised Premises is taken or condemned by any
governmental or quasi-governmental authority for any public or quasi-public use
or purpose (including sale under threat of such a taking), the Fixed Rent and
Additional Rent shall be equitably adjusted (on the basis of the number of
square feet before and after such event, and to the extent parking or other
material Building features are taken, such taking shall also be adjusted for) on
the date when title vests in such governmental or quasi-governmental authority
and the Lease shall otherwise continue in full force and effect. In any case,
Tenant shall have no claim against Landlord for any portion of the amount that
may be awarded as damages as a result of any governmental or quasi-governmental
taking or condemnation (or sale under threat of such taking or condemnation);
and all rights of Tenant to damages therefor are hereby assigned by Tenant to
Landlord. The foregoing shall not, however, deprive Tenant of any separate award
for moving expenses, dislocation damages or for any other award which would not
reduce the award payable to Landlord.
16. CASUALTY DAMAGE.
16.1 In the event of damage to or destruction of the Demised
Premises caused by fire or other casualty, or any such damage or destruction to
the Building or the facilities necessary to provide services and normal access
to the Demised Premises in accordance herewith, Landlord, after receipt of
written notice thereof from Tenant, and subject to any mortgagee's consent and
to
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the conditions set forth in this Section 16.1, shall undertake to make repairs
and restorations with reasonable diligence as hereinafter provided, unless this
Lease has been terminated by Landlord or Tenant as hereinafter provided or
unless any mortgagee which is entitled to receive casualty insurance proceeds
fails to make available to Landlord a sufficient amount of such proceeds to
cover the cost of such repairs and restoration. If (i) the damage is of such
nature or extent that, in Landlord's sole judgment, more than one hundred and
fifty (150) days would be required (with normal work crews and hours) to repair
and restore the part of the Demised Premises or Building which has been damaged,
or (ii) the Demised Premises or the Building is so damaged that, in Landlord's
sole judgment, it is uneconomical to restore or repair the Demised Premises or
the Building, as the case may be, or (iii) less than one hundred fifty (150)
days then remain on the current Lease Term, Landlord shall so advise Tenant
promptly, and either party, in the case described in clause (i) above, or
Landlord, in the cases described in clauses (ii) or (iii) above, within thirty
(30) days after any such damage or destruction shall have the right to terminate
this Lease by written notice to the other, as of the date specified in such
notice, which termination date shall be no later than thirty (30) days after the
date of such notice.
16.2 In the event of fire or other casualty damage, provided
this Lease is not terminated pursuant to the terms of this Section 16 and is
otherwise in full force and effect, and sufficient casualty insurance proceeds
in excess of the cost of adjusting the insurance claim and collecting the
insurance proceeds are available for application to such restoration or repair,
Landlord shall proceed diligently to restore the Demised Premises to
substantially its condition prior to the occurrence of the damage. Landlord
shall not be obligated to repair or restore any alterations, additions, fixtures
or equipment which Tenant may have installed (whether or not Tenant has the
right or the obligation to remove the same or is required to leave the same on
the Demised Premises as of the expiration or earlier termination of this Lease)
unless Tenant, in a manner satisfactory to Landlord, assures payment in full of
all costs as may be incurred by Landlord in connection therewith.
16.3 Landlord shall not insure the Building, the Demised
Premises, any improvements or alterations to the Demised Premises, or any
fixtures, equipment or other property of Tenant, all of which shall be the sole
responsibility of Tenant to insure as more fully set forth in Section 17. Tenant
shall, at its sole expense, insure the value of its leasehold improvements,
fixtures, equipment and personal property located in or on the Demised Premises,
for the purpose of providing funds to Landlord to repair and restore the Demised
Premises to substantially its condition prior to occurrence of the casualty
occurrence. If there are any such alterations, fixtures or additions and Tenant
does not assure or agree to assure payment of the cost of restoration or repair
as aforesaid, Landlord shall have the right to repair and restore the Demised
Premises to substantially the same condition as existed prior to the damage,
excepting such alterations, additions or fixtures.
16.4 The validity and effect of this Lease shall not be
impaired in any way by the failure of Landlord to complete repairs and
restoration of the Demised Premises or of the Building within one hundred and
fifty (150) days after commencement of the work, even if Landlord had in good
faith notified Tenant that the repair and restoration could be completed within
such period,
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provided that Landlord proceeds diligently with such repair and restoration, and
provided further that if Landlord does elect to repair and restore following an
event of casualty and such work is not completed within two hundred and ten
(210) days from the date Landlord commences the work, Tenant shall have the
right to terminate this Lease by written notice to Landlord, upon which both
parties shall be relieved of any liabilities arising under this Lease to each
other, except such liabilities of Tenant as may have accrued prior to such
termination. In the case of damage to the Demised Premises which is of a nature
or extent that Tenant's continued occupancy is in the judgment of Landlord and
Tenant substantially impaired, then the Annual Fixed Rent and Additional Rent
otherwise payable by Tenant hereunder shall be equitably abated or adjusted for
the duration of such impairment, subject to the condition set forth in Section
16.5. Tenant shall be responsible to repair or replace all leasehold
improvements and all equipment, fixtures, inventory and other personal property
located in or on the Demised Premises, subject to Section 9 and to such other
conditions as Landlord may require.
16.5 At Tenant's sole cost and expense, Tenant shall maintain
a rental coverage endorsement or other comparable form of coverage as part of
its all-risk insurance policy. Tenant will receive an abatement of Annual Fixed
Rent to the extent of payments received by Landlord from the carrier providing
the rental coverage endorsement.
17. INSURANCE; INDEMNIFICATION OF LANDLORD; WAIVER OF
SUBROGATION.
17.1 (a) Tenant covenants and agrees to exonerate, indemnify,
defend, protect and save Landlord harmless from and against any and all claims,
demands, expenses, losses, suits and damages as may be occasioned by reason of:
(i) any accident or matter occurring on or about the Demised Premises caused or
suffered by Tenant, its agents, employees, invitees, contractors or guests,
causing injury to persons or damage to property (including, without limitation,
the Demised Premises), unless such accident or other matter resulted solely from
the gross negligence or intentional act or omission of Landlord or Landlord's
agents, contractors or employees; (ii) the failure of Tenant fully and
faithfully to perform the obligations and observe the conditions of this Lease;
and/or (iii) the negligence or otherwise tortious act of Tenant or anyone in or
about the Demised Premises on behalf of or at the invitation or right of Tenant.
(b) Tenant shall maintain the following in full force and
effect continuously throughout the Lease Term, at Tenant's sole cost, risk and
expense:
(i) insurance against loss or damage to
the Building and all other improvements now or hereafter located on the Demised
Premises by fire and such other casualties as may be included in the broadest
form of all-risk insurance from time to time available, in an amount equal to
the full insurance replacement value of the Building and improvements, the
policy to have attached thereto replacement cost, agreed amount and rental
coverage endorsements or comparable forms of coverage;
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(ii) comprehensive general liability
insurance (including a contractual liability and fire legal liability insurance
endorsement) naming as an additional insured Landlord against claims for bodily
injury, death or property damage in amounts not less than Three Million Dollars
($3,000,000) (or such higher limits as may be determined by Landlord from time
to time) and business interruption insurance in an amount equal to Tenant's
gross income for twelve (12) months; and
(iii) boiler insurance, plate glass
insurance, and such other reasonable forms of insurance in such amounts as may
be required from time to time by Landlord or by any mortgagee.
All policies shall be issued by companies having a Best's financial rating of A
or better and a size class rating of XII (12) or larger or otherwise acceptable
to Landlord. At or prior to the Commencement Date, Tenant shall deposit the
policy or policies of such insurance, or certificates thereof, with Landlord and
shall deposit with Landlord renewals thereof at least fifteen (15) days prior to
each expiration. Said policy or policies of insurance or certificates thereof
shall have attached thereto an endorsement that such policy shall not be
canceled without at least thirty (30) days' prior written notice to Landlord
that no act or omission of Tenant shall invalidate the interest of Landlord
under said insurance and expressly waiving all rights of subrogation as set
forth below. At Landlord's request, Tenant shall provide Landlord with a letter
from an authorized representative of its insurance carrier stating that Tenant's
current and effective insurance coverage complies with the requirements
contained herein.
17.2 Each of the parties hereto releases the other, to the
extent of the releasing party's insurance coverage, from any and all liability
for any loss or damage covered by such insurance which may be inflicted upon the
property of such party even if such loss or damage shall be brought about by the
fault or negligence of the other party, its agents or employees; provided,
however, that this release shall be effective only with respect to loss or
damage occurring during such time as the appropriate policy of insurance shall
contain a clause to the effect that this release shall not affect said policy or
the right of the insured to recover thereunder. If any policy does not permit
such a waiver, and if the party to benefit therefrom requests that such a waiver
be obtained, the other party agrees to obtain an endorsement to its insurance
policies permitting such waiver of subrogation if it is available. If an
additional premium is charged for such waiver, the party benefiting therefrom
agrees to pay the amount of such additional premium promptly upon being billed
therefor.
17.3 This Section 17 shall expressly survive the expiration of
the Lease Term or earlier termination of the Lease.
18. INSPECTION; ACCESS; CHANGES IN BUILDING FACILITIES.
18.1 Landlord and its agents or other representatives shall be
permitted to enter the Demised Premises at reasonable times upon twenty-four
(24) hours' notice, except in a emergency
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situation when no such notice shall be required (i) to examine, inspect and
protect the Demised Premises and the Building and (ii) during the last six (6)
months of the Lease Term, to show it to prospective tenants and to erect upon,
affix to any suitable part of the Land or exterior of the Building a notice or
signage for letting the Demised Premises or, subject to Section 6, selling the
Demised Premises.
18.2 Landlord shall have access to and use of all areas in the
Demised Premises as well as access to and through the Demised Premises for the
purpose of operation, maintenance, decoration and repair; provided, however,
that except in emergencies such access shall not be exercised so as to interfere
unreasonably with Tenant's use of the Demised Premises. Tenant shall permit
Landlord to install, use and maintain pipes, ducts and conduits within the
Building walls, bearing columns and ceilings of the building, provided that the
installation work is performed at such times and by such methods as will not
materially interfere with Tenant's use of the Building, materially reduce the
floor area thereof or materially and adversely affect Tenant's layout. Landlord
and Tenant shall cooperate with each other in the location of Landlord's and
Tenant's facilities requiring such access.
18.3 Subject to the other terms and conditions of this Lease,
Landlord reserves the right at any time, without incurring any liability to
Tenant therefor, to make such changes in or to the Building and the fixtures and
equipment thereof, as well as in or to the street entrances, halls, foyers,
passages, elevators, if any, and stairways thereof, as it may deem necessary or
desirable; provided that there shall be no change that materially detracts from
the character or quality of the Building.
19. DEFAULT. Any other provisions in this Lease notwithstanding, the
occurrence of any of the following shall be an event of default under this Lease
(each, an "Event of Default"): (i) Tenant fails to pay any installment of Fixed
Rent, Additional Rent or other sum payable by Tenant hereunder within five (5)
days after the same is due and payable under this Lease; (ii) Tenant fails to
observe or perform any other covenant or agreement of Tenant herein contained
and such failure continues after written notice given by or on behalf of
Landlord to Tenant for more than ten (10) days; provided, however, that if
Tenant is proceeding diligently to cure any such default but such cannot
reasonably be cured within said ten (10) day period, Tenant shall have such
additional amount of time to cure as is reasonably necessary; (iii) Tenant uses
or occupies the Demised Premises other than as permitted hereunder; (iv) Tenant
assigns or sublets, or purports to assign or sublet, the Demised Premises or any
part thereof other than in the manner and upon the conditions set forth herein;
(v) Tenant abandons or vacates the Demised Premises or without Landlord's prior
written consent, or Tenant removes or attempts to remove or manifests an
intention to remove any or all of Tenant's property from the Demised Premises
other than in the ordinary and usual course of business; (vi) Tenant files a
petition commencing a voluntary case, or has filed against it a petition
commencing an involuntary case, under the Federal Bankruptcy Code (Title 11 of
the United States Code), as now or hereafter in effect, or under any similar
law, or files or has filed against it a petition or answer in bankruptcy or for
reorganization or for an arrangement pursuant to any state bankruptcy law or any
similar state law, and, in the case of any such involuntary action, such action
shall not be
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dismissed, discharged or denied within sixty (60) days after the filing thereof,
or Tenant consents or acquiesces in the filing thereof, (vii) a custodian,
receiver, trustee or liquidator of Tenant or of all or substantially all of
Tenant's property or of the Demised Premises shall be appointed in any
proceedings brought by or against Tenant and, in the latter case, such entity
shall not be discharged within sixty (60) days after such appointment or Tenant
consents to or acquiesces in such appointment; or (viii) Tenant shall generally
not pay Tenant's debts as such debts become due, or shall make an assignment for
the benefit of creditors, or shall admit in writing its inability to pay its
debts generally as they become due. The notice and grace period provisions in
clauses (i) and (ii) above shall have no application to the Events of Default
referred to in clauses (iii) through (viii) above.
20. LANDLORD'S REMEDIES.
20.1 Upon the occurrence of any Event of Default, Landlord
at any time thereafter may at its option exercise any one or more of the
following remedies:
(a) Termination of Lease. Landlord may
terminate this Lease, by written notice to Tenant, without any right by Tenant
to reinstate its rights by payment of rent due or other performance of the terms
and conditions hereof. Upon such termination Tenant shall immediately surrender
possession of the Demised Premises to Landlord, and Landlord shall immediately
become entitled to receive from Tenant an amount equal to the aggregate of all
Fixed Rent and Additional Rent which then remains due to Landlord but unpaid by
Tenant.
(b) Reletting. With or without terminating this
Lease, as Landlord may elect, Landlord may re-enter and repossess the Demised
Premises, or any part thereof, and lease the Demised Premises or any part
thereof to any other person upon such terms as Landlord shall deem reasonable,
for a term within or beyond the term of this Lease; provided, that any such
reletting prior to termination shall be for the account of Tenant, and Tenant
shall remain liable for (i) all Annual Fixed Rent, Additional Rent and other
sums which would be payable under this Lease by Tenant in the absence of such
expiration, termination or repossession, less (ii) the net proceeds, if any, of
any reletting effected for the account of Tenant after deducting from such
proceeds all of Landlord's expenses, reasonable attorneys' fees and expenses,
employees' expenses, reasonable brokerage commissions and fees, reasonable
alteration costs, expenses of preparation for such reletting and all costs and
expenses, direct or indirect, incurred as a result of Tenant's breach of the
Lease. Landlord shall use commercially reasonable efforts to relet the Demised
Premises. If the Demised Premises are at the time of default sublet or leased by
Tenant to others, Landlord may, as Tenant's agent, collect rents due from any
subtenant or other tenant and apply such rents to the rent and other amounts due
hereunder without in any way affecting Tenant's obligation to Landlord
hereunder. Such agency, being given for security, is hereby declared to be
irrevocable.
(c) Acceleration of Rent. Landlord may declare
Fixed Rent and all items of Additional Rent (the amount thereof to be based on
historical amounts and Landlord's estimates for future amounts) for the entire
balance of the then current Lease Term immediately due and
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payable, together with all other charges, payments, costs, and expenses payable
by Tenant as though such amounts were payable in advance on the date the Event
of Default occurred.
(d) Removal of Contents by Landlord. With
respect to any portion of the Demised Premises which is vacant or which is
physically occupied by Tenant, Landlord may remove all persons and property
therefrom, and store such property in a public warehouse or elsewhere at the
cost of and for the account of Tenant, without service of notice or resort to
legal process (all of which Tenant expressly waives) and without being deemed
guilty of trespass or becoming liable for any loss or damage which may be
occasioned thereby. Landlord shall have a lien for the payment of all sums
agreed to be paid by Tenant herein upon all Tenant's property, which lien is to
be in addition to Landlord's lien now or hereafter provided by law.
(e) Late Charge. In addition to all other
rights and remedies of Landlord, if an Event of Default shall occur, Landlord
shall have the right to charge a late payment penalty of five percent (5%) of
any amount owed to Landlord that is not paid within five (5) days of the date
when the same is due and payable under this Lease.
(f) SECTION 20.1(f) BELOW SETS FORTH WARRANTS OF
AUTHORITY FOR AN ATTORNEY TO CONFESS JUDGMENTS AGAINST TENANT. IN GRANTING THESE
WARRANTS OF AUTHORITY TO CONFESS JUDGMENTS AGAINST TENANT, TENANT HEREBY
KNOWINGLY, INTENTIONALLY, VOLUNTARILY AND UNCONDITIONALLY WAIVES ANY AND ALL
RIGHTS TENANT HAS OR MAY HAVE TO PRIOR NOTICES AND AN OPPORTUNITY FOR HEARING
UNDER THE RESPECTIVE CONSTITUTIONS AND LAWS OF THE UNITED STATES AND THE
COMMONWEALTH OF PENNSYLVANIA. UPON THE EXPIRATION OF THE THEN CURRENT TERM OF
THIS LEASE OR THE EARLIER TERMINATION OR SURRENDER HEREOF AS PROVIDED IN THIS
LEASE, IT SHALL BE LAWFUL FOR ANY ATTORNEY OF ANY COURT OF RECORD IN THE
COMMONWEALTH OF PENNSYLVANIA TO APPEAR AS ATTORNEY FOR TENANT AS WELL AS FOR ALL
PERSONS CLAIMING BY, THROUGH OR UNDER TENANT AND TO SIGN AN AGREEMENT FOR
ENTERING IN ANY COMPETENT COURT AND THEREIN CONFESS JUDGMENT FOR THE RECOVERY BY
LANDLORD OF POSSESSION OF THE DEMISED PREMISES, FOR WHICH THIS LEASE SHALL BE
ITS SUFFICIENT WARRANT, WHEREUPON, IF LANDLORD SO DESIRES, A WRIT OF POSSESSION
OR OTHER APPROPRIATE WRIT UNDER THE RULES OF CIVIL PROCEDURE THEN IN EFFECT MAY
ISSUE FORTHWITH, WITHOUT ANY PRIOR WRIT OR PROCEEDINGS; HOWEVER, IF SUCH
PROCEEDING IS TERMINATED AND THE POSSESSION OF THE DEMISED PREMISES REMAIN IN OR
BE RESTORED TO TENANT, LANDLORD SHALL HAVE THE RIGHT FOR THE SAME DEFAULT AND
UPON ANY SUBSEQUENT DEFAULT OR DEFAULTS, OR UPON THE TERMINATION OF THIS LEASE
UNDER ANY OF THE TERMS OF THIS LEASE TO BRING ONE OR MORE FURTHER AMICABLE
ACTION OR ACTIONS AS HEREINBEFORE SET FORTH TO RECOVER POSSESSION OF THE DEMISED
PREMISES AND CONFESS JUDGMENT FOR THE
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RECOVERY OF POSSESSION OF THE DEMISED PREMISES AS HEREINABOVE PROVIDED.
_________ TENANT
20.2 Proceedings. In any action of ejectment, Landlord shall
first cause to be filed in such action an affidavit made by it or someone acting
for it, setting forth the facts necessary to authorize the entry of judgment,
and, if a true copy of this Lease (and of the truth of the copy such affidavit
shall be sufficient evidence) be filed in such action, it shall not be necessary
to file the original as a warrant of attorney, any rule of Court, custom or
practice to the contrary notwithstanding. Tenant hereby releases to Landlord and
to any and all attorneys who may appear for Tenant all errors in said
proceedings and all liability thereof. If proceedings shall be commenced by
Landlord to recover possession under the Acts of Assembly and Rules of Civil
Procedure, either at the end of the term or upon the earlier termination of this
Lease, or for non-payment of rent or any other reason, Tenant specifically
waives the right to the three (3) months' notice and to the fifteen (15) or
thirty (30) days' notice required by the Landlord and Tenant Act of 1951, as the
same may be amended, and agrees that five (5) days' notice shall be sufficient
in either or any such case.
20.3 Survival of Tenant's Obligations. No expiration or
termination of this Lease Term pursuant to Section 20.1(a) above or by operation
of law or otherwise (except as expressly provided in this Lease), and no
repossession of the Demised Premises or any part thereof pursuant to Section
20.1(a) or (b) above or otherwise shall relieve Tenant of its liabilities and
obligations hereunder, all of which shall survive such expiration, termination
or repossession, and Landlord may, at its option, sue for and collect all rent
and other charges due hereunder at any time as when such charges accrue.
20.4 Injunction. In the event of breach or threatened breach
by Tenant of any provision of this Lease, Landlord shall have the right of
injunction and the right to invoke any remedy allowed at law or in equity in
addition to other remedies provided for herein.
20.5 Waiver of Redemption. Tenant hereby expressly waives any
and all rights of redemption granted by or under any present or future law in
the event this Lease is terminated, or in the event of Landlord obtaining
possession of the Demised Premises, or Tenant is evicted or dispossessed for any
cause, by reason of violation by Tenant of any of the provisions of this Lease.
20.6 Not Exclusive Right. No right or remedy herein conferred
upon or reserved to Landlord is intended to be exclusive of any other right or
remedy herein or by law provided, but each shall be cumulative and in addition
to every other right or remedy given herein or now or hereafter existing at law
or in equity or by statute.
20.7 Expenses. In the event that Landlord commences suit for
the repossession of the Demised Premises, for the recovery of rent or any other
amount due under the provisions of this Lease, or because of the breach of any
other covenant herein contained on the part of Tenant to be
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kept or performed, and a breach shall be established, Tenant shall pay to
Landlord all expenses incurred in connection therewith, including reasonable
attorneys' fees.
21. LANDLORD'S RIGHT TO CURE TENANT'S DEFAULT. If Tenant defaults in
the making of any payment or in the doing of any act herein required to be made
or done by Tenant, then Landlord may, but shall not be required to, make such
payment or do such act, and charge the amount of Landlord's expense, with
interest accruing and payable thereon at the Default Rate as of the date of the
expenditure by Landlord or as of the date of payment thereof by Tenant,
whichever is higher, from the date paid or incurred by Landlord to the date of
payment thereof by Tenant; provided, however, that nothing herein contained
shall be construed or implemented in such a manner as to allow Landlord to
charge or receive interest in excess of the maximum legal rate then allowed by
law. Such payment and interest shall constitute Additional Rent hereunder due
and payable with the next monthly installment of Fixed Rent; but the making of
such payment or the taking of such action by Landlord shall not operate to cure
such default by Tenant or to estop Landlord from the pursuit of any remedy to
which Landlord would otherwise be entitled.
22. ESTOPPEL CERTIFICATE. Tenant shall, at any time and from time to
time, at the request of Landlord or any mortgagee, upon ten (10) business days'
notice, execute, acknowledge and deliver to Landlord a statement in the form of
Exhibit "B" attached hereto and hereby made a part of this Lease or such other
reasonable form supplied by Landlord, it being intended that any such statement
delivered pursuant hereto may be relied upon by others with whom Landlord may be
dealing. Tenant hereby appoints Landlord as Tenant's attorney-in-fact to execute
any such estoppel certificates in the event Tenant does not execute and return
such certificates within the time period set forth above.
23. HOLDING OVER. If Tenant retains possession of the Demised Premises
or any part thereof after the termination of this Lease or expiration of the
Lease Term or otherwise in the absence of any written agreement between Landlord
and Tenant concerning any such continuance of the term, Tenant shall pay
Landlord (i) as agreed liquidated damages for such holding over alone, an
amount, calculated on a per diem basis for each day of such unlawful retention,
equal to the greater of (a) one hundred fifty percent (150%) of the Annual Fixed
Rent, or (b) the established market rental for the Demised Premises, for the
time Tenant thus remains in possession, plus, in each case, all Additional Rent
and other sums payable hereunder, and (ii) all other damages, costs and expenses
sustained by Landlord by reason of Tenant's holding over. Without limiting any
rights and remedies of Landlord resulting by reason of the wrongful holding over
by Tenant, or creating any right in Tenant to continue in possession of the
Demised Premises, all Tenant's obligations with respect to the use, occupancy
and maintenance of the Demised Premises shall continue during such period of
unlawful retention.
24. SURRENDER OF DEMISED PREMISES. Tenant shall, at the expiration or
earlier termination of the Lease Term, promptly surrender the Demised Premises
in good order and condition and in conformity with the applicable provisions of
this Lease, excepting only reasonable wear and tear and damage caused by insured
casualty.
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25. SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT.
25.1 Subject to the terms and conditions of Section 25.2, this
Lease and the estate, interest and rights hereby created are subordinate to any
mortgage now or hereafter placed upon the Building or the Land or any estate or
interest therein, including, without limitation, any mortgage on any leasehold
estate, and to all renewals, modifications, consolidations, replacements and
extensions of same as well as any substitutions therefor. Tenant agrees that in
the event any person, firm, corporation or other entity acquires the right to
possession of the Building or the Land, including any mortgagee or holder of any
estate or interest having priority over this Lease, Tenant shall, if requested
by such person, firm, corporation or other entity, attorn to and become the
tenant of such person, firm, corporation or other entity, upon the same terms
and conditions as are set forth herein for the balance of the Lease Term.
Notwithstanding the foregoing, any mortgagee may, at any time, subordinate its
mortgage to this Lease, without Tenant's consent, by notice in writing to
Tenant, and thereupon this Lease shall be deemed prior to such mortgage without
regard to their respective dates of execution and delivery, and in that event,
such mortgagee shall have the same rights with respect to this Lease as though
it had been executed prior to the execution and delivery of the mortgage.
Tenant, if requested by Landlord, shall execute any such instruments in
recordable form as may be reasonably required by Landlord in order to confirm or
effect the subordination or priority of this Lease, as the case may be, the
rights of Tenant set forth in Section 25.2, and the attornment of Tenant to
future landlords in accordance with the terms of this Section 25.
25.2 (a) Provided this Lease shall at all times be in full
force and effect and provided further that there shall exist no Event of Default
by Tenant hereunder, the right of possession by Tenant to possess and quietly
enjoy the Demised Premises and any or all of Tenant's rights under this Lease
shall not be affected in any way or disturbed by any lender doing business with
Landlord in the exercise of any such lender's rights under any formal agreements
between such lender and Landlord. Tenant shall not be named as a party defendant
to any foreclosure of any lien of any mortgage for the purpose of terminating
this Lease, and Tenant shall not, by any such foreclosure, be in any other way
foreclosed from its rights under this Lease.
(b) In the event that any such lender or its successors
or assigns comes into possession of the Demised Premises or acquires the
leasehold interest of Landlord by foreclosure of any mortgage between any such
lender and Landlord, or by proceedings on any note executed by Landlord in favor
of any such lender or otherwise, this Lease shall not be terminated by any such
foreclosure or proceedings; and this Lease shall continue in full force and
effect upon Tenant's attornment, as provided herein, as a direct lease between
Tenant and any such lender upon the same terms, covenants, conditions and
agreements set forth in this Lease.
(c) In the event that the Demised Premises or Landlord's
leasehold interest therein is sold or otherwise disposed of pursuant to any
right or power contained in any mortgage or any note between any such lender and
Landlord, or as a result of proceedings thereon, this Lease shall not be
terminated or affected thereby, and the purchaser of the Demised Premises or of
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Landlord's leasehold interest therein or any person or entity acquiring title
thereto shall so acquire it, subject to this Lease; and this Lease shall
continue in full force and effect upon Tenant's attornment, as provided herein,
as a direct lease between Tenant and any party acquiring title to Landlord's
leasehold interest therein, as aforesaid, upon the same terms, covenants
conditions and agreements set forth in this Lease.
26. BROKERS. Each party represents and warrants to the other that it
has not made any agreement or taken any action which may cause anyone to become
entitled to a commission as a result of the transactions contemplated by this
Lease, and each will indemnify, defend and hold harmless the other from any and
all claims, actual or threatened, for compensation by any such third person by
reason of such party's breach of its, his, her or their representation or
warranty contained in this Section 26. This Section 26 shall survive the
expiration of the Lease Term or earlier termination of this Lease.
27. NOTICES. All notices or other communications hereunder shall be in
writing and shall be deemed to have been given (i) if hand delivered or sent by
an express mail or delivery service or by national overnight courier, if and
when delivered to the respective parties at the below addresses (or at such
other address as a party may hereafter designate for itself by notice to the
other party as required hereby), or (ii) if mailed, then on the third business
day following the date on which such communication is deposited in the United
States mails, by first class or certified mail, return receipt requested,
postage prepaid, and addressed to the respective parties at the below addresses
(or at such other address as a party may hereafter designate for itself by
notice to the other party as required hereby). All notices and communications to
Tenant may also be given by leaving same at the Demised Premises during normal
business hours.
27.1 If to Landlord:
The Electronics Boutique, Inc.
931 South Matlack Street
West Chester, PA 19382
Attention: President
27.2 If to Tenant:
Electronics Boutique of America Inc.
931 South Matlack Street
West Chester, PA 19382
Attention: President
28. MISCELLANEOUS.
28.1. Successors and Assigns. Subject to Section 13, the
obligations of this Lease shall be binding upon and inure to the benefit of the
parties hereto and their respective successors
23
<PAGE>
and assigns; provided that Landlord and each successive owner of the Building
and/or the Land shall be liable only for obligations accruing during the period
of its ownership or interest in the Building and from and after the transfer by
Landlord or such successive owner of its ownership or other interest in the
Building, Tenant shall look solely to the successors in title for the
performance of Landlord's obligations hereunder arising thereafter. Any
successor of Landlord hereunder shall provide Tenant with a notice evidencing
that such successor Landlord has assumed all of Landlord's obligations under
this Lease.
28.2 Waivers. No delay or forbearance by Landlord in
exercising any right or remedy hereunder or in undertaking or performing any act
or matter which is not expressly required to be undertaken by Landlord shall be
construed respectively, to be a waiver of Landlord's rights or to represent any
agreement' by Landlord to undertake or perform such act or matter thereafter.
28.3 Consent to Exclusive Jurisdiction; Waiver of Trial by
Jury. Tenant hereby consents to the exclusive jurisdiction of the Common Pleas
Court of Chester County, Pennsylvania and/or the United States Court for the
Eastern District of Pennsylvania in any and all actions or proceedings arising
under this Lease, and irrevocably agrees to service of process in accordance
with Section 25 above. Landlord and Tenant agree to waive trial by jury in any
action, proceeding or counterclaim brought by either of the parties hereto
against the other on any matter whatsoever arising out of or in any way
connected with this Lease, the relationship of Landlord and Tenant, Tenant's
use, possession and/or occupancy of the Demised Premises, and/or any claim of
injury or damage and any emergency or any other statutory remedy. It is further
mutually agreed that in the event Landlord commences any summary proceeding for
non-payment of rent, Tenant will not interpose any counterclaim of whatever
nature or description in any such proceeding.
28.4 Limitation of Landlord's Liability. Tenant shall look
solely to the Demised Premises and rents derived therefrom for enforcement of
any obligation hereunder or by law assumed or enforceable against Landlord, and
no other property or other assets of Landlord shall be subjected to levy,
execution or other enforcement procedure for the satisfaction of Tenant's
remedies or with respect to this Lease, the relationship of landlord and tenant
hereunder or Tenant's use, possession and/or occupancy of the Demised Premises.
28.5 Time of the Essence. All times, wherever specified herein
for the performance by Landlord or Tenant of their respective obligations
hereunder, are of the essence of this Lease.
28.6 Severability. Each covenant and agreement in this Lease
shall for all purposes be construed to be a separate and independent covenant or
agreement. If any provision in this Lease or the application thereof shall to
any extent be invalid, illegal or otherwise unenforceable, the remainder of this
Lease, and the application of such provision other than as invalid, illegal or
unenforceable, shall not be affected thereby; and such provisions in this Lease
shall be valid and enforceable to the fullest extent permitted by law.
24
<PAGE>
28.7 Quiet Enjoyment. Provided Tenant is not in default of any
of the terms and conditions of this Lease, Tenant shall be entitled to quiet
enjoyment of the Demised Premises without disturbance or hindrance by Landlord
or anyone claiming under or through Landlord.
28.8 Amendment and Modification. This Lease, including all
Exhibits hereto, each of which is incorporated in this Lease, contains the
entire agreement between the parties hereto, and shall not be amended, modified
or supplemented unless by agreement in writing signed by both Landlord and
Tenant.
28.9 Headings and Terms. The title and caption headings and
table of contents of this Lease are for convenience of reference only and shall
not in any way be utilized to construe or interpret the agreement of the parties
as otherwise set forth herein. The term "Landlord" and term "Tenant" as used
herein shall mean, where appropriate, all persons acting by or on behalf of the
respective parties, except as to any required approvals, consents or amendments,
modifications or supplements hereunder when such terms shall only mean the
parties originally.
28.10 No Joint Venture. Nothing contained in this Lease shall
be construed to create a partnership, joint venture or other association between
Tenant and Landlord.
28.11 Counterparts. This Lease may be executed in counterparts
each of which shall be deemed an original and all of which, when taken together,
shall constitute one and the same agreement.
25
<PAGE>
IN WITNESS WHEREOF, the parties here to have caused this Agreement of
Lease to be executed on the day and year first above written.
LANDLORD:
[Corporate Seal] THE ELECTRONICS BOUTIQUE, INC.
Attest: By:
------------------------ ---------------------------
Marilyn Kirchner Joseph Firestone
Assistant Secretary President
TENANT:
[Corporate Seal] ELECTRONICS BOUTIQUE OF AMERICA INC.
Attest: By:
------------------------ ---------------------------
John R. Panichello Joseph Firestone
Secretary President
26
<PAGE>
EXHIBIT "A"
LEGAL DESCRIPTION OF LAND
Landlord: ____________________
Tenant: ______________________
A-1
<PAGE>
EXHIBIT "B"
FORM OF
TENANT ESTOPPEL CERTIFICATE AND STATEMENT
ELECTRONICS BOUTIQUE OF AMERICA INC.
(Tenant)
The undersigned (jointly and severally if more than one)
hereby represents, warrants and certifies to
____________________________________ (the "Landlord") and/or __________
("Mortgagee") that is the tenant and present occupant (the "Tenant") of certain
premises (the "Demised Premises") located at ______________________________ and
that:
1. Basic Lease Terms - The Demised Premises are more specifically
described in, and are leased under the provisions of, a lease agreement
(the "Lease"), the basic terms of which are described below:
1.1 Demised Premises: ____________;
1.2 Rentable Square Feet of Demised Premises: __________
1.3 Date of Lease: _________________________________
1.4 Commencement Date: ___________________________
1.5 Expiration Date: ________________________________
1.6 Current Annual/Monthly Fixed Rent: $_____ / $_______
1.7 Current Monthly Additional Rent: $________________
1.8 Total Monthly Rent As of : $___________________
1.9 Security Deposit: NONE
1.10 Total Rent Is Paid Through: _______________________
2. Modifications. The Lease contains all of the understandings
and agreements between Tenant and Landlord, and is in
existence in full force and effect, without modification,
addition, extension, or renewal on the date hereof (or is in
full force and effect modified as indicated below), except as
indicated below:
---------------------------------------------------
---------------------------------------------------
---------------------------------------------------
---------------------------------------------------
Landlord________________________
Tenant________________________
B-1
<PAGE>
3. Acceptance of Demised Premises. Tenant has accepted possession
of the Demised Premises and is now in possession of same, and
the improvements and space required to be furnished according
to the Lease have been fully delivered by Landlord and
accepted by Tenant.
4. Options. There are no options, rights of first refusal,
options to terminate, exclusive business rights, or other
rights in Tenant to extend or renew the term of the Lease or
to expand or otherwise modify the Demised Premises, except
as-indicated below:
5. Commencement of Rental Obligation. Tenant's obligation to pay
rent commenced as of May 31, 1998.
6. Rent Payment. No rent has been paid by Tenant in advance under
the Lease, except for the Total Monthly Rent, as described
above, that became due for the current month.
7. No Tenant Default. Tenant is not in default under the Lease
and is current in the payment of any and all charges required
to be paid by Tenant, except as indicated below:
--------------------------------------------------.
--------------------------------------------------.
--------------------------------------------------.
8. Subordination, Non-Disturbance and Attornment. In the event
that Landlord's interest is conveyed or Landlord otherwise
relinquishes possession of the Premises to a third party,
including but not limited to any mortgagee or successor in
interest to any such mortgagee, the undersigned agrees to
attorn to such third party and to recognize such third party
as landlord. Subject to the terms and conditions of Section
25.2 of the Lease, Tenant agrees to subordinate to any
mortgagee or successor in interest to any such mortgagee as
more fully set forth in the Lease. Any such attornment or
subordination shall be effective and self-operative without
the execution of any other instrument by either party hereto
but, upon the request of such landlord, the undersigned shall
execute and deliver an instrument confirming such attornment
or subordination.
9. No defense. Tenant has no defenses, set-offs, basis for
withholding of rent, claims or counterclaims against the
Landlord for any failure of performance of any of the terms of
the Lease, nor to the best of Tenant's knowledge are there
defaults or breaches by Landlord under the Lease, including,
without limitation, defaults relating to the design, condition
and tenant uses of the Demised Premises.
B-2
<PAGE>
10. No Prior Assignment or Subletting. Tenant has not assigned,
pledged, mortgaged or otherwise transferred or encumbered the
Lease or the rental payments thereunder, nor sublet all or any
part of the Premises and is not presently permitting the same
to be occupied or used by anyone other than Tenant except as
indicated below:
--------------------------------------------------------------
--------------------------------------------------------------
--------------------------------------------------------------
11. Use of Premises. Tenant has not accumulated, recycled,
stored, treated, spilled, emitted, leaked or disposed of any
hazardous, toxic or polluting substances or wastes at the
property. Tenant has not received notice from any governmental
agency that it may be responsible for clean-up of the property
or surrounding areas pursuant to the Federal Comprehensive
Environmental, Response, Compensation and Liability Act, 42
U.S.C. Section 9601 et seq., the Federal Water Pollution
Control Act (33 U.S. C.A. Section 1151 et seq.), the Clean
Water Act of 1977 (33 U.S.C.A. Section 1251 et seq.), or the
regulations promulgated thereunder (if applicable), or any
other federal, state or local environmental law, regulation or
ordinance.
The undersigned makes this statement with the understanding
that Landlord and any others with which Landlord may be dealing intend to rely
upon this Certificate and Statement and the undersigned agrees that they may so
rely.
Dated: _______________, 199_
ELECTRONICS BOUTIQUE OF AMERICA INC.
By:
------------------------------
Name:
Title:
B-3
<PAGE>
Exhibit 10.16
AGREEMENT AND BILL OF SALE
THIS AGREEMENT AND BILL OF SALE (this "Agreement") is entered into as
of the 13th day of July, 1998 by and between EB NEVADA INC., a Nevada
corporation having its principal office at 2255-A Renaissance Drive, Suite 4,
Las Vegas, NV ("Transferor"), and ELECTRONICS BOUTIQUE HOLDINGS CORP., a
Delaware corporation having its principal office at 931 South Matlack Street,
West Chester, PA ("Transferee").
WHEREAS, Transferee was incorporated under the laws of the State of
Delaware in March 1998 as a holding company for the operating activities of The
Electronics Boutique, Inc.;
WHEREAS, in contemplation of an initial public offering (the "IPO") of
shares of common stock, par value $.01 per share, of Transferee ("Common
Stock"), Transferor and Transferee have determined that it is in their best
interests for Transferor to transfer to Transferee all of the shares that it
holds in Electronics Boutique of America Inc., Elbo Inc., EB International, Inc.
and Electronics Boutique Canada Inc. (collectively, the "Operating Shares");
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto, intending to be
legally bound hereby, covenant and agree as follows:
1. Exchange of Shares.
(a) Effective (i) immediately prior to the execution of the
Underwriting Agreement between Transferor and the Transferee on the one hand and
Prudential Securities Incorporated and Salomon Smith Barney, as representatives
of the underwriters on the other, to be entered into in connection with the IPO,
and (ii) simultaneously with the effectuation of (A) the Agreement and Bill of
Sale, dated as of July 13, 1998, between The Electronics Boutique, Inc. and
Transferor, (B) the Agreement and Bill of Sale, dated as of July 13, 1998,
between Transferee and EB Investment Corp. and (C) the Agreement and Consent to
Assignment and Assumption of Partnership Interests, dated as of July 13, 1998,
by and among EB Services Corporation, James J. Kim, Agnes C. Kim, certain trusts
for the benefit of Susan Y. Kim, David D. Kim and John T. Kim, Transferee, EB
Investment Corp. and Electronics Boutique of America Inc., Transferor shall
assign, sell, transfer, grant and set over unto Transferee all of Transferor's
right, title and interest in the Operating Shares in exchange for that number of
shares of Common Stock equal to the amount obtained by dividing $257,705,600 by
the initial public offering price per share in the IPO (the "Holdings Shares"),
in a transaction described in Section 351 of the Internal Revenue Code of 1986,
as amended.
(b) Transferee agrees to accept the Operating Shares in
exchange for the Holdings Shares, which will be validly issued, fully paid, and
non-assessable.
<PAGE>
In furtherance of the foregoing, the parties hereto further agree as
follows:
2. Representations and Warranties. Transferor (i) has good title to the
Operating Shares and the power and authority to assign and transfer the
Operating Shares and (ii) has made no prior assignment thereof and (iii) to the
best of Transferor's knowledge, the Operating Shares are free and clear of all
liens, claims and encumbrances.
3. Successors and Assigns. The rights, interests and benefits granted
hereby and the burdens and obligations imposed hereby shall inure to the benefit
of and be binding upon, as the case may be, the parties hereto and their
respective successors and assigns.
4. Governing Law. This Agreement shall be governed by the laws of the
Commonwealth of Pennsylvania without regard to its choice of laws principles.
5. Further Assurances. Transferor and Transferee each agree that they
shall execute and deliver such instruments, documents and other writings as may
be necessary or desirable to confirm and carry out and to effectuate fully the
intent and purposes of this Agreement.
6. Counterparts. This Agreement may be signed in one or more
counterparts, each of which shall be deemed an original, and all of which taken
together shall constitute a single agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
2
<PAGE>
IN WITNESS WEHREOF, Transferor and Transferee have caused this Agreement
to be duly executed as of the day and year first above written.
TRANSFEROR: TRANSFEREE:
EB NEVADA INC. ELECTRONICS BOUTIQUE HOLDINGS
CORP.
By: /s/ Susan Y. Kim By: /s/ Joseph J. Firestone
----------------- ------------------------
Susan Y. Kim, Joseph J. Firestone,
Secretary President and Chief Executive Officer
3
<PAGE>
Exhibit 10.17
AGREEMENT AND CONSENT TO ASSIGNMENT
AND ASSUMPTION OF PARTNERSHIP INTERESTS
This Agreement and Consent to Assignment and Assumption of
Partnership Interests (this "Agreement") is entered into as of the 13th day
of July, 1998 by and among EB Services Corporation, a Pennsylvania
corporation ("EB Services"), the Susan Y. Kim Trust dated December 31, 1987,
the David D. Kim Trust dated December 31, 1987, the John T. Kim Trust dated
December 31, 1987 (collectively, the "Kim Trusts"), James J. Kim, Agnes C.
Kim (collectively, the "Kims" and, together with the Kim Trusts, the "Limited
Partners"), Electronics Boutique Holdings Corp., a Delaware corporation
("Holdings"), EB Investment Corp., a Delaware corporation ("EB Investment"),
and Electronics Boutique of America Inc., a Pennsylvania corporation ("EBOA")
. EB Services and the Limited Partners are collectively referred to herein as
the "Partners."
WHEREAS, the Partners are parties to a Limited Liability Partnership
Agreement, dated as of January 1997, as amended (the "Partnership
Agreement"), and collectively own 100% of the outstanding partnership
interests of EB Services Company, LLP, a limited liability partnership formed
pursuant to the Partnership Agreement and the Pennsylvania Revised Limited
Liability Partnership Act (the "Partnership");
WHEREAS, the Limited Partners own an aggregate of ninety-nine
percent (99%) of the outstanding partnership interests of the Partnership and
EB Services owns one percent (1%) of the outstanding partnership interests of
the Partnership (the "One Percent Interest"); and
WHEREAS, (i) the Partners desire to assign, transfer and set over to
Holdings an aggregate of 99.99% of the outstanding partnership interests of
the Partnership (the "Assigned Interests"), with EB Services retaining the
remaining .01% interest, (ii) Holdings desires to assign, transfer and set
over the Assigned Interests to EB Investment and (iii) EB Investment desires
to assign, transfer and set over the Assigned Interests to EBOA;
NOW, THEREFORE, in consideration of the mutual covenants and
agreements herein contained, the parties hereto, intending to be legally
bound hereby, covenant and agree as follows:
1. Assignments.
(a) Assignment to Holdings. At the Effective Time (as defined
below), (i) each of the Limited Partners shall assign, transfer and set
over to Holdings all of its interest in the Partnership and (ii) EB
Services shall assign, transfer and set over to Holdings ninety-nine
percent (99%) of the One Percent Interest collectively in exchange for
an aggregate of 100 shares of Common Stock (as defined below). Pursuant
to the aforementioned assignments, (i) each of the Kim Trusts shall
receive thirteen (13) shares of Common Stock, (ii) the Kims shall
receive an aggregate of sixty (60) shares of Common Stock and (iii) EB
Services shall receive one (1) share of Common Stock. The "Effective
Time" means that time immediately
<PAGE>
prior to the execution of the Underwriting Agreement between Holdings
and EB Nevada Inc., on the one hand and Prudential Securities
Incorporated and Salomon Smith Barney, as representatives of the
underwriters, on the other, to be entered into in connection with the
contemplated initial public offering of common stock ("Common Stock"),
par value $.01 per share, of Holdings.
(b) Assignment to EB Investment. At the Effective Time,
Holdings shall assign, transfer and set over the Assigned Interests to
EB Investment as a capital contribution to this wholly-owned
subsidiary.
(c) Assignment to EBOA. At the Effective Time, EB Investment
shall assign, transfer and set over the Assigned Interests to EBOA as a
capital contribution to this wholly-owned subsidiary.
(d) Timing. Each of the transfers of the Assigned Interests
contemplated by this Agreement shall occur simultaneously at the
Effective Time.
(e) Tax Consequences. Each of the assignments outlined above
are intended to qualify under Section 351 of the Internal Revenue Code
of 1986, as amended.
2. Assumption of Liabilities and Obligations. EBOA hereby agrees to
accept the Assigned Interests and assume, to the extent of the Assigned
Interests, the Partners' liabilities and obligations arising on or after the
Effective Time under the Partnership Agreement. EBOA agrees to be bound by all
terms, covenants and conditions of the Partnership Agreement and all related
instruments and documents as they pertain to the interests in the Partnership
transferred hereby from and after the Effective Time. The Limited Partners,
Holdings and EB Investment shall have no further obligations or liabilities with
respect to or by virtue of their interests in the Partnership transferred
hereby, except that the Limited Partners shall remain liable for those
obligations and liabilities which relate to the period of time prior to the
Effective Time.
3. Joinder to Partnership Agreement. At the Effective Time, EBOA shall
be bound as a partner by all of the terms and conditions set forth in the
Partnership Agreement.
4. Representations and Warranties. Each Partner represents and warrants
that (i) it has good title to its respective interest in the Partnership that it
is transferring hereby and the power and authority to assign and transfer such
interest, (ii) it has made no prior assignment of such interest and, (iii) to
the best of its knowledge, such interest is free and clear of all liens, claims
and encumbrances. Each of Holdings and EB Investment represents and warrants
that, at the Effective Time, it will have the power and authority to transfer
the interests it is transferring hereby, (ii) it has made no prior assignment of
such interests and, (iii) to the best of its knowledge, such interests are free
and clear of all liens, claims and encumbrances
2
<PAGE>
5. Indemnity. EBOA shall indemnify, defend and hold harmless the other
parties hereto from and against any and all cost, liabilities, damage or
expense, including reasonable attorneys' fees, originating from any failure by
it to pay any liability assumed hereunder or any act or omission by it, its
employees or agents, occurring or arising after the Effective Date, and arising
out of its right to any interest of the Partnership transferred hereby.
6. Acknowledgment and Consent of, and Waiver by, the General Partner.
EB Services, the general partner of the Partnership, consents, in accordance
with Article X of the Partnership Agreement, to each of the transfers described
herein and to the admission of EBOA as a partner thereof. EB Services hereby
waives (i) the requirement of written notice imposed by Section 10.1 of the
Partnership Agreement and (ii) its right of first refusal under Section 10.5
thereof.
7. Acknowledgment and Consent of the Limited Partners. The Limited
Partners, Holdings and EB Investment hereby consent, in accordance with Article
IX of the Partnership Agreement, to the transfer by EB Services of ninety-nine
percent (99%) of its interest in the Partnership and the subsequent transfers
thereof pursuant hereto and to the admission of EBOA as a partner thereof.
8. Further Assurances. The parties hereto agree that they shall execute
and deliver such instruments, documents and other writings as may be necessary
or desirable to confirm and carry out and to effectuate fully the intent and
purposes of this Agreement.
9. Successors and Assigns. The rights, interests and benefits granted
hereby and the burdens and obligations imposed hereby shall inure to the benefit
of and be binding upon, as the case may be, the parties hereto and their
respective successors and assigns.
10. Governing Law. This Assignment shall be governed by the laws of the
Commonwealth of Pennsylvania without regard to its choice of laws principles.
11. Counterparts. This Assignment may be signed in one or more
counterparts, each of which shall be deemed an original, and all of which taken
together shall constitute a single agreement.
[Remainder of Page Intentionally Left Blank]
3
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date set forth below.
EB SERVICES CORPORATION
By: /s/Joseph J. Firestone
--------------------------------
Joseph J. Firestone
President
SUSAN Y. KIM TRUST dated December 31, 1987
By: /s/Susan Y. Kim By: /s/John T. Kim By: /s/John F. A. Earley
-------------------- -------------------- --------------------
Susan Y. Kim John T. Kim John F. A. Earley
Trustee Trustee Trustee
DAVID D. KIM TRUST dated December 31, 1987
By: /s/Susan Y. Kim By: /s/David D. Kim By: /s/John F.A. Earley
-------------------- ------------------ -------------------
Susan Y. Kim David D. Kim John F. A. Earley
Trustee Trustee Trustee
JOHN T. KIM TRUST dated December 31, 1987
By: /s/Susan Y. Kim By: /s/John T. Kim By: /s/John F. A. Earley
-------------------- -------------------- --------------------
Susan Y. Kim John T. Kim John F. A. Earley
Trustee Trustee Trustee
[Signatures Continued on Following Page]
4
<PAGE>
/s/ James J. Kim
------------------------
JAMES J. KIM
/s/ Agnes C. Kim
------------------------
AGNES C. KIM
ELECTRONICS BOUTIQUE HOLDINGS CORP.
By: /s/Joesph J. Firestone
---------------------------------
Joseph J. Firestone
President and Chief Executive Officer
EB SERVICES CORPORATION
By: /s/Joseph J. Firestone
---------------------------------
Joseph J. Firestone
President and Chief Executive Officer
ELECTRONICS BOUTIQUE OF AMERICA INC.
By: /s/Joseph J. Firestone
---------------------------------
Joseph J. Firestone
President and Chief Executive Officer
5
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF ELECTRONICS BOUTIQUE HOLDINGS CORP.
1. Electronics Boutique Investment Corp., a Delaware corporation
2. Electronics Boutique of America Inc., a Pennsylvania corporation
3. Elbo Inc., a Delaware corporation
4. Electronics Boutique Canada Inc., an Ontario corporation
5. E.B. International, Inc., a Pennsylvania corporation
6. Electronics Boutique Korea, Inc., a South Korea corporation
7. Electronics Boutique Australia Pty Ltd, an Australia corporation
8. EB Finance Inc., a Delaware corporation
<PAGE>
Exhibit 23.1
Consent of Independent Certified Public Accountants
Board of Directors of
The Electronics Boutique, Inc. and
Partners of EB Services Company LLP:
We consent to the use of our report included herein and to the reference to
our firm under the heading "Experts" in the Prospectus.
/s/ KPMG Peat Marwick LLP
Philadelphia, Pennsylvania
July 22, 1998
