<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 24, 1998.
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
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. / /
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION
TO BE REGISTERED REGISTERED (1) SHARE (2) PRICE (2) FEE
<S> <C> <C> <C> <C>
Common Stock, $.01 par value 8,625,000 $17.00 $146,625,000 $43,255
</TABLE>
(1) Includes up to 1,125,000 shares that may be purchased from the Company and
the Selling Shareholders, pro rata, at the option of the Underwriters solely
to cover over-allotments, if any.
(2) Estimated solely for purposes of calculating registration fee in accordance
with Rule 457(a) under the Securities Act of 1933, as amended.
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>
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>
SUBJECT TO COMPLETION--DATED MARCH 24, 1998
PROSPECTUS
- --------------------------------------------------------------------------------
7,500,000 Shares
ELECTRONICS BOUTIQUE HOLDINGS CORP.
[Logo]
Common Stock
- ------------------------------------------------------------
Of the 7,500,000 shares of common stock, par value $.01 per share (the "Common
Stock"), offered hereby (the "Offering"), 3,750,000 shares are being sold by
Electronics Boutique Holdings Corp. (the "Company"), and 3,750,000 shares are
being sold by James J. Kim, the Chairman of the Company, and his wife Agnes C.
Kim (the "Selling Shareholders"). The Company will not receive any proceeds from
the sale of shares of Common Stock by the Selling Shareholders. 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) Shareholders
<S> <C> <C> <C> <C>
Per Share............................ $ $ $ $
Total(3)............................. $ $ $ $
</TABLE>
(1) The Company, the Selling Shareholders and certain trusts established for the
benefit of the children of James J. Kim and Agnes C. Kim (the "Kim Trusts,"
and, together with the "Selling Shareholders," the "Kim Shareholders") have
agreed to indemnify the several Underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting expenses estimated to be $650,000, all of which are payable
by the Company.
(3) The Company and the Selling Shareholders have granted the several
Underwriters a 30-day over-allotment option to purchase up to 1,125,000
additional shares of Common Stock, pro rata, 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 Shareholders
will be $ . See "Underwriting."
- --------------------------------------------------------------------------------
The shares of Common Stock are offered by the several Underwriters subject to
delivery by the Company and the Selling Shareholders 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, AND ITS SUBSIDIARIES, (II) TO "EB" MEAN THE ELECTRONICS
BOUTIQUE, INC., A PENNSYLVANIA CORPORATION, AND A WHOLLY OWNED SUBSIDIARY OF THE
COMPANY, AND (III) 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 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 January 31, 1998, the Company
operated 452 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,
Electronics Boutique Plc ("EB-UK"), which operated 129 stores and 17 department
store-based concessions in the United Kingdom and Ireland. As of January 31,
1998, the Company also managed 39 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
$249.6 million and $5.7 million, respectively, in 1994, to $449.2 million and
$25.1 million, respectively, in 1997. Comparable store sales increased 3.5%,
20.8% and 15.3% in 1995, 1996 and 1997, 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 $5.5 billion in calendar
1997, an increase of approximately 51% 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 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"),
3
<PAGE>
(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. By April
1998, the Company intends to provide customers with a complete product offering,
including access to the Company's database of over 7,500 items, which includes
all active and inactive electronic game titles.
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, which 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........................... 3,750,000 shares
Common Stock Offered by the Selling Shareholders.............. 3,750,000 shares
Common Stock to be Outstanding after the Offering (1)......... shares
Use of Proceeds by the Company................................ To fund an S corporation distribution
to the Kim Shareholders, repay certain
outstanding indebtedness, and for
general corporate purposes, including
financing new store openings. See "Use
of Proceeds."
Proposed Nasdaq National Market Symbol........................ ELBO
</TABLE>
- ------------------------
(1) Excludes shares of Common Stock reserved for issuance upon the
exercise of stock options outstanding as of , 1998 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, and 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>
1993 1994 1995 1996 1997
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales............................................ $ 240,387 $ 249,552 $ 268,956 $ 337,059 $ 449,180
Cost of goods sold................................... 175,865 182,505 199,226 252,813 338,615
---------- ---------- ---------- ---------- ----------
Gross profit......................................... 64,522 67,047 69,730 84,246 110,565
Operating expenses................................... 55,894 56,070 58,270 67,438 77,175
Depreciation and amortization........................ 4,638 5,324 6,180 6,936 8,316
---------- ---------- ---------- ---------- ----------
Income from operations............................... 3,990 5,653 5,280 9,872 25,074
Interest expense, net................................ 1,578 1,727 1,818 1,298 1,379
---------- ---------- ---------- ---------- ----------
Income before income tax expense..................... 2,412 3,926 3,462 8,574 23,695
Income tax expense (1)............................... 391 286 280 550 846
---------- ---------- ---------- ---------- ----------
Net income........................................... $ 2,021 $ 3,640 $ 3,182 $ 8,024 $ 22,849
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Net income per share.................................
Weighted average shares outstanding..................
PRO FORMA INCOME DATA:
Income before income tax expense..................... $ 2,412 $ 3,926 $ 3,462 $ 8,574 $ 23,695
Pro forma income tax provision....................... 972 1,582 1,395 3,455 9,543
---------- ---------- ---------- ---------- ----------
Pro forma net income (2)............................. $ 1,440 $ 2,344 $ 2,067 $ 5,119 $ 14,152
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Pro forma net income per share.......................
Pro forma weighted average shares
outstanding (3)....................................
OPERATING DATA (4):
Stores open at beginning of period................... 274 311 325 341 360
Stores open at end of period......................... 311 325 341 360 452
Sales per square foot (5)............................ $ 763 $ 721 $ 729 $ 831 $ 926
Average sales per store (000s)....................... $ 822 $ 785 $ 808 $ 962 $ 1,106
Comparable store sales increase (decrease)........... (10.8%) (6.6%) 3.5% 20.8% 15.3%
Inventory turnover................................... 3.0x 3.6x 3.8x 5.1x 5.3x
</TABLE>
<TABLE>
<CAPTION>
JANUARY 31, 1998
--------------------------
<S> <C> <C>
ACTUAL AS ADJUSTED(3)
---------- --------------
BALANCE SHEET DATA:
Working capital (deficit)............................................................. ($ 16,532)
Total assets.......................................................................... 143,170
Total liabilities..................................................................... 113,990
Stockholders' equity.................................................................. 29,180
</TABLE>
- ------------------------
(1) Prior to the reorganization, EB elected to be treated as an S corporation
and, as a result, its taxable income was passed through to its shareholders
for federal income tax purposes. Accordingly, the financial statements do
not include a provision for federal income taxes. EB 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.
(2) The pro forma net income gives effect to the application of the pro forma
income tax expense that would have been reported had EB been a corporation
subject to federal and all state income taxes for all periods shown. See
Notes 1 and 2 of Notes to Consolidated and Combined Financial Statements.
(3) Adjusted to give effect to the sale by the Company of 3,750,000 shares of
Common Stock offered hereby at an assumed initial public offering price of
$16.00 per share (after deducting underwriting discounts and commissions and
estimated Offering expenses), and after the application of the estimated net
proceeds therefrom to the Company. See "Use of Proceeds" and
"Capitalization."
(4) Does not reflect stores operated by EB-UK and WaldenSoftware for which the
Company provides management services. See "Business--Management Services."
(5) 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,
7
<PAGE>
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 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 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
8
<PAGE>
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 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.
LEASE EXPIRATIONS AND TERMINATIONS. As of January 31, 1998, 60 of the
Company's stores (13.3% of all stores) were operated under leases with terms
that expire in less than one year, including 13 month-to-month leases.
Approximately one-half of the Company's leases contain provisions which may
require the Company to obtain landlord consents to complete the Reorganization
and/or the Offering. The Company does not intend to solicit landlord consents
with respect to these leases; accordingly, the landlords could seek to terminate
these 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 to locate alternative sites on acceptable terms. 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 EXISTING SHAREHOLDERS. Upon completion of the Offering, the Kim
Shareholders will beneficially own approximately % of the outstanding shares
of Common Stock ( % if the Underwriters' over-allotment option is exercised
in full). Accordingly, the Kim Shareholders 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 not less than 25%, in the aggregate, of the issued and outstanding shares of
capital stock of the Company or the loan could be declared in default. See "Use
of Proceeds" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."
9
<PAGE>
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 $ 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 shares of Common Stock outstanding ( if the
Underwriters exercise their over-allotment option in full). Of those shares, a
total of shares (plus 1,125,000 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"). All of the remaining shares are held by the Kim
Shareholders, who are "affiliates" of the Company. Beginning 360 days after the
Offering, the Kim Shareholders 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 and the Kim Shareholders, including the Selling
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 Shareholders 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
10
<PAGE>
stock markets have experienced extreme price and volume fluctuations which may
affect the market price 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."
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
estimates that it will incur expenses of $300,000 to make its computer software
programs and operating systems "Year 2000" compliant. 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 formed in March 1998 as a holding company for EB, which was
incorporated in Pennsylvania in 1977. Prior to the consummation of the
Reorganization (as defined below), the Company conducted no business and held no
assets or liabilities and all of the outstanding shares of capital stock of EB
were owned by the Kim Shareholders. Prior to completion of the Offering, EB
Services Company LLP, an affiliated partnership owned by the Kim Shareholders
which provides management services for stores under management agreements with
the Company, will incorporate under the laws of the state of Delaware (such
corporation referred to herein as "EB Services"). As a result, the Kim
Shareholders will own all of the outstanding shares of capital stock of EB
Services. Thereafter, the Kim Shareholders will contribute all of the
outstanding shares of capital stock of EB and EB Services in exchange for shares
of Common Stock of the Company. The numbers of shares to be exchanged by each of
the Kim Shareholders are as follows: (i) Agnes C. Kim will exchange 1,000 shares
of Class A common stock of EB and shares of common stock of EB Services and
James J. Kim will exchange 12,600 shares of Class B common stock of EB and
shares of common stock of EB Services for an aggregate of shares of Common
Stock to be owned jointly by them; and (ii) each of the Kim Trusts will exchange
300 shares of Class A common stock of EB, 2,800 shares of Class B common stock
of EB and shares of common stock of EB Services for shares of Common
Stock to be owned by each of the Kim Trusts. The foregoing contributions will be
made pursuant to the terms of an exchange agreement between the Company and the
Kim Shareholders (the foregoing transactions referred to herein as the
"Reorganization"). See "Certain Transactions" and "Principal and Selling
Shareholders."
Following completion of the Reorganization and immediately prior to
completion of the Offering, all of the outstanding shares of capital stock of EB
and EB Services will be owned by the Company. Following completion of the
Offering, the Kim Shareholders will own an aggregate of shares of Common
Stock, representing approximately % of the outstanding shares of Common
Stock. See "Certain Transactions" and "Principal and Selling Shareholders."
TERMINATION OF S CORPORATION STATUS AND DISTRIBUTIONS
Prior to completion of the Reorganization, EB had elected to be treated for
federal and certain state income tax purposes as a corporation (an "S
Corporation") subject to taxation under Subchapter S of the Internal Revenue
Code of 1986, as amended (the "Code"). As a result, the net income of EB has
been taxed for federal (and some state) income tax purposes directly to EB's
shareholders rather than to EB. EB's status as an S Corporation will be
terminated effective immediately prior to completion of the Offering (the
"Termination Date").
EB and EB Services paid distributions aggregating $5.0 million, $13.0
million and $13.9 million during 1996, 1997 and 1998, respectively, primarily to
reimburse the Kim Shareholders for federal and state income tax liabilities
arising from EB's status as an S Corporation. In 1996, 1997 and 1998, EB paid
dividends of $2,751,094, $6,601,310 and $7,643,382, respectively, to James J.
Kim, $218,341, $502,009 and $606,618, respectively, to Agnes C. Kim, and
$676,855, $1,632,227 and $1,880,575, respectively, to each of the Kim Trusts. In
1997, EB Services distributed $330,000 to each of the Kim Trusts and $10,000 to
James J. Kim. Prior to the Reorganization, EB will declare a dividend in the
aggregate amount of approximately $26.1 million to the Kim Shareholders (the "S
Corp. Distribution"), which amount represents (i) a distribution of a portion of
retained earnings which was previously taxed to the Kim Shareholders and (ii) a
distribution of an amount approximating EB's earnings for the period from
February 1, 1998 through the Termination Date. The S Corp. distribution will be
paid upon completion of the Offering. See "Use of Proceeds."
The Company, EB and the Kim Shareholders will also enter into a tax
indemnification agreement providing that the Company and EB will be indemnified
by the Kim Shareholders with respect to their proportionate share of any U.S.
federal or state corporate income taxes attributable to the failure of EB to
qualify as an S Corporation for any period in any jurisdiction for which S
Corporation status was claimed through the Termination Date. The tax
indemnification agreement will also provide that the Company and EB will
indemnify the Kim Shareholders if such shareholders are required to pay
additional taxes or other amounts attributable to taxable years on or before the
Termination Date as to which EB filed or files tax returns claiming status as an
S Corporation. See "Certain Transactions."
12
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,750,000 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 $55,300,000
million ($63,692,500 million if the Underwriters' over-allotment option is
exercised in full). The Company will not receive any proceeds from the sale of
Common Stock by the Selling Shareholders. See "Principal and Selling
Shareholders."
The Company intends to use (i) approximately $26.1 million of the net
proceeds to fund the S Corp. Distribution, (ii) approximately $17.7 million of
the net proceeds to repay borrowings outstanding under EB's revolving credit
facility with Fleet and (iii) the balance of the net proceeds for general
corporate purposes, including financing new store openings.
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 March 23, 1998,
the Company had $17.7 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 and $8.3 million to pay dividends to certain of the Kim
Shareholders. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."
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 and EB Services paid distributions to its shareholders aggregating $5.0
million, $13.0 million and $13.9 million in 1996, 1997 and 1998, respectively.
The Company was formed in March 1998. Upon completion of the Offering, the
Company will pay to the Kim Shareholders the S Corp. Distribution, which
aggregates approximately $26.1 million.
Except as described above, the Company has not declared or paid any cash
dividends on its capital stock. Pursuant to the Fleet revolving credit and term
loan facility, EB may not declare or pay any dividends or make any other
distributions if (i) there is an outstanding default under such facility or (ii)
EB 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.
13
<PAGE>
CAPITALIZATION
The following table sets forth the current portion of long-term debt and the
capitalization of the Company at January 31, 1998 (i) on an actual basis and
(ii) on an as adjusted basis to give effect to the Reorganization, the sale of
3,750,000 shares of Common Stock offered by the Company 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." This table 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 appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JANUARY 31, 1998
----------------------
<S> <C> <C>
ACTUAL AS ADJUSTED
--------- -----------
<CAPTION>
(IN THOUSANDS, EXCEPT
FOR SHARE DATA)
(UNAUDITED)
<S> <C> <C>
Current portion of long-term debt......................................................... $ 2,400 $
--------- -----------
--------- -----------
Long-term debt............................................................................ $ 10,541 $
Stockholders' equity:
Preferred stock, $.01 par value; 25,000,000 shares authorized; none issued and
outstanding........................................................................... -- --
Common stock, $.01 par value; 100,000,000 shares authorized; shares issued and
outstanding and shares issued and outstanding as
adjusted (1).......................................................................... 2
Partners' capital of EB Services Company LLP.............................................. 1
Additional paid-in capital................................................................ 7,584
Foreign currency translation adjustment................................................... (1,143)
Retained earnings......................................................................... 22,736
--------- -----------
Total stockholders' equity................................................................ 29,180
--------- -----------
Total capitalization...................................................................... $ 42,121 $
--------- -----------
--------- -----------
</TABLE>
- ------------------------
(1) Excludes shares of Common Stock reserved for issuance upon the
exercise of options granted pursuant to the Equity Participation Plan, and
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."
14
<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 January 31, 1998, the net tangible book value of the Company was $21.5
million, or $ per share. After giving effect to the sale of 3,750,000 shares
of Common Stock by the Company (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 $
million, or $ per share. This represents an immediate increase in net
tangible book value of $ per share of Common Stock to existing
stockholders and an immediate and substantial dilution of $ 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 Offering............... $
Increase attributable to new investors....................
---------
Pro forma net tangible book value after the Offering........
---------
Dilution to new investors................................... $
---------
---------
</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)............................ % $ 7,587,655 % $
New investors........................................ 16.00
---------- --- ------------ ---
Total........................................ 100% $ 100%
---------- --- ------------ ---
---------- --- ------------ ---
</TABLE>
- ------------------------
(1) Excludes shares of Common Stock reserved for issuance upon the
exercise of stock options outstanding as of , 1998, under the
Equity Participation Plan, which have an exercise price at the initial
public offering price per share, and 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."
15
<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 1996 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 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>
1993 1994 1995 1996 1997
---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales........................................... $ 240,387 $ 249,552 $ 268,956 $ 337,059 $ 449,180
Cost of goods sold.................................. 175,865 182,505 199,226 252,813 338,615
---------- ---------- ---------- ---------- -----------
Gross profit........................................ 64,522 67,047 69,730 84,246 110,565
Operating expenses.................................. 55,894 56,070 58,270 67,438 77,175
Depreciation and amortization....................... 4,638 5,324 6,180 6,936 8,316
---------- ---------- ---------- ---------- -----------
Income from operations.............................. 3,990 5,653 5,280 9,872 25,074
Interest expense, net............................... 1,578 1,727 1,818 1,298 1,379
---------- ---------- ---------- ---------- -----------
Income before income tax expense.................... 2,412 3,926 3,462 8,574 23,695
Income tax expense (1).............................. 391 286 280 550 846
---------- ---------- ---------- ---------- -----------
Net income.......................................... $ 2,021 $ 3,640 $ 3,182 $ 8,024 $ 22,849
---------- ---------- ---------- ---------- -----------
---------- ---------- ---------- ---------- -----------
Net income per share................................
Weighted average shares outstanding.................
PRO FORMA INCOME DATA:
Income before income tax expense.................... $ 2,412 $ 3,926 $ 3,462 $ 8,574 $ 23,695
Pro forma income tax provision...................... 972 1,582 1,395 3,455 9,543
---------- ---------- ---------- ---------- -----------
Pro forma net income (2)............................ $ 1,440 $ 2,344 $ 2,067 $ 5,119 $ 14,152
---------- ---------- ---------- ---------- -----------
---------- ---------- ---------- ---------- -----------
Pro forma net income per share......................
Pro forma weighted average shares
outstanding (3)...................................
OPERATING DATA (4):
Stores open at beginning of period.................. 274 311 325 341 360
Stores open at end of period........................ 311 325 341 360 452
Sales per square foot (5)........................... $ 763 $ 721 $ 729 $ 831 $ 926
Average sales per store (000s)...................... $ 822 $ 785 $ 808 $ 962 $ 1,106
Comparable store sales increase (decrease).......... (10.8%) (6.6%) 3.5% 20.8% 15.3%
Inventory turnover.................................. 3.0x 3.6x 3.8x 5.1x 5.3x
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
JANUARY 29, JANUARY 28, FEBRUARY 3, FEBRUARY 1, JANUARY 31,
1994 1995 1996 1997 1998
------------ ------------ ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)................. $ (2,531) $ 3,344 $ (11,038) $ 9,893 $ (16,532)
Total assets.............................. 80,580 82,900 95,515 139,360 143,170
Total liabilities......................... 68,153 66,833 78,066 118,887 113,990
Stockholders' equity...................... 12,427 16,067 17,449 20,473 29,180
</TABLE>
- ------------------------
(1) Prior to the Reorganization, EB elected to be treated as an S Corporation
and, as a result, its taxable income was passed through to its shareholders
for federal income tax purposes. Accordingly, the financial statements do
not include a provision for federal income taxes. EB 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.
(2) The pro forma net income gives effect to the application of the pro forma
income tax expense that would have been reported had EB been a corporation
subject to federal and all state income taxes for all periods shown. See
Notes 1 and 2 of Notes to Consolidated and Combined Financial Statements.
(3) Adjusted to give effect to the sale by the Company of 3,750,000 shares of
Common Stock offered hereby at an assumed initial offering price of $16.00
per share (after deducting underwriting discounts and estimated Offering
expenses), and after the application of the estimated net proceeds therefrom
to the Company. See "Use of Proceeds" and "Capitalization."
(4) Does not reflect stores operated by EB-UK and WaldenSoftware for which the
Company provides management services. See "Business--Management Services."
(5) Calculated based on stores open for one year or longer.
17
<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 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 January 31, 1998, the Company operated a total of 452
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 129
stores and 17 department store-based concessions in the United Kingdom and
Ireland. As of January 31, 1998, the Company also managed 39 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 EB and EB Services.
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.
18
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain income statement items as a
percentage of net sales for the years indicated:
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Net sales.......................................................................... 100.0% 100.0% 100.0%
Cost of goods sold................................................................. 74.1 75.0 75.4
--------- --------- ---------
Gross profit....................................................................... 25.9 25.0 24.6
Operating expenses................................................................. 21.6 20.0 17.2
Depreciation and amortization...................................................... 2.3 2.1 1.8
--------- --------- ---------
Income from operations............................................................. 2.0 2.9 5.6
Interest expense, net.............................................................. 0.7 0.4 0.3
--------- --------- ---------
Income before income tax expense................................................... 1.3 2.5 5.3
Pro forma income tax expense....................................................... 0.5 1.0 2.1
--------- --------- ---------
Pro forma net income (1)........................................................... 0.8% 1.5% 3.2%
--------- --------- ---------
--------- --------- ---------
</TABLE>
- ------------------------
(1) The pro forma net income gives effect to the application of the pro forma
income tax expense that would have been reported had EB been a corporation
subject to federal and state income taxes for all periods shown. See Notes 1
and 2 of Notes to Consolidated and Combined Financial Statements.
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, (ii) a 15.3% increase in comparable store 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.
Gross profit increased by 31.2% from $84.2 million in 1996 to $110.6 million
in 1997. As a percentage of net sales, gross profit decreased from 25.0% in 1996
to 24.6% in 1997. The decrease in gross profit as a percentage of sales was
primarily due 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 14.4% from $67.4
million in 1996 to $77.2 million in 1997. As a percentage of net sales, selling,
general and administrative expense decreased from 20.0% in 1996 to 17.2% in
1997. The $9.7 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 net sales was primarily attributable to the increase in net sales
without a proportional increase in corporate and store-level overhead.
Depreciation and amortization expense increased by 19.9% from $6.9 million
in 1996 to $8.3 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 154% from $9.9 million in 1996 to $25.1
million in 1997. As a percentage of net sales, operating income increased from
2.9% in 1996 to 5.6% in 1997, as the increase in cost of goods sold as a
percentage of net sales was more than offset by the decline in operating
expenses as a percentage of net sales.
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.
19
<PAGE>
As a result of all the above factors, the Company's income before income
taxes increased by 176% from $8.6 million in 1996 to $23.7 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 and a 20.8% increase in comparable store 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.
Gross profit increased by 20.8% from $69.7 million in 1995 to $84.2 million
in 1996. As a percentage of net sales, gross profit decreased from 25.9% in 1995
to 25.0% in 1996. The decrease in gross profit as a percentage of net sales was
due primarily 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 15.7% from $58.3
million in 1995 to $67.4 million in 1996. As a percentage of net sales, selling,
general and administrative expense decreased from 21.6% in 1995 to 20.0% in
1996. The $9.1 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 net sales was primarily attributable to the increase in net sales
without a proportional increase in corporate and store-level overhead.
Depreciation and amortization expense increased by 12.2% from $6.2 million
in 1996 to $6.9 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 87.0% from $5.3 million in 1995 to $9.9
million in 1996. As a percentage of net sales, operating income increased from
2.0% in 1995 to 2.9% in 1996, as the increase in cost of goods sold as a
percentage of net sales was more than offset by the decline in operating
expenses as a percentage of net sales.
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 148% from $3.5 million in 1995 to $8.6 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 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."
20
<PAGE>
The following table sets forth certain unaudited quarterly income statement
information for 1996 and 1997. 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>
MAY 4, AUG. 3, NOV. 2, FEB. 1, MAY 3, AUG. 2, NOV. 1, JAN. 31,
1996 1996 1996 1997 1997 1997 1997 1998
------- ------- ------- -------- ------- ------- ------- --------
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE
DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales..................... $52,091 $51,081 $76,696 $157,191 $83,688 $72,894 $93,700 $198,898
Gross profit.................. 14,280 14,193 18,352 37,421 21,747 18,587 23,640 46,591
Operating income (loss)....... (2,274) (3,247) 839 14,554 2,408 (1,882) 988 23,560
Income (loss) before income
taxes....................... (2,502) (3,696) 391 14,381 2,113 (2,278) 646 23,214
Net income (loss)............. $(2,502) $(3,696) $ 391 $ 13,831 $ 2,113 $(2,284) $ 646 $ 22,374
Net income (loss) per
share.......................
AS A PERCENTAGE OF NET SALES:
Gross profit.................. 27.4% 27.8% 23.9% 23.8% 26.0% 25.5% 25.2% 23.4%
Operating income (loss)....... (4.4) (6.4) 1.1 9.3 2.9 (2.6) 1.1 11.8
Income (loss) before income
taxes....................... (4.8) (7.2) 0.5 9.1 2.5 (3.1) 0.7 11.7
Net income (loss)............. (4.8%) (7.2%) 0.5% 8.8% 2.5% (3.1%) 0.7% 11.2%
Net income (loss) per share...
</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 $11.2
million, $37.1 million and $31.1 million in cash from operations in 1995, 1996
and 1997, respectively. The $31.1 million of cash generated from operations in
1997 was primarily the result of $22.8 million of net income, $8.9 million of
non-cash charges to net income, and a $9.6 million increase in accounts payable
and accrued expenses, partially offset by an increase of $5.1 million in other
assets, a $2.9 million increase in due from affiliates and a $2.0 million
decrease in due to affiliates. The $6.0 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 $17.1 million, (ii) an
increase in other assets of $5.1 million, (iii) a decrease in affiliate payables
of $2.4 million and (iv) an increase in affiliate receivables of $2.2 million.
Such amounts were partially offset by an increase in net income of $14.8 million
and a decrease in inventory of $5.7 million. The $25.9 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, and a decrease in receivables from
affiliates of $4.4 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 accounts receivable, inventory,
and equipment, and the term loan facility is also secured by the Company's
21
<PAGE>
West Chester, Pennsylvania property. As of March 20, 1998, EB had $17.7 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. The Company intends to
use $17.7 million of its net proceeds of the Offering to repay EB's obligations
to Fleet.
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 Company. The Company
expects to make capital expenditures in 1998 of approximately $21.1 million,
primarily to open approximately 80 to 90 new stores.
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.
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
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income," was issued in June 1997 and established standards for
reporting and display of comprehensive income in financial statements. This
statement is effective for the Company's financial statements for the year ended
January 30, 1999. The adoption of this statement is not expected to have a
material effect on the Company's financial statements.
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 estimates that it will incur
expenses of $300,000 to make its computer software programs and operating
systems "Year 2000" compliant. 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.
22
<PAGE>
BUSINESS
GENERAL
The Company 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 January 31, 1998, the Company operated 452 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 129 stores
and 17 department store-based concessions in the United Kingdom and Ireland. As
of January 31, 1998, the Company also managed 39 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 $249.6 million and $5.7 million, respectively, in 1994,
to $449.2 million and $25.1 million, respectively, in 1997. Comparable store
sales increased 3.5%, 20.8% and 15.3% in 1995, 1996 and 1997, 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.
23
<PAGE>
Total domestic retail sales of video game titles, hardware and accessories
was approximately $5.5 billion in calendar 1997, an increase of approximately
51% 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
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. Industry
sources forecast continued growth in sales of the current generation of hardware
technology and related software for calendar years 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 "Katana," 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.
According to industry sources, 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. These sources estimate that
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.
24
<PAGE>
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 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.
25
<PAGE>
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 12
Stop 'N Save Software stores in both existing and new markets during 1998. As of
March 1, 1998, the Company had executed leases for 13 new domestic stores, and
is currently negotiating with landlords with respect to 23 potential new
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 January 31, 1998, the Company operated
15 stores in Australia, 27 stores in Canada, five stores in South Korea, and
provided management services to an affiliate, EB-UK, which operates 129 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 March 1, 1998, the Company had executed leases for three
new stores in Australia, and is currently negotiating with landlords with
respect to 12 potential new stores in Australia and for four 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."
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. In order to broaden its Internet
presence, during the first quarter of 1998, the Company entered into a two-month
arrangement with Yahoo! Inc. ("Yahoo") to promote the Company and its product
lines to potential customers through direct linkages from Yahoo to the Company's
Website. The Company intends to pursue aggressively other strategic alliances
with directories, search engines, content providers, and sites geared toward
electronic game players. By April 1998, the Company intends to provide customers
with a complete product offering, including access to the Company's database of
over 7,500 items, which includes all active and inactive electronic game titles.
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.
26
<PAGE>
- 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.
RETAIL OPERATIONS
As of January 31, 1998, the Company operated a total of 452 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.
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
27
<PAGE>
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 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.
28
<PAGE>
MANAGEMENT SERVICES
As of January 31, 1998, the Company provided management services to 185
specialty electronic game stores in the United States, the United Kingdom and
Ireland.
EB-UK STORES. The Company provides management services for 129 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 the Company). As of January 31, 1998, the Company
owned 25.1% of the outstanding shares of capital stock of EB-UK, which stock is
listed for trading on the London Stock Exchange.
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. The UK Services Agreement entitles EB to appoint
the managing director of EB-UK. EB has designated John Steinbrecher, a Vice
President of EB, as the managing director of EB-UK. 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.
WALDENSOFTWARE STORES. The Company manages 39 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
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<PAGE>
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. By
April 1998, the Company intends to provide customers with a complete product
offering, including access to the Company's database of over 7,500 items, which
includes all active and inactive electronic game titles. 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. During
February 1998, the Company recorded nearly 211,000 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 $399,000, compared to revenues of $100,000 in February 1998 alone. In order
to broaden its Internet presence, during the first quarter of 1998, the Company
entered into a two month arrangement with Yahoo to promote the Company and its
product lines to potential customers through direct linkages from Yahoo to the
Company's Website. The Company intends to pursue aggressively other 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
2,600 SKUs. The following table sets forth sales mix, expressed as a percentage
of total 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
30
<PAGE>
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.
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
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<PAGE>
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. 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 March 1, 1998, over 70,000
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.
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<PAGE>
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."
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
33
<PAGE>
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."
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 27 leases which have been subsequently extended, 16 leases in
negotiation and 13 stores currently leased on a month-to-month basis, of
which four 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. The Company owns its 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, the Company owns
four acres adjacent to the distribution center that will allow the Company to
expand its operations at the West Chester site as required.
TRADEMARKS/REGISTRATIONS
The Company owns 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.
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 February 1998, the Company had approximately 2,900 non-seasonal
associates, of which approximately 1,500 were employed on a part-time basis. In
addition, during the 1997 peak holiday
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<PAGE>
shopping season, the Company hired approximately 650 temporary associates. The
Company believes that 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.
35
<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 and Chief Executive Officer
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 its principal operating
subsidiary, Amkor Electronics, Inc. ("AEI") since September 1997 and 1968,
respectively. Amkor and AEI are semiconductor packaging and test service
companies. 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 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 serves
as a Director of Amkor. 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 Bylaws provide 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.
37
<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 have each been 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, his 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, $247,375 and $181,500 for
38
<PAGE>
Messrs. Firestone, Griffiths and Panichello, respectively, grants under the 1998
Equity Participation Plan of , and options, respectively and
certain fringe and other employee benefits that are made available to the senior
executives of the Company. 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," and 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
The Board of Directors has adopted and approved the Equity Participation
Plan and reserved 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 Bylaws provide 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 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
39
<PAGE>
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.
40
<PAGE>
CERTAIN TRANSACTIONS
In connection with the Reorganization, each of the Kim Shareholders will
exchange their interests in EB and EB Services in return for shares of Common
Stock. See "Reorganization." The Company also proposes to use a portion of the
net proceeds of the Offering to pay the S Corp. Distribution and to enter into a
tax indemnification agreement with EB and the Kim Shareholders and a
registration rights agreement with the Kim Shareholders. See "Reorganization,"
"Use of Proceeds" and "Description of Capital Stock--Registration Rights."
The Kim Shareholders collectively own all of the outstanding shares of
capital stock of AEI. EB has an intercompany financing arrangement with AEI, a
wholly owned subsidiary of Amkor, pursuant to which EB may borrow funds (at the
prime rate of interest plus 0.25%) from AEI, subject to AEI's consent. Since
1995, the maximum amount outstanding under these intercompany loans in the
ordinary course of business has been $25.1 million. In addition, in 1996, EB
borrowed $50.0 million from AEI in connection with a contemplated acquisition.
However, the acquisition was not consummated and EB repaid the $50.0 million to
AEI 11 business days after the date on which it was borrowed. As of March 23,
1998 EB was not indebted to AEI.
Since 1990, AEI has guaranteed EB's obligations to certain vendors in
amounts that fluctuate from time to time. The maximum amount guaranteed by AEI
to these vendors at no time has exceeded $30.0 million. In addition, AEI, Mr.
Kim and Amkor-Anam, Inc., a company owned by certain of the Kim Shareholders,
guaranteed EB's obligations under a $17.0 million line of credit and term loan
facilities totaling $15.0 million with Seoul Bank. On January 31, 1998, EB owed
an aggregate of $9.0 million under the term loan facilities. The term loans were
repaid and the line of credit was terminated by EB in March 1998. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-- Liquidity and Capital Resources."
In addition, in each of the last three years, various EB expenses were paid
by AEI on behalf of EB and various AEI expenses were paid by EB on behalf of
AEI. These expenses include insurance premiums, employee medical claims,
interest, rent and other miscellaneous expenses. In 1995, 1996 and 1997, AEI
made net advancements on behalf of EB of $604,000, $128,000 and $147,000
respectively, which were reflected in due to affiliates at the end of such
years. In 1997, EB repaid AEI $2.4 million of current and prior year
advancements.
In 1995 and 1996, EB advanced rent, utilities and other miscellaneous
expenses on behalf of Forte of $152,000 and $118,000, respectively. In addition,
EB sold certain fixtures and equipment to Forte in 1996 for a total of $113,543.
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 International, Inc. ("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
41
<PAGE>
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 the joint venture interests of Ssangyong and Fine Land 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.
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 $3.7 million were earned by EB and EB Services
during 1995, 1996 and 1997, respectively. Pursuant to the Reorganization, the
Kim Shareholders will contribute all of the outstanding shares of capital stock
of EB Services to the Company and the management fees paid by EB Canada and EB
Korea will be eliminated in consolidation. See "Reorganization."
In 1997, the Kim Trusts entered into an agreement with Rouse &
Associates-931 South Matlack Limited Partnership, a Pennsylvania limited
partnership, to purchase the Company's current West Chester headquarters and
distribution center. The Kim Trusts subsequently assigned their right to
purchase this property to EB for no consideration.
In 1997, EB advanced $180,000 to pay for certain personal expenses of Ms.
Susan Kim and Mr. John Panichello, which advance was repaid in full in such year
by the Susan Y. Kim Trust of December 31, 1987.
Members of the Kim family own all of the outstanding shares of Forte. In
1995, EB entered into an arrangement with AEI and Forte for insurance coverage.
At that time, AEI was a shareholder in a captive insurance fund, which offers
insurance benefits to its shareholders and pays dividends. Pursuant to the
arrangement between AEI, Forte and EB, AEI paid premiums to the fund and billed
EB and Forte for their share of the premiums. The amount of EB's portion of such
payments was approximately $428,000, $314,000 and $274,000 for 1995, 1996 and
1997, respectively. In 1997, AEI terminated the intercompany billing
relationship with EB and Forte, at which time EB purchased a share interest in
the fund. As a result of this transaction, Forte now obtains insurance coverage
through EB's participation in the fund. In April 1998, however, this
relationship between EB and Forte will terminate.
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.
42
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Common Stock as adjusted to reflect the sale of the
shares of Common Stock, as of March 23, 1998 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 Shareholders, and (v) all of the Company's
executive officers and directors as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED PRIOR TO
THE OFFERING SHARES
-------------------------------- BEING
NAME AND ADDRESS OF BENEFICIAL OWNER (1) NUMBER PERCENT OFFERED
- ------------------------------------------------------------------ --------------- ------- -------
<S> <C> <C> <C>
Agnes C. & James J. Kim (2)(3)(4).................................
931 South Matlack Street
West Chester, PA 19382
Susan Y. Kim Trust of December 31, 1987 (4)(5)....................
1500 E. Lancaster Avenue
Paoli, PA 19301
David D. Kim Trust of December 31, 1987 (4)(6)....................
1500 E. Lancaster Avenue
Paoli, PA 19301
John T. Kim Trust of December 31, 1987 (4)(7).....................
1500 E. Lancaster Avenue
Paoli, PA 19301
Joseph J. Firestone (8)...........................................
John R. Panichello (4)(8).........................................
Jeffrey W. Griffiths (8)..........................................
Dean S. Adler (8).................................................
Susan Y. Kim (4)(5)...............................................
Louis J. Siana (5)(6)(7)(8).......................................
All directors and executive officers
as a group (11 persons) (8).....................................
<CAPTION>
SHARES BENEFICIALLY
OWNED AFTER
THE OFFERING
--------------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER (1) NUMBER PERCENT
- ------------------------------------------------------------------ --------------- -------
<S> <C> <C>
Agnes C. & James J. Kim (2)(3)(4).................................
931 South Matlack Street
West Chester, PA 19382
Susan Y. Kim Trust of December 31, 1987 (4)(5)....................
1500 E. Lancaster Avenue
Paoli, PA 19301
David D. Kim Trust of December 31, 1987 (4)(6)....................
1500 E. Lancaster Avenue
Paoli, PA 19301
John T. Kim Trust of December 31, 1987 (4)(7).....................
1500 E. Lancaster Avenue
Paoli, PA 19301
Joseph J. Firestone (8)...........................................
John R. Panichello (4)(8).........................................
Jeffrey W. Griffiths (8)..........................................
Dean S. Adler (8).................................................
Susan Y. Kim (4)(5)...............................................
Louis J. Siana (5)(6)(7)(8).......................................
All directors and executive officers
as a group (11 persons) (8).....................................
</TABLE>
- ------------------------
* Less than 1.0% of outstanding shares of Common Stock
(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) If the overallotment option is exercised in full, the number of shares being
offered would be and the number and percent of shares beneficially owned
after the Offering would be and %, respectively.
(3) James J. and Agnes C. Kim are husband and wife and such shares of Common
Stock are owned jointly by them.
(4) Susan Y. Kim, David D. Kim and John T. Kim are the children of James J. and
Agnes C. Kim. John R. Panichello and Susan Y. Kim are husband and wife.
(5) Susan Y. Kim, John F. A. Earley, and Louis J. Siana are co-trustees of the
Susan Y. Kim Trust of December 31, 1987. As co-trustees, such persons may be
deemed to beneficially own such shares in accordance with Rule 13d-3 ("Rule
13d-3") promulgated under the Securities Exchange Act of 1934, as amended.
(6) David D. Kim, John F. A. Earley and Louis J. Siana are co-trustees of the
David D. Kim Trust of December 31, 1987. As co-trustees, such persons may be
deemed to beneficially own such shares in accordance with Rule 13d-3.
(7) John T. Kim, John F. A. Earley and Louis J. Siana are co-trustees of the
John T. Kim Trust of December 31, 1987. As co-trustees, such persons may be
deemed to beneficially own such shares in accordance with Rule 13d-3.
(8) Represents (or otherwise includes) shares of Common Stock which may be
acquired upon the exercise of options granted by the Company under the
Equity Participation Plan.
43
<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, and by the
provisions of applicable Delaware law.
COMMON STOCK
Upon completion of the Reorganization, there will be shares of Common
Stock outstanding, all of which will be beneficially owned by the Kim
Shareholders.
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
44
<PAGE>
acquire the Company or remove incumbent management even if some or a majority of
stockholders deemed such an attempt to be in their best interests. Insofar as
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 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
45
<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 among the Company and the Kim
Shareholders, the Kim Shareholders (and their transferees) were granted the
right to demand that the Company register any or all of the shares of
Common Stock held by the Kim Shareholders 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, the Kim Shareholders have 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 StockTrans, Inc.,
Ardmore, Pennsylvania.
46
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have shares of
Common Stock outstanding ( if the Underwriters' over-allotment option is
exercised in full). Of those shares, a total of ( 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. All of the remaining shares are held by the Kim Shareholders, who
are "affiliates" 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
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 the Kim Shareholders) 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." The Kim
Shareholders and their transferees are 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 and the Kim Shareholders, including the Selling Shareholders, 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
shares of Common Stock (including the shares of Common Stock 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."
47
<PAGE>
UNDERWRITING
The underwriters named below (the "Underwriters"), for whom Prudential
Securities Incorporated and Smith Barney 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 Shareholders the number of shares of
Common Stock set forth opposite their respective names.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
Prudential Securities Incorporated...............................................
Smith Barney Inc. ...............................................................
----------
Total............................................................................ 7,500,000
----------
----------
</TABLE>
The Company and the Selling Shareholders 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 Shareholders 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 Company and the Selling Shareholders have granted the Underwriters an
over-allotment option, exercisable for 30 days from the date of this Prospectus,
to purchase in the aggregate up to 1,125,000 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 7,500,000.
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 Shareholders 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 and the Kim Shareholders,
including the Selling Shareholders, 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.
48
<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 Shareholders 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 Company and the Selling Stockholders,
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
1,125,000 shares of Common Stock, by exercising the Underwriters' over-allotment
option referred to above. 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 selling group member 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.
49
<PAGE>
THE ELECTRONICS BOUTIQUE GROUP
INDEX TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE(S)
-----------
<S> <C>
Report of Independent Accountants........................................................................ 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
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
[TO BE FILED BY AMENDMENT]
F-2
<PAGE>
THE ELECTRONICS BOUTIQUE GROUP
CONSOLIDATED AND COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
FEBRUARY 1, JANUARY 31, JANUARY 31,
1997 1998 1998
-------------- -------------- --------------
<S> <C> <C> <C>
PRO FORMA
(NOTE 2)
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents..................................... $ 44,727,846 $ 20,639,610 $ 20,639,610
Account receivable:
Trade and vendors........................................... 2,469,164 2,618,382 2,618,382
Other....................................................... 1,784,902 1,754,691 1,754,691
Due from affiliates (notes 5, 7 and 8)........................ 3,045,224 3,684,654 3,684,654
Merchandise inventories....................................... 47,239,297 52,973,314 52,973,314
Deferred tax asset (note 2)................................... -- -- 2,173,000
Prepaid expenses.............................................. 2,681,965 2,837,647 2,837,647
-------------- -------------- --------------
Total current assets............................................ 101,948,398 84,508,298 86,681,298
-------------- -------------- --------------
Property and equipment:
Leasehold improvements........................................ 34,783,005 40,039,957 40,039,957
Fixtures and equipment........................................ 18,161,153 25,070,985 25,070,985
Building...................................................... -- 6,200,950 6,200,950
Land.......................................................... -- 632,806 632,806
Construction in progress...................................... 207,307 556,663 556,663
-------------- -------------- --------------
53,151,465 72,501,361 72,501,361
Less accumulated depreciation and amortization................ 26,725,475 32,535,305 32,535,305
-------------- -------------- --------------
Net property and equipment...................................... 26,425,990 39,966,056 39,966,056
-------------- -------------- --------------
Due from affiliates (note 5).................................... 1,136,114 -- --
Investment in affiliated company (note 8)....................... 5,793,189 10,801,415 10,801,415
Goodwill and other intangible assets, net of accumulated
amortization of $261,946 and $118,548 in 1997 and 1998,
respectively.................................................. 340,866 2,000,050 2,000,050
Deferred tax asset (note 2)..................................... -- -- 4,127,000
Other assets.................................................... 3,715,765 5,894,374 5,894,374
-------------- -------------- --------------
Total assets.................................................... $ 139,360,322 $ 143,170,193 $ 149,470,193
-------------- -------------- --------------
-------------- -------------- --------------
</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, JANUARY 31,
1997 1998 1998
-------------- -------------- --------------
<S> <C> <C> <C>
PRO FORMA
<CAPTION>
(NOTE 2)
(UNAUDITED)
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt (note 3).................... $ 6,599,996 $ 2,400,396 $ 2,400,396
Accounts payable.............................................. 71,031,406 83,713,978 83,713,978
Accrued expenses.............................................. 11,985,246 14,142,797 14,142,797
Due to affiliate (note 5)..................................... 1,981,194 -- --
Income taxes payable.......................................... 457,764 782,988 782,988
S Corporation distribution to stockholders (note 2)........... -- -- 40,000,000
-------------- -------------- --------------
Total current liabilities....................................... 92,055,606 101,040,159 141,040,159
-------------- -------------- --------------
Long-term liabilities:
Notes payable (note 3)........................................ 24,208,345 10,541,149 10,541,149
Deferred rent................................................. 2,623,537 2,408,579 2,408,579
-------------- -------------- --------------
26,831,882 12,949,728 12,949,728
-------------- -------------- --------------
Total liabilities............................................... 118,887,488 113,989,887 153,989,887
-------------- -------------- --------------
Commitments (note 4)
Stockholders' equity:
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 --
Foreign currency translation adjustment....................... -- (1,142,766) (1,142,766)
Retained earnings (deficit)................................... 12,886,179 22,735,417 (3,380,218)
-------------- -------------- --------------
Total stockholders' equity (deficit)............................ 20,472,834 29,180,306 (4,519,694)
-------------- -------------- --------------
Total liabilities and stockholders' equity...................... $ 139,360,322 $ 143,170,193 $ 149,470,193
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
F-4
<PAGE>
THE ELECTRONICS BOUTIQUE GROUP
CONSOLIDATED AND COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED
----------------------------------------------
FEBRUARY 3, FEBRUARY 1, JANUARY 31,
1996 1997 1998
-------------- -------------- --------------
<S> <C> <C> <C>
(UNAUDITED)
Net sales....................................................... $ 268,955,902 $ 337,058,946 $ 449,179,603
Costs and expenses:
Costs of merchandise sold, including freight.................. 199,225,558 252,812,925 338,614,309
Selling, general and administrative (notes 5 and 6)........... 58,270,151 67,437,742 77,174,804
Depreciation and amortization (notes 7 and 8)................. 6,180,394 6,936,418 8,316,053
-------------- -------------- --------------
263,676,103 327,187,085 424,105,166
Operating income................................................ 5,279,799 9,871,861 25,074,437
Interest expense, net of interest income of $819,870,
$1,121,562, and $1,217,337 in 1996, 1997 and 1998,
respectively.................................................. 1,818,105 1,298,296 1,378,919
-------------- -------------- --------------
Income before income taxes...................................... 3,461,694 8,573,565 23,695,518
State income taxes.............................................. 280,000 550,000 846,280
-------------- -------------- --------------
Net income...................................................... $ 3,181,694 $ 8,023,565 $ 22,849,238
-------------- -------------- --------------
-------------- -------------- --------------
Pro forma information (unaudited) (note 2):
Income before income taxes, as reported....................... -- -- $ 23,695,518
Pro forma income taxes........................................ -- -- 9,542,968
--------------
Pro forma net income.......................................... -- -- $ 14,152,550
--------------
--------------
Pro forma net income per share................................ -- -- --
Pro forma weighted average shares outstanding................. -- -- --
</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 --
Foreign currency
translation
adjustment......... -- -- -- -- -- -- -- --
----- ----------- ----- ----------- ----------- ----------- ------ ----------
Balance, January 31,
1998............... -- $ -- 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........... -- 8,023,565 8,023,565
Distributions........ -- (5,000,000) (5,000,000)
----------- ------------ ------------
Balance, February 1,
1997............... -- 12,886,179 20,472,834
Net income........... -- 22,849,238 22,849,238
Distributions........ -- (13,000,000) (13,000,000)
Capital
contribution....... -- -- 1,000
Foreign currency
translation
adjustment......... (1,142,766) -- (1,142,766)
----------- ------------ ------------
Balance, January 31,
1998............... $(1,142,766) $ 22,735,417 $29,180,306
----------- ------------ ------------
----------- ------------ ------------
</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
----------------------------------------------
FEBRUARY 3, FEBRUARY 1, JANUARY 31,
1996 1997 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income..................................................... $ 3,181,694 $ 8,023,565 $ 22,849,238
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
Amortization of other assets................................. 195,742 381,276 744,752
Loss on disposal of property and equipment................... 126,226 1,170,182 620,916
Loss in investment in affiliated companies................... 1,186,329 155,186 --
Changes in assets and liabilities:
Decrease (increase) in:
Accounts receivable...................................... 832,871 (471,533) 385,737
Due from affiliates...................................... (2,279,807) (688,891) (2,936,874)
Merchandise inventories.................................. (1,248,652) (5,646,658) 95,212
Prepaid expenses......................................... (594,187) 2,279 (27,311)
Intangible assets........................................ -- -- (566,024)
Other long-term assets................................... (3,007,421) 154,696 (5,086,599)
(Decrease) increase in:
Accounts payable......................................... 4,831,833 21,806,206 8,345,103
Accrued expenses......................................... 1,082,117 4,832,902 1,216,832
Due to affiliate......................................... 1,078,808 402,478 (1,981,194)
Income taxes payable..................................... (152,377) 455,187 213,047
Deferred rent............................................ (15,872) (74,711) (368,059)
-------------- -------------- --------------
Net cash provided by operating activities........................ 11,201,956 37,057,306 31,076,077
-------------- -------------- --------------
Cash flows used in investing activities:
Purchases of property and equipment............................ (6,760,191) (8,610,265) (18,471,984)
Proceeds from disposition of assets............................ 5,994 275,722 12,455
Net cash from business acquired................................ -- -- 2,149,646
Purchase of investment securities in affiliate................. (8,204,484) -- --
-------------- -------------- --------------
Net cash used in investing activities............................ (14,958,681) (8,334,543) (16,309,883)
-------------- -------------- --------------
Cash flows from financing activities:
Distributions.................................................. (1,800,000) (5,000,000) (13,000,000)
Net proceeds from (payments under) revolving credit facility... 10,000,000 (10,000,000) --
Proceeds from long-term debt................................... 500,000 25,000,000 --
Repayment of long-term debt.................................... (6,091,663) (1,599,996) (24,514,276)
Capital contribution........................................... -- -- 1,000
-------------- -------------- --------------
Net cash provided by (used in) financing activities.............. 2,608,337 8,400,004 (37,513,276)
-------------- -------------- --------------
Effects of exchange rates on cash................................ -- -- (1,341,154)
Net increase (decrease) in cash and cash equivalents............. (1,148,388) 37,122,767 (24,088,236)
Cash and cash equivalents, beginning of year..................... 8,753,467 7,605,079 44,727,846
-------------- -------------- --------------
Cash and cash equivalents, end of year........................... $ 7,605,079 $ 44,727,846 $ 20,639,610
-------------- -------------- --------------
-------------- -------------- --------------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest..................................................... $ 1,820,492 $ 2,970,932 $ 2,714,593
Income taxes................................................. $ 432,377 $ 89,659 $ 672,842
</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. ("EB") is among the world's largest specialty
retailers of electronic games. The Company'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 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 and 405 operating retail stores throughout the United
States and Puerto Rico at February 1, 1997 and January 31, 1998, respectively.
In addition, it operated 27 stores in Canada, 15 in Australia, and 5 in South
Korea at January 31, 1998. The EB Group also operates a mail order business and
sells product via the World Wide Web. Approximately 30% and 36% of the EB
Group's 1996 and 1997 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, its wholly owned subsidiaries and EB Services. Significant intercompany
accounts and transactions have been eliminated in consolidation and combination.
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.
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 and
1997 are losses of $125,000, $1,170,000 and $556,000, respectively, primarily
related to the closing of five stores in 1995 and nine stores in each of 1996
and 1997, and the remodeling of several stores each year.
F-8
<PAGE>
THE ELECTRONICS BOUTIQUE GROUP
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 twenty 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.
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 ADVERTING 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 in the year incurred.
VENDOR PROGRAMS
The EB Group receives manufacturer reimbursements for certain training,
promotional and marketing activities that offset the expenses incurred by the EB
Group.
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. Translation gains and losses are included in net income.
INCOME TAXES
Income taxes are payable personally by the stockholders pursuant to an
election under Subchapter "S" of the Internal Revenue Code. Accordingly, no
provision has been made for federal income taxes. 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 and $12,000,000 to its stockholders for
taxes in 1995, 1996 and 1997, respectively. EB Services made a $1,000,000
distribution in 1997.
F-9
<PAGE>
THE ELECTRONICS BOUTIQUE GROUP
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The tax basis of the assets and liabilities exceeded their financial
reporting basis by approximately $18,200,000 at February 1, 1997, and
$16,200,000 at January 31, 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 resulted in an effective state income tax rate in
excess of the statutory state rates.
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.
PRO FORMA INCOME PER SHARE
Pro forma income per share is calculated using the weighted average number
of shares of common stock outstanding during the year.
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) PRO FORMA INFORMATION (UNAUDITED)
In connection with the initial public offering of the Company's Common Stock
described in Note 10, EB plans to terminate its S Corporation status and make a
final distribution of previously taxed earnings to its stockholders.
Accordingly, the accompanying financial statements include certain pro forma
information which gives effect to the events explained below.
PRO FORMA BALANCE SHEET
The pro forma balance sheet of the EB Group as of January 31, 1998 reflects:
a) the estimated net deferred income taxes of $6,300,000 which will be recorded
by the EB Group as a result of the termination of EB's S Corporation status
shortly before completion of the offering.
b) an estimated distribution of $40,000,000 payable to the stockholders of all
taxed but undistributed S Corporation earnings of EB and EB Services, of
which $13,900,000 was paid in March 1998 and the remainder will be paid from
the net proceeds of the Offering to the Company.
The deferred income tax asset represents the tax effect of the cumulative
differences between the financial reporting and income tax bases of certain
assets and liabilities as of the termination of the S Corporation status.
F-10
<PAGE>
THE ELECTRONICS BOUTIQUE GROUP
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
(2) PRO FORMA INFORMATION (UNAUDITED) (CONTINUED)
The significant items comprising the EB Group pro forma net deferred income
tax assets and liabilities as of January 31, 1998 are temporary differences
relating to the following:
<TABLE>
<S> <C>
Deferred tax assets:
Inventory capitalized costs..................................... $1,386,000
Accrued expenses................................................ 787,000
Fixed assets.................................................... 3,820,000
Deferred rent................................................... 870,000
Amortization of goodwill........................................ 114,000
Foreign net operating loss carryforward......................... 539,000
---------
Total gross deferred tax asset.................................. 7,516,000
Valuation allowance............................................. (539,000)
---------
Deferred tax assets............................................. 6,977,000
Deferred tax liability:
Basis in affiliated company..................................... 677,000
---------
Net deferred tax asset.......................................... $6,300,000
---------
---------
</TABLE>
Since the EB Group does not intend to repatriate the earnings of its foreign
subsidiaries, no U.S. deferred taxes have been recorded on such amounts.
PRO FORMA STATEMENT OF INCOME
Immediately prior to completion of the initial public offering, EB will
terminate its status as an S Corporation and will be subject to Federal and all
state income taxes thereafter. Accordingly, for informational purposes, the
statement of income for 1997 reflects pro forma earnings on an after-tax basis,
assuming EB had been taxed as a C Corporation. The difference between the
Federal statutory income tax rate and the pro forma income tax rate was as
follows:
<TABLE>
<CAPTION>
Federal statutory tax rate........................................... 35.0%
<S> <C>
State income taxes, net of federal benefit........................... 3.5
Income of foreign subsidiaries....................................... (1.7)
Other................................................................ 3.5
---------
Pro forma income tax rate............................................ 40.3%
---------
---------
</TABLE>
(3) DEBT
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.
F-11
<PAGE>
THE ELECTRONICS BOUTIQUE GROUP
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
(3) DEBT (CONTINUED)
Long-term debt at February 1, 1997 and January 31, 1998 is summarized as
follows:
<TABLE>
<CAPTION>
FEBRUARY 1, JANUARY 31,
1997 1998
------------- -------------
<S> <C> <C>
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
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
------------- -------------
30,808,341 12,941,545
Less current installments.......................................................... 6,599,996 2,400,396
------------- -------------
$ 24,208,345 $ 10,541,149
------------- -------------
------------- -------------
</TABLE>
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 are as follows:
<TABLE>
<CAPTION>
AMOUNT
-------------
<S> <C>
1998........................................................................... $ 2,400,396
1999........................................................................... 5,408,749
2000........................................................................... 3,800,400
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)
(4) 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 and $5,422,000 and $8,132,000 in 1995,
1996 and 1997, 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 and $28,448,000 and
$35,138,000 in 1995, 1996 and 1997, 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)
and ($70,000) and $139,000 for years 1995, 1996 and 1997, respectively.
(5) RELATED-PARTY TRANSACTIONS
DUE FROM AFFILIATES
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. 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.
At February 1, 1997, amounts due from the affiliated company were $1,417,000,
which included $281,000 in current assets and $1,136,000 in noncurrent assets.
In 1997 the EB Group acquired 100% of the capital stock of EB International
Inc., which resulted in goodwill of $337,000 that is being amortized over the
expected period of benefit of ten years. The EB Group has consolidated the
results of operations of EB International since the beginning of 1997. The pro
forma effect of the acquisition is not material to 1996. Prior to 1997, the
investment in EB International 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.
F-13
<PAGE>
THE ELECTRONICS BOUTIQUE GROUP
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
(5) RELATED-PARTY TRANSACTIONS (CONTINUED)
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 and January 31, 1998. Interest
expense on affiliate borrowings was approximately $858,000, $250,000 and $0 for
1995, 1996 and 1997, respectively.
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
and $575,000 and $431,000 for 1995, 1996 and 1997, respectively, and is included
in selling, general and administrative expenses.
(6) 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 and $633,000 during 1995,
1996, and 1997, 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 and January 31, 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 and 1997.
(7) 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 EB Group has
consolidated the results of operations of EB Canada since the beginning of 1997.
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.
F-14
<PAGE>
THE ELECTRONICS BOUTIQUE GROUP
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
(8) 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 20
years. The $6,400,000 of goodwill from this transaction resulted in amortization
expense of $133,000 in 1995 and $321,000 in each of 1996 and 1997.
At February 1, 1997 and January 31, 1998, the fair market value of the
investment was $21,691,000 and $52,615,000, 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, as defined. The management fee receivable, which is included in due
from affiliates, was $397,000 and $665,000 at February 1, 1997 and January 31,
1998. Additionally, the agreement provides that the EB Group is to be reimbursed
by Electronics Boutique plc for all reasonable traveling and subsistence
expenses of employees of the EB Group incurred during the performance of the
agreement. At February 1, 1997 and January 31, 1998, these amounts were $435,000
and $52,000, and are included in due from affiliates.
(9) 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 and $302,000
in 1995, 1996 and 1997, respectively.
(10) SUBSEQUENT EVENTS
In March 1998, the Company's Board of Directors authorized the filing of a
Registration Statement on Form S-1 in connection with a planned initial public
offering of the Company's 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. As of March 20, 1998, EB had $17,700,000 of
outstanding borrowings under the revolving credit facility and had not borrowed
amounts under the term loan. The Company intends to use $17,700,000 of its net
proceeds of the Offering to repay EB's obligations to Fleet.
F-15
<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 SHAREHOLDERS 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........................... 13
Dividend Policy........................... 13
Capitalization............................ 14
Dilution.................................. 15
Selected Consolidated and Combined
Financial and Operating Data............ 16
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. 18
Business.................................. 23
Management................................ 36
Certain Transactions...................... 41
Principal and Selling Shareholders........ 43
Description of Capital Stock.............. 44
Shares Eligible for Future Sale........... 47
Underwriting.............................. 48
Legal Matters............................. 49
Experts................................... 49
Additional Information.................... 49
Index to Consolidated and Combined
Financial Statements.................... F-1
</TABLE>
7,500,000 Shares
[LOGO]
ELECTRONICS BOUTIQUE
HOLDINGS CORP.
Common Stock
--------------
PROSPECTUS
--------------
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......................................................... *
EDGAR and Printing Expenses........................................................ *
Legal Fees and Expenses............................................................ *
Accounting Fees and Expenses....................................................... *
Blue Sky Fees and Expenses......................................................... *
Transfer Agent's Fees and Expenses................................................. *
Directors and Officers Insurance Premiums.......................................... *
Miscellaneous Expenses............................................................. *
---------
Total.............................................................................. $ *
---------
---------
</TABLE>
- ------------------------
* To be completed by amendment.
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 shares of Common Stock were issued to
the Kim Shareholders in exchange for all of the outstanding shares of capital
stock of EB and EB Services. 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
* 10.1 Tax Indemnification Agreement, dated as of , 1998, by and among the Company,
EB and certain stockholders of the Company.
* 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
** 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 (included on Signature Pages)
27.1 Financial Data Schedule
</TABLE>
- ------------------------
* To be filed by Amendment.
** Not applicable
(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
II-2
<PAGE>
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.
II-3
<PAGE>
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 March 13, 1998.
ELECTRONICS BOUTIQUE HOLDINGS CORP.
BY: /S/ JOSEPH J. FIRESTONE
-----------------------------------------
Joseph J. Firestone,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Joseph J. Firestone and John R. Panichello, and
either of them, his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place, and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Registration Statement, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or any of them, or their or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below on March 23, 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>
II-4
<PAGE>
Exhibit 3.1
CERTIFICATE OF INCORPORATION
OF
ELECTRONICS BOUTIQUE HOLDINGS CORP.
FIRST: The name of the Corporation is Electronics Boutique Holdings Corp.
SECOND: The address of the registered office of the Corporation in the
State of Delaware is 103 Springer Building, 3411 Silverside Road, Wilmington,
Delaware 19810, located in the County of New Castle, Delaware. The name of its
registered agent at that address is Organization Services, Inc.
THIRD: The purpose of the Corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of Delaware as set forth in Title 8 of the Delaware Code (the "GCL").
FOURTH: A. The total number of shares of capital stock which the
Corporation shall have authority to issue is 125,000,000 shares (the "Capital
Stock"), consisting of 100,000,000 shares of common stock, par value $.01 per
share (the "Common Stock"), and 25,000,000 shares of preferred stock, par value
$.01 per share (the "Preferred Stock").
B. Shares of Preferred Stock may be issued from time to time in one or
more series, as provided for herein or as provided for by the Board of Directors
as permitted hereby. All shares of Preferred Stock shall be of equal rank and
shall be identical, except as fixed by the Board of Directors for any series
provided for by the Board of Directors as permitted hereby. All shares of any
one series shall be identical in all respects with all the other shares of such
series, except the shares of any one series issued at different times may differ
as to the dates from which dividends thereon may be cumulative.
The Board of Directors is hereby authorized, by resolution or resolutions,
to establish, out of the unissued (including previously issued and subsequently
retired) shares of Preferred Stock not then allocated to any series of Preferred
Stock, additional series of Preferred Stock. Before any shares of any such
additional series are issued, the Board of Directors shall fix and determine,
and is hereby expressly empowered to fix and determine, by resolution or
resolutions, the number of shares constituting such series and the
distinguishing characteristics and the relative rights, preferences, privileges
and immunities, if any, and any qualifications, limitations or restrictions
thereof, so far as not inconsistent with the provisions of this Article FOURTH.
Without limiting the generality of the foregoing, the Board of Directors may fix
and determine:
1. The designation of such series and the number of shares which
shall constitute such series of such shares;
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2. The rate of dividend, if any, payable on shares of such series;
3. Whether the shares of such series shall be cumulative,
non-cumulative or partially cumulative as to dividends, and the dates from
which any cumulative dividends are to accumulate;
4. Whether the shares of such series may be redeemed, and, if so,
the price or prices at which and the terms and conditions on which shares
of such series may be redeemed;
5. The amount payable upon shares of such series in the event of the
voluntary or involuntary dissolution, liquidation or winding up of the
affairs of the Corporation;
6. The sinking fund provisions, if any, for the redemption of shares
of such series;
7. The voting rights, if any, of the shares of such series;
8. The terms and conditions, if any, on which shares of such series
may be converted into shares of capital stock of the Corporation of any
other class or series;
9. Whether the shares of such series are to be preferred over shares
of capital stock of the Corporation of any other class or series as to
dividends, or upon the voluntary or involuntary dissolution, liquidation,
or winding up of the affairs of the Corporation, or otherwise; and
10. Any other characteristics, preferences, limitations, rights,
privileges, immunities or terms not inconsistent with the provisions of
this Article FOURTH.
C. Except as otherwise provided in this Certificate of Incorporation,
each holder of Common Stock shall be entitled to one vote for each share of
Common Stock held by him on all matters submitted to stockholders for a vote and
each holder of Preferred Stock of any series that is Voting Stock (as
hereinafter defined) shall be entitled to such number of votes for each share
held by him as may be specified in the Certificate of Designation in respect
thereof.
FIFTH: The name and mailing address of the sole incorporator is as follows:
Brian I. Sopinsky, Esquire
Klehr, Harrison, Harvey, Branzburg & Ellers LLP
1401 Walnut Street
Philadelphia, PA 19102-3163
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SIXTH: The Corporation is to have perpetual existence.
SEVENTH: A. The Board of Directors shall have the power to make, adopt,
alter, amend, change or repeal the Bylaws of the Corporation (the "Bylaws") by
resolution adopted by the affirmative vote of a majority of the entire Board of
Directors, subject to any law or Bylaw provision requiring the affirmative vote
of a larger percentage of the members of the Board of Directors.
B. Stockholders may not make, adopt, alter, amend, change or repeal
the Bylaws of the Corporation or Articles Seventh, Eighth, Ninth, Tenth or
Eleventh of this Certificate of Incorporation except upon the affirmative vote
of at least 66.67% of the votes entitled to be cast by the holders of all
outstanding shares then entitled to vote generally in the election of directors,
voting together as a single class.
EIGHTH: The business and affairs of the Corporation shall be managed by or
under the direction of the Board of Directors, which shall consist of not less
than three nor more than twenty directors, the exact number of directors to be
determined from time to time by resolution adopted by affirmative vote of a
majority of the entire Board of Directors, subject to any bylaw requiring the
affirmative vote of a larger percentage of the members of the Board of
Directors. The Board of Directors shall be divided as nearly equal as possible
in number into three classes, designated Class I, Class II and Class III. Class
I directors shall be initially elected for a term expiring at the first annual
meeting of stockholders of the Corporation following the date hereof, Class II
directors shall be initially elected for a term expiring at the second annual
meeting of stockholders of the Corporation following the date hereof, and Class
III directors shall be initially elected for a term expiring at the third annual
meeting of stockholders of the Corporation following the date hereof. At each
annual meeting of stockholders, beginning in 1999, successors to the class of
directors whose term expires at that annual meeting shall be elected for a three
year term. If the number of directors is changed, any increase or decrease
shall be apportioned among the classes so as to maintain the number of directors
in each class as nearly equal as possible, and any additional director of any
class elected to fill a vacancy resulting from an increase in such class shall
hold office for a term that shall coincide with the remaining term of that
class, but in no case will a decrease in the number of directors shorten the
term of any incumbent director. A director shall hold office until the annual
meeting for the year in which his term expires and until his successor shall be
elected and shall qualify, subject, however, to such director's prior death,
resignation, retirement, disqualification or removal from office. Subject to
Article III, Section 2 of the Bylaws, any vacancy on the Board of Directors that
results from an increase in the number of directors and any other vacancy may
only be filled by a majority of the directors then in office, even if less than
a quorum, or by a sole remaining director. Any director elected to fill a
vacancy not resulting from an increase in the number of directors shall have the
same remaining term as that of his predecessor.
NINTH: Special meetings of the stockholders of the Corporation, for any
purpose or purposes, may only be called at any time by a majority of the entire
Board of Directors or by either the Chairman, the Chief Executive Officer or the
President of the Corporation.
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TENTH: No stockholder action may be taken except at an annual or special
meeting of stockholders of the Corporation and stockholders of the Corporation
may not take any action by written consent in lieu of a meeting.
ELEVENTH: Directors and officers, in exercising their respective powers
with a view to the interests of the Corporation, may consider:
(a) The interests of the Corporation's employees, suppliers,
creditors and customers;
(b) The economy of the state and nation;
(c) The interests of the community and of society; and
(d) The long-term as well as short-term interests of the Corporation
and its stockholders, including the possibility that these interests may be best
served by the continued independence of the Corporation.
This Article ELEVENTH does not create or authorize any causes of action
against the corporation or its directors or officers.
TWELFTH: A. Subject to Section C of this Article TWELFTH, the Corporation
shall indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of the Corporation) by reason of the fact that he is or was a
director or officer of the Corporation, or is or was serving at the request of
the Corporation as a director or officer of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the Corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the Corporation, or, with respect to any criminal action or
proceeding, had reasonable cause to believe his conduct was unlawful.
B. Subject to Section C of this Article TWELFTH, the Corporation
shall indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action or suit by or in the right
of the Corporation to procure a judgment in its favor by reason of the fact that
he is or was a director or officer of the Corporation, or is or was serving at
the request of the Corporation as a director or officer of another corporation,
partnership,
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joint venture, trust or other enterprise against expenses (including
attorneys' fees) actually and reasonably incurred by him in connection with
the defense or settlement of such action or suit if he acted in good faith
and in a manner he reasonably believed to be in or not opposed to the best
interests of the Corporation; except that no indemnification shall be made in
respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable to the Corporation unless and only to the extent that
the Court of Chancery or the court in which such action or suit was brought
shall determine upon application that, despite the adjudication of liability
but in view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which the Court of
Chancery or such other court shall deem proper.
C. Any indemnification under this Article TWELFTH (unless ordered by
a court) shall be made by the Corporation only as authorized in the specific
case upon a determination that indemnification of the director or officer is
proper in the circumstances because he has met the applicable standard of
conduct set forth in Section A or Section B of this Article TWELFTH, as the case
may be. Such determination shall be made (i) by a majority vote of directors
who were not parties to such action, suit or proceeding, even though less than a
quorum, or (ii) by a committee of such disinterested directors designated by a
majority of such disinterested directors, even though less than a quorum, or
(iii) if there are no such disinterested directors or if such disinterested
directors so direct, by independent legal counsel in a written opinion, or (iv)
by the stockholders. To the extent, however, that a director or officer of the
Corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding described in Section A or Section B of this Article
TWELFTH, or in defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection therewith, without the necessity of authorization
in the specific case.
D. For purposes of any determination under Section C of this Article
TWELFTH, a person shall be deemed to have acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interest of the
Corporation, and, with respect to any criminal action or proceeding, to have had
no reasonable cause to believe his conduct was unlawful, if his action is based
on the records or books of account of the Corporation or another enterprise, or
on information supplied to him by the officers of the Corporation or another
enterprise in the course of their duties, or on the advice of legal counsel for
the Corporation or another enterprise or on information or records given or
reports made to the Corporation or another enterprise by an independent
certified public accountant or by an appraiser or other expert selected with
reasonable care by the Corporation or another enterprise. The term "another
enterprise" as used in this Section D of Article TWELFTH shall mean any other
corporation or any partnership, joint venture, trust or other enterprise of
which such person is or was serving at the request of the Corporation as a
director, officer, employee or agent. The provisions of this Section D shall
not be deemed to be exclusive or to limit in any way the circumstances in which
a person may be deemed to have met the applicable standard of conduct set forth
in Sections A or B of this Article TWELFTH as the case may be.
E. Notwithstanding any contrary determination in the specific case
under Section C of this Article TWELFTH, and notwithstanding the absence of any
determination thereunder, any
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director or officer may apply to any court of competent jurisdiction in the
State of Delaware for indemnification to the extent otherwise permissible
under Sections A and B of this Article TWELFTH. The basis of such
indemnification by a court shall be a determination by such court that
indemnification of the director or officer is proper in the circumstances
because he has met the applicable standards of conduct set forth in Sections
A or B of this Article TWELFTH, as the case may be. Notice of any
application for indemnification pursuant to this Section E of Article TWELFTH
shall be given to the Corporation promptly upon the filing of such
application.
F. Expenses incurred by a director or officer of the Corporation in
defending or investigating a threatened or pending action, suit or proceeding
may be paid by the Corporation in advance of the final disposition of such
action, suit or proceeding upon receipt of an undertaking by or on behalf of the
director or officer to repay such amount if it shall ultimately be determined
that he is not entitled to be indemnified by the Corporation as authorized in
this Article TWELFTH.
G. The indemnification and advancement of expenses provided by this
Article TWELFTH shall not be deemed exclusive of any other rights to which any
person seeking indemnification or advancement of expenses may be entitled under
any Bylaw, agreement, contract, vote of stockholders or disinterested directors
or pursuant to the direction (howsoever embodied) of any court of competent
Jurisdiction or otherwise, both as to action in his official capacity and as to
action in another capacity while holding such office, it being the policy of the
Corporation that indemnification of, and advancement of expenses to, the persons
specified in Sections A and B of this Article TWELFTH shall be made to the
fullest extent permitted by law. The provisions of this Article TWELFTH shall
not be deemed to preclude the indemnification of, and advancement of expenses
to, any person who is not specified in Sections A or B of this Article TWELFTH
but whom the Corporation has the power or obligation to indemnify under the
provisions of the General Corporation Law of the State of Delaware, or
otherwise. The indemnification provided by this Article TWELFTH shall continue
as to a person who has ceased to be a director or officer and shall inure to the
benefit of the heirs, executors and administrators of such person.
H. The Corporation may purchase and maintain insurance on behalf of
any person who is or was a director or officer of the Corporation, or, while a
director or officer of the Corporation, is or was serving at the request of the
Corporation as a director or officer of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him
and incurred by him in any such capacity, or arising out of his status as such,
whether or not the Corporation would have the power or the obligation to
indemnify him against such liability under the provisions of this Article
TWELFTH.
I. For purposes of this Article TWELFTH, reference to "the
Corporation" shall include, in addition to the resulting corporation, any
constituent corporation (including any constituent of a constituent) absorbed in
a consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors or officers, so that any
person who is or was a director or officer of such constituent corporation, or
is or was serving at the request of such constituent corporation as a director
or officer of another corporation, partnership,
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limited liability company, joint venture, trust or other enterprise, shall
stand in the same position under the provisions of this Article TWELFTH with
respect to the resulting or surviving corporation as he would have with
respect to such constituent corporation if its separate existence had
continued.
THIRTEENTH: Whenever a compromise or arrangement is proposed between this
Corporation and its creditors or any class of them and/or between this
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this Corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this Corporation under
the provisions of Section 291 of the GCL or on the application of trustees in
dissolution or of any receiver or receivers appointed for this Corporation under
the provisions of Section 279 of the GCL, order a meeting of the creditors or
class of creditors, and/or of the stockholders or class of stockholders of this
Corporation, as the case may be, to be summoned in such manner as the said court
directs. If a majority in number representing three-fourths in value of the
creditors or class of creditors, and/or of the stockholders or class of
stockholders of this Corporation, as the case may be, agree to any compromise or
arrangement and to any reorganization of this Corporation as a consequence of
such compromise or arrangement, the said compromise or arrangement and the said
reorganization shall, if sanctioned by the court to which the said application
has been made, be binding on all the creditors or class of creditors, and/or on
all the stockholders or class of stockholders, of this Corporation, as the case
may be, and also on this Corporation.
FOURTEENTH: The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred upon
stockholders herein are granted subject to this reservation.
FIFTEENTH: No director of this Corporation shall be personally liable to
the Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of the law, (iii) under Section 174 of the GCL, or (iv) for any
transaction from which the director derived an improper personal benefit. If
the GCL is hereafter amended to authorize corporate action further limiting or
eliminating the personal liability of directors, then the liability of each
director of the Corporation shall be limited or eliminated to the fullest extent
permitted by the GCL as so amended from time to time.
I, THE UNDERSIGNED, being the sole incorporator hereinbefore named, for the
purpose of forming a corporation pursuant to the General Corporation Law of the
State of Delaware, do make this certificate, hereby declaring and certifying
that this is my act and deed and the facts herein stated are true, and
accordingly have hereunto set my hand this 13th day of March, 1998.
/s/ Brian I. Sopinsky
------------------------------------
Brian I. Sopinsky, Sole Incorporator
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Exhibit 3.2
BYLAWS
OF
ELECTRONICS BOUTIQUE HOLDINGS CORP.
ARTICLE I.
OFFICES
Section 1. Registered Office. The registered office of Electronics
Boutique Holdings Corp. (the "Corporation") shall be at 103 Springer
Building, 3411 Silverside Road, Wilmington, Delaware 19810.
Section 2. Other Offices. The Corporation may also have offices at
such other places both within and without the State of Delaware as the Board
of Directors of the Corporation (the "Board of Directors") may from time to
time determine.
ARTICLE II.
MEETINGS OF STOCKHOLDERS
Section 1. Place of Meetings. Meetings of the stockholders for the
election of directors or for any other purpose shall be held at such time and
place, either within or without the State of Delaware as shall be designated
from time to time by the Board of Directors and stated in the notice of the
meeting or in a duly executed waiver of notice thereof.
Section 2. Annual Meetings. The annual meeting of stockholders
shall be held on such date and at such time as may be fixed by the Board of
Directors and stated in the notice of the meeting, for the purpose of
electing directors and for the transaction of only such other business as is
properly brought before the meeting in accordance with these Bylaws (these
"Bylaws").
Written notice of an annual meeting stating the place, date and hour of
the meeting, shall be given to each stockholder entitled to vote at such
meeting not less than ten (10) nor more than sixty (60) days before the date
of the meeting.
To be properly brought before the annual meeting, business must be
either (i) specified in the notice of annual meeting (or any supplement or
amendment thereto) given by or at the direction of the Board of Directors,
(ii) otherwise brought before the annual meeting by or at the direction of
the Board of Directors, or (iii) otherwise properly brought before the annual
meeting by a stockholder. In addition to any other applicable requirements,
for business to be properly brought before an annual meeting by a
stockholder, the stockholder must have given timely notice thereof in writing
to the Secretary of the Corporation. To be timely, a stockholder's notice
must be delivered
<PAGE>
to or mailed and received at the principal executive offices of the
Corporation not less than sixty (60) days nor more than ninety (90) days
prior to the meeting; provided, however, that in the event that less than
seventy (70) days notice or prior public disclosure of the date of the annual
meeting is given or made to stockholders, notice by a stockholder, to be
timely, must be received no later than the close of business on the tenth
(10th) day following the day on which such notice of the date of the annual
meeting was mailed or such public disclosure was made, whichever first
occurs. A stockholder's notice to the Secretary shall set forth (a) as to
each matter the stockholder proposes to bring before the annual meeting (i) a
brief description of the business desired to be brought before the annual
meeting and the reasons for conducting such business at the annual meeting,
and (ii) any material interest of the stockholder in such business, and (b)
as to the stockholder giving the notice (i) the name and record address of
the stockholder and (ii) the class, series and number of shares of capital
stock of the Corporation which are beneficially owned by the stockholder.
Notwithstanding anything in these Bylaws to the contrary, no business shall
be conducted at the annual meeting except in accordance with the procedures
set forth in this Article II, Section 2. The officer of the Corporation
presiding at an annual meeting shall, if the facts warrant, determine and
declare to the annual meeting that business was not properly brought before
the annual meeting in accordance with the provisions of this Article II,
Section 2, and if such officer should so determine, such officer shall so
declare to the annual meeting and any such business not properly brought
before the meeting shall not be transacted.
Section 3. Special Meetings. Unless otherwise prescribed by law or
by the Certificate of Incorporation of the Corporation (the "Certificate of
Incorporation"), special meetings of stockholders, for any purpose or
purposes, may only be called by a majority of the entire Board of Directors,
the Chairman of the Board, the Chief Executive Officer or the President.
Written notice of a special meeting stating the place, date and hour of
the meeting, shall be given to each stockholder entitled to vote at such
meeting not less than ten (10) nor more than sixty (60) days before the date
of the meeting. Business transacted at any special meeting shall be limited
to the purposes stated in the notice.
Section 4. Quorum. Except as otherwise provided by law or by the
Certificate of Incorporation, the holders of a majority of the capital stock
issued and outstanding and entitled to vote thereat, present in person or
represented by proxy, shall constitute a quorum at all meetings of the
stockholders for the transaction of business. If, however, such quorum shall
not be present or represented at any meeting of the stockholders, the holders
of a majority of the votes entitled to be cast by the stockholders entitled
to vote thereat, present in person or represented by proxy may adjourn the
meeting from time to time, without notice other than announcement at the
meeting, until a quorum shall be present or represented by proxy. At such
adjourned meeting at which a quorum shall be present or represented, any
business may be transacted which might have been transacted at the meeting as
originally noticed. If the adjournment is for more than thirty (30) days, or
if after the adjournment a new record date is fixed for the adjourned
meeting, a notice of the adjourned meeting shall be given to each stockholder
entitled to vote at the meeting.
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Section 5. Voting. Unless otherwise required by law, the
Certificate of Incorporation, the rules or regulations of The Nasdaq National
Market or any stock exchange applicable to the Corporation or these Bylaws,
any question (other than the election of directors) brought before any
meeting of stockholders shall be decided by the vote of the holders of a
majority of the stock represented and entitled to vote thereat. At all
meetings of stockholders for the election of directors, a plurality of the
votes cast shall be sufficient to elect. Each stockholder represented at a
meeting of stockholders shall be entitled to cast one vote for each share of
the capital stock entitled to vote thereat held by such stockholder, unless
otherwise provided by the Certificate of Incorporation. Such votes may be
cast in person or by proxy but no proxy shall be voted after three years from
its date, unless such proxy provides for a longer period. The Board of
Directors, in its discretion, or the officer of the Corporation presiding at
a meeting of stockholders, in his discretion, may require that any votes cast
at such meeting shall be cast by written ballot.
Section 6. List of Stockholders Entitled to Vote. The officer of
the Corporation who has charge of the stock ledger of the Corporation shall
prepare and make, at least ten (10) days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each
stockholder. Such list shall be open to the examination of any stockholder,
for any purpose germane to the meeting, during ordinary business hours, for a
period of at least ten (10) days prior to the meeting, either at a place
within the city where the meeting is to be held, which place shall be
specified in the notice of the meeting, or, if not so specified, at the place
where the meeting is to be held. The list shall also be produced and kept at
the time and place of the meeting during the whole time thereof, and may be
inspected by any stockholder of the Corporation who is present.
Section 7. Stock Ledger. The stock ledger of the Corporation shall
be the only evidence as to who are the stockholders entitled to examine the
stock ledger, the list required by Section 6 of this Article II or the books
of the Corporation, or to vote in person or by proxy at any meeting of
stockholders.
Section 8. Adjournment. Any meeting of the stockholders, including
one at which directors are to be elected, may be adjourned for such periods
as the presiding officer of the meeting or the stockholders present in person
or by proxy and entitled to vote shall direct.
ARTICLE III.
DIRECTORS
Section 1. Powers; Number; Qualifications. The business and affairs
of the Corporation shall be managed by or under the direction of the Board of
Directors, except as may be otherwise provided by law or in the Certificate
of Incorporation. The number of directors which shall constitute the Board
of Directors shall be not less than three (3) nor more than twenty (20),
spread as evenly as possible among the Corporation's three classes of
directors. The exact number of
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directors shall be fixed from time to time, within the limits specified in
this Article III Section 1 or in the Certificate of Incorporation, or by the
Board of Directors. Directors need not be stockholders of the Corporation.
Section 2. Election; Term of Office; Resignation; Removal;
Vacancies. Each director shall hold office until the next annual meeting of
stockholders at which the term of the class to which he has been elected
expires and until such director's earlier resignation, removal from office,
death or incapacity. Any director may resign at any time upon written notice
to the Board of Directors or to the Chief Executive Officer or the Secretary
of the Corporation. Such resignation shall take effect at the time specified
therein, and unless otherwise specified therein no acceptance of such
resignation shall be necessary to make it effective. Any director or the
entire Board of Directors may be removed, but only for cause, by the holders
of a majority of the shares then entitled to vote at an election of
directors. Unless otherwise provided in the Certificate of Incorporation,
vacancies and newly created directorships resulting from any increase in the
authorized number of directors or from any other cause may be filled by a
majority of the directors then in office, although less than a quorum, or by
a sole remaining director and each director so chosen shall hold office until
the next annual meeting at which the term of the class to which such director
has been elected expires and until such director's successor shall be duly
elected and shall qualify, or until such director's earlier resignation,
removal from office, death or incapacity.
Section 3. Nominations. Nominations of persons for election to the
Board of Directors of the Corporation at a meeting of stockholders of the
Corporation may be made at such meeting by or at the direction of the Board
of Directors, by any committee or persons appointed by the Board of Directors
or by any stockholder of the Corporation entitled to vote for the election of
directors at the meeting who complies with the notice procedures set forth in
this Article III, Section 3. Such nominations by any stockholder shall be
made pursuant to timely notice in writing to the Secretary of the
Corporation. To be timely, a stockholder's notice shall be delivered to or
mailed and received at the principal executive offices of the Corporation not
less than sixty (60) days nor more than ninety (90) days prior to the
meeting; provided however, that in the event that less than seventy (70) days
notice or prior public disclosure of the date of the meeting is given or made
to stockholders, notice by the stockholder, to be timely, must be received no
later than the close of business on the tenth (10th) day following the day on
which such notice of the date of the meeting was mailed or such public
disclosure was made, whichever first occurs. Such stockholder's notice to
the Secretary shall set forth (i) as to each person whom the stockholder
proposes to nominate for election or reelection as a director, (a) the name,
age, business address and residence address of the person, (b) the principal
occupation or employment of the person, (c) the class and number of shares of
capital stock of the Corporation which are beneficially owned by the person,
and (d) any other information relating to the person that is required to be
disclosed in solicitations for proxies for election of directors pursuant to
the Rules and Regulations of the Securities and Exchange Commission under
Section 14 of the Securities Exchange Act of 1934, as amended, and (ii) as to
the stockholder giving the notice (a) the name and record address of the
stockholder and (b) the class and number of shares of capital stock of the
Corporation which are beneficially owned by the stockholder. The Corporation
may require any proposed nominee to furnish such other information as may
reasonably be required by the Corporation to determine the eligibility of
such proposed nominee to serve as a
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director of the Corporation. No person shall be eligible for election as a
director of the Corporation unless nominated in accordance with the
procedures set forth herein. The officer of the Corporation presiding at an
annual meeting shall, if the facts warrant, determine and declare to the
meeting that a nomination was not made in accordance with the foregoing
procedure, and if he should so determine, he shall so declare to the meeting
and the defective nomination shall be disregarded.
Section 4. Meetings. The Board of Directors of the Corporation may
hold meetings, both regular and special, either within or without the State
of Delaware. Regular meetings of the Board of Directors may be held without
notice at such time and at such place as may from time to time be determined
by the Board of Directors. Special meetings of the Board of Directors may be
called by the Chairman of the Board or Chief Executive Officer or the
President or Chief Operating Officer or a majority of the entire Board of
Directors. Notice thereof stating the place, date and hour of the meeting
shall be given to each director either by mail not less than forty-eight (48)
hours before the date of the meeting, by telephone or telegram on twenty-four
(24) hours notice, or on such shorter notice as the person or persons calling
such meeting may deem necessary or appropriate in the circumstances.
Section 5. Quorum. Except as may be otherwise specifically provided
by law, the Certificate of Incorporation or these Bylaws, at all meetings of
the Board of Directors or any committee thereof, a majority of the entire
Board of Directors or such committee, as the case may be, shall constitute a
quorum for the transaction of business and the act of a majority of the
directors present at any meeting at which there is a quorum shall be the act
of the Board of Directors or such committee, as the case may be. If a quorum
shall not be present at any meeting of the Board of Directors or of any
committee thereof, a majority of the directors present thereat may adjourn
the meeting from time to time until a quorum shall be present.
Section 6. Actions of Board of Directors. Unless otherwise provided
by the Certificate of Incorporation or these Bylaws, any action required or
permitted to be taken at any meeting of the Board of Directors or of any
committee thereof may be taken without a meeting, if all the members of the
Board of Directors or committee, as the case may be, consent thereto in
writing, and the writing or writings are filed with the minutes of
proceedings of the Board of Directors or committee.
Section 7. Meetings by Means of Conference Telephone. Unless
otherwise provided by the Certificate of Incorporation or these Bylaws,
members of the Board of Directors of the Corporation, or any committee
designated by the Board of Directors, may participate in a meeting of the
Board of Directors or such committee by means of a conference telephone or
similar communications equipment by means of which all persons participating
in the meeting can hear each other, and participation in a meeting pursuant
to this Article III, Section 7 shall constitute presence in person at such
meeting.
Section 8. Committees. The Board of Directors may designate one or
more committees, each committee to consist of one or more of the directors of
the Corporation. The Board of Directors may designate one or more directors
as alternate members of any committee, who may replace any disqualified
member at any meeting of any such committee. In the disqualification of a
member of
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a committee, and in the absence of a designation by the Board of Directors of
an alternate member to replace the disqualified member, the member or members
thereof present at any meeting and not disqualified from voting, whether or
not he or they constitute a quorum, may unanimously appoint another member of
the Board of Directors to act at the meeting in the place of any disqualified
member. Any committee, to the extent allowed by law and provided in the
resolution establishing such committee, shall have and may exercise all the
powers and authority of the Board of Directors in the management of the
business and affairs of the Corporation. Each committee shall keep regular
minutes and report to the Board of Directors when required.
Section 9. Compensation. The directors may be paid their expenses,
if any, of attendance at each meeting of the Board of Directors and may be
paid a fixed amount (in cash or other form of consideration) for attendance
at each meeting of the Board of Directors or a stated salary as director. No
such payment shall preclude any director from serving the Corporation in any
other capacity and receiving compensation therefor. Members of special or
standing committees may be allowed like compensation for attending committee
meetings.
Section 10. Interested Directors. No contract or transaction between
the Corporation and one or more of its directors or officers, or between the
Corporation and any other corporation, partnership, association, or other
organization in which one or more of its directors or officers are directors
or officers, or have a financial interest, shall be void or voidable solely
for this reason, or solely because the director or officer is present at or
participates in the meeting of the Board of Directors or committee thereof
which authorizes the contract or transaction, or solely because his or their
votes are counted for such purpose, if (i) the material facts as to his or
their relationship or interest and as to the contract or transaction are
disclosed or are known to the Board of Directors or the committee, and the
Board of Directors or committee in good faith authorizes the contract or
transaction by the affirmative votes of a majority of the disinterested
directors, even though the disinterested directors be less than a quorum; or
(ii) the material facts as to his or their relationship or interest and as to
the contract or transaction are disclosed or are known to the stockholders
entitled to vote thereon, and the contract or transaction is specifically
approved in good faith by vote of the stockholders; or (iii) the contract or
transaction is fair as to the Corporation as of the time it is authorized,
approved or ratified, by the Board of Directors, a committee thereof or the
stockholders. Common or interested directors may be counted in determining
the presence of a quorum at a meeting of the Board of Directors or of a
committee which authorizes the contract or transaction.
ARTICLE IV.
OFFICERS
Section 1. General. The officers of the Corporation shall be
elected by the Board of Directors and shall consist of: a Chairman of the
Board; a Chief Executive Officer; a President; a Secretary; and a Treasurer.
The Board of Directors, in its discretion, may also elect one or more Vice
Presidents (including Executive Vice Presidents and Senior Vice Presidents),
Assistant Secretaries, Assistant Treasurers, a Controller and such other
officers as in the judgment of the Board
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of Directors may be necessary or desirable. Any number of offices may be
held by the same person and more than one person may hold the same office,
unless otherwise prohibited by law, the Certificate of Incorporation or these
Bylaws. The officers of the Corporation need not be stockholders of the
Corporation nor, except in the case of the Chairman of the Board of
Directors, need such officers be directors of the Corporation.
Section 2. Election. The Board of Directors at its first meeting
held after each annual meeting of stockholders shall elect the officers of
the Corporation who shall hold their offices for such terms and shall
exercise such powers and perform such duties as shall be determined from time
to time by the Board of Directors; and all officers of the Corporation shall
hold office until their successors are chosen and qualified, or until their
earlier resignation or removal. Except as otherwise provided in this Article
IV, any officer elected by the Board of Directors may be removed at any time
by the affirmative vote of a majority of the Board of Directors. Any vacancy
occurring in any office of the Corporation shall be filled by the Board of
Directors. The salaries of all officers who are directors of the Corporation
shall be fixed by the Board of Directors.
Section 3. Voting Securities Owned by the Corporation. Powers of
attorney, proxies, waivers of notice of meeting, consents and other
instruments relating to securities owned by the Corporation may be executed
in the name of and on behalf of the Corporation by the Chairman of the Board,
Chief Executive Officer, President or any Vice President, and any such
officer may, in the name and on behalf of the Corporation, take all such
action as any such officer may deem advisable to vote in person or by proxy
at any meeting of security holders of any corporation in which the
Corporation may own securities and at any such meeting shall possess and may
exercise any and all rights and powers incident to the ownership of such
securities and which, as the owner thereof, the Corporation might have
exercised and possessed if present. The Board of Directors may, by
resolution, from time to time confer like powers upon any other person or
persons.
Section 4. Chairman of the Board. The Chairman of the Board shall
be a member of the Board of Directors, and shall exercise and perform such
duties and have such powers as may be prescribed by the Board of Directors or
these Bylaws, all in accordance with basic policies as established by and
subject to the oversight of the Board of Directors.
Section 5. Chief Executive Officer. The Chief Executive Officer of
the Corporation shall supervise, coordinate and manage the Corporation's
business and activities and supervise, coordinate and manage its operating
expenses and capital allocation, shall have general authority to exercise all
the powers necessary for the Chief Executive Officer of the Corporation and
shall perform such other duties and have such other powers as may be
prescribed by the Board of Directors or these Bylaws, all in accordance with
basic policies as established by and subject to the oversight of the Board of
Directors. In the absence or disability of the Chairman of the Board, the
duties of the Chairman of the Board shall be performed and the Chairman of
the Board's authority may be exercised by the Chief Executive Officer and, in
the event the Chief Executive Officer is absent or disabled, such duties
shall be performed and such authority may be exercised by a director
designated for such purpose by the Board of Directors.
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Section 6. President. The President shall have general authority to
exercise all the powers necessary for the President of the Corporation and
shall perform such other duties and have such other powers as may be
prescribed by the Board of Directors or these Bylaws, all in accordance with
basic policies as established by and subject to the oversight of the Board of
Directors, the Chairman of the Board and the Chief Executive Officer. In the
absence or disability of the Chairman of the Board and Chief Executive
Officer, the duties of the Chairman of the Board shall be performed and the
Chairman of the Board's authority may be exercised by the President and, in
the event the President is absent or disabled, such duties shall be performed
and such authority may be exercised by a director designated for such purpose
by the Board of Directors.
Section 7. Vice Presidents. At the request of the President or in
the absence of each of the Chairman of the Board, Chief Executive Officer and
President, or in the event of their inability or refusal to act, the Vice
President or the Vice Presidents if there is more than one (in the order
designated by the Board of Directors) shall perform the duties of the
Chairman of the Board, Chief Executive Officer and/or President, and when so
acting, shall have all the powers of and be subject to all the restrictions
upon such offices (other than as Chairman of the Board). Each Vice President
shall perform such other duties and have such other powers as the Board of
Directors from time to time may prescribe. If there be no Vice President,
the Board of Directors shall designate the officer of the Corporation who, in
the absence of each of the Chairman of the Board, Chief Executive Officer and
President or in the event of the inability or refusal of such officers to
act, shall perform the duties of such offices (other than as Chairman of the
Board), and when so acting, shall have all the powers of and be subject to
all the restrictions upon such offices (other than as Chairman of the Board).
Section 8. Secretary. The Secretary shall attend all meetings of
the Board of Directors and all meetings of stockholders and record all the
proceedings thereat in a book or books to be kept for that purpose; the
Secretary shall also perform like duties for the standing committees when
required. The Secretary shall give, or cause to be given, notice of all
meetings of the stockholders and special meetings of the Board of Directors,
and shall perform such other duties as may be prescribed by the Board of
Directors, the Chairman of the Board, the Chief Executive Officer or the
President, under whose supervision the Secretary shall be. If the Secretary
shall be unable or shall refuse to cause to be given notice of all meetings
of the stockholders and special meetings of the Board of Directors, and if
there be no Assistant Secretary, then the Board of Directors, the Chairman of
the Board, the Chief Executive Officer or the President may choose another
officer to cause such notice to be given. The Secretary shall have custody
of the seal of the Corporation and the Secretary or any Assistant Secretary,
if there be one, shall have authority to affix the same to any instrument
requiring it and when so affixed, it may be attested by the signature of the
Secretary or by the signature of any such Assistant Secretary. The Board of
Directors may give general authority to any other officer to affix the seal
of the Corporation and to attest the affixing by his signature. The
Secretary shall see that all books, reports, statements, certificates and
other documents and records required by law to be kept or filed are properly
kept or filed, as the case may be.
Section 9. Treasurer. The Treasurer shall have the custody of the
corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements in books belonging
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to the Corporation and shall deposit all moneys and other valuable effects in
the name and to the credit of the Corporation in such depositories as may be
designated by the Board of Directors. The Treasurer shall disburse the funds
of the Corporation as may be ordered by the Board of Directors, taking proper
vouchers for such disbursements, and shall render to the President and the
Board of Directors, at its regular meetings, or when the Board of Directors
so requires, an account of all his transactions as Treasurer and of the
financial condition of the Corporation. If required by the Board of
Directors, the Treasurer shall give the Corporation a bond in such sum and
with such surety or sureties as shall be satisfactory to the Board of
Directors for the faithful performance of the duties of his office and for
the restoration to the Corporation, in case of his death, resignation,
retirement or removal from office, of all books, papers, vouchers, money and
other property of whatever kind in his possession or under his control
belonging to the Corporation.
Section 10. Assistant Secretaries. Except as may be otherwise
provided in these Bylaws, Assistant Secretaries, if there be any, shall
perform such duties and have such powers as from time to time may be assigned
to them by the Board of Directors, the Chairman of the Board, the Chief
Executive Officer, the President, any Vice President, if there be one, or the
Secretary, and in the absence of the Secretary or in the event of his
disability or refusal to act, shall perform the duties of the Secretary, and
when so acting, shall have all the powers of and be subject to all the
restrictions upon the Secretary.
Section 11. Assistant Treasurers. Assistant Treasurers, if there be
any, shall perform such duties and have such powers as from time to time may
be assigned to them by the Board of Directors, the Chairman of the Board, the
Chief Executive Officer, the President, any Vice President, if there be one,
or the Treasurer, and in the absence of the Treasurer or in the event of his
disability or refusal to act, shall perform the duties of the Treasurer, and
when so acting, shall have all the powers of and be subject to all the
restrictions upon the Treasurer. If required by the Board of Directors, an
Assistant Treasurer shall give the Corporation a bond in such sum and with
such surety or sureties as shall be satisfactory to the Board of Directors
for the faithful performance of the duties of his office and for the
restoration to the Corporation, in case of his death, resignation, retirement
or removal from office, of all books, papers, vouchers, money and other
property of whatever kind in his possession or under his control belonging to
the Corporation.
Section 12. Controller. The Controller shall establish and maintain
the accounting records of the Corporation in accordance with generally
accepted accounting principles applied on a consistent basis, maintain proper
internal control of the assets of the Corporation and shall perform such
other duties as the Board of Directors, the Chairman of the Board, the Chief
Executive Officer, the President or any Vice President of the Corporation may
prescribe.
Section 13. Other Officers. Such other officers as the Board of
Directors may choose shall perform such duties and have such powers as from
time to time may be assigned to them by the Board of Directors. The Board of
Directors may delegate to any other officer of the Corporation the power to
choose such other officers and to prescribe their respective duties and
powers.
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ARTICLE V.
STOCK
Section 1. Form of Certificates. Every holder of stock in the
Corporation shall be entitled to have a certificate signed, in the name of
the Corporation (i) by the Chief Executive Officer, the President or a Vice
President and (ii) by the Treasurer or an Assistant Treasurer, or the
Secretary or an Assistant Secretary of the Corporation, certifying the number
of shares owned by him in the Corporation.
Section 2. Signatures. Any or all of the signatures on the
certificate may be a facsimile, including, but not limited to, signatures of
officers of the Corporation and countersignatures of a transfer agent or
registrar. In case an officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have
ceased to be such officer, transfer agent or registrar before such
certificate is issued, it may be issued by the Corporation with the same
effect as if he were such officer, transfer agent or registrar at the date of
issue.
Section 3. Lost Certificates. The Board of Directors may direct a
new certificate to be issued in place of any certificate theretofore issued
by the Corporation alleged to have been lost, stolen or destroyed, upon the
making of an affidavit of that fact by the person claiming the certificate of
stock to be lost, stolen or destroyed. When authorizing such issue of a new
certificate, the Board of Directors may, in its discretion and as a condition
precedent to the issuance thereof, require the owner of such lost, stolen or
destroyed certificate, or his legal representative, to advertise the same in
such manner as the Board of Directors shall require and/or to give the
Corporation a bond in such sum as it may direct as indemnity against any
claim that may be made against the Corporation with respect to the
certificate alleged to have been lost, stolen or destroyed.
Section 4. Transfers. Stock of the Corporation shall be
transferable in the manner prescribed by law and in these Bylaws. Transfers
of stock shall be made on the books of the Corporation only by the person
named in the certificate or by his attorney lawfully constituted in writing
and upon the surrender of the certificate therefor, which shall be canceled
before a new certificate shall be issued.
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THE 1998 EQUITY PARTICIPATION PLAN
OF ELECTRONICS BOUTIQUE HOLDINGS CORP.
Electronics Boutique Holdings Corp., a Delaware corporation, has adopted
the 1998 Equity Participation Plan of Electronics Boutique Holdings Corp. (the
"Plan"), effective ____________, 1998 for the benefit of its eligible employees,
consultants and directors.
The purposes of this Plan are as follows:
(1) To provide an additional incentive for directors, key Employees and
consultants to further the growth, development and financial success of the
Company by personally benefiting through the ownership of Company stock and/or
rights which recognize such growth, development and financial success.
(2) To enable the Company to obtain and retain the services of directors,
key Employees and consultants considered essential to the long range success of
the Company by offering them an opportunity to own stock in the Company and/or
rights which will reflect the growth, development and financial success of the
Company.
ARTICLE 1.
DEFINITIONS
1.1. General. Wherever the following initially capitalized terms are used
in this Plan they shall have the meanings specified below, unless the context
clearly indicates otherwise.
1.2. Award Limit. "Award Limit" shall mean ____________________ shares of
Common Stock.
1.3. Board. "Board" shall mean the Board of Directors of the Company, as
comprised from time to time.
1.4. Change in Control. "Change in Control" shall mean a change in
ownership or control of the Company effected through either of the following
transactions.
1.4.1. any person or related group of persons (other than the
Company or a person that directly or indirectly controls, is controlled by, or
is under common control with, the Company) directly or indirectly acquires
beneficial ownership (within the meaning of Rule 13d-3 under the Exchange Act)
of securities possessing more than fifty percent (50%) of the total combined
voting power of the Company's outstanding, securities pursuant to a tender or
exchange offer made directly to the Company's stockholders which the Board does
not recommend such stockholders to accept; or
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1.4.2. there is a change in the composition of the Board over a
period of thirty-six (36) consecutive months (or less) such that a majority of
the Board members (rounded up to the nearest whole number) ceases, by reason of
one or more proxy contests for the election of Board members, to be comprised of
individuals who either (i) have been Board members continuously since the
beginning of such period or (ii) have been elected or nominated for election as
Board members during such period by at least a majority of the Board members
described in clause (i) who were still in office at the time such election or
nomination was approved hy the Board.
1.5. Code. "Code" shall mean the Internal Revenue Code of 1986, as
amended.
1.6. Committee. "Committee" shall mean the Compensation Committee of the
Board, appointed as provided in Section 9.1, as comprised from time to time, or
such other Committee designated by the Board to administer the provisions of
this Plan.
1.7. Common Stock. "Common Stock" shall mean the common stock of the
Company, par value $.01 per share.
1.8. Company. "Company" shall mean Electronics Boutique Holdings Corp., a
Delaware corporation.
1.9. Corporate Transaction. "Corporate Transaction" shall mean any of the
following stockholder-approved transactions to which the Company is a party:
(a) a merger or consolidation in which the Company is not the surviving
entity, except for a transaction the principal purpose of which is to (i) change
the State in which the Company is incorporated, (ii) form a holding company, or
(iii) effect a similar reorganization as to form whereupon this Plan and all
Options are assumed by the successor entity;
(b) the sale, transfer, exchange or other disposition of all or
substantially all of the assets of the Company, in complete liquidation or
dissolution of the Company in a transaction not covered by the exceptions to
clause (a), above; or
(c) any reverse merger in which the Company is the surviving entity but in
which securities possessing more than fifty percent (50%) of the total combined
voting power of the Company's outstanding securities are transferred or issued
to a person or persons different from those who held such securities immediately
prior to such merger.
1.10. Deferred Stock. "Deferred Stock" shall mean Common Stock awarded
under Article 7 of this Plan.
1.11. Director. "Director" shall mean a member of the Board.
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1.12. Dividend Equivalent. "Dividend Equivalent" shall mean a right to
receive the equivalent value (in cash or Common Stock) of dividends paid on
Common Stock, awarded under Article 7 of this Plan.
1.13. Employee. "Employee" shall mean any officer or other employee
(as defined in accordance with Section 3401(c) of the Code) of the Company, or
of any corporation which is a Subsidiary.
1.14. Exchange Act. "Exchange Act" shall mean the Securities Exchange
Act of 1934, as amended.
1.15. Fair Market Value. "Fair Market Value" of a share of Common
Stock, as of a given date shall be (i) the closing price of a share of Common
Stock on the principal exchange on which shares of Common Stock are then
trading, if any (or as reported on any composite index which includes such
principal exchange), on the trading day previous to such date, or if shares were
not traded on the trading day previous to such date, then on the next preceding
date on which a trade occurred, or (ii) if Common Stock is not traded on an
exchange but is quoted on NASDAQ or a successor quotation system, either the (i)
closing sale price or (i) the mean between the closing representative bid and
asked prices for the Common Stock on the trading day previous to such date as
reported by NASDAQ or such successor quotation systems, as may be appropriate,
or (iii) if Common Stock is not publicly traded on an exchange and not quoted on
NASDAQ or a successor quotation system, the Fair Market Value of a share of
Common Stock as established by the Committee (or the Board, in the case of
Options granted to Independent Directors) acting in good faith.
1.16. Grantee. "Grantee" shall mean an Employee or consultant granted
a Performance Award, Dividend Equivalent, Stock Payment or Stock Appreciation
Right, or an award of Deferred Stock, under this Plan.
1.17. Incentive Stock Option. "Incentive Stock Option" shall mean an
option which conforms to the applicable provisions of Section 422 of the Code
and which is designated as an Incentive Stock Option by the Committee.
1.18. Independent Director. "Independent Director" shall mean a member
of the Board who is not also an Employee of the Company.
1.19. Non-Qualified Stock Option. "Non-Qualified Stock Option" shall
mean an Option which is not designated as an Incentive Stock Option by the
Committee.
1.20. Option. "Option" shall mean a stock option granted under Article
3 of this Plan. An Option granted under this Plan shall, as determined by the
Committee, be either a Non-Qualified Stock Option or an Incentive Stock Option;
provided, however, that Options granted to Independent Directors and consultants
shall be Non-Qualified Stock Options.
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1.21. Optionee. "Optionee" shall mean an Employee, consultant or
Independent Director granted an Option under this Plan.
1.22. Performance Award. "Performance Award" shall mean a cash bonus,
stock bonus or other performance or incentive award that is paid in cash.
Common Stock or a combination of both, awarded under Article 7 of this Plan.
1.23. Plan. "Plan" shall mean the 1998 Equity Participation Plan of
Electronics Boutique Holdings Corp.
1.24. QDRO. "QDRO" shall mean a qualified domestic relations order as
defined by the Code or Title I of the Employee Retirement Income Security Act of
1974, as amended, or the rules thereunder.
1.25. Restricted Stock. "Restricted Stock" shall mean Common Stock
awarded under Article 6 of this Plan.
1.26. Restricted Stockholder. "Restricted Stockholder" shall mean an
Employee or consultant granted an award of Restricted Stock under Article 6 of
this Plan.
1.27. Rule 16b-3. "Rule 16b-3" shall mean that certain Rule 16b-3
under the Exchange Act, as such Rule may be amended from time to time.
1.28. Section 162(m) Participant. "Section 162(m) Participant" shall
mean any key Employee designated by the Committee as a key Employee whose
compensation for the fiscal year in which the key Employee is so designated or a
future fiscal year may be subject to the limit on deductible compensation
imposed by Section 162(m) of the Code.
1.29. Stock Appreciation Right. "Stock Appreciation Right" shall mean
a stock appreciation right granted under Article 8 of this Plan.
1.30. Stock Payment. "Stock Payment" shall mean (i) a payment in the
form of shares of Common Stock, or (ii) an option or other right to purchase
shares of Common Stock, as part of a deferred compensation arrangement, made in
lieu of all or any portion of the compensation, including without limitation,
salary, bonuses and commissions, that would otherwise become payable to a key
Employee or consultant in cash, awarded under Article 7 of this Plan.
1.31. Subsidiary. "Subsidiary" shall mean a corporation in an unbroken
chain of corporations beginning with the Company if each of the corporations
other than the last corporation in the unbroken chain then owns stock possessing
50 percent or more of the total combined voting power of all classes of stock in
one of the other corporations in such chain.
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1.32. Termination of Consultancy. "Termination of Consultancy" shall
mean the time when the engagement of an Optionee, Grantee or Restricted
Stockholder as a consultant to the Company or a Subsidiary is terminated for any
reason, with or without cause, including, but not by way of limitation, by
resignation, discharge, death or retirement; but excluding terminations where
there is a simultaneous commencement of employment with the Company or any
Subsidiary. The Committee, in its absolute discretion, shall determine the
effect of all matters and questions relating to Termination of Consultancy,
including, but not by way of limitation, the question of whether a Termination
of Consultancy resulted from a discharge for good cause, and all questions of
whether particular leaves of absence constitute Terminations of Consultancy.
Notwithstanding any other provision of this Plan, the Company or any Subsidiary
has an absolute and unrestricted right to terminate a consultant's service at
any time for any reason whatsoever, with or without cause, except to the extent
expressly provided otherwise in writing.
1.33. Termination of Directorship. "Termination of Directorship" shall
mean the time when an Optionee who is an Independent Director ceases to be a
Director for any reason, including, but not by way of limitation, a termination
by resignation, failure to be elected, death or retirement. The Board, in its
sole and absolute discretion, shall determine the effect of all matters and
questions relating to Termination of Directorship with respect to Independent
Directors.
1.34. Termination of Employment. "Termination of Employment" shall
mean the time when the employee-employer relationship between an Optionee,
Grantee or Restricted Stockholder and the Company or any Subsidiary is
terminated for any reason, with or without cause, including, but not by way
of limitation, a termination by resignation, discharge, death, disability or
retirement, but excluding (i) terminations where there is a simultaneous
reemployment or continuing employment of an Optionee, Grantee or Restricted
Stockholder by the Company or any Subsidiary, (ii) at the discretion of the
Committee, terminations which result in a temporary severance of the
employee-employer relationship, and (iii) at the discretion of the Committee,
terminations which are followed by the simultaneous establishment of a
consulting relationship by the Company or a Subsidiary with the former
employee. The Committee, in its absolute discretion, shall determine the
effect of all matters and questions relating to Termination of Employment,
including, but not by way of limitation, the question of whether a
Termination of Employment resulted from a discharge for good cause, and all
questions of whether particular leaves of absence constitute Terminations of
Employment, provided, however, that, unless otherwise determined by the
Committee in its discretion, a leave of absence, change in status from an
employee to an independent contractor or other change the employee-employer
relationship shall constitute a Termination of Employment if, and to the
extent that, such leave of absence, change in status or other change
interrupts employment for the purposes of Section 422(a)(2) of the Code and
the then applicable regulations and revenue rulings under said Section.
Notwithstanding, any other provision of this Plan, the Company or any
Subsidiary has an absolute and unrestricted right to terminate an Employee's
employment at any time for any reason whatsoever, with or without cause,
except to the extent expressly provided otherwise in writing.
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ARTICLE 2.
SHARES SUBJECT TO PLAN
2.1. Shares Subject to Plan.
(a) The shares of stock subject to Options, awards of Restricted Stock,
Performance Awards, Dividend Equivalents, awards of Deferred Stock, Stock
Payments or Stock Appreciation Rights shall be Common Stock, initially, shares
of the Company's Common Stock, par value $.01 per share. The aggregate number
of such shares which may be issued upon exercise of such options or rights or
upon any such awards under the Plan shall not exceed [10% of post offering
outstanding]. The shares of Common Stock issuable upon exercise of such options
or rights or upon any such awards may be either previously authorized but
unissued shares or treasury shares.
(b) The maximum number of shares which may be subject to Options, awards
of Restricted Stock, Performance Awards, Dividend Equivalents, awards of
Deferred Stock, Stock Payments or Stock Appreciation Rights granted under the
Plan to any individual in any fiscal year shall not exceed the Award Limit. To
the extent required by Section 162(m) of the Code, shares subject to Options
which are canceled continue to be counted against the Award Limit and if, after
grant of an Option, the price of shares subject to such Option is reduced, the
transaction is treated as a cancellation of the Option and a grant of a new
Option and both the Option deemed to be canceled and the Option deemed to be
granted are counted against the Award Limit. Furthermore, to the extent
required by Section 162(m) of the Code, if, after grant of a Stock Appreciation
Right, the base amount on which stock appreciation is calculated is reduced to
reflect a reduction in the Fair Market Value of the Company's Common Stock, the
transaction is treated as a cancellation of the Stock Appreciation Right and a
grant of a new Stock Appreciation Right and both the Stock Appreciation Right
deemed to be canceled and the Stock Appreciation Right deemed to be granted are
counted against the Award Limit.
2.2. Add-back of Options and Other Rights. If any Option, or other right
to acquire shares of Common Stock under any other award under this Plan, expires
or is canceled without having been fully exercised, or is exercised in whole or
in part for cash as permitted by this Plan, the number of shares subject to such
Option or other right but as to which such Option or other right was not
exercised prior to its expiration, cancellation or exercise may again be
optioned, granted or awarded hereunder, subject to the limitations of Section
2.1. Furthermore, any shares subject to Options or other awards which are
adjusted pursuant to Section 10.3 and become exercisable with respect to shares
of stock of another corporation shall be considered canceled and may again be
optioned, granted or awarded hereunder, subject to the limitations of Section
2.1. Shares of Common Stock which are delivered by the Optionee or Grantee or
withheld by the Company upon the exercise of any Option or other award under
this Plan, in payment of the exercise price thereof, may again be optioned,
granted or awarded hereunder, subject to the limitations of Section 2.1. If any
share of Restricted Stock is forfeited by the Grantee or
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repurchased by the Company pursuant to Section 6.6 hereof, such share may again
be optioned, granted or awarded hereunder, subject to the limitations of Section
2.1. Notwithstanding, the provisions of this Section 2.2, no shares of Common
Stock may again be optioned, granted or awarded if such action would cause an
Incentive Stock Option to fail to qualify as an incentive stock option under
Section 422 of the Code.
ARTICLE 3.
GRANTING OF OPTIONS
3.1. Eligibility. Any Employee or consultant selected by the Committee
pursuant to Section 3.4.1.1 shall be eligible to be granted an Option. Each
Independent Director of the Company shall be eligible to be granted Options at
the times and in the manner set forth in Section 4.4.1.
3.2. Disqualification for Stock Ownership. No person may be granted an
Incentive Stock Option under this Plan if such person, at the time the Incentive
Stock Option is granted, owns stock possessing more than ten percent (10%) of
the total combined voting power of all classes of stock of the Company or any
then existing Subsidiary or parent corporation (within the meaning of Section
422 of the Code) unless such Incentive Stock Option conforms to the applicable
provisions of Section 422 of the Code.
3.3. Qualification of Incentive Stock Options. No Incentive Stock Option
shall be granted to any person who is not an Employee.
3.4. Granting of Options.
3.4.1. The Committee shall from time to time, in its absolute
discretion, and subject to applicable limitations of this Plan:
3.4.1.1. Determine which Employees are key Employees and select
from among the key Employees or consultants (including Employees or
consultants who have previously received Options or other awards under this
Plan) such of them as in its opinion should be granted Options;
3.4.1.2. Subject to the Award Limit, determine the number of
shares to be subject to such Options granted to the selected key Employees
or consultants;
3.4.1.3. Subject to Section 3.3, determine whether such Options
are to be Incentive Stock Options or Non-Qualified Stock Options and
whether such Options are to qualify as performance-based compensation as
described in Section 162(m)(4)(C) of the Code; and
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3.4.1.4. Determine the terms and conditions of such Options,
consistent with this Plan, provided, however, that the terms and conditions
of Options intended to qualify as performance-based compensation as
described in Section 162(m)(4)(C) of the Code shall include, but not be
limited to, such terms and conditions as may be necessary to meet the
applicable provisions of Section 162(m) of the Code.
3.4.2. Upon the selection of a key Employee or consultant to be
granted an Option, the Committee shall instruct the Secretary of the Company to
issue the Option and may impose such conditions on the grant of the Option as it
deems appropriate. Without limiting the generality of the preceding sentence,
the Committee may, in its discretion and on such terms as it deems appropriate,
require as a condition on the grant of an Option to an Employee or consultant
that the Employee or consultant surrender for cancellation some or all of the
unexercised Options, awards of Restricted Stock or Deferred Stock, Performance
Awards, Stock Appreciation Rights, Dividend Equivalents or Stock Payments or
other rights which have been previously granted to him under this Plan or
otherwise. An Option, the grant of which is conditioned upon such surrender,
may have an option price lower (or higher) than the exercise price of such
surrendered Option or other award, may cover the same (or a lesser or greater)
number of shares as such surrendered Option or other award, may contain such
other terms as the Committee deems appropriate, and shall be exercisable in
accordance with its terms, without regard to the number of shares, price,
exercise period or any other term or condition of such surrendered Option or
other award.
3.4.3. Any Incentive Stock Option granted under this Plan may be
modified by the Committee to disqualify such option from treatment as an
"incentive stock option" under Section 422 of the Code.
ARTICLE 4.
TERMS OF OPTIONS
4.1. Option Agreement. Each Option shall be evidenced by a written Stock
Option Agreement, which shall be executed by the Optionee and an authorized
officer of the Company and which shall contain such terms and conditions as the
Committee (or the Board, in the case of Options granted to Independent
Directors) shall determine, consistent with this Plan. Stock Option Agreements
evidencing Options intended to qualify as performance-based compensation as
described in Section 162(m)(4)(C) of the Code shall contain such terms and
conditions as may be necessary to meet the applicable provisions of Section
162(m) of the Code. Stock Option Agreements evidencing Incentive Stock Options
shall contain such terms and conditions as may be necessary to meet the
applicable provisions of Section 422 of the Code.
4.2. Option Price. The price per share of the shares subject to each
Option shall be set by the Committee, provided, however, that such price shall
be no less than the par value of a
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share of Common Stock, unless otherwise permitted by applicable state law, and
(i) in the case of Incentive Stock Options and Options intended to qualify as
performance-based compensation as described in Section 162(m)(4)(C) of the Code,
such price shall not be less than 100% of the Fair Market Value of a share of
Common Stock on the date the Option is granted; (ii) in the case of Incentive
Stock Options granted to an individual then owning (within the meaning of
Section 424(d) of the Code) more than 10% of the total combined voting power of
all classes of stock of the Company or any Subsidiary or parent corporation
thereof (within the meaning of Section 422 of the Code) such price shall not be
less than 110% of the Fair Market Value of a share of Common Stock on the date
the Option is granted; and (iii) in the case of Options granted to Independent
Directors, such price shall equal 100% of the Fair Market Value of a share of
Common Stock on the date the Option is granted; provided, however, that the
price of each share subject to each Option granted to Independent Directors on
the date of the initial public offering of Common Stock shall equal the initial
public offering price per share of Common Stock.
4.3. Option Term. The term of an Option shall be set by the Committee in
its discretion, provided, however, that, (i) in the case of Options granted to
Independent Directors, the term shall be ten (10) years from the date the Option
is granted, without variation or acceleration hereunder, but subject to Section
5.6, and (ii) in the case of Incentive Stock Options, the term shall not be more
than ten (10) years from the date the Incentive Stock Option granted, or five
(5) years from such date if the Incentive Stock Option is granted to an
individual then owning (within the meaning of Section 424(d) of the Code) more
than 10% of the total combined voting power of all classes of stock of the
Company or any Subsidiary or parent corporation thereof (within the meaning of
Section 422 of the Code). Except as limited by requirements of Section 422 of
the Code and regulations and rulings thereunder applicable to Incentive Stock
Options and by Section 10.2 hereof, the Committee may extend the term of any
outstanding Option in connection with any Termination of Employment or
Termination of Consultancy of the Optionee, or amend any other term or condition
of such Option relating to such a termination.
4.4. Option Vesting
4.4.1. The period during which the right to exercise an Option in
whole or in part vests in the Optionee shall be set by the Committee and the
Committee may determine that an Option may not be exercised in whole or in part
for a specified period after it is granted; provided, however, that Options
granted to Independent Directors (comprised of 15,000 shares each as of the
closing date of the initial public offering to _______and ______, and 7,500
shares to each director as of every third year anniversary of becoming an
Independent Director) shall become exercisable in cumulative annual installments
of 33 1/3% on each of the first, second and third anniversaries of the date of
Option grant, without variation or acceleration hereunder except as provided in
Section 10.3. At any time after grant of an Option, the Committee may, in its
sole and absolute discretion and subject to whatever terms and conditions it
selects, accelerate the period during which an Option (except an Option granted
to an Independent Director) vests.
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4.4.2. No portion of an Option which is unexercisable at
Termination of' Employment, Termination of Directorship or Termination of
Consultancy, as the case may be, shall thereafter become exercisable, except as
may be otherwise provided by the Committee in the case of Options granted to
Employees or consultants either in the Stock Option Agreement or by action of
the Committee following the grant of the Option.
4.4.3. To the extent that the aggregate Fair Market Value of stock
with respect to which "incentive stock options" (within the meaning of Section
422 of the Code, but without regard to Section 422(d) of the Code) are
exercisable for the first time by an Optionee during, any calendar year (under
the Plan and all other incentive stock option plans of the Company and any
Subsidiary) exceeds $100,000, such Options shall be treated as Non-Qualified
Options to the extent required by Section 422 of the Code. The rule set forth
in the preceding sentence shall be applied by taking Options into account in the
order in which they were granted. For purposes of this Section 4.4.3., the Fair
Market Value of stock shall be determined as of the time the Option with respect
to such stock is granted.
4.5. Continued Employment. Nothing in this Plan or in any Stock Option
Agreement hereunder shall confer upon any Optionee any right to continue in the
employ of, or as a consultant for, the Company or any Subsidiary, or as a
director of the Company, or shall interfere with or restrict in any the rights
of the Company and any Subsidiary, hereby expressly reserved, to discharge any
Optionee at any time for any reason whatsoever, with or without good cause.
ARTICLE 5.
EXERCISE OF OPTIONS
5.1. Partial Exercise. An exercisable Option may be exercised in whole or
in part. However, an Option shall not be exercisable with respect to fractional
shares and the Committee (or the Board, in the case of Options granted to
Independent Directors) may require that, by the terms of the Option, a partial
exercise can only be effective with respect to a minimum number of shares.
5.2. Manner of Exercise. All or a portion of an exercisable Option shall
be deemed exercised upon delivery of all of the following to the Secretary of
the Company or his office:
5.2.1. A written notice complying with the applicable rules
established by the Committee (or the Board, in the case of Options granted to
Independent Directors) stating that the Option, or a portion thereof, is
exercised. The notice shall be signed by the Optionee or other person then
entitled to exercise the Option or such portion;
5.2.2. Such representations and documents as the Committee (or the
Board, in the case of Options granted to Independent Directors), in its absolute
discretion, deems necessary
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or advisable to effect compliance with all applicable provisions of the
Securities Act of 1933, as amended, and any other federal or state securities
laws or regulations. The Committee or Board may, in its absolute discretion,
also take whatever additional actions it deems appropriate to effect such
compliance including, without limitation, placing legends on share certificates
and issuing stop-transfer notices to agents and registrars;
5.2.3. In the event that the Option shall be exercised pursuant to
Section 10.1 by any person or persons other than the Optionee, appropriate proof
of the right of such person or persons to exercise the Option (such as a copy of
the appropriate court order); and
5.2.4. Full cash payment to the Secretary of the Company for the
shares with respect to which the Option, or portion thereof, is exercised.
However, the Committee (or the Board, in the case of Options granted to
Independent Directors), may in its discretion (i) allow a delay in payment up to
thirty (30) days from the date the Option, or portion thereof, is exercised,
(ii) allow payment, in whole or in part, through the delivery of shares of
Common Stock owned by the Optionee, duly endorsed for transfer to the Company
with a Fair Market Value on the date of delivery equal to the aggregate exercise
price of the Option or exercised portion thereof; (iii) allow payment, in whole
or in part, through the surrender of shares of Common Stock then issuable upon
exercise of the Option having a Fair Market Value on the date of Option exercise
equal to the aggregate exercise price of the Option or exercised portion
thereof, (iv) allow payment, in whole or in part, through the delivery of
property of any kind which constitutes good and valuable consideration, (v)
allow payment, in whole or in part, through the delivery of a full recourse
promissory note bearing interest (at no less than such rate as shall then
preclude the imputation of interest under the Code) and payable upon such terms
as may be prescribed by the Committee or the Board, (vi) allow payment, in whole
or in part, through the delivery of a notice that the Optionee has placed a
market sell order with a broker with respect to shares of Common Stock then
issuable upon exercise of the Option, and that the broker has been directed to
pay a sufficient portion of the net proceeds of the sale to the Company in
satisfaction of the Option exercise price; or (vii) allow payment through any
combination of the consideration provided in the foregoing subparagraphs (iii),
(iv), (v) and (vi). In the case of a promissory note, the Committee (or the
Board, in the case of Options granted to Independent Directors) may also
prescribe the form of such note and the security to be given for such note. The
Option may not be exercised, however, by delivery of a promissory note or by a
loan from the Company when or where such loan or other extension of credit is
prohibited by law.
5.3. Conditions to Issuance of Stock Certificates. The Company shall not
be required to issue or deliver any certificate or certificates for shares of
stock purchased upon the exercise of any Option or portion thereof prior to
fulfillment of all of the following conditions:
5.3.1. The admission of such shares to listing on all stock
exchanges on which such class of stock is then listed;
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5.3.2. The completion of any registration or other qualification of
such shares under any state or federal law, or under the rulings or regulations
of the Securities and Exchange Commission or any other governmental regulatory
body which the Committee or Board shall in its absolute discretion, deem
necessary or advisable;
5.3.3. The obtaining of any approval or other clearance from any
state or federal governmental agency or transfer agent based on Committee
instructions for non-certificated shares which the Committee (or Board, in the
case of Options ranted to Independent Directors) shall, in its absolute
discretion, determine to be necessary or advisable.
5.3.4. The lapse of such reasonable period of time following, the
exercise of the Option as the Committee (or Board, in the case of Options
granted to Independent Directors) may establish from time to time for reasons of
administrative convenience; and
5.3.5. The receipt by the Company of full payment for such shares,
including payment of any applicable withholding tax.
5.4. Rights as Stockholders. The holders of Options shall not be, nor have
any of the rights or privileges of, stockholders of the Company in respect of
any shares purchasable upon the exercise of any part of an Option unless and
until certificates representing such Shares have been issued by the Company to
such holders.
5.5. Ownership and Transfer Restrictions. The Committee (or Board, in the
case of Options granted to Independent Directors), in its absolute discretion,
may impose at the time of grant such restrictions on the ownership and
transferability of the shares purchasable upon the exercise of an Option as it
deems appropriate. Any such restriction shall be set forth in the respective
Stock Option Agreement and may be referred to on the certificates evidencing
such shares. The Committee may require the Employee to give the Company prompt
notice of any disposition of shares of Common Stock acquired by exercise of an
Incentive Stock Option within (i) two years from the date of granting such
Option to such Employee or (ii) one year after the transfer of such shares to
such Employee. The Committee may direct that the certificates evidencing shares
acquired by exercise of an Option refer to such requirement to give prompt
notice of disposition.
5.6. Limitations on Exercise of Options. No Option granted hereunder may
be exercised to any extent by anyone after the first to occur of the following
events:
5.6.1. The expiration of twelve (12) months from the date of the
Optionee's death;
5.6.2. The expiration of twelve (12) months from the date of the
Optionee's Termination of Employment, Consulting or Directorship by reason of
his permanent and total disability (within the meaning of Section 22(e)(3) of
the Code);
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5.6.3. The expiration of three (3) months from the date of the
Optionee's Termination of Directorship for any reason other than such Optionee's
death or his permanent and total disability, unless the Optionee dies within
said three-month period; or
5.6.4. The expiration of ten years from the date the Option was
granted.
ARTICLE 6.
AWARD OF RESTRICTED STOCK
6.1. Award of Restricted Stock.
6.1.1. The Committee may from time to time, in its absolute
discretion:
6.1.1.1. Select from among the key Employees or consultants
(including Employees or consultants who have previously received other awards
under this Plan) such of them as in its opinion should be awarded Restricted
Stock, and
6.1.2. Determine the purchase price, if any, and other terms and
conditions applicable to Such Restricted Stock, consistent with this Plan.
6.1.3. The Committee shall establish the purchase price, if any,
and form of payment for Restricted Stock, however, that such purchase price
shall be no less than the par value of the Common Stock to be purchased, unless
otherwise permitted by applicable state law. In all cases, legal consideration
shall be required for each issuance of Restricted Stock.
6.1.4. Upon the selection of a key Employee or consultant to be
awarded Restricted Stock, the Committee shall instruct the Secretary of the
Company to issue such Restricted Stock and may impose such conditions on the
issuance of such Restricted Stock as it deems appropriate.
6.2. Restricted Stock Agreement. Restricted Stock shall be issued only
pursuant to a written Restricted Stock Agreement, which shall be executed by the
selected Key Employee or consultant and an authorized officer of the Company and
which shall contain such terms and conditions as the Committee shall determine,
consistent with this Plan.
6.3. Consideration. As consideration for the issuance of Restricted
Stock, in addition to payment of any purchase price, the Restricted
Stockholder shall agree, in the written Restricted Stock Agreement, to remain
in the employ of, or to consult for, the Company or any Subsidiary for a
period of at least [one] year after the Restricted Stock is issued (or such
shorter period as may be fixed in the Restricted Stock Agreement or by action
of the Committee following grant of the Restricted Stock). Nothing in this
Plan or in any Restricted Stock
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Agreement hereunder shall confer on any Restricted Stockholder any right to
continue in the employ of, or as a consultant for, the Company or any Subsidiary
or shall interfere with or restrict in any way the rights of the Company and any
Subsidiary, which are hereby expressly reserved, to discharge any Restricted
Stockholder at any time for any reason whatsoever, with or without good cause.
6.4. Rights as Stockholders. Upon delivery of the shares of Restricted
Stock to the escrow holder pursuant to Section 6.7, the Restricted Stockholder
shall have, unless otherwise provided by the Committee, all the rights of a
stockholder with respect to said shares, subject to the restrictions in his
Restricted Stock Agreement, including the right to receive all dividends and
other distributions paid or made with respect to the shares, provided, however,
that in the discretion of the Committee, any extraordinary, distributions with
respect to the Common Stock shall be subject to the restrictions set forth in
Section 6.5.
6.5. Restriction. All shares of Restricted Stock issued under this Plan
(including any shares received by holders thereof with respect to shares of
Restricted Stock is a result of stock dividends, stock splits or any other form
of recapitalization) shall at the time of grant, in the terms of each individual
Restricted Stock Agreement, be subject to such restrictions as the Committee
shall provide, which restrictions may include, without limitation, restrictions
concerning voting rights and transferability and restrictions based on duration
of employment with the Company, Company performance and individual performance,
provided, however, that by action taken the Restricted Stock is issued, the
Committee may, on such terms and conditions as it may determine to be
appropriate, remove any or all of the restrictions imposed by the terms of the
Restricted Stock Agreement. Restricted Stock may not be sold or encumbered
until all restrictions are terminated or expire. Unless provided otherwise by
the Committee, if no consideration was paid by the Restricted Stockholder upon
issuance, a Restricted Stockholder's rights in vested Restricted Stock shall
lapse upon Termination of Employment or, applicable, upon Termination of
Consultancy with the Company.
6.6. Repurchase of Restricted Stock. The Committee shall provide in the
terms of each individual Restricted Stock Agreement that the Company shall have
the right to repurchase from the Restricted Stockholder the Restricted Stock
then subject to restrictions under the Restricted Stock Agreement immediately
upon a Termination of Employment or, if applicable, upon a Termination of
Consultancy between the Restricted Stockholder and the Company, at a cash price
per share equal to the price paid by the Restricted Stockholder for such
Restricted Stock; provided, however, that provision may be made that no such
right of repurchase shall exist in the event of a Termination of Employment or
Termination of Consultancy without cause, or following a change in control of
the Company or because of the Restricted Stockholder's retirement, death or
disability, or otherwise.
6.7. Escrow. The Secretary of the Company or such other escrow holder as
the Committee may appoint shall retain physical custody of each certificate
representing Restricted Stock until all of the restrictions imposed under the
Restricted Stock Agreement with respect to
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the shares evidenced by such certificate expire or shall have been removed or,
with respect to non-certificated shares, until the Committee so instructs the
transfer agent to remove any restriction the Committee previously had the
transfer agent place on the certificates.
6.8. Legend. In order to enforce the restrictions imposed upon shares of
Restricted Stock hereunder, the Committee shall cause a legend or legends to be
placed on certificates representing all shares of Restricted Stock that are
still subject to restrictions under Restricted Stock Agreements, which legend or
legends shall make appropriate reference to the conditions imposed thereby.
6.9. Provisions Applicable to Section 162(m) Participants.
6.9.1. Notwithstanding anything in the Plan to the contrary, the
Committee may grant Restricted Stock awards to a Section 162(m) Participant that
vest upon the attainment of performance targets for the Company which are
related to one or more of the following performance goals: (i) pre-tax income,
(ii) operating income, (iii) cash flow, (iv) earnings per share, (v) return on
equity, (vi) return on invested capital or assets and (vii) cost reductions or
savings.
6.9.2. To the extent necessary, to comply with the
performance-based compensation requirements of Section 162(m)(4)(C) of the Code,
with respect to Restricted Stock which may be granted to one or more Section
162(m) Participants, no later than ninety (90) days following the commencement
of any fiscal year in question or any other designated fiscal period (or such
other time as may be required or permitted by Section 162(m) of the Code), the
Committee shall, in writing, (i) designate one or more Section 162(m)
Participants, (ii) select the performance goal or goals applicable to the fiscal
year or other designated fiscal period, (iii) establish the various targets and
bonus amounts which may be earned for such fiscal year or other designated
fiscal period and (iv) specify the relationship between performance goals and
targets and the amounts to be earned by each Section 162(m) Participant for such
fiscal year or other designated fiscal period. Following the completion of each
fiscal year or other designated fiscal period, the Committee shall certify in
writing whether the applicable performance targets have been achieved for such
fiscal year or other designated fiscal period. In determining the amount earned
by a Section 162(m) Participant, the Committee shall have the right to reduce
(but not to increase) the amount payable at a given level of performance to take
into account additional factors that the Committee may deem relevant to the
assessment of individual or corporate performance for the fiscal year or other
designated fiscal period.
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ARTICLE 7.
PERFORMANCE AWARDS, DIVIDEND EQUIVALENTS,
DEFERRED STOCK, STOCK PAYMENTS
7.1. Performance Awards. Any key Employee or consultant selected by the
Committee may be granted one or more Performance Awards. The value of such
Performance Awards may be linked to the market value, book value, net profits or
other measure of the value of Common Stock or other specific performance
criteria determined appropriate by the Committee, in each case on a specified
date or dates or over any period or periods determined by the Committee, or may
be based upon the appreciation in the market value, book value, net profits or
other measure of the value of a specified number of shares of Common Stock over
a fixed period or periods determined by the Committee. In making such
determinations, the Committee shall consider (among such other factors as it
deems relevant in light of the specific type of award) the contributions,
responsibilities and other compensation of the particular key Employee or
consultant.
[7.2. Dividend Equivalents. Any key Employee or consultant selected by
the Committee may be granted Dividend Equivalents based on the dividends
declared on Common Stock, to be credited as of dividend payment dates, during
the period between the date an Option, Stock Appreciation Right, Deferred Stock
or Performance Award is granted, and the date such Option, Stock Appreciation
Right, Deferred Stock or Performance Award is exercised, vests or expires, as
determined by the Committee. Such Dividend Equivalents shall be converted to
cash or additional shares of Common Stock by such formula and at such time and
subject to such limitations as may be determined by the Committee. With respect
to Dividend Equivalents granted with respect to Options intended to be qualified
performance-based compensation for purposes of Section 162(m) of the Code, such
Dividend Equivalents shall be payable regardless of whether such Option is
exercised.]
7.3. Stock Payments. Any key Employee or consultant selected by the
Committee may receive Stock Payments in the manner determined from time to time
by the Committee. The number of shares shall be determined by the Committee and
may be based upon the Fair Market Value, book value, net profits or other
measure of the value of Common Stock or other specific performance criteria
determined appropriate by the Committee, determined on the date such Stock
Payment is made or on any date thereafter.
7.4. Deferred Stock. Any key Employee or consultant selected by the
Committee may be granted an award of Deferred Stock in the manner determined
from time to time by the Committee. The number of shares of Deferred Stock
shall be determined by the Committee and may be linked to the market value, book
value, net profits or other measure of the value of Common Stock or other
specific performance criteria determined to be appropriate by the Committee, in
each case on a specified date or dates or over any period or periods determined
by
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the Committee. Common Stock underlying a Deferred Stock award will not be until
the Deferred Stock award has vested, pursuant to a vesting schedule or
performance criteria set by the Committee. Unless otherwise provided by the
Committee, a Grantee of Deferred Stock shall have no rights as a Company
stockholder with respect to such Deferred Stock until such time as the award has
vested and the Common Stock underlying the award has been issued.
7.5. Performance Award Agreement, Dividend Equivalent Agreement, Deferred
Stock Agreement, Stock Payment Agreement. Each Performance Award, Dividend
Equivalent, award of Deferred Stock and/or Stock Payment shall be evidenced by a
written agreement, which shall be executed by the Grantee and an authorized
Officer of the Company and which shall contain such terms and conditions as the
Committee shall determine, consistent with this Plan.
7.6. Term. The term of a Performance Award, Dividend Equivalent, award of
Deferred Stock and/or Stock Payment shall be set by the Committee in its
discretion.
7.7. Exercise Upon Termination of Employment. A Performance Award,
Dividend Equivalent, award of Deferred Stock and/or Stock Payment is exercisable
or payable only while the Grantee is an Employee or consultant; provided that
the Committee may at the time of grant determine that the Performance Award,
Dividend Equivalent, award of Deferred Stock and/or Stock Payment may be
exercised or paid subsequent to Termination of Employment or Termination of
Consultancy without cause, or following a change in control of the Company, or
because of the Grantee's retirement, death or disability, or otherwise.
7.8. Payment on Exercise. Payment of the amount determined under Section
7.1 or 7.2 above shall be in cash, in Common Stock or a combination of both, as
determined by the Committee. To the extent any payment under this Article 7 is
effected in Common Stock, it shall be made subject to satisfaction of all
provisions of Section 5.3.
7.9. Consideration. In consideration of the granting of a Performance
Award, Dividend Equivalent, award of Deferred Stock and/or Stock Payment, the
Grantee shall agree, in a written agreement, to remain in the employ of, or to
consult for, the Company or any Subsidiary for a period of at least [one] year
after such Performance Award, Dividend Equivalent, award of Deferred Stock
and/or Stock Payment is granted (or such shorter period as may be fixed in such
agreement or by action of the Committee following such grant). Nothing in this
Plan or in any agreement hereunder shall confer on any Grantee any right to
continue in the employ of, or as a consultant for, the Company or any Subsidiary
or shall interfere with or restrict in any way the rights of the Company and any
Subsidiary, which are hereby expressly reserved, to discharge any Grantee at any
time for any reason whatsoever, with or without good cause.
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7.10. Provisions Applicable to Section 162(m) Participants.
7.10.1. Notwithstanding anything in the Plan to the contrary, the
Committee may grant any performance or incentive awards described in Article 7
to a Section 162(m) Participant that vest or become exercisable upon the
attainment of performance targets for the Company which are related to one or
more of the following performance goals: (i) pre-tax income, (ii) operating
income, (iii) cash flow, (iv) earnings per share, (v) return on equity, (vi)
return on invested capital or assets and (vii) cost reductions or savings.
7.10.2. To the extent necessary to comply with the performance-based
compensation requirements of Section 162(m)(4)(C) of the Code, with respect to
performance or incentive awards described in Article 7 which may be granted to
one or more Section 162(m) Participants, no later than ninety (90) days
following the commencement of any fiscal year in question or any other
designated fiscal period (or such other time as may be required or permitted by
Section 162(m) of the Code), the Committee shall, in writing, (i) designate one
or more Section 162(m) Participants, (ii) select the performance goal or goals
applicable to the fiscal year or other designated fiscal period, (iii) establish
the various targets and bonus amounts which may be earned for such fiscal year
or other designated fiscal period and (iv) specify the relationship between
performance goals and targets and the amounts to be earned by each Section
162(m) Participant for such fiscal year or other designated fiscal period.
Following the completion of each fiscal year or other designated fiscal period,
the Committee shall certify in writing whether the applicable performance
targets have been achieved for such fiscal year or other designated fiscal
period. In determining the amount earned by a Section 162(m) Participant, the
Committee shall have the right to reduce (but not to increase) the amount
payable at a given level of performance to take into account additional factors
that the Committee may deem relevant to the assessment of individual or
corporate performance for the fiscal year or other designated fiscal period.
ARTICLE 8.
STOCK APPRECIATION RIGHTS
8.1. Grant of Stock Appreciation Rights. A Stock Appreciation Right may be
granted to any key Employee or consultant selected by the Committee. A Stock
Appreciation Right may be granted (i) in connection and simultaneously, with the
grant of an Option, (ii) with respect to a previously granted Option, or (iii)
independent of an Option. A Stock Appreciation Right shall be subject to such
terms and conditions not inconsistent with this Plan as the Committee shall
impose and shall be evidenced by a written Stock Appreciation Right Agreement,
which shall be executed by the Grantee and an authorized officer of the Company.
The Committee, in its discretion, may determine whether a Stock Appreciation
Right is to qualify as performance-based compensation as described in Section
162(m)(4)(C) of the Code and Stock Appreciation Right Agreements evidencing
Stock Appreciation Rights intended to so
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qualify shall contain such terms and conditions as may be necessary, to meet the
applicable provisions of Section 162(m) of the Code. Without limiting the
generality of the foregoing, the Committee may, in its discretion and on such
terms as it deems appropriate, require as a condition of the grant of a Stock
Appreciation Right to an Employee or consultant that the Employee or consultant
surrender for cancellation some or all of the unexercised Options, awards of
Restricted Stock or Deferred Stock, Performance Awards, Stock Appreciation
Rights, Dividend Equivalents or Stock Payments, or other rights which have been
previously granted to him under this Plan or otherwise. A Stock Appreciation
Right, the grant of which is conditioned upon such surrender, may have an
exercise price lower (or higher) than the exercise price of the surrendered
Option or other award, may cover the same (or a lesser or greater) number of
shares as such surrendered Option or other award, may contain such other terms
as the Committee deems appropriate, and shall be exercisable in accordance with
its terms, without regard to the number of shares, price, exercise period or any
other term or condition of such surrendered Option or other award.
8.2. Coupled Stock Appreciation Rights.
8.2.1. A Coupled Stock Appreciation Right ("CSAR") shall be related
to a particular Option and shall be exercisable only when and to the extent the
related Option is exercisable.
8.2.2. A CSAR may be granted to the Grantee for no more than the
number of shares subject to the simultaneously or previously granted Option to
which it is coupled.
8.2.3. A CSAR shall entitle the Grantee (or other person entitled
to exercise the Option pursuant to this Plan) to surrender to the Company
unexercised a portion of the Option to which the CSAR relates (to the extent
then exercisable pursuant to its terms) and to receive from the Company in
exchange therefor an amount determined by multiplying the difference obtained by
subtracting the Option exercise price from the Fair Market Value of a share of
Common Stock on the date of exercise of the CSAR by the number of shares of
Common Stock with respect to which the CSAR shall have been exercised, subject
to any limitations the Committee may impose.
8.3. Independent Stock Appreciation Rights.
8.3.1. An Independent Stock Appreciation Right ("ISAR") shall be
unrelated to any Option and shall have a term set by the Committee. An ISAR
shall be exercisable in such installments as the Committee may determine. An
ISAR shall cover such number of shares of Common Stock as the Committee may
determine. The exercise price per share of Common Stock subject to each ISAR
shall be set by the Committee. An ISAR is exercisable only while the Grantee is
an Employee or consultant ; provided that the Committee may determine that the
ISAR may be exercised subsequent to Termination of Employment or Termination of
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Consultancy without cause, or following a change in control of the Company, or
because of the Grantee's retirement, death or disability, or otherwise.
8.3.2. An ISAR shall entitle the Grantee (or other person entitled
to exercise the ISAR pursuant to this Plan) to exercise all or a specified
portion of the ISAR (to the extent then exercisable pursuant to its terms) and
to receive from the Company an amount determined by multiplying the difference
obtained by subtracting the exercise price per share of the ISAR from the Fair
Market Value of a share of Common Stock on the date of exercise of the ISAR by
the number of shares of Common Stock with respect to which the ISAR shall have
been exercised, subject to any limitations the Committee may impose.
8.4. Payment and Limitations on Exercise.
8.4.1. Payment of the amount determined under Section 8.2.3 and
8.3.2 above shall be in cash, in Common Stock (based on its Fair Market Value as
of the date the Stock Appreciation Right is exercised) or a combination of both,
as determined by the Committee. To the extent such payment is effected in
Common Stock it shall be made subject to satisfaction of all provisions of
Section 5.3 above pertaining to Options.
8.4.2. Grantees of Stock Appreciation Rights may be required to
comply with any timing or other restrictions with respect to the settlement or
exercise of a Stock Appreciation Right, including a window-period limitation, as
may at the time of grant be imposed in the discretion of the Board or Committee.
8.5. Consideration. In consideration of the granting of a Stock
Appreciation Right, the Grantee shall agree, in the written Stock Appreciation
Right Agreement, to remain in the employ of, [or to consult for], the Company or
any Subsidiary for a period of at least [one] year after the Stock Appreciation
Right is granted (or such shorter period as may be fixed in the Stock
Appreciation Right Agreement or by action of the Committee following grant of
the Restricted Stock). Nothing in this Plan or in any Stock Appreciation Right
Agreement hereunder shall confer on any Grantee any right to continue in the
employ of, or as a consultant for, the Company or any Subsidiary or shall
interfere with or restrict in any way the rights of the Company and any
Subsidiary, which are hereby expressly reserved, to discharge any Grantee at any
time for any reason whatsoever, with or without good cause.
ARTICLE 9.
ADMINISTRATION
9.1. Compensation Committee. The Compensation Committee (or another
committee or a subcommittee of the Board assuming, the functions of the
Committee under this Plan) shall consist solely of two or more Independent
Directors appointed by and holding office at the
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pleasure of the Board, each of whom is both a "non-employee director" as defined
by Rule 16b-3 and an "outside director" for purposes of Section 162(m) of the
Code. Appointment of Committee members shall be effective upon acceptance of
appointment. Committee members may resign at any time by delivering written
notice to the Board. Vacancies in the Committee may be filled by the Board.
9.2. Duties and Powers of Committee. It shall be the duty of the Committee
to conduct the general administration of this Plan in accordance with its
provisions. The Committee shall have the power to interpret this Plan and the
agreements pursuant to which Options, awards of Restricted Stock or Deferred
Stock, Performance Awards, Stock Appreciation Rights, Dividend Equivalents or
Stock Payments are granted or awarded, and to adopt such rules for the
administration, interpretation, and application of this Plan as are consistent
therewith and to interpret, amend or revoke any such rules. Notwithstanding the
foregoing, the full Board, acting by a majority of its members in office, shall
conduct the general administration of the Plan with respect to Options granted
to Independent Directors. Any such grant or award under this Plan need not be
the same with respect to each Optionee, Grantee or Restricted Stockholder. Any
such interpretations and rules with respect to Incentive Stock Options shall be
consistent with the provisions of Section 422 of the Code. In its absolute
discretion, the Board may at any time and from time to time exercise any and all
rights and duties of the Committee under this Plan except with respect to
matters which under Rule 16b-3 or Section 162(m) of the Code, or any regulations
or rules issued thereunder, are required to be determined in the sole discretion
of the Committee.
9.3. Majority Rule; Unanimous Written Consent. The Committee shall act by
a majority of its members in attendance at a meeting at which a quorum is
present or by a memorandum or other written instrument signed by all members of
the Committee.
9.4. Compensation; Professional Assistance: Good Faith Actions. Members of
the Committee shall receive such compensation for their services as members as
may be determined by the Board. All expenses and liabilities which members of
the Committee incur in connection with the administration of this Plan shall be
borne by the Company. The Committee may, with the approval of the Board, employ
attorneys, consultants, accountants, appraisers, brokers, or other persons. The
Committee, the Company and the Company's officers and Directors shall be
entitled to rely upon the advice, opinions or valuations of any such persons.
All actions taken and all interpretations and determinations made by the
Committee or the Board in good faith shall be final and binding upon all
Optionees, Grantees, Restricted Stockholders, the Company and all other
interested persons. No members of the Committee or Board shall be personally
liable for any action, determination or interpretation made in good faith with
respect to this Plan, Options, awards of Restricted Stock or Deferred Stock,
Performance Awards, Stock Appreciation Rights, Dividend Equivalents or Stock
Payments, and all members of the Committee and the Board shall be fully
protected by the Company in respect of any such action, determination or
interpretation.
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ARTICLE 10.
MISCELLANEOUS PROVISIONS
10.1. Not Transferable. Options, Restricted Stock awards, Deferred
Stock awards, Performance Awards, Stock Appreciation Rights, Dividend
Equivalents or Stock Payments under this Plan may not be sold, pledged,
assigned, or transferred in any manner other than by will or the laws of descent
and distribution or pursuant to a QDRO, unless and until such rights or awards
have been exercised, or the shares underlying such rights or awards have been
issued, and all restrictions applicable to such shares have lapsed. No Option,
Restricted Stock Award, Deferred Stock Award, Performance Award, Stock
Appreciation Right, Dividend Equivalent or Stock Payment or interest or right
therein shall be liable for the debts, contracts or engagements of the Optionee,
Grantee or Restricted Stockholder or his successors in interest or shall be
subject to disposition by transfer, alienation, anticipation, pledge,
encumbrance, assignment or any other means whether such disposition be voluntary
or involuntary or by operation of law by judgment, levy, attachment, garnishment
or any other legal or equitable proceedings (including bankruptcy), and any
attempted disposition thereof shall be null and void and of no effect, except to
the extent that such disposition is permitted by the preceding sentence.
During the lifetime of the Optionee or Grantee, only he or she or his
or her personal representatives may exercise an Option or other right or award
(or any portion thereof) granted to him under the Plan, unless it has been
disposed of pursuant to a QDRO. After the death of the Optionee or Grantee, any
exercisable portion of an Option or other right or award may, prior to the time
when such portion becomes unexercisable under the Plan or the applicable Stock
Option Agreement or other agreement, be exercised by his personal representative
or by any person empowered to do so under the deceased Optionee's or Grantee's
will or under the then applicable laws of descent and distribution.
10.2. Amendment, Suspension or Termination of this Plan. Except as
otherwise provided in this Section 10.2, this Plan may be wholly or partially
amended or otherwise modified, suspended or terminated at any time or from time
to time by the Board or the Committee. However, without the approval of the
Company's stockholders given within twelve months before or after the action by
the Board or the Committee, no action of the Board or the Committee may, except
as provided in Section 10.3, increase the limits imposed in Section 2.1 on the
maximum number of shares which may be issued under this Plan or modify the Award
Limit, and no action of the Board or the Committee may be taken that would
otherwise require stockholder approval as a matter of applicable law, regulation
or rule. No amendment, suspension or termination of this Plan shall, without
the consent of the holder of Options, Restricted Stock Awards, Deferred Stock
Awards, Performance Awards, Stock Appreciation Rights, Dividend Equivalents or
Stock Payments, alter or impair any rights or obligations under any Options,
Restricted Stock Awards, Deferred Stock Awards, Performance Awards, Stock
Appreciation Rights, Dividend Equivalents or Stock Payments theretofore granted
or awarded, unless the award itself otherwise expressly so provides. No
Options, Restricted Stock, Deferred
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Stock, Performance Awards, Stock Appreciation Rights, Dividend Equivalents or
Stock Payments may be granted or awarded during any period of suspension or
after termination of this Plan, and in no event may any Incentive Stock Option
be granted under this Plan after the first to occur of the following events:
10.2.1. The expiration of ten years from the date the Plan is
adopted by the Board: or
10.2.2. The expiration of ten years from the date the Plan is
approved by the Company's stockholders under Section 10.4.
10.3. Changes in Common Stock or Assets of the Company, Acquisition or
Liquidation of the Company and Other Corporate Events.
10.3.1. Subject to Section 10.3, in the event that the Committee (or
the Board, in the case of Options granted to Independent Directors) determines
that any dividend or other distribution whether in the form of cash, Common
Stock, other securities, or other property), recapitalization, reclassification,
stock split, reverse stock split, reorganization, merger, consolidation,
split-up, spin-off, combination, repurchase, liquidation, dissolution, or sale,
transfer, exchange or other disposition of all or substantially all of the
assets of the Company (including, but not limited to, a Corporate Transaction),
or exchange of Common Stock or other securities of the Company, issuance of
warrants or other rights to purchase Common Stock or other securities of the
Company, or other similar corporate transaction or event, in the Committee's
sole discretion (or in the case of Options granted to Independent Directors, the
Board's sole discretion), affects the Common Stock such that an adjustment is
determined by the Committee to be appropriate in order to prevent dilution or
enlargement of the benefits or potential benefits intended to be made available
under the Plan or with respect to an Option, Restricted Stock Award, Performance
Award, Stock Appreciation Right, Dividend Equivalent, Deferred Stock Award or
Stock Payment, then the Committee (or the Board, in the case of Options granted
to Independent Directors) shall, in such manner as it may deem equitable, adjust
any or all of
10.3.1.1. the number and kind of shares of Common Stock (or
other securities or property) with respect to which Options, Performance
Awards, Stock Appreciation Rights, Dividend Equivalents or Stock Payments
may be granted under the Plan, or which may be granted as Restricted Stock
or Deferred Stock (including, but not limited to, adjustments of the
limitations in Section 2.1 on the maximum number and kind of shares which
may be issued and adjustments of the Award Limit),
10.3.1.2. the number and kind of shares of Common Stock, (or
other securities or property) subject to outstanding Options, Performance
Awards, Stock, Appreciation Rights, Dividend Equivalents, or Stock
Payments, and in the number and kind of shares of outstanding Restricted
Stock or Deferred Stock, and
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10.3.1.3. the grant or exercise price with respect to any
Option, Performance Award, Stock Appreciation Right, Dividend Equivalent or
Stock Payment.
10.3.2. Subject to Section 10.3, in the event of any Corporate
Transaction or other transaction or event described in Section 10.3.1 or any
unusual or nonrecurring transactions or events affecting the Company, any
affiliate of the Company, or the financial statements of the Company or any
affiliate, or of changes in applicable laws, regulations, or accounting
principles, the Committee (or the Board, in the case of Options granted to
Independent Directors) in its discretion is hereby authorized to take any one or
more of the following actions whenever the Committee (or the Board, in the case
of Options granted to Independent Directors) determines that such action is
appropriate in order to prevent dilution or enlargement of the benefits or
potential benefits intended to be made available under the Plan or with respect
to any option, right or other award under this Plan, to facilitate such
transactions or events or to give effect to such changes in laws, regulations or
principles:
10.3.2.1. In its sole and absolute discretion, and on such terms
and conditions as it deems appropriate, the Committee (or the Board, in the
case of Options granted to Independent Directors) may provide, either by
the terms of the agreement or by action taken prior to the occurrence of
such transaction or event and either automatically or upon the optionee's
request, for either the purchase of any such Option, Performance Award,
Stock Appreciation Right, Dividend Equivalent, or Stock Payment, or any
Restricted Stock or Deferred Stock for the payment of an amount of cash
equal to the amount that could have been attained upon the exercise of such
option, right or award or realization of the optionee s rights had such
option, right or award been currently exercisable or payable or fully
vested or the replacement of such option, right or award with other rights
or property selected by the Committee (or the Board, in the case of Options
granted to Independent Directors) in its sole discretion;
10.3.2.2. In its sole and absolute discretion, the Committee (or
the Board, in the case of Options granted to Independent Directors) may
provide in terms of such Option, Performance Award, Stock Appreciation
Right, Dividend Equivalent, or Stock Payment, or Restricted Stock or
Deferred Stock Award that it cannot be exercised after such event;
10.3.2.3. In its sole and absolute discretion, and on such terms
and conditions as it deems appropriate, the Committee (or the Board, in the
case of Options granted to Independent Directors) may provide, either by
the terms of such Option, Performance Award, Stock Appreciation Right,
Dividend Equivalent, or Stock Payment, or Restricted Stock or Deferred
Stock or by action taken prior to the occurrence of such transaction or
event, that for a specified period of time prior to such transaction or
event, such option, right or award shall be exercisable as to all shares
covered thereby, notwithstanding anything to the contrary in (i) Section
4.4 or (ii) the provisions of such
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Option, Performance Award, Stock Appreciation Right, Dividend Equivalent,
or Stock Payment, or Restricted Stock or Deferred Stock;
10.3.2.4. In its sole and absolute discretion, and on such terms
and conditions as it deems appropriate, the Committee (or the Board, in the
case of Options granted to Independent Directors) may provide, either by
the terms of such Option, Performance Award, Stock Appreciation Right,
Dividend Equivalent, or Stock Payment, or Restricted Stock or Deferred
Stock or by action taken prior to the occurrence of such transaction or
event, that upon such event, such option, right or award be assumed by the
successor or survivor corporation, or a parent or subsidiary thereof, or
shall be substituted for by similar options, rights or awards covering the
stock of the successor or survivor corporation, or a parent or subsidiary
thereof, with appropriate adjustments as to the number and kind of shares
and prices; and
10.3.2.5. In its sole and absolute discretion, and on such terms
and conditions as it deems appropriate, the Committee (or the Board, in the
case of Options granted to Independent Directors) may make adjustments in
the number and type of shares of Common Stock (or other securities or
Property) subject to outstanding Options, Performance Awards, Stock
Appreciation Rights, Dividend Equivalents, or Stock Payments, and in the
number and kind of outstanding Restricted Stock or Deferred Stock and/or in
the terms and conditions of (including the grant or exercise price), and
the criteria included in, outstanding options, rights and awards and
options, rights and awards which may be granted in the future.
10.3.2.6. In its sole and absolute discretion, and on such terms
and conditions as it deems appropriate, the Committee may provide either by
the terms of a Restricted Stock Award or Deferred Stock Award or by action
taken prior to the occurrence of such event that, for a specified period of
time prior to such event, the restrictions imposed under a Restricted Stock
Agreement or a Deferred Stock Agreement upon some or all shares of
Restricted Stock or Deferred Stock may be terminated, and, in the case of
Restricted Stock, some or all shares of such Restricted Stock may cease to
be subject to repurchase under Section 6.6 or forfeiture under Section 6.5
after such event.
10.3.2.7. None of the foregoing discretionary actions taken under
this Section 10.3 shall be permitted with respect to Options granted to
Independent Directors to the extent that such discretion would be
inconsistent with the applicable exemptive conditions of Rule 16b-3. In
the event of a Change in Control or a Corporate Transaction, to the extent
that the Board does not have the ability under Rule 16b-3 to take or to
refrain from taking the discretionary actions set forth in Section
10.3(b)(iii) above, each Option granted to an Independent Director shall be
exercisable as to all shares covered thereby upon such Change in Control or
during the five days immediately preceding the consummation of such
Corporate Transaction and subject to such consummation, notwithstanding
anything to the contrary in Section 4.4 or the vesting
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schedule of such Options. In the event of a Corporate Transaction, to the
extent that the Board does not have the ability under Rule 16b-3 to take or
to refrain from taking the discretionary actions set forth in Section
10.3(b)(ii) above, no Option granted to an Independent Director may be
exercised following such Corporate Transaction unless such Option is, in
connection with such Corporate Transaction, either assumed by the successor
or survivor corporation (or parent or subsidiary thereof) or replaced with
a comparable right with respect to shares of the capital stock of the
successor or survivor corporation (or parent or subsidiary thereof).
10.3.3. Subject to Section 10.3.4 and 10.8, the Committee (or the
Board, in the case of Options granted to Independent Directors) may, in its
discretion, at the time of grant, include such further provisions and
limitations in any Option, Performance Award, Stock Appreciation Right, Dividend
Equivalent, or Stock Payment, or Restricted Stock or Deferred Stock agreement or
certificate, as it may deem equitable and in the best interests of the Company.
10.3.4. With respect to Options, Stock Appreciation Rights and
performance or incentive awards described in Article 7 which are granted to
Section 162(m) Participants and are intended to qualify as performance-based
compensation under Section 162(m)(4)(C), no adjustment or action described in
this Section 10.3 or in any other provision of the Plan shall be authorized to
the extent that such adjustment or action would cause the Plan to violate
Section 422(b)(1) of the Code or would cause such option or stock appreciation
right to fail to so qualify under Section 162(m)(4)(C), as the case may be, or
any successor provisions thereto. Furthermore, no such adjustment or action
shall be authorized to the extent such adjustment or action would result in
short-swing profits liability under Section 16 or violate the exemptive
conditions of Rule 16b-3 unless the Committee (or the Board, in the case of
Options granted to Independent Directors) determines that the option or other
award is not to comply with such exemptive conditions. The number of shares of
Common Stock subject to any option, right or award shall always be rounded to
the next whole number.
10.4. Approval of Plan by Stockholders. This Plan will be submitted
for the approval of the Company's stockholders within twelve months after the
date of the Board's initial adoption of this Plan, Options, Performance Awards,
Stock Appreciation Rights, Dividend Equivalents or Stock Payments may be granted
and Restricted Stock or Deferred Stock may be awarded prior to such stockholder
approval, provided that such Options, Performance Awards, Stock Appreciation
Rights, Dividend Equivalents or Stock Payments shall not be exercisable and such
Restricted Stock or Deferred Stock shall not vest prior to the time when this
Plan is approved by the stockholders, and provided further that if such approval
has not been obtained at the end of said twelve-month period, all Options,
Performance Awards, Stock Appreciation Rights, Dividend Equivalents or Stock
Payments previously granted and all Restricted Stock or Deferred Stock
previously awarded under this Plan shall thereupon be canceled and become null
and void.
10.5. Tax Withholding. The Company shall be entitled to require
payment in cash or deduction from other compensation payable to each Optionee,
Grantee or Restricted Stockholder
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of any sums required by federal, state or local tax law to be withheld with
respect to the issuance, vesting or exercise of any Option, Restricted Stock,
Deferred Stock, Performance Award, Stock Appreciation Right, Dividend Equivalent
or Stock Payment. The Committee (or the Board, in the case of Options granted
to Independent Directors) may in its discretion and in satisfaction of the
foregoing requirement allow such Optionee, Grantee or Restricted Stockholder to
elect to have the Company withhold shares of Common Stock otherwise issuable
under such Option or other award (or allow the return of shares of Common Stock)
having a Fair Market Value equal to the sums required to be withheld.
10.6. Loans. The Committee may, in its discretion, extend one or more
loans to key Employees in connection with the exercise or receipt of an Option,
Performance Award, Stock Appreciation Right, Dividend Equivalent or Stock
Payment granted under this Plan, or the issuance of Restricted Stock or Deferred
Stock awarded under this Plan. The terms and conditions of any such loan shall
be set by the Committee.
10.7. Forfeiture Provisions. Pursuant to its general authority to
determine the terms and conditions applicable to awards under the Plan, the
Committee (or the Board, in the case of Options granted to Independent
Directors) shall have the right (to the extent consistent with the applicable
exemptive conditions of Rule 16b-3) to provide, in the terms of Options or other
awards made under the Plan, or to require the recipient to agree by separate
written instrument, that (i) any proceeds, gains or other economic benefit
actually or constructively received by the recipient upon any receipt or
exercise of the award, or upon the receipt or resale of any Common Stock
underlying such award, must be paid to the Company, and (ii) the award shall
terminate and any unexercised portion of such award (whether or not vested)
shall be forfeited, if (a) a Termination of Employment, Termination of
Consultancy or Termination of Directorship occurs prior to a specified date, or
within a specified time period following receipt or exercise of the award, or
(b) the recipient at any time, or during a specified time period, engages in any
activity in competition with the Company, or which is inimical, contrary or
harmful to the interests of the Company, as further defined by the Committee (or
the Board, as applicable).
10.8. Limitations Applicable to Section 16 Persons and
Performance-Based Compensation. Notwithstanding any other provision of this
Plan, and any Option, Performance Award, Stock Appreciation Right, Dividend
Equivalent or Stock Payment granted, or Restricted Stock or Deferred Stock
awarded, to any individual who is then subject to Section 16 of the Exchange
Act, shall be subject to any additional limitations set forth in any applicable
exemptive rule under Section 16 of the Exchange Act (including any amendment to
Rule 16b-3 of the Exchange Act) that are requirements for the application of
such exemptive rule. To the extent permitted by applicable law, the Plan,
Options, Performance Awards, Stock Appreciation Rights, Dividend Equivalents,
Stock Payments, Restricted Stock and Deferred Stock granted or awarded hereunder
shall be deemed amended to the extent necessary to conform to such applicable
exemptive rule. Furthermore, notwithstanding any other provision of this Plan,
any Option, Stock Appreciation Right or performance or incentive award described
in Article VII which is granted to a Section 162(m) Participant and is intended
to qualify as performance-based
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compensation as described in Section 162(m)(4)(C) of the Code shall be subject
to any additional limitations set forth in Section 162(m) of the Code (including
any amendment to Section 162(m) of the Code) or any regulations or rulings
issued thereunder that are requirements for qualification as performance-based
compensation as described in Section 162(m)(4)(C) of the Code, and this Plan
shall be deemed amended to the extent necessary to conform to such requirements.
10.9. Effect of Plan Upon Options and Compensation Plans. The adoption
of this Plan shall not affect any other compensation or incentive plans in
effect for the Company or any Subsidiary. Nothing in this Plan shall be
construed to limit the right of the Company (i) to establish any other forms of
incentives or compensation for Employees, Directors or Consultants of the
Company or any Subsidiary or (ii) to grant or assume options or other rights
otherwise than under this Plan in connection with any proper corporate purpose
including but not by way of limitation, the grant or assumption of options in
connection with the acquisition by purchase, lease, merger, consolidation or
otherwise, of the business stock or assets of any corporation, partnership,
limited liability company, firm or association.
10.10. Compliance with Laws. This Plan, the granting and vesting of
Options, Restricted Stock awards, Deferred Stock Awards, Performance Awards,
Stock Appreciation Rights, Dividend Equivalents or Stock Payments under this
Plan and the issuance and delivery of shares of Common Stock and the payment of
money under this Plan or under Options, Performance Awards, Stock Appreciation
Rights, Dividend Equivalents or Stock, Payments granted or Restricted Stock or
Deferred Stock awarded hereunder are subject to compliance with all applicable
federal and state laws, rules and regulations (including but not limited to
state and federal securities law and federal margin requirements) and to such
approvals by any listing, regulatory or governmental authority as may, in the
opinion of counsel for the Company, be necessary or advisable in connection
therewith. Any securities delivered under this Plan shall be subject to such
restrictions, and the person acquiring such securities shall, if requested by
the Company, provide such assurances and representations to the Company as the
Company may deem necessary or desirable to assure compliance with all applicable
legal requirements. To the extent permitted by applicable law, the Plan,
Options, Restricted Stock awards, Deferred Stock awards, Performance Awards,
Stock Appreciation Rights, Dividend Equivalents or Stock Payments granted or
awarded hereunder shall be deemed amended to the extent necessary to conform to
such laws, rules and regulations.
10.11. Titles. Titles are provided herein for convenience only and are
not to serve as a basis for interpretation or construction of this Plan.
10.12. Governing Law. This Plan and any agreements hereunder shall be
administered, interpreted and enforced under the internal laws of the
Commonwealth of Pennsylvania without regard to conflicts of laws thereof.
-28-
<PAGE>
I hereby certify that the foregoing Plan was duly adopted by the Board of
Directors of ___________________ on ____________, 1998.
Executed on this ____ day of _________, 1998.
Secretary,
-29-
<PAGE>
Exhibit 10.5
__________________________________________________
THE ELECTRONICS BOUTIQUE, INC.
__________________________________________________
__________________________________________________
__________________________________________________
LOAN AND SECURITY AGREEMENT
Dated: March 16, 1998
__________________________________________________
__________________________________________________
__________________________________________________
FLEET CAPITAL CORPORATION
__________________________________________________
<PAGE>
TABLE OF CONTENTS
Page
----
SECTION 1. CREDIT FACILITY. . . . . . . . . . . . . . . . . . . . . . . . .1
1.1 Revolving Credit Loans . . . . . . . . . . . . . . . . . . . . . .1
1.2 Supplemental Loan. . . . . . . . . . . . . . . . . . . . . . . . .1
SECTION 2. INTEREST, FEES AND CHARGES. . . . . . . . . . . . . . . . . . . .2
2.1 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
2.2 Computation of Interest and Fees . . . . . . . . . . . . . . . . .4
2.3 Commitment Fee . . . . . . . . . . . . . . . . . . . . . . . . . .4
2.4 Collateral Management Fee. . . . . . . . . . . . . . . . . . . . .4
2.5 Audit and Appraisal Fees . . . . . . . . . . . . . . . . . . . . .4
2.6 Reimbursement of Expenses. . . . . . . . . . . . . . . . . . . . .4
2.7 Bank Charges . . . . . . . . . . . . . . . . . . . . . . . . . . .5
2.8 Indemnity re: LIBOR. . . . . . . . . . . . . . . . . . . . . . . .5
SECTION 3. LOAN ADMINISTRATION . . . . . . . . . . . . . . . . . . . . . . .5
3.1 Manner of Borrowing Revolving Credit Loans . . . . . . . . . . . .5
3.2 Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
3.3 Mandatory and Permissive Prepayments . . . . . . . . . . . . . . .7
3.4 Application of Payments and Collections. . . . . . . . . . . . . .7
3.5 All Loans to Constitute One Obligation . . . . . . . . . . . . . .8
3.6 Loan Account . . . . . . . . . . . . . . . . . . . . . . . . . . .8
3.7 Statements of Account. . . . . . . . . . . . . . . . . . . . . . .8
SECTION 4. TERM AND TERMINATION. . . . . . . . . . . . . . . . . . . . . . .8
4.1 Term of Agreement. . . . . . . . . . . . . . . . . . . . . . . . .8
4.2 Termination. . . . . . . . . . . . . . . . . . . . . . . . . . . .9
SECTION 5. SECURITY INTERESTS. . . . . . . . . . . . . . . . . . . . . . . .9
5.1 Security Interest in Collateral. . . . . . . . . . . . . . . . . .9
5.2 Lien Perfection; Further Assurances. . . . . . . . . . . . . . . 10
5.3 Lien on Realty . . . . . . . . . . . . . . . . . . . . . . . . . 11
SECTION 6. COLLATERAL ADMINISTRATION . . . . . . . . . . . . . . . . . . . 11
6.1 General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
6.2 Administration of Accounts . . . . . . . . . . . . . . . . . . . 12
6.3 Administration of Inventory. . . . . . . . . . . . . . . . . . . 12
6.4 Administration of Equipment. . . . . . . . . . . . . . . . . . . 13
6.5 Payment of Charges . . . . . . . . . . . . . . . . . . . . . . . 13
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<PAGE>
SECTION 7. REPRESENTATIONS AND WARRANTIES. . . . . . . . . . . . . . . . . 13
7.1 General Representations and Warranties . . . . . . . . . . . . . 13
7.2 Continuous Nature of Representations and Warranties. . . . . . . 17
7.3 Survival of Representations and Warranties . . . . . . . . . . . 17
SECTION 8. COVENANTS AND CONTINUING AGREEMENTS . . . . . . . . . . . . 18
8.1 Affirmative Covenants. . . . . . . . . . . . . . . . . . . . . . 18
8.2 Negative Covenants . . . . . . . . . . . . . . . . . . . . . . . 19
8.3 Specific Financial Covenants . . . . . . . . . . . . . . . . . . 22
8.4 Stock Ownership. . . . . . . . . . . . . . . . . . . . . . . . . 22
SECTION 9. CONDITIONS PRECEDENT . . . . . . . . . . . . . . . . . . . . . 22
9.1 Documentation. . . . . . . . . . . . . . . . . . . . . . . . . . 22
9.2 No Default . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
9.3 Other Loan Documents . . . . . . . . . . . . . . . . . . . . . . 24
9.4 Availability . . . . . . . . . . . . . . . . . . . . . . . . . . 24
9.5 No Litigation. . . . . . . . . . . . . . . . . . . . . . . . . . 24
SECTION 10. EVENTS OF DEFAULT; RIGHTS AND REMEDIES
ON DEFAULT. . . . . . . . . . . . . . . . . . . . . . . . . . 24
10.1 Events of Default. . . . . . . . . . . . . . . . . . . . . . . . 24
10.2 Acceleration of the Obligations. . . . . . . . . . . . . . . . . 26
10.3 Other Remedies . . . . . . . . . . . . . . . . . . . . . . . . . 27
10.4 Remedies Cumulative; No Waiver . . . . . . . . . . . . . . . . . 28
SECTION 11. MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . . . . 28
11.1 Power of Attorney. . . . . . . . . . . . . . . . . . . . . . . . 28
11.2 Indemnity. . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
11.3 Modification of Agreement; Sale of Interest. . . . . . . . . . . 29
11.4 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . 30
11.5 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . 30
11.6 Cumulative Effect; Conflict of Terms . . . . . . . . . . . . . . 30
11.7 Execution in Counterparts. . . . . . . . . . . . . . . . . . . . 30
11.8 Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
11.9 Lender's Consent . . . . . . . . . . . . . . . . . . . . . . . . 31
11.10 Credit Inquiries. . . . . . . . . . . . . . . . . . . . . . . . 31
11.11 Time of Essence . . . . . . . . . . . . . . . . . . . . . . . . 31
11.12 Entire Agreement. . . . . . . . . . . . . . . . . . . . . . . . 31
11.13 Interpretation. . . . . . . . . . . . . . . . . . . . . . . . . 31
11.14 GOVERNING LAW; CONSENT TO FORUM . . . . . . . . . . . . . . . . 32
11.15 WAIVERS BY BORROWER . . . . . . . . . . . . . . . . . . . . . . 33
ii
<PAGE>
LOAN AND SECURITY AGREEMENT
THIS LOAN AND SECURITY AGREEMENT is made this ____ day of March, 1998,
by and between FLEET CAPITAL CORPORATION ("Lender"), a Rhode Island corporation
with an office at 200 Glastonbury Boulevard, Glastonbury, CT 06033 and THE
ELECTRONICS BOUTIQUE, INC., a Pennsylvania corporation ("Borrower"), with its
chief executive office at 931 South Matlack Street, West Chester, PA 19382.
Capitalized terms used in this Agreement have the meanings assigned to them
in Appendix A, General Definitions. Accounting terms not otherwise specifically
defined herein shall be construed in accordance with GAAP, consistently applied.
SECTION 1. CREDIT FACILITY
Subject to the terms and conditions of, and in reliance upon the
representations and warranties made in, this Agreement and the other Loan
Documents, Lender agrees to make a Total Credit Facility of up to $50,000,000.00
available upon Borrower's request therefor, as follows:
1.1 Revolving Credit Loans. Lender agrees, for so long as no Event of
Default exists, to make Revolving Credit Loans to Borrower from time to time, as
requested by Borrower in the manner set forth in subsection 3.1.1 hereof, up to
a maximum principal amount at any time outstanding equal to the lesser of (a) an
amount equal to the difference between the Maximum Revolving Credit Amount and
the outstanding balance of the Supplemental Loan or (b)the Borrowing Base, which
shall be repayable in accordance with the terms of the Revolving Credit Note.
If the unpaid balance of the Revolving Credit Loans should exceed the Borrowing
Base or any other limitation set forth in this Agreement, such Revolving Credit
Loans shall nevertheless constitute Obligations that are due and payable on
demand, secured by the Collateral other than the Mortgage and entitled to all
benefits thereof.
1.2 Supplemental Loan. Lender agrees that upon Borrower's request and so
long as (i) no Event of Default is then outstanding, (ii) Borrower then executes
and delivers to lender the Supplemental Loan Note, and (iii) Borrower executes
and delivers or causes to be executed and delivered to Lender the Mortgage and
all other documents described in and otherwise fulfills its obligations under
Section 5.3 hereof, it shall make a supplemental loan (the "Supplemental Loan")
to Borrower in the principal amount of $6,000,000, which shall be repayable in
accordance with the terms of the Supplemental Loan Note and shall be secured by
all of the Collateral. Lender's obligation under this Section 1.2 shall
terminate upon the earlier to occur of (a) the Maturity Date or (b) termination
of the Revolving Credit.
1.3 Use of Proceeds. The proceeds of the Loans shall be used solely for
(i) satisfaction of all existing Indebtedness of Borrower to Bank of Seoul; (ii)
Borrower's working capital needs;
<PAGE>
and (iii) other corporate needs of Borrower not otherwise prohibited under the
terms of Section 8.2 of this Agreement.
SECTION 2. INTEREST, FEES AND CHARGES
2.1 Interest.
2.1.1 Revolving Credit Interest:
(a) Rate Options. At the time of each Loan, and thereafter
from time to time, Borrower shall have the right, subject to the terms and
conditions of this Agreement, and provided no Event of Default has occurred and
is continuing, to designate to Lender (in writing, if so requested by Lender)
that all, or a portion of the Loans shall bear interest at either the (i) LIBOR
Based Rate or (ii) Floating Rate. Interest on each portion thereof shall accrue
and be paid at the time and rate applicable to the respective option selected by
Borrower or otherwise governing under the terms of this Agreement. If for any
reason the LIBOR Based Rate option is unavailable, the Floating Rate shall
apply. The rate of interest on Floating Rate Loans shall increase or decrease
by an amount equal to any increase or decrease in the Base Rate effective as of
the opening of business on the day that any such change in the Base Rate occurs.
(i) LIBOR Rate Option:
(A) Requests. Provided no Event of Default has
occurred and is continuing, and subject to the provisions of this Section 2.1.1
(a)(i), if Borrower desires to have the LIBOR Based Rate apply to all or a
portion of the Loans, Borrower shall give Lender a written irrevocable request
no later than 11:00 A.M. Eastern time on the second (2nd) Business Day prior to
the requested borrowing date specifying (1) the date the LIBOR Based Rate shall
apply (which shall be a Business Day), (2) the LIBOR Interest Period, and (3)
the amount to be subject to the LIBOR Based Rate provided that such amount shall
be an integral multiple of Five Hundred Thousand Dollars ($500,000.00). In no
event may Borrower have outstanding at any time more than five (5) different
tranches of LIBOR Rate Loans.
2
<PAGE>
(B) LIBOR Interest Periods. LIBOR Rate Loans
shall be selected by Borrower for a LIBOR Interest Period during which the LIBOR
Based Rate is applicable; provided, however, that if the LIBOR Interest Period
would otherwise end on a day which shall not be a London Business Day, such
LIBOR Interest Period shall be extended to the next preceding or succeeding
London Business Day as is the Lender's custom in the market to which such LIBOR
Rate Loan relates. All accrued and unpaid interest on a LIBOR Rate Loan shall
be paid monthly in accordance with Section 3.2.2. No LIBOR Interest Period with
respect to any of the Loans may end after the Maturity Date. Subject to all of
the terms and conditions applicable to a request to convert all or a portion of
the Loans to a LIBOR Rate Loan, Borrower may extend a LIBOR Rate Loan as of the
last day of the LIBOR Interest Period to a new LIBOR Rate Loan. If Borrower
fails to notify the Lender of the LIBOR Interest Period for a subsequent LIBOR
Rate Loan at least two (2) Business Days prior to the last day of the then
current LIBOR Interest Period of an outstanding LIBOR Rate Loan, then such
outstanding LIBOR Rate Loan shall, at the end of the applicable LIBOR Interest
Period, accrue interest at the Floating Rate.
(C) Adjustments. The Adjusted LIBOR Rate may be
automatically adjusted by Lender on a prospective basis to take into account the
additional or increased cost of maintaining any necessary reserves for
Eurodollar deposits or increased costs due to changes in applicable law or
regulation or the interpretation thereof occurring subsequent to the
commencement of the then applicable LIBOR Interest Period, including but not
limited to, changes in tax laws (except changes of general applicability in
corporate income tax laws) and changes in the reserve requirements imposed by
the Board of Governors of the Federal Reserve System (or any successor or other
applicable governing body), excluding the Reserve Percentage and any Reserve
which has resulted in a payment pursuant to Section 2.8 below, that increase the
cost to Lender of funding the LIBOR Rate Loan. Lender shall promptly give
Borrower notice of such a determination and adjustment, which determination
shall be prima facie evidence of the correctness of the fact and the amount of
such adjustment.
(D) Unavailability. If Borrower shall have
requested the rate based on the Adjusted LIBOR Rate in accordance with this
Section 2.1.1(a)(I) and Lender shall have determined, in good faith, that
Eurodollar deposits equal to the amount of the principal of the requested LIBOR
Rate Loan and for the LIBOR Interest Period specified are unavailable, or that
the rate based on the Adjusted LIBOR Rate will not adequately and fairly reflect
the cost of the Adjusted LIBOR Rate applicable to the specified LIBOR Interest
Period, of making or maintaining the principal amount of the requested LIBOR
Rate Loan during the LIBOR Interest Period specified, or that by reason of
circumstances affecting Eurodollar markets, adequate means do not exist for
ascertaining the rate based on the Adjusted LIBOR Rate applicable to the
specified LIBOR Interest Period, Lender shall promptly give notice of such
determination to Borrower that the rate based on the Adjusted LIBOR Rate is not
available. A determination, in good faith, by Lender hereunder shall be prima
facie evidence of the correctness of the fact and amount of such additional
costs or unavailability. Upon such a determination, (i) the obligation to
convert to, or maintain a LIBOR Rate Loan at the rate based on the Adjusted
LIBOR Rate shall be suspended until Lender shall have notified Borrower that
such conditions shall have ceased to exist, and (ii) the portion of the Loans
subject to the request or requested conversion shall accrue interest at the
3
<PAGE>
Floating Rate.
2.1.2 Default Rate of Interest. Upon and after the occurrence of
an Event of Default, and during the continuation thereof, and after written
notice of Lender's intention to institute the Default Rate (as defined below),
the principal amount of all Loans shall bear interest at a rate per annum equal
to two hundred (200) basis points above the interest rate otherwise applicable
thereto (the "Default Rate").
2.1.3 Maximum Interest. In no event whatsoever shall the
aggregate of all amounts deemed interest hereunder or under the Notes and
charged or collected pursuant to the terms of this Agreement or pursuant to the
Notes exceed the highest rate permissible under any law which a court of
competent jurisdiction shall, in a final determination, deem applicable hereto.
If any provisions of this Agreement or the Notes are in contravention of any
such law, the rate hereunder shall automatically be reduced to the maximum rate
permitted by applicable law, and Lender shall, in its discretion, to the extent
permitted by applicable law, apply such excess to the principal balance of the
Loans or refund such excess to Borrower, and such provisions shall be deemed
amended to conform thereto.
2.2 Computation of Interest and Fees. Interest and all fees shall be
calculated daily and shall be computed on the actual number of days elapsed over
a year of 360 days.
2.3 Commitment Fee. Borrower shall pay to Lender on the Closing Date, a
commitment fee of $100,000, which is deemed fully earned and nonrefundable on
the Closing Date.
2.4 Collateral Management Fee. Borrower shall pay to Lender an annual
collateral management fee of $25,000 ("Collateral Management Fee") which fee
shall be fully earned, non-refundable, and payable quarterly in advance,
commencing on the Closing Date and on the same day of each quarterly period
thereafter.
2.5 Audit and Appraisal Fees. Borrower shall pay to Lender audit and
appraisal fees in accordance with Lender's current schedule of fees in effect
from time to time in connection with Lender's audits and appraisals of
Borrower's books and records and such other matters as Lender shall deem
appropriate, plus all out-of-pocket expenses incurred by Lender in connection
with such audits and appraisals; provided that, so long as no Event of Default
has occurred and is continuing, all such audit and appraisal fees incurred
during each 12 month period after the Closing Date shall be limited to, and
included within, the Collateral Management Fee.
2.6 Reimbursement of Expenses. If, at any time or times regardless of
whether or not an Event of Default then exists, Lender incurs legal or
accounting expenses or any other costs or out-of-pocket expenses in connection
with (i) the analysis, negotiation and preparation of this Agreement or any of
the other Loan Documents and closing on the Credit Facility described herein
(provided that Borrower's reimbursement obligation for legal fees (excluding
out-of-pocket expenses) relating to closing on the Credit Facility shall be
capped at $17,500.00), any amendment, modification, replacement or termination
of this Agreement or any of the other Loan Documents;
4
<PAGE>
(ii) the reasonable out-of-pocket expenses incurred in the administration of
this Agreement or any of the other Loan Documents and the transactions
contemplated hereby and thereby (Borrower's reimbursement obligation under this
clause (ii) to be limited to $5,000.00 per year absent the occurrence of an
Event of Default, in which case, such reimbursement obligation shall be
unlimited); (iii) any litigation, contest, dispute, suit, proceeding or action
(whether instituted by Lender, Borrower or any other Person) in any way relating
to the Collateral, this Agreement or any of the other Loan Documents or
Borrower's affairs; (iv) any attempt (as permitted under this Agreement)
following the occurrence of an Event of Default to enforce any rights of Lender
against Borrower or any other Person which may be obligated to Lender by virtue
of this Agreement or any of the other Loan Documents, including, without
limitation, the Account Debtors; or (v) any attempt (as permitted under this
Agreement) to inspect, verify, protect, preserve, restore, collect, sell,
liquidate or otherwise dispose of or realize upon the Collateral; then all such
legal and accounting expenses, other costs and out of pocket expenses of Lender
shall be charged to Borrower. All amounts chargeable to Borrower under this
Section 2.6 shall be Obligations secured by all of the Collateral, shall be
payable on demand to Lender and shall bear interest from the date such demand is
made until paid in full at the Floating Rate applicable to the Loans from time
to time. Borrower shall also reimburse Lender for expenses incurred by Lender
in its administration of the Collateral to the extent and in the manner provided
in Section 6 hereof.
2.7 Bank Charges. Borrower shall pay to Lender, on demand, any and all
fees, costs or expenses which Lender pays to a bank or other similar institution
arising out of or in connection with (i) the forwarding to Borrower or any other
Person on behalf of Borrower, by Lender of proceeds of Loans made by Lender to
Borrower pursuant to this Agreement and (ii) the depositing for collection by
Lender of any check or item of payment received or delivered to Lender on
account of the Obligations. As of the Closing Date, the average wire transfer
charges charged to Lender are approximately $20.00 per wire transfer.
2.8 Indemnity re: LIBOR. Borrower hereby indemnifies Lender and holds
Lender harmless from and against any and all losses or expenses that Lender may
sustain or incur as a consequence of any prepayment or any Default by Borrower
in the payment of the principal of or interest on any LIBOR Rate Loan or failure
by Borrower to complete a borrowing of, a prepayment of or conversion of or to a
LIBOR Rate Loan after notice thereof has been given by Borrower, including (but
not limited to) any interest payable by Lender to lenders of funds obtained by
it in order to make or maintain its LIBOR Rate Loans hereunder, and any other
loss or expense incurred by Lender by reason of the liquidation or reemployment
of deposits or other funds acquired by Lender to make, continue, convert into or
maintain, a LIBOR Rate Loan.
SECTION 3. LOAN ADMINISTRATION
3.1 Manner of Borrowing Revolving Credit Loans. Borrowings under the
Credit Facility established pursuant to Section 1 hereof shall be as follows:
3.1.1 Loan Requests. A request for a Revolving Credit Loan shall
be made, or shall
5
<PAGE>
be deemed to be made, by an Authorized Officer in the following manner: (i)
Borrower may give Lender notice of the intention to borrow, in which notice
Borrower shall specify the amount of the proposed borrowing and the proposed
borrowing date (which shall be a Business Day), no later than 1:00 P.M. Eastern
time on the proposed borrowing date, provided, however, that no such request may
be made at a time when there exists an Event of Default; and (ii) the becoming
due of any amount required to be paid under this Agreement or any of the Notes,
whether as interest or for any other Obligation, shall be deemed irrevocably to
be a request for a Revolving Credit Loan on the due date in the amount required
to pay such interest or other Obligation. As an accommodation to Borrower,
Lender shall permit telephonic requests for Loans and electronic transmittal of
instructions, authorizations, agreements or reports to Lender by Borrower.
Unless Borrower specifically directs Lender in writing not to accept or act upon
telephonic or electronic communications from Borrower, Lender shall have no
liability to Borrower for any loss or damage suffered by Borrower as a result of
Lender's honoring of any requests, execution of any instructions, authorizations
or agreements or reliance on any reports communicated to it telephonically or
electronically and purporting to have been sent to Lender by Borrower and Lender
shall have no duty to verify the origin of any such communication or the
authority of the person sending it.
3.1.2 Disbursement. Borrower hereby irrevocably authorizes Lender
to disburse the proceeds of each Loan requested, or deemed to be requested,
pursuant to this subsection 3.1.2 as follows: (i) the proceeds of each Loan
requested under subsection 3.1.1(i) shall be disbursed by Lender in lawful money
of the United States of America in immediately available funds, in the case of
the initial borrowing, in accordance with the terms of the written disbursement
letter from Borrower, and in the case of each subsequent borrowing, by wire
transfer to such bank account as may be agreed upon by Borrower and Lender from
time to time or elsewhere if pursuant to a written direction from Borrower; and
(ii) the proceeds of each Loan requested under subsection 3.1.1(ii) shall be
disbursed by Lender by way of direct payment of the relevant interest or other
Obligation.
3.1.3 Authorization. Borrower hereby irrevocably authorizes
Lender, in Lender's sole discretion, to advance to Borrower, and to charge to
Borrower's Loan Account hereunder as a Revolving Credit Loan (regardless of
whether an Overadvance is thereby created) a sum sufficient to pay all interest,
when due, accrued on the Obligations during the immediately preceding month, all
principal when due, and all costs, fees and expenses at any time owed by
Borrower to Lender hereunder.
3.1.4 Borrowing Base Certificates. Borrower shall give Lender a
copy of its current inventory report as well as a current Borrowing Base
Certificate on a monthly basis within ten (10) Business Days days of the end of
each month.
3.2 Payments. Except where evidenced by notes or other instruments issued
or made by Borrower to Lender specifically containing payment provisions which
are in conflict with this Section 3.2 (in which event the conflicting provisions
of said notes or other instruments shall govern and control), the Obligations
shall be payable as follows:
3.2.1 Principal. Principal payable on account of Loans shall be
payable by
6
<PAGE>
Borrower to Lender immediately upon the earliest of (i) the receipt by Lender or
Borrower of any proceeds of any of the Collateral to the extent of said proceeds
under the conditions set forth in Section 3.3.1 below, (ii) the occurrence of an
Event of Default in consequence of which Lender elects to accelerate the
maturity and payment of the Obligations, or (iii) termination of this Agreement
pursuant to Section 4 hereof; provided, however, that if an Overadvance shall
exist at any time, Borrower shall, on demand, repay the Overadvance.
3.2.2 Interest. Interest accrued on the Loans shall be due on the
earliest of (i) the first calendar day of each month (for the immediately
preceding month), computed through the last calendar day of the preceding month,
(ii) the occurrence of an Event of Default in consequence of which Lender elects
to accelerate the maturity and payment of the Obligations or (iii) termination
of this Agreement pursuant to Section 4 hereof.
3.2.3 Costs, Fees and Charges. Costs, fees and charges payable
pursuant to this Agreement shall be payable by Borrower as and when provided in
Section 2 hereof to Lender or to any other Person designated by Lender in
writing.
3.2.4 Other Obligations. The balance of the Obligations (other
than those set forth in this Section 3.2) requiring the payment of money shall
be payable by Borrower to Lender as and when provided in this Agreement, the
Notes, the Other Agreements or the Security Documents, or if not otherwise
provided, then on demand.
3.3 Mandatory and Permissive Prepayments.
3.3.1 Proceeds of Sale, Loss, Destruction or Condemnation of
Collateral. If Borrower sells any of its personal Property as permitted
pursuant to this Agreement or if any of the Collateral is lost or destroyed or
taken by condemnation and no Event of Default is then outstanding, the proceeds
of any such sale, loss, destruction or taking (including insurance proceeds) may
be retained by Borrower for any use in its business not prohibited hereunder.
Under all other circumstances, all proceeds (including insurance proceeds) of
any sale(s) of personal Property or of any loss, destruction, or taking of
personal Property as well as all proceeds of any sale, destruction or taking of
the real Property (if subject to the Mortgage) shall be immediately paid to or
retained by Lender and applied as a mandatory prepayment of the Loans (first to
the Supplemental Loan, then to the Revolving Credit Loans). Lender shall not be
required to release its Mortgage on the Real Property in connection with any
sale thereof unless the Supplemental Loan (including all accrued interest
thereon) is then unconditionally paid in full.
3.3.2 LIBOR Rate Loans. No portion of the LIBOR Rate Loans may be
prepaid for any reason during a LIBOR Interest Period unless Borrower first
satisfies in full its obligations under Section 2.8 arising from such
prepayment.
3.4 Application of Payments and Collections. Subject to subsection 2.2 of
this Agreement, all items of payment received by Lender by 2:00 p.m. Eastern
time, on any Business Day shall be deemed received on that Business Day. All
items of payment received after 2:00 p.m.
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Eastern time, on any Business Day shall be deemed received on the following
Business Day. Until payment in full of all Obligations and termination of this
Agreement, Borrower irrevocably waives (except as expressly provided for in this
Agreement or otherwise by Lender) the right to direct the application of any and
all payments and collections at any time or times hereafter received by Lender
from or on behalf of Borrower, and Borrower does hereby irrevocably agree that
Lender shall have the continuing exclusive right to apply and reapply any and
all such payments and collections received at any time or times hereafter by
Lender or its agent against the Obligations, in such manner as Lender may deem
advisable, notwithstanding any entry by Lender upon any of its books and
records. Notwithstanding the foregoing, prior to the occurrence of an Event of
Default, Borrower shall be entitled to direct whether a payment of principal be
applied to the Supplemental Loan or the Revolving Credit Loans provided such
application does not contravene any other requirement for application expressly
set forth in this Agreement. If, as the result of receipt of proceeds or
collections of Collateral as authorized by subsection 6.2.6 hereof, a credit
balance exists in the Loan Account, such credit balance shall not accrue
interest in favor of Borrower, but shall be available to Borrower at any time or
times for so long as no Default or Event of Default exists. Such credit balance
may be applied to and offset any of the Obligations arising from time to time.
3.5 All Loans to Constitute One Obligation. The Loans shall constitute
one general Obligation of Borrower, and shall be secured by Lender's Lien upon
all of the Collateral, subject to Section 4.2.4.
3.6 Loan Account. Lender shall enter all Loans as debits to the Loan
Account and shall also record in the Loan Account all payments made by Borrower
on any Obligations and all proceeds of Collateral which are finally paid to
Lender, and may record therein, in accordance with customary accounting
practice, other debits and credits, including interest and all charges and
expenses properly chargeable to Borrower.
3.7 Statements of Account. Lender will account to Borrower monthly with a
statement of Loans, charges and payments made pursuant to this Agreement, and
such account rendered by Lender shall be deemed final, binding and conclusive
upon Borrower absent manifest error unless Lender is notified by Borrower in
writing to the contrary within sixty (60) days of the date each accounting is
mailed to Borrower. Such notice shall only be deemed an objection to those
items specifically objected to therein.
SECTION 4. TERM AND TERMINATION
4.1 Term of Agreement. Subject to Lender's right to cease making Loans to
Borrower upon or after the occurrence, and during the continuance, of any
Default or Event of Default, this Agreement shall be in effect for a period of
three (3) years from the date hereof (the "Original Term") and this Agreement
shall automatically renew itself for one-year periods thereafter (the "Renewal
Terms") unless terminated as provided in Section 4.2 hereof.
4.2 Termination.
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4.2.1 Termination by Lender. Upon at least 90 days prior written
notice to Borrower, Lender may terminate this Agreement as of the last day of
the Original Term or the then current Renewal Term and Lender may terminate this
Agreement without notice upon or after the occurrence, and during the
continuance, of an Event of Default.
4.2.2 Termination by Borrower. Upon at least 45 days prior
written notice to Lender, Borrower may, at its option, terminate this Agreement;
provided, however, no such termination shall be effective until Borrower has
paid all of the Obligations in immediately available funds. Any notice of
termination given by Borrower shall be irrevocable unless Lender otherwise
agrees in writing, and Lender shall have no obligation to make any Loans on or
after the termination date stated in such notice. Subject only to Section 4.2.4
below, Borrower may elect to terminate this Agreement in its entirety only and
no section of this Agreement or type of Loan available hereunder may be
terminated singly.
4.2.3 Effect of Termination. All of the Obligations shall be
immediately due and payable upon the termination date stated in any notice of
termination of this Agreement. All undertakings, agreements, covenants,
warranties and representations of Borrower contained in the Loan Documents shall
survive any such termination, and Lender shall retain its Liens in the
Collateral and all of its rights and remedies under the Loan Documents
notwithstanding such termination until Borrower has paid the Obligations to
Lender, in full, in immediately available funds. Notwithstanding the payment in
full of the Obligations, Lender shall not be required to terminate its security
interests in the Collateral unless, with respect to any loss or damage Lender
may incur as a result of dishonored checks or other items of payment received by
Lender from Borrower or any Account Debtor and applied to the Obligations,
Lender shall have received a written agreement in form and substance
satisfactory to Lender, executed by Borrower and by any Person (whose
creditworthiness for such purpose is reasonably acceptable to Lender) whose
loans or other advances to Borrower are used in whole or in part to satisfy the
Obligations, indemnifying Lender from any such potential loss or damage.
4.2.4 Prepayment of Supplemental Loan. Borrower may at any time
prepay all or a portion of the Supplemental Loan. At such time as the
Supplemental Loan is unconditionally paid in full, the Mortgage shall be
satisfied and released and be of no further force and effect.
SECTION 5. SECURITY INTERESTS
5.1 Security Interest in Collateral. To secure the prompt payment and
performance to Lender of the Obligations, Borrower hereby grants to Lender a
continuing first Lien upon the following assets of Borrower, whether now owned
or existing or hereafter created, acquired or arising and wheresoever located:
(i) Accounts;
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(ii) Inventory;
(iii) Equipment;
(iv) Fixtures;
(v) General Intangibles relating to credit card transactions and/or
related to or arising from other Collateral;
(vi) Instruments related to or arising from other Collateral;
(vii) Documents related to or arising from other Collateral;
(viii) All monies and other Property of any kind now or at any time
or times hereafter in the possession or under the control of Lender or a
bailee or Affiliate of Lender;
(ix) All books and records (including, without limitation, customer
lists, credit files, computer programs, print-outs, and other computer
materials and records) of Borrower pertaining to any of (i) through (viii)
above; and
(x) All accessions to, substitutions for and all replacements and
cash and non-cash proceeds of (i) through (ix) above, including, without
limitation, proceeds of and unearned premiums with respect to insurance
policies insuring any of the Collateral.
5.2 Lien Perfection; Further Assurances. Borrower shall execute such
UCC-1 financing statements as are required by the Code and such other
instruments, assignments or documents as are necessary to perfect Lender's Lien
upon any of the Collateral and shall take such other action as may be required
by applicable law to perfect or to continue the perfection of Lender's Lien upon
the Collateral, including without limitation, the execution of all instruments,
documents and agreements required to have Lender's Lien noted on all
certificates of title for Borrower's Property for which such a certificate has
been issued and delivery to Lender of all Collateral requested by Lender to be
so delivered in order for Lender to obtain a perfected Lien thereon. Unless
prohibited by applicable law, and following Borrower's failure to do so after
written request by Lender, Borrower hereby authorizes Lender to execute and file
any such financing statement on Borrower's behalf. The parties agree that a
carbon, photographic or other reproduction of this Agreement shall be sufficient
as a financing statement and may be filed in any appropriate office in lieu
thereof. At Lender's request, Borrower shall also promptly execute or cause to
be executed and shall deliver to Lender any and all documents, instruments and
agreements deemed necessary by Lender to give effect to or carry out the terms
or intent of the Loan Documents, including, without limitation, delivery of all
landlord/ warehousemen lien subordination/waiver agreements requested by Lender.
5.3 Lien on Realty. Subject to the provisions of Section 4.2.4 hereof,
the due and punctual payment and performance of the Obligations related to the
Supplemental Loan shall also be secured by the Lien created by the Mortgage upon
the Real Property of the Borrower described
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therein. The Mortgage shall be executed by the Borrower in favor of Lender and
shall be duly recorded, at Borrower's expense, in each office where such
recording is required to constitute a fully perfected first Lien on the Real
Property covered thereby. Borrower shall deliver to Lender, at Borrower's
expense, mortgagee title insurance policies issued by a title insurance company
satisfactory to Lender, which policies shall be in form and substance
satisfactory to Lender and shall insure a valid first Lien in favor of Lender on
the Real Property covered thereby, subject only to those exceptions acceptable
to Lender and its counsel. Borrower shall deliver to Lender such other
documents, including, without limitation, existing survey prints and flood plain
certificates of the Real Property, as Lender and its counsel may request
relating to the Real Property subject to the Mortgage.
SECTION 6. COLLATERAL ADMINISTRATION
6.1 General
6.1.1 Location of Collateral. All Collateral, other than
Inventory in transit and motor vehicles, will at all times be kept by Borrower
at one or more of the locations set forth in Exhibit 6.1.1 hereto and shall not,
without the prior written approval of Lender, be moved therefrom except, prior
to an Event of Default and Lender's acceleration of the maturity of the
Obligations in consequence thereof, for (i) transfers of Collateral among
locations on such Exhibit 6.1.1, (ii) sales of Inventory in the ordinary course
of business; and (iii) removals of Equipment in connection with dispositions
thereof that are authorized by subsection 6.4.2 hereof.
6.1.2 Insurance of Collateral. Borrower shall maintain and pay
for insurance upon all Collateral wherever located and with respect to
Borrower's business, covering casualty, hazard, public liability, flood and such
other risks in such amounts and with such insurance companies as are reasonably
satisfactory to Lender. Borrower shall deliver the originals of such policies
to Lender with satisfactory lender's loss payable endorsements, naming Lender as
lender loss payee, assignee, mortgagee and/or additional insured, as appropriate
and providing that all such insurance proceeds are paid to Lender. Each policy
of insurance or endorsement shall contain a clause requiring the insurer to give
not less than 30 days prior written notice to Lender in the event of
cancellation of the policy for any reason whatsoever and a clause specifying
that the interest of Lender shall not be impaired or invalidated by any act or
neglect of Borrower or the owner of the Property or by the occupation of the
premises for purposes more hazardous than are permitted by said policy. If
Borrower fails to provide and pay for such insurance, and after written demand
from Lender to do so, Lender may, at its option, but shall not be required to,
procure the same and charge Borrower therefor. Borrower agrees to deliver to
Lender, promptly as rendered, true copies of all reports made in any reporting
forms to insurance companies.
6.1.3 Protection of Collateral. All expenses of protecting,
storing, warehousing, insuring, handling, maintaining and shipping the
Collateral, any and all excise, property, sales, and use taxes imposed by any
state, federal, or local authority on any of the Collateral or in respect of the
sale thereof shall be borne and paid by Borrower. If Borrower fails to promptly
pay any portion
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thereof when due, and Borrower fails to immediately make such past due payment
after Lender requests in writing, Lender may, at its option, but shall not be
required to, pay the same and charge Borrower therefor. Lender shall not be
liable or responsible in any way for the safekeeping of any of the Collateral or
for any loss or damage thereto or for any diminution in the value thereof, or
for any act or default of any warehouseman, carrier, forwarding agency, or other
person whomsoever, but the same shall be at Borrower's sole risk.
6.2 Administration of Accounts.
6.2.1 Records, Schedules and Assignments of Accounts. Borrower
shall keep accurate and complete records of its Accounts (including without
limitation purchases made through use of credit cards) and all payments and
collections thereon and shall submit to Lender, as Lender shall request if an
Event of Default is outstanding, copies of such records.
6.2.2 Collection of Accounts, Proceeds of Collateral. To expedite
collection, Borrower shall endeavor in the first instance to make collection
of its Accounts. If an Event of Default is outstanding, at the request of
Lender, all remittances received by Borrower on account of Accounts, together
with the proceeds of any other Collateral, shall be held as Lender's property
by Borrower as trustee of an express trust for Lender's benefit and Borrower
shall immediately remit the same in kind to Lender or to a depository account
designated by Lender. Lender retains the right at all times after the
occurrence of an Event of Default to notify Account Debtors that Accounts
have been assigned to Lender and to collect Accounts directly in its own name
and to charge the collection costs and expenses, including attorneys' fees to
Borrower. Lender has no duty to protect, insure, collect or realize upon the
Accounts or preserve rights therein.
6.3 Administration of Inventory.
6.3.1 Records and Reports of Inventory. Borrower shall keep
accurate and complete records of its Inventory. Borrower shall continue to
conduct a physical inventory in accordance with its prior procedures and shall
provide to Lender a copy of its report based on each such physical inventory
promptly thereafter, together with such supporting information as Lender shall
request. If Lender has accelerated the Obligations following the occurrence of
an Event of Default, Lender shall have the right to require Borrower to conduct
a physical inventory.
6.3.2 Inventory Valuation System. Borrower shall at all times
maintain an Inventory valuation system acceptable to Lender, Borrower's existing
system being acceptable to Lender.
6.4 Administration of Equipment.
6.4.1 Records and Schedules of Equipment. Borrower shall keep
accurate records itemizing and describing the kind, type, quality, quantity and
value of its Equipment and all dispositions thereof and if an Event of Default
is outstanding shall furnish Lender, upon Lender's request, with a current
schedule containing the foregoing information.
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6.4.2 Dispositions of Equipment. Borrower will not sell, lease or
otherwise dispose of or transfer any of the Equipment or any part thereof (a)
other than in the ordinary course of its business or (b) without the prior
written consent of Lender if an Event of Default is outstanding and Lender has
so required in writing.
6.5 Payment of Charges. All amounts chargeable to Borrower under
Section 6 hereof shall be Obligations secured by all of the Collateral, shall be
payable within 10 days following demand and shall bear interest from the date
such advance was made until paid in full at the Floating Rate applicable to the
Loans from time to time.
SECTION 7. REPRESENTATIONS AND WARRANTIES
7.1 General Representations and Warranties. To induce Lender to enter
into this Agreement and to make advances hereunder, Borrower warrants,
represents and covenants to Lender that:
7.1.1. Organization and Qualification. Borrower is a corporation
duly organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation. Borrower is duly qualified and is authorized
to do business and is in good standing as a foreign corporation in each state or
jurisdiction listed on Exhibit 7.1.1 hereto. There is no other state or
jurisdiction where the character of its Properties or the nature of its
activities make such qualification necessary and Borrower's lack of
qualification is likely to have a Material Adverse Effect.
7.1.2 Corporate Power and Authority. Borrower has full corporate
power and authority to enter into, execute, deliver and perform this Agreement
and each of the other Loan Documents to which it is a party. The execution,
delivery and performance of this Agreement and each of the other Loan Documents
have been duly authorized by all necessary corporate action and do not (i)
require any consent or approval of the shareholders of Borrower; (ii) contravene
Borrower's charter, articles or certificate of incorporation or by-laws; (iii)
violate, or cause Borrower to be in default under, any provision of any law,
rule, regulation, order, writ, judgment, injunction, decree, determination or
award in effect having applicability to Borrower; (iv) result in a breach of or
constitute a default under any indenture or loan or credit agreement or any
other material agreement, lease or instrument to which Borrower is a party or by
which it or its Properties may be bound or affected; or (v) result in, or
require, the creation or imposition of any Lien upon or with respect to any of
the Properties now owned or hereafter acquired by Borrower.
7.1.3 Legally Enforceable Agreement. This Agreement is, and each
of the other Loan Documents when delivered under this Agreement will be, a
legal, valid and binding obligation of Borrower enforceable against it in
accordance with its respective terms.
7.1.4 Capital Structure. Exhibit 7.1.4 hereto states (i) the
correct name of each of the Subsidiaries, if any, of Borrower, its jurisdiction
of incorporation and the percentage of its
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Voting Stock owned by Borrower, (ii) the name of Borrower's corporate or
joint venture Affiliates and the nature of the affiliation, (iii) the number,
nature and holder of all outstanding Securities of Borrower and each
Subsidiary of Borrower and (iv) the number of authorized, issued and treasury
shares of Borrower and each Subsidiary of Borrower. Borrower has good title
to all of the shares it purports to own of the stock of each of its
Subsidiaries, free and clear in each case of any Lien other than Permitted
Liens. All such shares have been duly issued and are fully paid and
non-assessable. Except as disclosed on Exhibit 7.1.4, there are no
outstanding options to purchase, or any rights or warrants to subscribe for,
or any commitments or agreements to issue or sell, or any Securities or
obligations convertible into, or any powers of attorney relating to, shares
of the capital stock of Borrower or any of its Subsidiaries. Except as shown
on Exhibit 7.1.4, there are no outstanding agreements or instruments binding
upon any shareholder of Borrower relating to the ownership of its shares of
capital stock.
7.1.5 Corporate Names. Borrower has not been known as or used any
corporate, fictitious or trade names except those listed on Exhibit 7.1.5
hereto during the 5 year period preceding the Closing Date. Except as set
forth on Exhibit 7.1.5, Borrower has not been the surviving corporation of a
merger or consolidation or acquired all or substantially all of the assets of
any Person during the 5 year period preceding the Closing Date.
7.1.6 Business Locations; Agent for Process. Borrower's chief
executive offices and other places of business are as listed on Exhibit 6.1.1
hereto. During the preceding 5 year period, Borrower has not had an office,
place of business or agent for service of process other than as listed on
Exhibit 6.1.1. Except as shown on Exhibit 6.1.1, no Inventory is stored with a
bailee, warehouseman or similar party, nor is any Inventory consigned to any
Person.
7.1.7 Title to Properties; Priority of Liens. Borrower has good,
indefeasible and marketable title to and fee simple ownership of, or valid and
subsisting leasehold interests in, all of its real Property (including the Real
Property), and good title to all of the Collateral and all of its other
Property, in each case, free and clear of all Liens except Permitted Liens.
Borrower has paid or discharged, or reserved for, all lawful claims which, if
unpaid, might become a Lien against any Properties of Borrower that is not a
Permitted Lien. The Liens granted to Lender under Section 5 hereof are first
priority Liens, subject only to Permitted Liens.
7.1.8 Equipment. The Equipment is in satisfactory operating
condition and repair, in light of its intended use, in all material respects.
7.1.9 Financial Statements; Fiscal Year. The balance sheets of
Borrower and such other Persons described therein (including the accounts of all
Subsidiaries, if any, of Borrower for the respective periods during which a
Subsidiary relationship existed) as of December 31, 1997 and the related
statements of income, changes in stockholder's equity, and changes in financial
position for the periods ended on such dates, have been prepared in accordance
with GAAP and present fairly the financial positions of Borrower at such dates
and the results of Borrower's operations for such period. Since December 31,
1997, there has been no material change in the condition, financial or
otherwise, of Borrower and no change in the aggregate value of Equipment and
real Property
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(including the Real Property) owned by Borrower. The fiscal year of Borrower
and each of its Subsidiaries ends on January 31 of each year.
7.1.10 Full Disclosure. The financial statements referred to in
subsection 7.1.10 hereof do not, nor does this Agreement or any other written
statement of Borrower to Lender, contain any untrue statement of a material fact
or, (when taken as a whole with all other information submitted by Borrower or
made available to, and reviewed by Lender), omit a material fact necessary to
make the statements contained therein or herein not misleading. There is no
fact which Borrower has failed to disclose to Lender in writing which is likely
to have Material Adverse Effect.
7.1.11 Solvent Financial Condition. Borrower is now and, after
giving effect to the Loans to be made hereunder, at all times will be, Solvent.
7.1.12 Surety Obligations. Except as set forth on Exhibit 7.1.12
hereto, Borrower is not obligated as surety or indemnitor under any surety or
similar bond or other contract issued or entered into or any agreement to assure
payment, performance or completion of performance of any undertaking or
obligation of any Person.
7.1.13 Taxes. Borrower's federal tax identification number is
shown on Exhibit 7.1.13 hereto. Borrower has filed all federal, state and local
tax returns and other reports it is required by law to file and has paid, or
made provision for the payment of, all taxes, assessments, fees, levies and
other governmental charges upon it, its income and Properties as and when such
taxes, assessments, fees, levies and charges are due and payable, unless and to
the extent any thereof are being actively contested in good faith and by
appropriate proceedings and Borrower maintains reasonable reserves on its books
therefor. The provision for taxes on the books of Borrower is adequate for all
years not closed by applicable statutes, and for its current fiscal year.
7.1.14 Brokers. There are no claims against Borrower for brokerage
commissions, finder's fees or investment banking fees in connection with the
transactions contemplated by this Agreement.
7.1.15 Patents, Trademarks, Copyrights and Licenses. Borrower owns
or possesses all the patents, trademarks, service marks, trade names, copyrights
and licenses used in and necessary for the present and planned future conduct of
its business without any known conflict with the rights of others. All such
patents, trademarks, service marks, tradenames, copyrights, licenses and other
similar rights are listed on Exhibit 7.1.15 hereto.
7.1.16 Governmental Consents. Borrower has, and is in good
standing with respect to, all governmental consents, approvals, licenses,
authorizations, permits, certificates, inspections and franchises necessary to
continue to conduct its business as heretofore or proposed to be conducted by it
and to own or lease and operate its Properties as now owned or leased by it,
except where the failure to do so would not be likely to have a Material Adverse
Effect.
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7.1.17 Compliance with Laws. Except as set forth on Exhibit 7.1.17
hereto, Borrower has duly complied with, and its Properties, business operations
and leaseholds are in compliance in all material respects with, the provisions
of all federal, state and local laws, rules and regulations applicable to
Borrower, its Properties or the conduct of its business and there have been no
citations, notices or orders of noncompliance issued to Borrower under any such
law, rule or regulation except where such noncompliance would not be likely to
have a Material Adverse Effect. Borrower has established and maintains an
adequate monitoring system to ensure that it remains in compliance with all
federal, state and local laws, regulations and rules applicable to it. To the
best of Borrower's knowledge, no Inventory has been produced in violation of the
Fair Labor Standards Act (29 U.S.C. Section 201 et seq.), as amended.
7.1.18 Restrictions. Borrower is not a party or subject to any
contract, agreement, or charter or other corporate restriction, which materially
and adversely affects its business or the use or ownership of any of its
Properties. Borrower is not a party or subject to any contract or agreement
which restricts its right or ability to incur Indebtedness, other than as set
forth on Exhibit 7.1.18 hereto, none of which prohibit the execution of or
compliance with this Agreement or the other Loan Documents by Borrower.
7.1.19 Litigation. Except as set forth on Exhibit 7.1.19 hereto,
there are no actions, suits, proceedings or investigations pending, or to the
knowledge of Borrower, threatened, against or affecting Borrower or the
business, operations, Properties, prospects, profits or condition of Borrower.
Borrower is not in default with respect to any order, writ, injunction,
judgment, decree or rule of any court, governmental authority or arbitration
board or tribunal.
7.1.20 No Defaults. No event has occurred and no condition exists
which would, upon or after the execution and delivery of this Agreement or
Borrower's performance hereunder, constitute a Default or an Event of Default.
Borrower is not in default, and no event has occurred and no condition exists
which constitutes, or which with the passage of time or the giving of notice or
both would constitute, a default in the payment of any Indebtedness to any
Person for Money Borrowed.
7.1.21 Pension Plans. Except as disclosed on Exhibit 7.1.21
hereto, Borrower does not have any Plan. Borrower is in full compliance in all
material respects with the requirements of ERISA and the regulations promulgated
thereunder with respect to each Plan. No fact or situation that could result in
a material adverse change in the financial condition of Borrower exists in
connection with any Plan. Neither Borrower nor any Subsidiary of Borrower has
withdrawal liability in connection with a Multiemployer Plan.
7.1.22 Third Party Relations. There exists no actual or threatened
termination, cancellation or limitation of, or any modification or change in,
the business relationship between Borrower and credit card issuer having a
merchant agreement with Borrower whose purchases individually or in the
aggregate are material to the business of Borrower or with any material
supplier, the effect of which is likely to have a Material Adverse Effect.
There exists no present condition or state of facts or circumstances which would
materially affect adversely Borrower or
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prevent Borrower from conducting such business after the consummation of the
transactions contemplated by this Agreement in substantially the same manner in
which it has heretofore been conducted.
7.1.23 Labor Relations. Except as described on Exhibit 7.1.23
hereto, Borrower is not a party to any collective bargaining agreement. There
are no material grievances, disputes or controversies with any union or any
other organization of Borrower's employees, or threats of strikes, work
stoppages or any asserted pending demands for collective bargaining by any union
or organization.
7.2 Continuous Nature of Representations and Warranties. Each
representation and warranty contained in this Agreement and the other Loan
Documents shall be continuous in nature and shall, in all material respects,
remain accurate, complete and not misleading at all times during the term of
this Agreement. Notwithstanding the foregoing, Lender acknowledges that certain
of the representations and warranties contained in this Agreement may no longer
be accurate if Borrower is recapitalized (including any recapitalization
reflecting the transfer of Borrower's stock to a new Delaware holding company in
exchange for stock of such company) as a result of a public offering of its
stock. Lender agrees that any such inaccuracy which results from such a public
offering shall not constitute an Event of Default provided the change in
circumstances giving rise to such inaccuracy is not likely to have a Material
Adverse Effect and Borrower discloses such changed circumstances to Lender in
writing within thirty (30) days of the occurrence of such changed circumstances.
7.3 Survival of Representations and Warranties. All representations and
warranties of Borrower contained in this Agreement or any of the other Loan
Documents shall survive the execution, delivery and acceptance thereof by Lender
and the parties thereto and the closing of the transactions described therein or
related thereto.
SECTION 8. COVENANTS AND CONTINUING AGREEMENTS
8.1 Affirmative Covenants. During the term of this Agreement, and
thereafter for so long as there are any Obligations to Lender, Borrower
covenants that, unless otherwise consented to by Lender in writing, it shall:
8.1.1 Visits and Inspections. Permit representatives of Lender,
from time to time, but only during normal business hours and, provided no Event
of Default has occurred, no more than four (4) times annually (after the
occurrence of an Event of Default, there shall be no limit on frequency) to
visit and inspect the Properties of Borrower, inspect, audit and make extracts
from its books and records, and discuss with its officers, its employees and its
independent accountants, Borrower's business, assets, liabilities, financial
condition, business prospects and results of operations.
8.1.2 Notices. Promptly notify Lender in writing of the
occurrence of any event or
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the existence of any fact which renders any representation or warranty in this
Agreement or any of the other Loan Documents inaccurate, incomplete or
misleading in any material respect.
8.1.3 Financial Statements. Keep adequate records and books of
account with respect to its business activities in which proper entries are made
reflecting all of its financial transactions; and cause to be prepared and
furnished to Lender the following (all to be prepared on a consistent basis for
Borrower alone without consolidation with any other Person):
(i) not later than 120 days after the close of each fiscal
year of Borrower, unqualified audited financial statements of Borrower as
of the end of such year, certified by a firm of independent certified
public accountants of recognized standing selected by Borrower but
acceptable to Lender to have been prepared in accordance with GAAP;
(ii) not later than 30 days after the end of each month
hereafter, including the last month of Borrower's fiscal year, unaudited
interim financial statements of Borrower as of the end of such month and of
the portion of Borrower's fiscal year then elapsed, certified by the
principal financial officer of Borrower to have been prepared in accordance
with GAAP and fairly to present the financial position and results of
operations of Borrower for such month and period subject only to changes
from audit and year-end adjustments and except that such statements need
not contain notes;
(iii) promptly after the sending or filing thereof, as
the case may be, copies of any proxy statements, financial statements or
reports which Borrower has sent to all of its shareholders and copies of
any regular, periodic and special reports or registration statements which
Borrower files with the Securities and Exchange Commission or any
governmental authority which may be substituted therefor, or any national
securities exchange;
(iv) promptly after the filing thereof, copies of any annual
report to be filed under ERISA in connection with each Plan;
(v) upon completion, but not later than 30 days prior to
the close of each fiscal year of Borrower, financial Projections for
Borrower, for Borrower's upcoming fiscal year, prepared on a month by month
basis, in form acceptable to Lender; and
(vi) such other data and information (financial and
otherwise) as Lender, from time to time, may reasonably request, bearing
upon or related to the Collateral or Borrower's financial condition or
results of operations, including without limitation, detailed monthly
accounts payable agings.
Within 45 days after the delivery of the financial statements
described in clause (i) of this subsection 8.1.3, Borrower shall forward to
Lender a copy of the accountants' letter to Borrower's management that is
prepared in connection with such financial statements and also shall
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cause to be prepared and shall furnish to Lender a certificate of the aforesaid
certified public accountants certifying to Lender that, based upon their
examination of the financial statements of Borrower performed in connection
with their examination of said financial statements, they are not aware of any
Event of Default, or, if they are aware of such Event of Default, specifying the
nature thereof, and acknowledging in a manner satisfactory to Lender, that they
are aware that Lender is relying on such financial statements in making its
decision with respect to the Loans. Concurrently with the delivery of the
financial statements described in clauses (i) and (ii) of this subsection 8.1.3,
or more frequently if requested by Lender, Borrower shall cause to be prepared
and furnished to Lender a Compliance Certificate in the form of Exhibit 8.1.3
hereto executed by the chief financial officer of Borrower.
8.1.4 Landlord and Storage Agreements. Provide Lender, upon
request by Lender, with copies of all leases and other material written
agreements between Borrower and any landlord or warehouseman which owns any
warehouse or distribution facility at which any Inventory may, from time to
time, be kept.
8.1.5 Intentionally Omitted.
8.2 Negative Covenants. During the term of this Agreement, and thereafter
for so long as there are any Obligations to Lender, Borrower covenants that,
unless Lender has first consented thereto in writing, it will not:
8.2.1 Mergers; Consolidations; Acquisitions. Merge or consolidate
with any Person; nor acquire all or any substantial part of the Properties of
any Person if (a) Aggregate Adjusted Availability would be less than $3,500,000
after taking into effect any such transaction, (b) an Event of Default is then
outstanding or would otherwise occur after taking into effect any such
transaction, or (c) in the case of a merger or consolidation, Borrower is not
the surviving Person.
8.2.2 Loans. Make any loans or other advances of money to any
Person if (a) Aggregate Adjusted Availability would be less than $3,500,000
after taking into effect such a loan or other advance or (b) an Event of Default
is then outstanding or would otherwise occur after taking into effect such a
loan or other advance.
8.2.3 Total Indebtedness. Create, incur, assume, or suffer to
exist any Indebtedness, except:
(i) Obligations owing to Lender;
(ii) Subordinated Debt;
(iii) accounts payable to trade creditors and current
operating expenses (other than for Money Borrowed) which are not aged
beyond normal business practice of Borrower, in each case incurred in the
ordinary course of business and paid within
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the normal time period, unless the same are being actively contested in
good faith and by appropriate and lawful proceedings; and Borrower shall
have set aside such reserves, if any, with respect thereto as are required
by GAAP and deemed adequate by such Borrower and its independent
accountants;
(iv) Obligations to pay Rentals permitted by subsection
8.2.13 and Capitalized Lease Obligations permitted under subsection 8.2.8;
(v) Permitted Purchase Money Indebtedness;
(vi) taxes not yet due or being contested in the manner
described in subsection 7.1.14 hereto;
(vii) contingent liabilities arising out of endorsements
of checks and other negotiable instruments for deposit or collection in the
ordinary course of business; and
(viii) any other Indebtedness if (a) Aggregate Adjusted
Availability would be at least $3,500,000 after taking into effect the
incurrence of such Indebtedness and (b) no Event of Default is then
outstanding or would otherwise occur after taking into effect the
incurrence of such Indebtedness.
8.2.4 Affiliate Transactions. Enter into, or be a party to, any
transaction with any Affiliate of Borrower or any stockholder, except (a) in the
ordinary course of and pursuant to the reasonable requirements of Borrower's
business and upon fair and reasonable terms which are fully disclosed to Lender
and are no less favorable to Borrower than Borrower would obtain in a comparable
arm's length transaction with a Person not an Affiliate or stockholder of
Borrower or (b) if (i) Aggregate Adjusted Availability would be at least
$3,500,000 after taking into effect such transaction and (ii) no Event of
Default is then outstanding or would otherwise occur after taking into effect
such transaction.
8.2.5 Limitation on Liens. Create or suffer to exist any Lien
upon any of its Property, income or profits, whether now owned or hereafter
acquired, except:
(i) Liens at any time granted in favor of Lender;
(ii) Liens for taxes (excluding any Lien imposed
pursuant to any of the provisions of ERISA) not yet due, or being contested
in the manner described in subsection 7.1.14 hereto, but only if in
Lender's judgment such Lien does not adversely affect Lender's rights or
the priority of Lender's Lien in the Collateral;
(iii) such other Liens as appear on Exhibit 8.2.5
hereto;
(iv) Purchase Money Liens securing Permitted Purchase
Money
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Indebtedness;
(v) Liens on Borrower's real Property after the
Supplemental Loan and all Obligations related thereto have been
indefeasibly paid in full; and
(vi) such other Liens as Lender may hereafter approve
in writing.
8.2.6 Subordinated Debt. Make any payment of any part or all of
any Subordinated Debt or take any other action or omit to take any other action
in respect of any Subordinated Debt in contravention of the written terms of any
instrument evidencing such Subordinated Debt.
8.2.7 Distributions. Declare or make any Distributions if (a)
Aggregate Adjusted Availability would be less than $3,500,000 after taking into
effect the proposed Distribution or (b) an Event of Default is then outstanding
or would otherwise occur after taking into effect the proposed Distribution.
8.2.8 Disposition of Assets. Sell, lease or otherwise dispose of
its Properties, including any disposition of Property as part of a sale and
leaseback transaction, to or in favor of any Person, except (i) sales of
Inventory in the ordinary course of business for so long as there has been no
acceleration of the Obligations; (ii) dispositions expressly authorized by this
Agreement or (iii) other dispositions if (a) Aggregate Adjusted Availability
would be at least $3,500,000 after taking into account the effects of such
transaction and (b) no Event of Default is then outstanding or would occur after
taking into account the effects of such transaction.
8.2.9 Restricted Investment. Make or have any Restricted
Investment if (a) Aggregate Adjusted Availability would be less than $3,500,000
after taking into effect such Restricted Investment or (b) an Event of Default
is then outstanding or would otherwise occur after taking into effect of such
Restricted Investment.
8.2.10 Tax Consolidation. File or consent to the filing of any
consolidated income tax return with any Person other than a Subsidiary of
Borrower.
8.3 Specific Financial Covenants. During the term of this Agreement, and
thereafter for so long as there are any Obligations to Lender, Borrower
covenants that, unless otherwise consented to by Lender in writing, it shall:
8.3.1 Minimum Net Worth. Maintain at all times a Net Worth of not
less than $14,000,000.
8.3.2 Minimum Cash Flow. Achieve a positive Cash Flow
for the four fiscal quarters ending January 31, 1998 and for the four fiscal
quarter period ending on the last day of each subsequent fiscal quarter.
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8.4 Stock Ownership. James Kim and/or any immediate family member of
James Kim and/or any trust for which any such immediate family member is the
beneficiary shall own and control, beneficially and of record, at least 25% in
the aggregate, of the issued and outstanding capital stock (i) of Borrower, or
(ii) of Borrower's parent company if the stock of Borrower is transferred to
such new parent company in conjunction with an initial public offering of
Borrower's stock and in which case such parent company shall at all times own
all issued and outstanding capital stock of Borrower.
SECTION 9. CONDITIONS PRECEDENT
Notwithstanding any other provision of this Agreement or any of the
other Loan Documents, and without affecting in any manner the rights of Lender
under the other sections of this Agreement, Lender shall not be required to make
any Loan under this Agreement unless and until each of the following conditions
has been and continues to be satisfied:
9.1 Documentation. Lender shall have received, in form and substance
satisfactory to Lender and its counsel, a duly executed copy of this Agreement
and the other Loan Documents, together with such additional documents,
instruments and certificates as Lender and its counsel shall require in
connection therewith from time to time (provided however that the Supplemental
Loan Note, Mortgage, Mortgagee Endorsement and the documents contemplated by
subsection (I) below are to be provided contemporaneously with the making of the
Supplemental Loan), all in form and substance satisfactory to Lender and its
counsel, including, without limitation, the following:
(A) Certified copies of Borrower's casualty insurance policies,
together with loss payable endorsements on Lender's standard form of Lender Loss
Payee and Mortgagee Endorsement naming Lender as lender loss payee and/or
mortgagee, as applicable, and certified copies of Borrower's liability insurance
policies, together with endorsements naming Lender as additional insured;
(B) Certified copies of (i) resolutions of Borrower's board of
directors authorizing the execution and delivery of this Agreement and the Loan
Documents and the performance of all transactions contemplated hereby and
thereby, (ii) Borrower's by-laws, and (iii) an incumbency certificate of
Borrower;
(C) A copy of the Articles or Certificate of Incorporation of
Borrower, and all amendments thereto, certified by the Secretary of State or
other appropriate official of its jurisdiction of incorporation;
(D) Good standing certificate for Borrower, issued by the Secretary
of State or other appropriate official of Borrower's jurisdiction of
incorporation and each jurisdiction where the conduct of Borrower's business
activities or the ownership of its Properties necessitates qualification;
(E) A closing certificate signed by the chief executive officer of
Borrower dated
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as of the date hereof, stating that (i) the representations and warranties set
forth in Section 7 hereof are true and correct on and as of such date, (ii)
Borrower is on such date in compliance with all the terms and provisions set
forth in this Agreement and (iii) on such date no Default or Event of Default
has occurred or is continuing;
(F) The Security Documents duly executed, accepted and acknowledged
by or on behalf of each of the signatories thereto;
(G) The Other Agreements duly executed and delivered by Borrower;
(H) The favorable, written opinion of counsel to Borrower as to the
transactions contemplated by this Agreement and any of the other Loan Documents;
(I) Title insurance reports and commitments, surveys and flood plain
certificates of the Real Property;
(J) Written instruction from Borrower directing the application of
proceeds of the initial Loans made pursuant to this Agreement and an initial
Borrowing Base Certificate from Borrower;
(K) Payoff agreement and UCC-3 termination statements from Borrower's
existing lender;
(L) Execution and delivery by holders of the Subordinated Debt of
intercreditor and subordination agreements and instruments evidencing such
Subordinated Debt (all on payment terms acceptable to Lender);
(M) UCC-1 financing statement, state and federal tax lien and
judgment searches;
(N) Payment of all fees and expenses owing hereunder; and
(O) Such other documents, instruments and agreements as Lender shall
reasonably request in connection with the foregoing matters.
9.2 No Default. No Default or Event of Default shall exist.
9.3 Other Loan Documents. Each of the conditions precedent set forth in
the other Loan Documents shall have been satisfied.
9.4 Availability. Lender shall have determined that immediately after
Lender has made the initial Loans contemplated hereby and paid all closing costs
incurred in connection with the transactions contemplated hereby, Aggregate
Adjusted Availability on the Closing Date shall not be less than $5,000,000.
9.5 No Litigation. No action, proceeding, investigation, regulation or
legislation shall
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have been instituted, threatened or proposed before any court, governmental
agency or legislative body (i) to enjoin, restrain or prohibit, or to obtain
damages in respect of, or which is related to or arises out of this Agreement or
the consummation of the transactions contemplated hereby or (ii) which relates
to the Collateral, assets, business operations or obligations of Borrower which
(in Lender's judgment) could have a material adverse effect upon the
creditworthiness, condition, operations or prospects (financial or otherwise) of
Borrower.
SECTION 10. EVENTS OF DEFAULT; RIGHTS AND REMEDIES ON DEFAULT
10.1 Events of Default. The occurrence of one or more of the following
events shall constitute an "Event of Default":
10.1.1 Payment of Obligations. Borrower shall fail to pay any
Obligations owing hereunder or under the Notes, or any other of the Obligations,
on the due date thereof (whether due at stated due date, maturity, on demand,
upon acceleration, or otherwise).
10.1.2 Misrepresentations. Any representation, warranty or other
statement made or furnished to Lender by or on behalf of Borrower or any
Subsidiary of Borrower in this Agreement, any of the other Loan Documents or any
instrument, certificate or financial statement furnished in compliance with or
in reference thereto, proves to have been false or misleading in any material
respect when made or furnished or when reaffirmed pursuant to Section 7.2
hereof.
10.1.3 Breach of Specific Covenants. Borrower shall fail or
neglect to perform, keep or observe any covenant contained in Sections 5.2, 5.3,
8.1.1, 8.1.3, 8.2 or 8.3 hereof on the date that Borrower is required to
perform, keep or observe such covenant.
10.1.4 Breach of Other Covenants. Borrower shall fail or neglect
to perform, keep or observe any covenant contained in this Agreement (other than
a covenant which is dealt with specifically elsewhere in Section 10.1 hereof)
and the breach of such other covenant is not cured to Lender's satisfaction
within twenty (20) days (ten (10) days in the case of a breach of the covenants
contained in Section 6.1.1 hereof) after the sooner to occur of Borrower's
receipt of notice of such breach from Lender or the date on which such failure
or neglect first becomes known to any officer of Borrower.
10.1.5 Default Under Security Documents/Other Agreements. Any
event of default shall occur under, or Borrower shall default in the performance
or observance of any term, covenant, condition or agreement contained in, any of
the Security Documents or the Other Agreements and such default shall continue
beyond any applicable grace period.
10.1.6 Other Defaults. There shall occur any default with respect
to the Subordinated Debt or any default or event of default on the part of
Borrower under any agreement, document or instrument to which Borrower is a
party or by which Borrower or any of its Property is bound, creating or relating
to any Indebtedness (other than the Obligations) in excess of $50,000.
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<PAGE>
10.1.7 Uninsured Losses. Any material loss, theft, damage or
destruction of any of the Collateral not fully covered (subject to such
deductibles as Lender shall have permitted) by insurance.
10.1.8 Adverse Changes. There shall occur any material adverse
change in the financial condition or business prospects of Borrower.
10.1.9 Insolvency and Related Proceedings. Borrower shall cease to
be Solvent or shall suffer the appointment of a receiver, trustee, custodian or
similar fiduciary, or shall make an assignment for the benefit of creditors, or
any petition for an order for relief shall be filed by or against Borrower under
the Bankruptcy Code (if against Borrower, the continuation of such proceeding
for more than 30 days), or Borrower shall make any offer of settlement,
extension or composition to its unsecured creditors generally.
10.1.10 Business Disruption; Condemnation. There shall occur a
cessation of a substantial part of the business of Borrower for a period which
significantly affects Borrower's capacity to continue its business, on a
profitable basis; or Borrower shall suffer the loss or revocation of any license
or permit now held or hereafter acquired by Borrower which is necessary to the
continued or lawful operation of its business and which loss or revocation will
have a Material Adverse Effect; or Borrower shall be enjoined, restrained or in
any way prevented by court, governmental or administrative order from conducting
all or any part of its business affairs which will have a Material Adverse
Effect; or any lease or agreement pursuant to which Borrower leases, uses or
occupies any Property shall be canceled or terminated prior to the expiration of
its stated term and such cancellation or termination will have a Material
Adverse Effect; or any material part of the Collateral shall be taken through
condemnation or the value of such Property shall be impaired through
condemnation.
10.1.11 ERISA. A Reportable Event shall occur which Lender, in its
sole discretion, shall determine in good faith constitutes grounds for the
termination by the Pension Benefit Guaranty Corporation of any Plan or for the
appointment by the appropriate United States district court of a trustee for any
Plan, or if any Plan shall be terminated in a "distress termination" pursuant to
Section 4041(c) or any such trustee shall be requested or appointed, or if
Borrower is in "default" (as defined in Section 4219(c)(5) of ERISA) with
respect to payments to a Multiemployer Plan resulting from Borrower's complete
or partial withdrawal from such Plan.
10.1.12 Challenge to Agreement. Borrower or any Subsidiary of
Borrower shall challenge or contest in any action, suit or proceeding the
validity or enforceability of this Agreement or any of the other Loan Documents,
the legality or enforceability of any of the Obligations or the perfection or
priority of any Lien granted to Lender.
10.1.13 Criminal Action or Forfeiture. Borrower shall be criminally
indicted or convicted under any law or engage in any conduct which is reasonably
likely to result in a forfeiture of any material Property of Borrower.
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<PAGE>
10.1.14 Judgments. Any money judgment in excess of $1,000,000, writ
of attachment or similar process is filed against Borrower.
10.2 Acceleration of the Obligations. Without in any way limiting the
right of Lender to demand payment of any portion of the Obligations payable on
demand in accordance with Section 3.2 hereof, upon or at any time after the
occurrence of an Event of Default, all or any portion of the Obligations shall,
at the option of Lender and without presentment, demand, protest or further
notice by Lender, become at once due and payable and Borrower shall forthwith
pay to Lender, the full amount of such Obligations, provided, that upon the
occurrence of an Event of Default specified in subsection 10.1.9 hereof, all of
the Obligations shall become automatically due and payable without declaration,
notice or demand by Lender.
10.3 Other Remedies. Upon and after the occurrence of an Event of Default,
Lender shall have and may exercise from time to time the following rights and
remedies (to the full extent permitted by applicable law):
10.3.1 All of the rights and remedies of a secured party under the
Code or under other applicable law, and all other legal and equitable rights to
which Lender may be entitled, all of which rights and remedies shall be
cumulative and shall be in addition to any other rights or remedies contained in
this Agreement or any of the other Loan Documents, and none of which shall be
exclusive.
10.3.2 The right to take immediate possession of the Collateral,
and to (i) require Borrower to assemble the Collateral, at Borrower's expense,
and make it available to Lender at a place designated by Lender which is
reasonably convenient to both parties, and (ii) enter any premises where any of
the Collateral shall be located and to keep and store the Collateral on said
premises until sold (and if said premises be the Property of Borrower, Borrower
agrees not to charge Lender for storage thereof).
10.3.3 The right to sell or otherwise dispose of all or any
Collateral in its then condition, or after any further manufacturing or
processing thereof, at public or private sale or sales, with such notice as may
be required by law, in lots or in bulk, for cash or on credit, all as Lender, in
its sole discretion, may deem advisable. Borrower agrees that 7 days written
notice to Borrower of any public or private sale or other disposition of
Collateral shall be reasonable notice thereof, and such sale shall be at such
locations as Lender may designate in said notice. Lender shall have the right
to conduct such sales on Borrower's premises, without charge therefor, and such
sales may be adjourned from time to time in accordance with applicable law.
Lender shall have the right to sell, lease or otherwise dispose of the
Collateral, or any part thereof, for cash, credit or any combination thereof,
and Lender may purchase all or any part of the Collateral at public or, if
permitted by law, private sale and, in lieu of actual payment of such purchase
price, may set off the amount of such price against the Obligations. The
proceeds realized from the sale of any Collateral may be applied, after allowing
2 Business Days for collection, first to the costs, expenses and attorneys' fees
incurred by Lender in collecting the Obligations, in enforcing the rights of
Lender under the Loan Documents
26
<PAGE>and in collecting, retaking, completing, protecting, removing, storing,
advertising for sale, selling and delivering any Collateral; second to the
interest due upon any of the Obligations; and third, to the principal of the
Obligations. If any deficiency shall arise, Borrower shall remain liable to
Lender therefor.
10.3.4 Lender is hereby granted a license or other right to use,
without charge, Borrower's labels, patents, copyrights, rights of use of any
name, trade secrets, tradenames, trademarks and advertising matter, or any
Property of a similar nature, as it pertains to the Collateral, in advertising
for sale and selling any Collateral and Borrower's rights under all licenses and
all franchise agreements shall inure to Lender's benefit.
10.3.5 Lender may, at its option, reduce or modify the Borrowing
Base, or any portion thereof or the advance rates or to take additional reserves
in the Borrowing Base.
10.4 Remedies Cumulative; No Waiver. All covenants, conditions,
provisions, warranties, guaranties, indemnities, and other undertakings of
Borrower contained in this Agreement and the other Loan Documents, or in any
document referred to herein or contained in any agreement supplementary hereto
or in any schedule given to Lender or contained in any other agreement between
Lender and Borrower, heretofore, concurrently, or hereafter entered into, shall
be deemed cumulative to and not in derogation or substitution of any of the
terms, covenants, conditions, or agreements of Borrower herein contained. The
failure or delay of Lender to require strict performance by Borrower of any
provision of this Agreement or to exercise or enforce any rights, Liens, powers,
or remedies hereunder or under any of the aforesaid agreements or other
documents or security or Collateral shall not operate as a waiver of such
performance, Liens, rights, powers and remedies, but all such requirements,
Liens, rights, powers, and remedies shall continue in full force and effect
until all Loans and all other Obligations owing or to become owing from Borrower
to Lender shall have been fully satisfied. None of the undertakings,
agreements, warranties, covenants and representations of Borrower contained in
this Agreement or any of the other Loan Documents and no Event of Default by
Borrower under this Agreement or any other Loan Documents shall be deemed to
have been suspended or waived by Lender, unless such suspension or waiver is by
an instrument in writing specifying such suspension or waiver and is signed by a
duly authorized representative of Lender and directed to Borrower.
SECTION 11. MISCELLANEOUS
11.1 Power of Attorney. Borrower hereby irrevocably designates, makes,
constitutes and appoints Lender (and all Persons designated by Lender) as
Borrower's true and lawful attorney (and agent-in-fact) and Lender, or Lender's
agent, may, without notice to Borrower and in either Borrower's or Lender's
name, but at the cost and expense of Borrower:
11.1.1 At such time or times as Lender or said agent, in its sole
discretion, may determine if an Event of Default is outstanding, endorse
Borrower's name on any checks, notes, acceptances, drafts, money orders or any
other evidence of payment or proceeds of the Collateral which come into the
possession of Lender or under Lender's control.
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11.1.2 At such time or times as Lender or its agent in its sole
discretion may determine after Lender has accelerated the Obligations following
the occurrence of an Event of Default: (i) demand payment of the Accounts from
the Account Debtors, enforce payment of the Accounts by legal proceedings or
otherwise, and generally exercise all of Borrower's rights and remedies with
respect to the collection of the Accounts; (ii) settle, adjust, compromise,
discharge or release any of the Accounts or other Collateral or any legal
proceedings brought to collect any of the Accounts or other Collateral; (iii)
sell or assign any of the Accounts and other Collateral upon such terms, for
such amounts and at such time or times as Lender deems advisable; (iv) take
control, in any manner, of any item of payment or proceeds relating to any
Collateral; (v) prepare, file and sign Borrower's name to a proof of claim in
bankruptcy or similar document against any Account Debtor or to any notice of
lien, assignment or satisfaction of lien or similar document in connection with
any of the Collateral; (vi) receive, open and dispose of all mail addressed to
Borrower and to notify postal authorities to change the address for delivery
thereof to such address as Lender may designate; (vii) endorse the name of
Borrower upon any of the items of payment or proceeds relating to any Collateral
and deposit the same to the account of Lender on account of the Obligations;
(viii) endorse the name of Borrower upon any chattel paper, document,
instrument, invoice, freight bill, bill of lading or similar document or
agreement relating to the Accounts, Inventory and any other Collateral; (ix) use
Borrower's stationery and sign the name of Borrower to verifications of the
Accounts and notices thereof to Account Debtors; (x) use the information
recorded on or contained in any data processing equipment and computer hardware
and software relating to the Accounts, Inventory, Equipment and any other
Collateral; (xi) make and adjust claims under policies of insurance; and (xii)
do all other acts and things necessary, in Lender's determination, to fulfill
Borrower's obligations under this Agreement.
11.2 Indemnity. Borrower hereby agrees to indemnify Lender and hold Lender
harmless from and against any liability, loss, damage, suit, action or
proceeding ever suffered or incurred by Lender (including attorneys' fees and
legal expenses) as the result of Borrower's failure to observe, perform or
discharge Borrower's duties hereunder. In addition, Borrower shall defend
Lender against and save it harmless from all claims of any Person with respect
to the Collateral. Without limiting the generality of the foregoing, these
indemnities shall extend to any claims asserted against Lender by any Person
under any Environmental Laws or similar laws by reason of Borrower's or any
other Person's failure to comply with laws applicable to solid or hazardous
waste materials or other toxic substances. Notwithstanding any contrary
provision in this Agreement, the obligation of Borrower under this Section 11.2
shall survive the payment in full of the Obligations and the termination of this
Agreement.
11.3 Modification of Agreement; Sale of Interest. This Agreement may not
be modified, altered or amended, except by an agreement in writing signed by
Borrower and Lender. Borrower may not sell, assign or transfer any interest in
this Agreement, any of the other Loan Documents, or any of the Obligations, or
any portion thereof, including, without limitation, Borrower's rights, title,
interests, remedies, powers, and duties hereunder or thereunder. Borrower
hereby consents to Lender's participation, sale, assignment, transfer or other
disposition, at any time or times hereafter, of this Agreement and any of the
other Loan Documents, or of any portion hereof or thereof,
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including, without limitation, Lender's rights, title, interests, remedies,
powers, and duties hereunder or thereunder. In the case of an assignment, the
assignee shall have, to the extent of such assignment, the same rights, benefits
and obligations as it would if it were "Lender" hereunder and Lender shall be
relieved of all obligations hereunder upon any such assignments. Borrower
agrees that it will use its best efforts to assist and cooperate with Lender in
any manner reasonably requested by Lender to effect the sale of participations
in or assignments of any of the Loan Documents or any portion thereof or
interest therein, including, without limitation, assisting in the preparation of
appropriate disclosure documents. Borrower further agrees that Lender may
disclose credit information regarding Borrower to any potential participant or
assignee.
11.4 Severability. Wherever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement shall be prohibited by or
invalid under applicable law, such provision shall be ineffective only to the
extent of such prohibition or invalidity, without invalidating the remainder of
such provision or the remaining provisions of this Agreement.
11.5 Successors and Assigns. This Agreement, the Other Agreements and the
Security Documents shall be binding upon and inure to the benefit of the
successors and assigns of Borrower and Lender.
11.6 Cumulative Effect; Conflict of Terms. The provisions of the Other
Agreements and the Security Documents are hereby made cumulative with the
provisions of this Agreement. Except as otherwise provided in Section 3.2
hereof and except as otherwise provided in any of the other Loan Documents by
specific reference to the applicable provision of this Agreement, if any
provision contained in this Agreement is in direct conflict with, or
inconsistent with, any provision in any of the other Loan Documents, the
provision contained in this Agreement shall govern and control.
11.7 Execution in Counterparts. This Agreement may be executed in any
number of counterparts and by different parties hereto in separate counterparts,
each of which when so executed and delivered shall be deemed to be an original
and all of which counterparts taken together shall constitute but one and the
same instrument.
11.8 Notice. Except as otherwise provided herein, all notices, requests
and demands to or upon a party hereto, to be effective, shall be in writing and
shall be sent by certified or registered mail, return receipt requested, by
personal delivery against receipt, by overnight courier or by facsimile and,
unless otherwise expressly provided herein, shall be deemed to have been validly
served, given or delivered immediately when delivered against receipt, one
Business Day after deposit in the mail, postage prepaid, or with an overnight
courier or, in the case of facsimile notice, when sent, addressed as follows:
If to Lender: Fleet Capital Corporation
200 Glastonbury Boulevard
Glastonbury, CT 06033
Attention: Howard Handman, Vice President
Facsimile No.: 860-657-7759
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With a copy to: Blank Rome Comisky & McCauley LLP
One Logan Square
Philadelphia, PA 19103
Attention: Harvey I. Forman, Esq.
Facsimile No.: 215-569-5522
If to Borrower: The Electronics Boutique, Inc.
931 South Matlack St.
West Chester, PA 19382
Attention: John Panichello, Chief Financial
Officer
Facsimile No.: 610-430-6574
With a copy to: Siana, Shields & Vaughan
961 Pottstown Pike
Chester Springs, Pa 19425
Attention: Stephen Siana, Esquire
Facsimile No.: 610-321-5531
or to such other address as each party may designate for itself by notice given
in accordance with this Section 11.8; provided, however, that any notice,
request or demand to or upon Lender pursuant to subsections 2.1.1., 3.1.1 or
4.2.2 hereof shall not be effective until received by Lender.
11.9 Lender's Consent. Whenever Lender's consent is required to be
obtained under this Agreement, any of the Other Agreements or any of the
Security Documents as a condition to any action, inaction, condition or event,
Lender shall be authorized to give or withhold such consent in its sole and
absolute discretion and to condition its consent upon the giving of additional
collateral security for the Obligations, the payment of money or any other
matter.
11.10 Credit Inquiries. Borrower hereby authorizes and permits Lender to
respond to usual and customary credit inquiries from third parties concerning
Borrower; provided, however, that Lender shall have no duty or obligation to so
respond or continue to respond.
11.11 Time of Essence. Time is of the essence of this Agreement, the
Other Agreements and the Security Documents.
11.12 Entire Agreement. This Agreement and the other Loan Documents,
together with all other instruments, agreements and certificates executed by the
parties in connection therewith or with reference thereto, embody the entire
understanding and agreement between the parties hereto and thereto with respect
to the subject matter hereof and thereof and supersede all prior agreements,
understandings and inducements, whether express or implied, oral or written.
11.13 Interpretation. No provision of this Agreement or any of the other
Loan Documents shall be construed against or interpreted to the disadvantage of
any party hereto by any court or other governmental or judicial authority by
reason of such party having or being deemed to have structured or dictated such
provision.
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11.14 GOVERNING LAW; CONSENT TO FORUM. THIS AGREEMENT HAS BEEN
NEGOTIATED, EXECUTED AND DELIVERED AT AND SHALL BE DEEMED TO HAVE BEEN MADE IN
PHILADELPHIA, PENNSYLVANIA. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF THE COMMONWEALTH OF PENNSYLVANIA; PROVIDED,
HOWEVER, THAT IF ANY OF THE COLLATERAL SHALL BE LOCATED IN ANY JURISDICTION
OTHER THAN PENNSYLVANIA, THE LAWS OF SUCH JURISDICTION SHALL GOVERN THE METHOD,
MANNER AND PROCEDURE FOR FORECLOSURE OF LENDER'S LIEN UPON SUCH COLLATERAL AND
THE ENFORCEMENT OF LENDER'S OTHER REMEDIES IN RESPECT OF SUCH COLLATERAL TO THE
EXTENT THAT THE LAWS OF SUCH JURISDICTION ARE DIFFERENT FROM OR INCONSISTENT
WITH THE LAWS OF PENNSYLVANIA. AS PART OF THE CONSIDERATION FOR NEW VALUE
RECEIVED, AND REGARDLESS OF ANY PRESENT OR FUTURE DOMICILE OR PRINCIPAL PLACE OF
BUSINESS OF ANY BORROWER OR LENDER, EACH BORROWER HEREBY CONSENTS AND AGREES
THAT THE COMMON PLEAS COURT OF PHILADELPHIA, PENNSYLVANIA OR, AT LENDER'S
OPTION, THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF
PENNSYLVANIA, SHALL HAVE EXCLUSIVE JURISDICTION TO HEAR AND DETERMINE ANY CLAIMS
OR DISPUTES BETWEEN BORROWER AND LENDER PERTAINING TO THIS AGREEMENT OR TO ANY
MATTER ARISING OUT OF OR RELATED TO THIS AGREEMENT. BORROWER EXPRESSLY SUBMITS
AND CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN
ANY SUCH COURT, AND BORROWER HEREBY WAIVES ANY OBJECTION WHICH BORROWER MAY HAVE
BASED UPON LACK OF PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM NON CONVENIENS
AND HEREBY CONSENTS TO THE GRANTING OF SUCH LEGAL OR EQUITABLE RELIEF AS IS
DEEMED APPROPRIATE BY SUCH COURT. BORROWER HEREBY WAIVES PERSONAL SERVICE OF
THE SUMMONS, COMPLAINT AND OTHER PROCESS ISSUED IN ANY SUCH ACTION OR SUIT AND
AGREES THAT SERVICE OF SUCH SUMMONS, COMPLAINT AND OTHER PROCESS MAY BE MADE BY
REGISTERED OR CERTIFIED MAIL ADDRESSED TO BORROWER AT THE ADDRESS SET FORTH IN
THIS AGREEMENT AND THAT SERVICE SO MADE SHALL BE DEEMED COMPLETED UPON THE
EARLIER OF BORROWER'S ACTUAL RECEIPT THEREOF OR 3 DAYS AFTER DEPOSIT IN THE U.S.
MAILS, PROPER POSTAGE PREPAID. NOTHING IN THIS AGREEMENT SHALL BE DEEMED OR
OPERATE TO AFFECT THE RIGHT OF LENDER TO SERVE LEGAL PROCESS IN ANY OTHER MANNER
PERMITTED BY LAW, OR TO PRECLUDE THE ENFORCEMENT BY LENDER OF ANY JUDGMENT OR
ORDER OBTAINED IN SUCH FORUM OR THE TAKING OF ANY ACTION UNDER THIS AGREEMENT TO
ENFORCE SAME IN ANY OTHER APPROPRIATE FORUM OR JURISDICTION.
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11.15 WAIVERS BY BORROWER. BORROWER WAIVES (i) THE RIGHT TO TRIAL BY JURY
(WHICH LENDER HEREBY ALSO WAIVES) IN ANY ACTION, SUIT, PROCEEDING OR
COUNTERCLAIM OF ANY KIND ARISING OUT OF OR RELATED TO ANY OF THE LOAN DOCUMENTS,
THE OBLIGATIONS OR THE COLLATERAL: (ii) PRESENTMENT, DEMAND AND PROTEST AND
NOTICE OF PRESENTMENT, PROTEST, DEFAULT, NON PAYMENT, MATURITY, RELEASE,
COMPROMISE, SETTLEMENT, EXTENSION OR RENEWAL OF ANY OR ALL COMMERCIAL PAPER,
ACCOUNTS, CONTRACT RIGHTS, DOCUMENTS, INSTRUMENTS CHATTEL PAPER AND GUARANTIES
AT ANY TIME HELD BY LENDER ON WHICH BORROWER MAY IN ANY WAY BE LIABLE AND HEREBY
RATIFIES AND CONFIRMS WHATEVER LENDER MAY DO IN THIS REGARD; (iii) EXCEPT AS
OTHERWISE EXPRESSLY PROVIDED BY THIS AGREEMENT, NOTICE PRIOR TO TAKING
POSSESSION OR CONTROL OF THE COLLATERAL OR ANY BOND OR SECURITY WHICH MIGHT BE
REQUIRED BY ANY COURT PRIOR TO ALLOWING LENDER TO EXERCISE ANY OF LENDER'S
REMEDIES; (iv) THE BENEFIT OF ALL VALUATION, APPRAISEMENT AND EXEMPTION LAWS;
AND (v) NOTICE OF ACCEPTANCE HEREOF. BORROWER ACKNOWLEDGES THAT THE FOREGOING
WAIVERS ARE A MATERIAL INDUCEMENT TO LENDER'S ENTERING INTO THIS AGREEMENT AND
THAT LENDER IS RELYING UPON THE FOREGOING WAIVERS IN ITS FUTURE DEALINGS WITH
BORROWER. BORROWER WARRANTS AND REPRESENTS THAT IT HAS REVIEWED THE FOREGOING
WAIVERS WITH ITS LEGAL COUNSEL AND HAS KNOWINGLY AND VOLUNTARILY WAIVED ITS JURY
TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF
LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE
COURT.
IN WITNESS WHEREOF, this Agreement has been duly executed in Philadelphia,
Pennsylvania on the day and year specified at the beginning of this Agreement.
ATTEST: THE ELECTRONICS BOUTIQUE, INC.
By:_________________________ By:_________________________
Secretary
Title:________________________
Accepted in Philadelphia, PA
FLEET CAPITAL CORPORATION
By:___________________________
Title:_________________________
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APPENDIX A
GENERAL DEFINITIONS
When used in the Loan and Security Agreement dated as of _____________,
1998, by and between Fleet Capital Corporation and The Electronics Boutique,
Inc. the following terms shall have the following meanings (terms defined in the
singular to have the same meaning when used in the plural and vice versa):
Account Debtor - any Person who is or may become obligated under or on
account of an Account.
Accounts - collectively, all accounts and accounts receivable,
contract rights arising from Borrower's agreements with credit card
issuers, whether now owned or hereafter created or acquired by Borrower or
in which Borrower now has or hereafter acquired any interest.
Adjusted LIBOR Rate - For any LIBOR Interest Period, as applied
to a LIBOR Rate Loan, the rate per annum (rounded upwards, if
necessary to the next 1/16 of 1%) determined pursuant to the following
formula:
Adjusted Libor Rate = Libor Rate
--------------------------
(1.00 - Reserve Percentage)
For purposes hereof, "Libor Rate" shall mean the arithmetic average of the
rates of interest per annum (rounded upwards, if necessary to the next 1/16
of 1%) at which Bank is offered deposits of United States Dollars in the
interbank eurodollar loan market on or about 2:00 P.M. New York time two
(2) Business Days prior to the commencement of such LIBOR Interest Period
on amounts substantially equal to the LIBOR Rate Loan as to which Borrower
may elect the Adjusted LIBOR Rate to be applicable with a maturity of
comparable duration to the LIBOR Interest Period selected by Borrower for
such LIBOR Rate Loan.
Adjusted Net Earnings From Operations - with respect to any fiscal
period, means the net earnings (or loss) after provision for income taxes
for such fiscal period of Borrower, as reflected on the financial statement
of Borrower supplied to Lender pursuant to subsection 8.1.3 of the
Agreement, but excluding:
(i) any gain or loss arising from the sale of capital
assets;
(ii) any gain arising from any write-up of assets;
(iii) earnings of any Subsidiary of Borrower accrued prior to
the date it became a Subsidiary;
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(iv) earnings of any corporation, substantially all the
assets of which have been acquired in any manner by Borrower, realized
by such corporation prior to the date of such acquisition;
(v) net earnings of any business entity (other than a
Subsidiary of Borrower) in which Borrower has an ownership interest
unless such net earnings shall have actually been received by Borrower
in the form of cash distributions;
(vi) any portion of the net earnings of any Subsidiary of
Borrower which for any reason is unavailable for payment of dividends
to Borrower;
(vii) the earnings of any Person to which any assets of
Borrower shall have been sold, transferred of disposed of, or into
which Borrower shall have merged, or been a party to any consolidation
or other form of reorganization, prior to the date of such
transaction;
(viii) any gain arising from the acquisition of any Securities
of Borrower; and
(ix) any gain arising from extraordinary or non-recurring
items.
Affiliate - a Person (other than a Subsidiary): (i) which directly or
indirectly through one or more intermediaries controls, or is controlled
by, or is under common control with, a Person; (ii) which beneficially owns
or holds 5% or more of any class of the Voting Stock of a Person; or (iii)
5% or more of the Voting Stock (or in the case of a Person which is not a
corporation, 5% or more of the equity interest) of which is beneficially
owned or held by a Person or a Subsidiary of a Person.
Agreement - the Loan and Security Agreement referred to in the first
sentence of this Appendix A, all Exhibits thereto and this Appendix A as
each of the same may be amended, modified, renewed, extended, replaced,
restated or substituted from time to time.
Aggregate Adjusted Availability - at the time of determination, an
amount equal to the then applicable Borrowing Base less the sum of (i) the
amount of Revolving Credit Loans as of such time of determination
(including Loans requested to be made on such date) plus (ii) all sums then
due and owing to trade creditors which remain outstanding beyond normal
trade terms or other normal business practice of Borrower, plus (iii) for
the purposes of such determination on the Closing Date, closing payments
and expenses.
Authorized Officer - any officer of Borrower authorized by resolution
of the Board of Directors of Borrower to execute documents, instruments,
certificates and agreements on behalf of Borrower in favor of Lender and
who is identified on the incumbency certificate referenced in Section
9.1(B) herein.
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Availability - the amount of money which Borrower is entitled to
borrow from time to time as Revolving Credit Loans, such amount being the
difference derived when the sum of the principal amount of Revolving Credit
Loans then outstanding (including any amounts which Lender may have paid
for the account of Borrower pursuant to any of the Loan Documents and which
have not been reimbursed by Borrower) is subtracted from the lesser of (i)
the Maximum Revolving Credit Amount (minus the outstanding balance of the
Supplemental Loan) or (ii) the Borrowing Base. If the amount outstanding
is equal to or greater than the Lesser of (i) Maximum Revolving Credit
Amount or (ii) the Borrowing Base, Availability is 0.
Bank - Fleet National Bank, or such other bank as Lender may hereafter
designate.
Base Rate - the rate of interest announced or quoted by Bank from time
to time as its base rate for commercial loans, whether or not such rate is
the lowest rate charged by Bank to its most preferred borrowers; and, if
such base rate for commercial loans is discontinued by Bank as a standard,
a comparable reference rate designated by Bank as a substitute therefor
shall be the Base Rate.
Borrowing Base - as at any date of determination thereof, an amount
equal to:
(a) 60% of the value of Eligible Inventory at such date
calculated on the basis of the lower of cost or market on a first-in,
first-out basis;
MINUS
(b) such reserves as Lender may have established from time
to time.
Borrowing Base Certificate - the certificate signed by the chief
executive officer, chief financial officer, controller or accounting
manager of Borrower showing the status of Borrower's Inventory, outstanding
Revolving Credit Loans and other information in the form of Exhibit A-1 to
the Agreement.
Business Day - any day excluding Saturday, Sunday and any day which is
a legal holiday under the laws of the Commonwealth of Pennsylvania or is a
day on which banking institutions located in such state are closed.
Capital Expenditures - cash expenditures made for the acquisition of
any fixed assets or improvements, replacements, substitutions or additions
thereto which have a useful life of more than one year, including the total
principal portion of Capitalized Lease Obligations excluding expenditures
for the replacement of any assets leased under a Capitalized Lease
Obligation in connection with a casualty or loss thereof.
Cash Flow - for any period, means Borrower's (i) Adjusted Net Earnings
from
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Operations for such period plus (ii) depreciation and amortization expenses
for such period plus (iii) deferred taxes for such period, plus (iv)
expenses incurred by Borrower in conjunction with its anticipated initial
public offering, less (v) non-financed Capital Expenditures, less (vi)
principal payments on account of current maturities of long-term
Indebtedness and less (vii) principal payments on Capitalized Lease
Obligations, less (viii) cash Distributions (excluding the first
$10,000,000 in 1998), less (ix) an amount equal to the difference (if a
positive number) between (a) all loans and advances to Affiliates during
such period and (b) all repayments of loans and advances received from
Affiliates in such period, all as determined in accordance with GAAP.
There shall be excluded from the foregoing calculations all proceeds
received from and disbursements (other than under clause (iv) above) made
of the proceeds of Borrower's anticipated initial public offering.
Capitalized Lease Obligation - any Indebtedness represented by
obligations under a lease that is required to be capitalized for financial
reporting purposes in accordance with GAAP.
Closing Date - the date on which all of the conditions precedent in
Section 9 of the Agreement are satisfied and the initial Loan is made or
issued under the Agreement.
Code - the Uniform Commercial Code as adopted and in force in the
Commonwealth of Pennsylvania and as from time to time in effect.
Collateral - all of the Property and interests in Property described
in Section 5 of the Agreement, and all other Property and interests in
Property that now or hereafter secure the payment and performance of any of
the Obligations.
Credit Facility - the Revolving Credit Facility and Supplemental Loan.
Default - an event or condition, the occurrence of which would, with
the lapse of time or the giving of notice, or both, become an Event of
Default.
Default Rate - as defined in subsection 2.1.2 of the Agreement.
Distribution - in respect of any corporation means and includes: (i)
the payment of any dividends or other distributions on capital stock of the
corporation (except distributions in such stock) and (ii) the redemption or
acquisition of Securities unless made contemporaneously from the net
proceeds of the sale of Securities.
Eligible Inventory - all Inventory of Borrower, unless it constitutes
one of the following (the determination thereof to be in Lender's
reasonable discretion):
(i) it is not finished goods Inventory; or
(ii) it is slow-moving, obsolete, defective, or not
deemed saleable in accordance with Borrower's standard practices; or
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(iii) it does not meet all material standards imposed
by any governmental agency or authority for Inventory of its type; or
(iv) it does not conform, in all material respects, to
the warranties and representations applicable thereto set forth in the
Agreement; or
(v) it is not at all times subject to Lender's duly
perfected, first priority security interest and no other Lien except a
Permitted Lien; or
(vi) it is not situated at a location in the United
States or Puerto Rico listed on Exhibit 6.1.1 (as it may be amended,
supplemented or replaced from time to time in writing) and as to which
non-retail locations Lender has received a landlord's waiver or
warehouseman's waiver acceptable to Lender; or
(vii) it is in transit (except in transit from any of
Borrower's warehouses to its retail stores or between its retail
stores); or
(viii) it is sports collectible Inventory.
Environmental Laws - all federal, state and local laws, rules,
regulations, ordinances, programs, permits, guidances, orders and consent
decrees relating to environmental matters.
Equipment - collectively, all machinery, apparatus, equipment,
fittings, furniture, fixtures, motor vehicles and other tangible personal
Property (other than Inventory) of every kind and description used in
Borrower's operations or owned by Borrower or in which Borrower has an
interest, whether now owned or hereafter acquired by Borrower and wherever
located, and all parts, accessories and special tools and all increases and
accessions thereto and substitutions and replacements therefor.
ERISA - the Employee Retirement Income Security Act of 1974, as amended,
and all rules and regulations from time to time promulgated thereunder.
Event of Default - as defined in Section 10.1 of the Agreement.
Floating Rate - the Base Rate.
Floating Rate Loans - collectively, all Loans bearing interest at the
Floating Rate.
GAAP - generally accepted accounting principles in the United States
of America in effect from time to time.
General Intangibles - collectively, all personal property of Borrower
(including without limitation choses in action, patents, trademarks and
copyrights and applications therefor, tax and other types of refunds,
deposits, licenses, contract rights, and computer
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disks, data and software) other than goods, Accounts, Chattel Paper,
Documents, Instruments, Investment Property and money, whether now owned or
hereafter created or acquired by Borrower.
Indebtedness - as applied to a Person means, without duplication
(i) all items, which in accordance with GAAP would be
included in determining total liabilities as shown on the liability
side of a balance sheet of such Person as at the date as of which
Indebtedness is to be determined, including, without limitation,
Capitalized Lease Obligations,
(ii) all obligations of other Persons which such Person has
guaranteed,
(iii) all reimbursement obligations in connection with
letters of credit or letter of credit guaranties issued for the
account of such Person, and
(iv) in the case of Borrower (without duplication), the
Obligations.
Inventory - collectively, all Inventory of Borrower, whether now
owned or hereafter acquired including, without limitation, all goods
intended for sale or lease by Borrower, or for display or demonstration;
all work in process; all raw materials and other materials and supplies of
every nature and description used or which might be used in connection with
the manufacture, printing, packing, shipping, advertising, selling, leasing
or furnishing of such goods or otherwise used or consumed in Borrower's
business; and all Documents evidencing and General Intangibles relating to
any of the foregoing, whether now owned or hereafter acquired by Borrower.
Investment Property - has the meaning ascribed thereto in the Code.
LIBOR Interest Period - a period of one, two, three or six months
duration during which the LIBOR Based Rate is applicable.
LIBOR Based Rate - a rate of interest equal to the Adjusted LIBOR Rate
plus 250 basis points.
LIBOR Rate Loans - collectively, all Loans bearing interest at the
LIBOR Based Rate.
Lien - any interest in Property securing an obligation owed to, or a
claim by, a Person other than the owner of the Property, whether such
interest is based on common law, statute or contract and including, without
limitation, the security interest, security title or lien arising from a
security agreement, mortgage, deed of trust, deed to secure debt,
encumbrance, pledge, conditional sale or trust receipt, or a lease,
consignment or bailment for security
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purposes. The term "Lien" shall also include reservations, exceptions,
encroachments, easements, rights-of-way, covenants, conditions,
restrictions, leases and other title exceptions and encumbrances affecting
Property. For the purpose of the Agreement, Borrower shall be deemed to be
the owner of any Property which it has acquired or holds subject to a
conditional sale agreement or other arrangement pursuant to which title to
the Property has been retained by or vested in some other Person for
security purposes.
Loan Account - the loan account established on the books of Lender
pursuant to Section 3.6 of the Agreement.
Loan Documents - the Agreement, the Other Agreements and the Security
Documents as each of the same may be amended, modified, renewed, extended,
replaced, restated or substituted from time to time.
Loans - all loans and advances of any kind made by Lender pursuant to
the Agreement, including without limitation the Revolving Credit Loans and
the Supplemental Loan.
London Business Day - any Business Day on which banks in London,
England are open for business.
Material Adverse Effect - a material and adverse effect on the (a)
financial condition, business, prospects or Property of Borrower, (b) the
ability of Borrower to pay or perform its obligations and undertakings
hereunder, or (c) the validity or enforceability of the Obligations or
Lender's Liens in the Collateral or the priority thereof.
Maturity Date - the last day of the Original Term or, if any Renewal
Term is in effect, then the last day of such Renewal Term.
Maximum Revolving Credit Amount - $50,000,000.
Money Borrowed - means (i) Indebtedness arising from the lending of
money by any Person to Borrower; (ii) Indebtedness, whether or not in any
such case arising from the lending by any Person of money to Borrower, (A)
which is represented by notes payable or drafts accepted that evidence
extensions of credit, (B) which constitutes obligations evidenced by bonds,
debentures, notes or similar instruments, or (C) upon which interest
charges are customarily paid (other than accounts payable) or that was
issued or assumed as full or partial payment for Property; (iii)
Indebtedness that constitutes a Capitalized Lease Obligation; (iv)
reimbursement obligations with respect to letters of credit or guaranties
of letters of credit and (v) Indebtedness of Borrower under any guaranty of
obligations that would constitute Indebtedness for Money Borrowed under
clauses (i) through (iii) hereof, if owed directly by Borrower.
Mortgage - that certain mortgage as described in Section 5.3 of the
Agreement, as the
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same may be amended, modified, renewed, extended, replaced, restated or
substituted from time to time, to be executed by Borrower in favor of
Lender, to be in form and substance acceptable to Lender, and by which
Borrower shall grant and convey to Lender, as security for the Supplemental
Loan, a Lien upon the Real Property.
Multiemployer Plan - has the meaning set forth in Section 4001(a)(3)
of ERISA.
Net Worth - at any date means a sum equal to:
(i) the net book value (after deducting related depreciation,
obsolescence, amortization, valuation, and other proper reserves) at which
the assets of a Person would be shown on a balance sheet at such date in
accordance with GAAP, minus
(ii) the amount at which such Person's liabilities (other than
capital stock and surplus and Subordinated Debt) and including as
liabilities all reserves for contingencies and other potential liabilities,
all as would be shown on such balance sheet in accordance with GAAP.
Notes - collectively, the Revolving Credit Note and the Supplemental
Loan Note.
Obligations - all Loans and all other advances, debts, liabilities,
obligations, covenants and duties, together with all interest, fees and
other charges thereon, owing, arising, due or payable from Borrower to
Lender of any kind or nature, present or future, whether or not evidenced
by any note, guaranty or other instrument, whether arising under the
Agreement or any of the other Loan Documents or otherwise whether direct or
indirect (including those acquired by assignment), absolute or contingent,
primary or secondary, due or to become due, now existing or hereafter
arising and however acquired. The term includes without limitation, all
interest, charges, fees, expenses, attorneys' fees, and any other sums
chargeable to Borrower, under any of the Loan Documents.
Original Term - as defined in Section 4.1 of the Agreement.
Other Agreements - any and all agreements and instruments (other than
the Agreement and the Security Documents), heretofore, now or hereafter
executed by Borrower, any guarantor, or any other third party and delivered
to Lender in respect of the transactions contemplated by the Agreement, as
each of the same may be amended, modified, renewed, extended, replaced,
restated or substituted from time to time.
Overadvance - the amount, if any, by which the outstanding principal
amount of Revolving Credit Loans exceeds the Borrowing Base.
Participating Lender - each Person who shall be granted the right by
Lender to participate in any of the Loans described in the Agreement and
who shall have entered into a participation agreement in form and substance
satisfactory to Lender.
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Permitted Liens - any Lien of a kind specified in subsection 8.2.5 of
the Agreement.
Permitted Purchase Money Indebtedness - Purchase Money Indebtedness of
Borrower incurred after the date hereof which is secured by a Purchase
Money Lien.
Person - an individual, partnership, corporation, limited liability
company, joint stock company, land trust, business trust, or unincorporated
organization, or a government or agency or political subdivision thereof.
Plan - an employee benefit plan now or hereafter maintained for
employees of Borrower that is covered by Title IV of ERISA.
Projections - Borrower's forecasted Consolidated and Consolidating (if
applicable) (a) balance sheets, (b) profit and loss statements, and (c)
cash flow statements, all prepared on a consistent basis with Borrower's
historical financial statements, together with appropriate supporting
details and a statement of underlying assumptions.
Property - any interest in any kind of property or asset, whether
real, personal or mixed, or tangible or intangible.
Purchase Money Indebtedness - means and includes (i) Indebtedness
(other than the Obligations) for the payment of all or any part of the
purchase price of any fixed assets, (ii) any Indebtedness (other than the
Obligations) incurred at the time of or within 10 days prior to or after
the acquisition of any fixed assets for the purchase price thereof, and
(iii) any renewals, extensions or refinancings thereof, but not any
increases in the principal amounts thereof outstanding at the time.
Purchase Money Lien - a Lien upon fixed assets which secures Purchase
Money Indebtedness, but only if such Lien shall at all times be confined
solely to the fixed assets, the purchase price of which was financed
through the incurrence of the Purchase Money Indebtedness secured by such
Lien.
Real Property - the real estate (with buildings, improvements, rents
and profits) described on Exhibit A-2 to this Agreement.
Regulation D - Regulation D of the Board of Governors of the Federal
Reserve System, comprising Part 204 of Title 12, Code of Federal
Regulations, as amended, and any successor thereto.
Rentals - as defined in subsection 8.2.13 of the Agreement.
Renewal Terms - as defined in Section 4.1 of the Agreement.
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<PAGE>
Reportable Event - any of the events set forth in Section 4043(b) of
ERISA.
Reserve - for any day, that reserve (expressed as a decimal) which is
in effect (whether or not actually incurred) with respect to Bank on such
day, as prescribed by the Board of Governors of the Federal Reserve System
(or any successor or any other banking authority to which Bank is subject
including any board or governmental or administrative agency of the United
States or any other jurisdiction to which Bank is subject), for determining
the maximum reserve requirement (including without limitation any basic,
supplemental, marginal or emergency reserves) for Eurocurrency liabilities
as defined in Regulation D.
Reserve Percentage - for Bank on any day, that percentage (expressed
as a decimal) which is in effect on such day, prescribed by the Board of
Governors of the Federal Reserve System (or any successor or any other
banking authority to which Lender is subject, including any board or
governmental or administrative agency of the United States or any other
jurisdiction to which Bank is subject) for determining the maximum reserve
requirement (including without limitation any basic, supplemental, marginal
or emergency reserves) for (i) deposits of United States Dollars or (ii)
Eurocurrency liabilities as defined in Regulation D, in each case used to
fund a LIBOR Rate Loan subject to an Adjusted LIBOR Rate. The Adjusted
LIBOR Rate shall be adjusted automatically on and as of the effective day
of any change in the Reserve Percentage.
Restricted Investment - any investment made in cash or by delivery of
Property to any Person, whether by acquisition of stock, Indebtedness or
other obligation or Security, or by loan, advance or capital contribution,
or otherwise, or in any Property except the following:
(i) investments in one or more Subsidiaries of Borrower to
the extent existing on the Closing Date;
(ii) Property to be used in the ordinary course of
business;
(iii) Current assets arising from the sale of goods and
services in the ordinary course of business of Borrower;
(iv) investments in direct obligations of the United States
of America, or any agency thereof or obligations guaranteed by the
United States of America, provided that such obligations mature within
one year from the date of acquisition thereof;
(v) investments in certificates of deposit maturing within
one year from the date of acquisition issued by a bank or trust
company organized under the laws of the United States or any state
thereof having capital surplus and undivided profits aggregating at
least $100,000,000;
10
<PAGE>
(vi) investments in commercial paper given the highest
rating by a national credit rating agency and maturing not more than
270 days from the date of creation thereof; and
(vii) mutual funds that invest in any of the foregoing.
Revolving Credit Loan - a Loan made by Lender as provided in Section
1.1 of the Agreement.
Revolving Credit Facility - the credit facility established by for the
making of Revolving Credit Loans pursuant to Section 1.1.1 hereof.
Revolving Credit Note - the secured promissory note to be executed by
Borrower on the Closing Date in favor of Lender to evidence Borrower's
obligation to repay the Revolving Credit Loans, which shall be in the form
of Exhibit A-3 to the Agreement.
Schedule of Accounts - as defined in subsection 6.4.1 of the
Agreement.
Security - shall have the same meaning as in Section 2(1) of the
Securities Act of 1933, as amended.
Security Documents - the Mortgage, and all other instruments and
agreements now or at any time hereafter securing the whole or any part of
the Obligations, as each of the same may be amended, modified, renewed,
extended, replaced, restated or substituted from time to time.
Solvent - as to any Person, such Person (i) owns Property whose fair
saleable value is greater than the amount required to pay all of such
Person's Indebtedness (including contingent debts), (ii) is able to pay all
of its Indebtedness as such Indebtedness matures and (iii) has capital
sufficient to carry on its business and transactions and all business and
transactions in which it is about to engage.
Subordinated Debt - Unsecured indebtedness of Borrower that is
subordinated to the Obligations in a manner, under terms and subject to a
written agreement satisfactory to Lender.
Subsidiary - any corporation of which a Person owns, directly or
indirectly through one or more intermediaries, more than 50% of the Voting
Stock at the time of determination.
Supplemental Loan - the Loan described in subsection 1.2 of the
Agreement.
Supplemental Loan Note - the secured promissory note to be executed by
Borrower in favor of Lender as a pre-condition to Lender's making the
Supplemental Loan available to Borrower to evidence Borrower's obligation
to pay the Supplemental Loan, which shall
11
<PAGE>
be in the form of Exhibit A-4 to the Agreement.
Total Credit Facility - $50,000,000.
Voting Stock - Securities of any class or classes of a corporation the
holders of which are ordinarily, in the absence of contingencies, entitled
to elect a majority of the corporate directors (or Persons performing
similar functions).
Other Terms. All other terms contained in the Agreement shall have,
when the context so indicates, the meanings provided for by the Code to the
extent the same are used or defined therein.
Certain Matters of Construction. The terms "herein", "hereof" and
"hereunder" and other words of similar import refer to the Agreement as a
whole and not to any particular section, paragraph or subdivision. Any
pronoun used shall be deemed to cover all genders. The section titles,
table of contents and list of exhibits appear as a matter of convenience
only and shall not affect the interpretation of the Agreement. All
references to statutes and related regulations shall include any amendments
of same and any successor statutes and regulations. All references to any
of the Loan Documents shall include any and all modifications thereto and
any and all extensions or renewals thereof.
12
<PAGE>
LIST OF EXHIBITS
Exhibit A-1 Borrowing Base Certificate
Exhibit A-2 Real Property
Exhibit A-3 Revolving Credit Note
Exhibit A-4 Supplemental Loan Note
Exhibit 6.1.1 Borrower's and each Subsidiary's Business Locations
Exhibit 7.1.1 Jurisdictions in which Borrower and each
Subsidiary is Authorized to do Business
Exhibit 7.1.4 Capital Structure of Borrower
Exhibit 7.1.5 Corporate Names
Exhibit 7.1.12 Existing Sureties
Exhibit 7.1.13 Tax Identification Numbers of Subsidiaries
Exhibit 7.1.15 Patents, Trademarks, Copyrights and Licenses
Exhibit 7.1.16 Contracts Restricting Borrower's Right to Incur Debts
Exhibit 7.1.17 Compliance with Laws
Exhibit 7.1.19 Litigation
Exhibit 7.1.21 Pension Plans
Exhibit 7.1.23 Labor Contracts
Exhibit 8.1.3 Compliance Certificate
Exhibit 8.2.5 Permitted Liens
13
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF ELECTRONICS BOUTIQUE HOLDINGS CORP.
1. The Electronics Boutique, Inc., a Pennsylvania corporation
2. Electronics Boutique Canada Inc., an Ontario corporation
3. E.B. International, Inc., a Pennsylvania corporation
4. Electronics Boutique Korea, Inc., a South Korea corporation
5. Electronics Boutique Australia Pty Ltd, an Australia corporation
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ELECTRONICS BOUTIQUE GROUP CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-02-1997
<PERIOD-END> JAN-31-1998
<CASH> 20,639,610
<SECURITIES> 0
<RECEIVABLES> 8,057,727
<ALLOWANCES> 0
<INVENTORY> 52,973,314
<CURRENT-ASSETS> 84,508,298
<PP&E> 72,501,361
<DEPRECIATION> 32,535,305
<TOTAL-ASSETS> 143,170,193
<CURRENT-LIABILITIES> 101,040,159
<BONDS> 0
0
0
<COMMON> 2,290
<OTHER-SE> 29,178,016
<TOTAL-LIABILITY-AND-EQUITY> 143,170,193
<SALES> 449,179,603
<TOTAL-REVENUES> 449,179,603
<CGS> 338,614,309
<TOTAL-COSTS> 85,490,857<F1>
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,378,919
<INCOME-PRETAX> 23,695,518
<INCOME-TAX> 846,280
<INCOME-CONTINUING> 22,849,238
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,849,238
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>TOTAL SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.
</FN>
</TABLE>
