<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 19, 1999.
REGISTRATION NO. 333-88561
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
PRE-EFFECTIVE
AMENDMENT NO. 2 TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ELECTRONICS BOUTIQUE HOLDINGS CORP.
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 5734 51-0379406
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
------------------------
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 STEPHEN M. WISEMAN, ESQUIRE
KLEHR, HARRISON, HARVEY, BRANZBURG & ELLERS LLP KING & SPALDING
260 SOUTH BROAD STREET 1185 AVENUE OF THE AMERICAS
PHILADELPHIA, PENNSYLVANIA 19102 NEW YORK, NEW YORK 10036
(215) 568-6060 (212) 556-2100
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are being offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / / _____________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / _____________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / _____________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
ELECTRONICS BOUTIQUE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN
OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
<PAGE>
SUBJECT TO COMPLETION--NOVEMBER 19, 1999
PROSPECTUS
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<TABLE>
<S> <C>
3,500,000 Shares
[LOGO] ELECTRONICS BOUTIQUE HOLDINGS CORP.
Common Stock
</TABLE>
- --------------------------------------------------------------------------------
Electronics Boutique Holdings Corp. is offering 2,000,000 shares of common stock
and EB Nevada Inc., the selling stockholder, is offering 1,500,000 shares of
common stock. Electronics Boutique will not receive any proceeds from the sale
of shares by the selling stockholder.
Electronics Boutique is among the world's largest specialty retailers of
electronic games, including video games and PC entertainment software, video
game hardware, PC productivity software, PC accessories and related products.
The shares of Electronics Boutique are quoted in the Nasdaq National Market
under the symbol "ELBO". On November 18, 1999, the last reported sale price in
the Nasdaq National Market was $23.0625 per share.
<TABLE>
<CAPTION>
Per Share Total
<S> <C> <C>
Public offering price.............................. $ $
Underwriting discounts and commissions............. $ $
Proceeds, before expenses, to Electronics
Boutique......................................... $ $
Proceeds to selling stockholder.................... $ $
</TABLE>
SEE "RISK FACTORS" ON PAGES 5 TO 10 FOR FACTORS THAT SHOULD BE CONSIDERED BEFORE
INVESTING IN THE SHARES OF ELECTRONICS BOUTIQUE.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
- --------------------------------------------------------------------------------
The underwriters may, under some circumstances, purchase up to 525,000
additional shares from the selling stockholder at the public offering price,
less underwriting discounts and commissions. Delivery and payment for the shares
will be on , 1999.
PRUDENTIAL SECURITIES
BANC OF AMERICA SECURITIES LLC
GERARD KLAUER MATTISON & CO., INC.
PRUDENTIALSECURITIES.COM
, 1999
<PAGE>
[PHOTOS, MAPS, ETC.]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Prospectus Summary................. 1
Risk Factors....................... 5
Forward-Looking Statements......... 11
Use of Proceeds.................... 12
Price Range of Common Stock........ 12
Capitalization..................... 13
Selected Consolidated Financial and
Operating Data................... 14
Management's Discussion and
Analysis of Financial Condition
and Results of Operations........ 16
</TABLE>
<TABLE>
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PAGE
--------
<S> <C>
Business........................... 25
Management......................... 38
Principal and Selling
Stockholders..................... 40
Underwriting....................... 42
Legal Matters...................... 43
Experts............................ 43
Available Information.............. 44
Index to Consolidated Financial
Statements....................... F-1
</TABLE>
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Electronics Boutique-Registered Trademark-, EBX-Registered Trademark- and
Stop 'N Save Software-Registered Trademark- are registered trademarks of
Electronics Boutique. BC Sports Collectibles and EBWORLD.COM are trademarks
which are owned by Electronics Boutique. We have a trademark application for
EBKids pending. Nintendo-Registered Trademark-, N64-Registered Trademark-,
Pokemon-Registered Trademark- and Game Boy-Registered Trademark- are registered
trademarks of Nintendo of America, Inc. ("Nintendo"), Sega-Registered Trademark-
and Sega Dreamcast-Registered Trademark- are registered trademarks of Sega
Enterprises ("Sega"), Sony-Registered Trademark- and
PlayStation-Registered Trademark- are registered trademarks of Sony Computer
Entertainment, Inc. ("Sony"), AOL-Registered Trademark- is a registered
trademark of America Online, Inc. ("America Online"), CNET-Registered Trademark-
is a registered trademark of CNET, Inc. ("CNET"),
Waldensoftware-Registered Trademark- is a registered trademark of Walden Book
Company, Inc., Star Wars-Registered Trademark- is a registered trademark of
Lucasfilm, Ltd., Furby-Registered Trademark- is a registered trademark of Tiger
Electronics, Inc. and Electronic Arts-Registered Trademark- is a registered
trademark of Electronic Arts, Inc. ("Electronic Arts").
The fiscal year of Electronics Boutique ends on the Saturday nearest
January 31. Accordingly, the financial statements for the years ended
February 1, 1997 ("fiscal 1997"), January 31, 1998 ("fiscal 1998") and
January 30, 1999 ("fiscal 1999") each include 52 weeks of operations.
- --------------------------------------------------------------------------------
You should rely only on the information contained or incorporated by
reference in this prospectus. We have not authorized anyone to provide you with
different information. We are not making an offer of these securities in any
jurisdiction where the offer or sale is not permitted. You should not assume
that the information contained in this prospectus is accurate as of any date
other than the date on the front cover of this prospectus.
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary is not complete and may not contain all of the information that
investors should consider before investing in the common stock of Electronics
Boutique. Investors should read the entire prospectus carefully.
ELECTRONICS BOUTIQUE
We believe we are among the world's largest specialty retailers of
electronic games. We sell video games and PC entertainment software, supported
by the sale of video game hardware, PC productivity software, PC accessories and
related products. We offer our products through our large and growing store
base, which, as of September 30, 1999, included 576 stores located in 46 states,
Puerto Rico, Canada, Australia and South Korea, operating primarily under the
names Electronics Boutique and Stop 'N Save Software and through our web site at
WWW.EBWORLD.COM. In addition to our retailing activities, we provide management
services for Electronics Boutique, plc ("EB-UK"), a leading specialty retailer
of electronic games in the United Kingdom and Ireland, and for Waldensoftware
stores on behalf Borders Group, Inc. Our total revenues and operating income
have grown from $339.6 million and $10.3 million in fiscal 1997 to $573.9
million and $32.4 million in fiscal 1999.
Our 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. We
believe that we attract the core game enthusiast due to our:
- specialty store focus on the electronic game category,
- ability to stock sought-after new releases,
- breadth of product selection, and
- knowledgeable sales associates.
Our "first to market" strategy establishes our stores and web site as the
destination of choice for electronic game enthusiasts. We believe that our
vendors recognize the importance of our core game enthusiast customer base and,
consequently, often reward us with disproportionately large allocations of
newly-released products. We plan to grow our revenues and operating income by:
- expanding our domestic new store base,
- focusing on online retailing,
- increasing store productivity, and
- pursuing international opportunities.
We believe we were one of the first video game and PC entertainment software
specialty retailers to offer a web site with product reviews and online
purchasing. Our core customer tends to be Internet savvy, making e-commerce a
necessary and natural progression of our retailing platform. We believe our
success in store-based retailing, our strong market identity and existing
infrastructure differentiates EBWORLD.COM from other online retailers.
Electronics Boutique Holdings Corp. was incorporated under the laws of the
State of Delaware in March 1998 as a holding company for Electronics Boutique's
operating activities. Electronics Boutique was incorporated in the Commonwealth
of Pennsylvania in 1977. Our principal executive offices are located at 931
South Matlack Street, West Chester, Pennsylvania 19382 and our telephone number
is (610) 430-8100. Electronics Boutique also has a web site located at
WWW.EBWORLD.COM. The information which appears on the web site is not part of
this prospectus.
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Shares offered by Electronics Boutique....... 2,000,000 shares
Shares offered by the selling stockholder.... 1,500,000 shares(1)
Total shares outstanding after this 22,204,500 shares
offering...................................
Use of proceeds by Electronics Boutique...... Advertising and marketing initiatives for
Internet operations; working capital,
including financing new store openings, and
other general corporate purposes.
Nasdaq National Market Symbol................ ELBO
</TABLE>
(1) Does not include up to 525,000 shares that the underwriters may purchase if
they exercise their over-allotment option.
RISK FACTORS
You should consider the risk factors before investing in Electronic
Boutique's common stock and the impact from events that could adversely affect
its business.
2
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<TABLE>
<CAPTION>
TWENTY-SIX WEEKS
YEAR ENDED ENDED
--------------------------------------- --------------------
FEBRUARY 1, JANUARY 31, JANUARY 30, AUGUST 1, JULY 31,
1997 1998 1999 1998 1999
----------- ----------- ----------- --------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales........................... $337,059 $449,180 $570,514 $208,660 $235,119
Management fees..................... 2,526 4,792 3,405 1,101 1,581
-------- -------- -------- -------- --------
Total revenues...................... 339,585 453,972 573,919 209,761 236,700
Cost of goods sold.................. 252,813 338,498 431,744 155,424 172,777
-------- -------- -------- -------- --------
Gross profit........................ 86,772 115,474 142,175 54,337 63,923
Operating expenses.................. 69,828 87,003 99,972 46,330 53,000
Depreciation and amortization....... 6,615 7,997 9,775 4,659 5,547
-------- -------- -------- -------- --------
Income from operations.............. 10,329 20,474 32,428 3,348 5,376
Equity in earnings (loss) of
affiliates........................ (573) 2,903 (161) (161) --
Interest expense (income), net...... 1,298 1,380 289 808 (252)
Preacquisition loss of
subsidiaries(1)................... -- 913 -- -- --
-------- -------- -------- -------- --------
Income before income tax expense.... 8,458 22,910 31,978 2,379 5,628
Income tax expense(2)............... 550 846 11,693 191 2,206
-------- -------- -------- -------- --------
Net income.......................... $ 7,908 $ 22,064 $ 20,285 $ 2,188 $ 3,422
======== ======== ======== ======== ========
Net income per share--basic......... $ .17
========
Weighted average shares
outstanding--basic................ 20,169
========
Net income per share--diluted....... $ .17
========
Weighted average shares
outstanding--diluted.............. 20,334
========
PRO FORMA INCOME DATA(2):
Income before income taxes.......... $ 8,458 $ 22,910 $ 31,978 $ 2,379
Pro forma income taxes.............. 3,514 9,415 11,866 932
-------- -------- -------- --------
Pro forma net income(3)............. $ 4,944 $ 13,495 $ 20,112 $ 1,447
Pro forma net income per
share--basic...................... $ .31 $ .85 $ 1.12 $ .09
======== ======== ======== ========
Pro forma weighted average shares
outstanding--basic(4)............. 15,794 15,794 18,030 15,890
======== ======== ======== ========
Pro forma net income per share--
diluted........................... $ .31 $ .85 $ 1.11 $ .09
======== ======== ======== ========
Pro forma weighted average shares
outstanding--diluted(4)........... 15,794 15,794 18,084 15,890
======== ======== ======== ========
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
TWENTY-SIX WEEKS
YEAR ENDED ENDED
--------------------------------------- --------------------
FEBRUARY 1, JANUARY 31, JANUARY 30, AUGUST 1, JULY 31,
1997 1998 1999 1998 1999
----------- ----------- ----------- --------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING DATA(5):
Stores open at beginning of
period(6)......................... 341 390 452 452 528
Stores open at end of period........ 360 452 528 474 564
Sales per square foot(7)............ $ 831 $ 926 $ 1,016 $ 390 $ 359
Average sales per store............. $ 962 $ 1,106 $ 1,213 $ 466 $ 437
Comparable store sales increase
(decrease)........................ 20.8% 15.3% 14.1% 17.8% (1.2)%
Inventory turnover.................. 5.0x 5.2x 5.6x 2.5x 2.3x
</TABLE>
<TABLE>
<CAPTION>
JULY 31, 1999
-------------------------------------
ACTUAL AS ADJUSTED(8)
-------- --------------------------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)................................... $ (7,904) $ 35,399
Total assets................................................ 152,436 195,739
Total liabilities........................................... 99,950 99,950
Stockholders' equity........................................ 52,486 95,789
</TABLE>
- ------------------------------
(1) The results of operations of two subsidiaries, EB International, Inc. and
Electronics Boutique Canada, Inc., have been consolidated since the
beginning of fiscal 1998. Preacquisition loss of subsidiaries represents
losses in EB International, Inc. and Electronics Boutique Canada, Inc. prior
to their acquisition by Electronics Boutique. See the notes to the
consolidated financial statements which are included in this prospectus.
(2) Prior to Electronics Boutique's initial public offering, its predecessors
were taxed as an S Corporation and a partnership. As a result, their taxable
income was passed through to their partners and shareholders for federal
income tax purposes. Accordingly, for periods prior to the initial public
offering on July 28, 1998, the financial statements do not include a
provision for federal income taxes. Additionally, a predecessor to
Electronics Boutique 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 prior to July 28, 1998, provide for income
taxes in some states. See the notes to the consolidated financial statements
which are included in this prospectus.
(3) The pro forma net income gives effect to the application of the pro forma
income tax expense that would have been reported had The Electronics
Boutique, Inc. and EB Services Company LLP been subject to federal and all
state income taxes for fiscal years 1997, 1998 and 1999 and the twenty-six
weeks ended August 1, 1998. See the notes to the consolidated financial
statements which are included in this prospectus.
(4) Pro forma weighted average shares outstanding gives effect to the number of
shares which would have been outstanding upon completion of the initial
public offering and related transactions for periods prior to the initial
public offering. See the notes to the consolidated financial statements
which are included in this prospectus.
(5) Does not reflect stores operated by EB-UK and Waldensoftware for which
Electronics Boutique provides management services. See "Business--Management
Services."
(6) As of February 2, 1997, stores open at beginning of period reflects the
consolidation of Electronics Boutique's domestic stores and its
international stores.
(7) Calculated based on stores open for the entire fiscal period presented.
(8) Adjusted to give effect to the sale by Electronics Boutique of 2,000,000
shares of common stock in this offering and the application of the estimated
net proceeds.
4
<PAGE>
RISK FACTORS
You should carefully consider the following risk factors, in addition to the
other information set forth in this prospectus, before purchasing shares of
common stock of Electronics Boutique. Each of these risk factors could adversely
affect our business, operating results and financial condition, as well as
adversely affect the value of an investment in our common stock. Investment in
our common stock involves a high degree of risk.
RISKS RELATED TO THE ELECTRONIC GAME AND PC INDUSTRIES
MANUFACTURERS MAY FAIL TO INTRODUCE NEW PRODUCTS, WHICH COULD HURT OUR
ABILITY TO ATTRACT AND RETAIN CUSTOMERS.
We are highly dependent on the introduction of new and enhanced video game
and PC hardware and software for our success. If manufacturers fail to introduce
new games and systems, we would have difficulty attracting and retaining
customers to buy the products we sell. Any failure to attract and retain
customers could adversely affect our business. Many of the factors that impact
our ability to offer new products, and to attract and retain customers, are
largely beyond our control. These factors include:
- dependence upon manufacturers to introduce new or enhanced video game
systems,
- reliance upon continued technological development and the continued use of
PCs,
- dependence upon software publishers to develop popular game and
entertainment titles for future generation game systems or PCs, and
- the availability and timeliness of new product releases at our stores.
THE VIDEO GAME SYSTEM AND SOFTWARE PRODUCT INDUSTRIES ARE CYCLICAL WHICH
COULD CAUSE SIGNIFICANT FLUCTUATION IN OUR EARNINGS.
Demand for video game systems and software fluctuates in relation to the
introduction of next-generation hardware and related software titles. Following
the introduction of next-generation products, sales of the new products increase
steadily, while sales of the prior-generation products steadily decrease.
Manufacturers have historically introduced next-generation systems every four to
five years. Peak sales of prior-generation hardware tend to occur in the year of
introduction of next-generation systems, while peak sales of prior-generation
software titles tend to occur in the year following the peak of prior-generation
hardware. If leading video game systems manufacturers fail to introduce
next-generation systems, or fail to make significant enhancements to existing
systems, our sales of hardware systems and related titles will decrease, which
decrease could have a material adverse effect on our results of operations and
financial condition.
IF WE FAIL TO KEEP PACE WITH RAPIDLY CHANGING INDUSTRY TECHNOLOGY, WE WILL BE
AT A COMPETITIVE DISADVANTAGE.
The video game and PC industries are characterized by swiftly changing
technology, evolving industry standards, frequent new product introductions and
rapid product obsolescence. These characteristics require us to respond quickly
to technological changes and to understand their impact on our customers'
preferences. In particular, many video games and other entertainment software
are readily available on the Internet. The ability to download electronic games
onto PCs could make the retail sale of video games and PC entertainment software
obsolete. If this technology continues to expand our customers' ability to
access software through other sources, our revenues and earnings could decline.
5
<PAGE>
RISKS RELATED TO OUR BUSINESS
FAILURE TO MANAGE NEW STORE OPENINGS COULD NEGATIVELY IMPACT OUR OPERATIONAL
AND FINANCIAL RESULTS.
Our growth will depend on our ability to open and operate new stores
profitably. From January 31, 1999 through September 30, 1999, we have opened
approximately 48 new stores, and intend to open an additional 52 new stores by
January 29, 2000. Our ability to open new stores timely and profitably depends
upon several contingencies, many of which are beyond our control. The
contingencies include:
- our ability to locate suitable store sites, negotiate acceptable lease
terms, and build out or refurbish sites on a timely and cost-effective
basis,
- our ability to hire, train and retain skilled associates, and
- our ability to integrate new stores into our existing operations.
In addition, our services agreement with EB-UK significantly restricts our
ability to open stores in Europe. We cannot assure you that we will be able to
achieve our planned expansion or that our new stores will achieve sales and
profitability levels comparable to our existing stores.
IF WE DO NOT COMPETE EFFECTIVELY, WE WILL LOSE CUSTOMERS AND OUR EARNINGS
WILL DECLINE.
The electronic game industry is intensely competitive and subject to rapid
changes in consumer preferences and frequent new product introductions. We
compete with:
- video game and PC software specialty stores located in malls and other
locations,
- mass merchants,
- toy retail chains,
- online retailers,
- mail-order businesses,
- catalogs,
- direct-to-consumer software publishers, and
- office supply, computer product and consumer electronics superstores.
Increased competition may lead to reduced profit margins on video games and
PC entertainment software. In addition, customers can rent video games from many
video stores and cable television providers. Further, it is likely that other
methods of distribution will emerge in the future, which would result in
increased competition. Many of our competitors have longer operating histories
and significantly greater financial, managerial, creative, sales and marketing
and other resources than we have. We also compete with other forms of
entertainment activities, including movies, television, theater, sporting events
and family entertainment centers. If we do not compete effectively, our revenues
and earnings may be adversely affected.
OUR OPERATING RESULTS FLUCTUATE FROM PERIOD TO PERIOD, WHICH COULD RESULT IN
A LOWER PRICE FOR OUR COMMON STOCK.
Our business is affected by seasonal patterns. We historically generate our
highest net sales, management fees and net income during the fourth quarter,
which includes the holiday selling season. During fiscal 1999, we generated
approximately 44% of our net sales and approximately 82% of our operating income
during the fourth quarter. Accordingly, any adverse trend in net sales during
the holiday selling season could hurt our results of operations for the quarter
as well as for the entire year.
6
<PAGE>
Our results of operations may fluctuate from quarter to quarter depending upon a
variety of factors, most of which we cannot control. These factors include:
- the timing of new product introductions and new store openings,
- net sales contributed by new stores,
- increases or decreases in comparable store sales,
- adverse weather conditions,
- shifts in the timing of certain holidays or promotions, and
- changes in our merchandise mix.
Any one or more of these factors could affect our business, financial
condition and results of operations, and this makes the prediction of results of
operations on a quarterly basis difficult. Also, it is possible that our
quarterly results of operations may be below the expectations of public market
analysts and investors. This could adversely affect the price of our common
stock.
IF WE FAIL TO OBTAIN PRODUCTS FROM OUR SUPPLIERS, OUR SALES AND GROSS PROFIT
WILL BE NEGATIVELY AFFECTED.
We rely heavily upon our suppliers to provide us with new products as
quickly as possible. We purchase a significant amount of products from Nintendo,
Sony, Electronic Arts, D&H Distributing Company, Sega and Hasbro, Inc. and often
receive shipments of new release products which are disproportionately large
relative to our share of the overall consumer market. During fiscal 1999, we
purchased products from Sony, Nintendo and Electronic Arts, which represented
11.0%, 10.8% and 9.3%, respectively, of our net sales. The loss of any of these
suppliers could reduce our product offerings, which could cause us to be at a
competitive disadvantage. In addition, our financial performance largely depends
upon the business terms we obtain from our suppliers, including competitive
prices, unsold product return policies, advertising and market development
allowances, freight charges and payment terms. Our failure to maintain favorable
business terms with our suppliers could adversely affect our ability to offer
products to consumers at competitive prices.
During fiscal 1999, approximately one-third of our product purchases were
from domestic distributors of products manufactured overseas, primarily in Asia.
To the extent that our distributors rely on overseas sources for a large portion
of their products, any event causing a disruption of imports, including the
imposition of import restrictions, could hurt our business. In addition, in the
recent past, many Asian currencies were devalued significantly in relation to
the U.S. dollar, and financial markets in Asia experienced significant turmoil.
We cannot assure you that these events will not occur again in the future, and
if these events do occur, our business could be harmed. Trade restrictions in
the form of tariffs or quotas, or both, applicable to the products we sell could
also affect the importation of those products generally and could increase the
cost and reduce the supply of products available to us.
OUR E-COMMERCE STRATEGY IS DEPENDENT UPON THE GROWTH OF THE INTERNET AS A
MEANS OF COMMERCE.
If the e-commerce market does not grow or grows more slowly than we expect,
our business may not grow as quickly as we anticipate. A number of factors could
prevent the acceptance and growth of e-commerce, including the following:
- e-commerce is at an early stage and buyers may be unwilling to shift their
traditional purchasing to online purchasing,
- increased government regulation or taxation may adversely affect the
viability of e-commerce, and
7
<PAGE>
- adverse publicity and consumer concern about the reliability, cost, ease
of access, quality of services, capacity, performance and security of
e-commerce transactions could discourage its acceptance and growth.
OUR E-COMMERCE STRATEGY MAY NOT SUCCEED, WHICH WILL IMPEDE OUR GROWTH.
Our e-commerce strategy depends in part on our ability to significantly
increase sales of our products over the Internet. We are pursuing opportunities
to sell our products over the Internet through our web site EBWORLD.COM as well
as through Internet marketing partnerships with America Online, CNET and
Ziff-Davis Inc. This is a relatively new business and marketing strategy for us
and involves risks and uncertainties. We may not succeed in marketing our
products over the Internet. In addition, our Internet strategy will require us
to significantly increase our advertising and marketing expenditures. If these
expenditures do not result in significant sales, our results of operations will
be adversely affected.
OUR INTERNATIONAL OPERATIONS EXPOSE US TO NUMEROUS RISKS.
We have retail operations in various foreign countries, including Canada,
South Korea and Australia, and we intend to pursue opportunities that may arise
in these and other countries. Net sales in these foreign countries represented
9.3% of our net sales in fiscal 1999. We are subject to the risks inherent in
conducting business across national boundaries, any one of which could
negatively impact our business. These risks include:
- economic downturns,
- currency exchange rate fluctuations,
- changes in governmental policy,
- international incidents,
- military outbreaks,
- government instability,
- nationalization of foreign assets, and
- government protectionism.
We cannot assure you that one or more of these factors will not impair our
current or future international operations and, as a result, harm our overall
business.
IF WE ARE UNABLE TO RENEW OUR LEASES OR FIND ADDITIONAL SITES FOR EXPANSION,
OUR REVENUE GROWTH MAY DECLINE.
As of September 30, 1999, 72 of our stores (12.5% of all stores) were
operated under leases with terms that expire in less than one year. We cannot
assure you that we will be able to maintain our existing store locations as
leases expire, that we will be able to locate suitable alternative sites on
acceptable terms or find additional sites for new store expansion. If we fail to
maintain existing store locations, locate to alternative sites or find
additional sites for new store expansion, our revenues and earnings may decline.
WE DEPEND UPON OUR KEY PERSONNEL AND THEY WOULD BE DIFFICULT TO REPLACE.
Our success depends upon our ability to attract, motivate and retain key
management associates for our stores and skilled merchandising, marketing and
administrative personnel at our headquarters. In the past, we have been
successful in maintaining the continuity of our management team, including our
executive officers, Joseph J. Firestone, our President and Chief Executive
Officer, Jeffrey W. Griffiths, our Senior Vice President of Merchandising and
Distribution and President of EBKids, Seth
8
<PAGE>
P. Levy, our Senior Vice President and Chief Information Officer and the
President of EBWORLD.COM and John R. Panichello, our Senior Vice President and
Chief Financial Officer and President of BC Sports Collectibles. However, we
cannot assure you that we will continue to be successful in attracting and
retaining such personnel.
RISKS RELATED TO THE OFFERING
THE KIM FAMILY HAS SIGNIFICANT CONTROL OF ELECTRONICS BOUTIQUE AND CAN MAKE
DECISIONS THAT COULD ADVERSELY AFFECT OUR STOCK PRICE.
Following this offering, EB Nevada Inc., a company indirectly controlled by
James Kim, his wife and certain trusts for the benefit of his children, will
beneficially own approximately 61.6% of the outstanding shares of common stock
(59.2% if the underwriters exercise their over-allotment option in full).
Accordingly, the Kim family will effectively control Electronics Boutique. Under
a credit facility we have with Fleet Capital Corporation, the Kim family is
obligated to own, directly or indirectly, not less than 25% of the issued and
outstanding capital stock of Electronics Boutique.
SHARES ARE RESTRICTED FROM IMMEDIATE RESALE BUT MAY BE SOLD INTO THE MARKET
IN THE NEAR FUTURE.
THIS COULD CAUSE THE MARKET PRICE OF OUR COMMON STOCK TO DROP SIGNIFICANTLY.
After this offering, we will have outstanding 22,204,500 shares of common
stock, of which 8,524,887 shares may be resold in the public market immediately.
The remaining shares of our total outstanding shares will become available for
resale in the public market as shown in the chart below.
As restrictions on resale end, the market price could drop significantly if
the holders of these restricted shares sell them or are perceived by the market
as intending to sell them.
<TABLE>
<CAPTION>
DATE OF AVAILABILITY FOR RESALE
NUMBER OF SHARES INTO PUBLIC MARKET
- ---------------- ---------------------------------------------
<S> <C>
13,679,613 120 days after the date of this prospectus
pursuant to a lock-up agreement these
stockholders have with Prudential Securities.
However, Prudential Securities can waive this
restriction at any time and without notice.
Following the expiration of the lock-up
period, these shares of common stock may be
sold by "affiliates" of Electronics Boutique,
subject to the volume limitations of the
federal securities laws.
</TABLE>
WE EXPECT TO EXPERIENCE VOLATILITY IN OUR STOCK PRICE.
The stock market in general has experienced extreme price and volume
fluctuations. These broad market fluctuations may adversely affect the market
price of our common stock, regardless of our actual operating performance. You
may be unable to resell your shares at or above the public offering price due to
a number of factors, including:
- actual or anticipated quarterly fluctuations in our operating results,
- changes in expectations of future financial performance or changes in
estimates of securities analysts,
- changes in the market valuations of other companies,
- announcements of technological innovations,
9
<PAGE>
- announcements relating to strategic relationships, acquisitions or
industry consolidation, and
- general economic, market and political conditions not related to our
business.
MANAGEMENT MAY APPLY THE PROCEEDS OF THIS OFFERING TO USES THAT DECREASE OUR
PROFITS OR MARKET VALUE.
Our management will have broad discretion in how we use the net proceeds of
this offering and you must rely on their judgment regarding the application of
the proceeds. You may not agree with management's use of the proceeds of this
offering. Our management may use the net proceeds from this offering for
purposes that may decrease our profits or market value, including Internet
initiatives and related marketing and promotional expenses.
OTHER RISKS
OUR STATUS AS A HOLDING COMPANY AND OUR CREDIT FACILITY RESTRICT OUR ABILITY
TO PAY DIVIDENDS ON OUR COMMON STOCK.
We are a holding company and do not have any material assets other than our
ownership interests in our subsidiaries. Our common stock will be junior in
right of payment to all of our existing and future liabilities and obligations
and, by virtue of the fact that we are a holding company, our common stock will
be structurally junior in right of payment to all existing and future
liabilities and obligations of each of our subsidiaries. We have not declared or
paid dividends on our common stock since our initial public offering and do not
currently intend to do so. In addition, our credit facility with Fleet Capital
Corporation restricts our ability to declare or pay dividends on our common
stock.
PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND BYLAWS AND STATE LAW COULD
RESTRICT OR PREVENT A TAKEOVER, WHICH MAY LIMIT THE PRICE THAT INVESTORS ARE
WILLING TO PAY FOR OUR COMMON STOCK.
Our Certificate of Incorporation and Bylaws and the Delaware General
Corporation Law include provisions that could make it more difficult for a third
party to acquire us, even though the acquisition might be beneficial to you and
other stockholders. If an acquisition is delayed or prevented, the market price
of our common stock could be adversely affected.
YEAR 2000 PROBLEMS COULD DISRUPT OUR BUSINESS OPERATIONS AND COULD ADVERSELY
AFFECT OUR REVENUES.
We use a significant number of computer software programs and operating
systems in our 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 cannot interpret appropriately the upcoming calendar year 2000, we will
have to modify or even replace the source code or applications. We are currently
modifying our computer software programs and operating systems to make them
"Year 2000" compliant and intend to complete our "Year 2000" compliance program
before December 31, 1999. We anticipate spending approximately $850,000 in
connection with our "Year 2000" compliance program, of which $794,000 has been
expended through October 30, 1999. However, we cannot be sure that the costs
necessary to update software, or potential systems interruptions will not exceed
that amount.
In addition, in the event that our "Year 2000" remediation efforts fail, we
could experience the following:
- we could experience significant delays in receiving or shipping products,
- we could lose communication links with our stores,
- store security systems may not operate, and
- stores may not be able to process transactions or engage in normal
business activity.
Any large system failures could have a material adverse effect on our
business, results of operations and financial condition.
10
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. These
statements relate to future events or our future financial performance. In some
cases, you can identify forward-looking statements by terminology such as
"anticipates," "believes," "continue," "could," "estimates," "expects,"
"intends," "may," "plans," "potential," "predicts," "should" or "will" or the
negative of such terms or other comparable terminology. These statements are
only predictions and involve known and unknown risks, uncertainties and other
factors, including the risks outlined under "Risk Factors," that may cause our
or our industry's actual results, levels of activity, performance or
achievements to be materially different from any future results, levels of
activity, performance or achievements expressed or implied by such
forward-looking statements. You should not place undue reliance on these
forward-looking statements.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of such statements. We
are under no duty to update any of the forward-looking statements after the date
of this prospectus to conform such statements to actual results, unless required
by law.
We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise
after the date of this prospectus. In light of these risks and uncertainties,
the forward-looking events and circumstances discussed in this prospectus may
not occur causing actual results to differ materially from those anticipated or
implied in the forward-looking statements.
11
<PAGE>
USE OF PROCEEDS
The net proceeds to Electronics Boutique from the sale of the common stock
in this offering are estimated to be $ , after deducting underwriting
discounts and commissions and estimated offering expenses of $ . We intend
to use these net proceeds in the following manner:
- approximately $12 million for advertising and marketing initiatives for
our Internet operations and
- working capital expenditures, including financing new store openings, and
other general corporate purposes.
Our management will have broad discretion over the use of the net proceeds
from this offering. Pending these uses, we may invest the net proceeds
temporarily in short-term, investment grade, interest-bearing securities or
guaranteed obligations of the U.S. government. Electronics Boutique will not
receive any proceeds from the sale of common stock by the selling stockholders.
PRICE RANGE OF COMMON STOCK
Electronics Boutique's common stock is quoted in the Nasdaq National Market
under the symbol "ELBO." The following table sets forth the high and low sales
prices of the common stock as reported by the Nasdaq National Market since
trading in the common stock began on July 29, 1998.
<TABLE>
<CAPTION>
HIGH LOW
-------- --------
<S> <C> <C>
FISCAL 1999
Second Fiscal Quarter..................................... $14.13 $13.25
Third Fiscal Quarter...................................... $14.00 $ 6.63
Fourth Fiscal Quarter..................................... $25.75 $11.75
FISCAL 2000
First Fiscal Quarter...................................... $19.88 $12.13
Second Fiscal Quarter..................................... $18.38 $13.50
Third Fiscal Quarter...................................... $26.31 $16.63
Fourth Fiscal Quarter (through November 18, 1999)......... $25.38 $19.00
</TABLE>
On November 18, 1999, the last reported sale price of the common stock in
the Nasdaq National Market was $23.0625 per share.
12
<PAGE>
CAPITALIZATION
The following table sets forth as of July 31, 1999 (i) the actual
capitalization of Electronics Boutique and (ii) the capitalization of
Electronics Boutique as adjusted to reflect this offering and the application of
the estimated net proceeds received by Electronics Boutique. See "Use of
Proceeds." The following table should be read in conjunction with Electronic
Boutique's consolidated financial statements and accompanying notes, which are
included in this prospectus.
<TABLE>
<CAPTION>
JULY 31, 1999
-------------
<S> <C> <C> <C>
ACTUAL AS
ADJUSTED
------- -------
(IN
THOUSANDS)
(UNAUDITED)
Current portion of long-term debt.......................... $ 58 $ 58
Long-term debt............................................. -- --
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;
20,169,900 shares issued and outstanding; and
22,169,900 shares issued and outstanding, as
adjusted(1)............................................ 202 222
Additional paid-in capital............................... 31,551 74,834
Accumulated other comprehensive expense.................. (475) (475)
Retained earnings........................................ 21,208 21,208
------- -------
Total stockholders' equity................................. 52,486 95,789
------- -------
Total capitalization....................................... $52,544 $95,847
======= =======
</TABLE>
- ------------------------
(1) Excludes 1,557,519 shares of common stock issuable upon exercise of
outstanding options. Also excludes an aggregate of 458,701 shares of common
stock available for the future grant of stock options and other equity
securities under the Electronics Boutique Equity Participation Plan.
13
<PAGE>
SELECTED CONSOLIDATED 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,
our summary consolidated financial and operating data. The information presented
below under the captions "Statement of Income Data" for fiscal years 1995
through 1999 and "Balance Sheet Data" as of January 28, 1995, February 3, 1996,
February 1, 1997, January 31, 1998 and January 30, 1999 is derived from our
audited consolidated financial statements. Prior to July 28, 1998, the
consolidated financial statements include the combined financial position and
results of operations of The Electronics Boutique, Inc. and EB Services Company
LLP, which were predecessors to Electronics Boutique. Our audited consolidated
financial statements for each of the three fiscal years in the three-year period
ended January 30, 1999, and as of January 31, 1998 and January 30, 1999, are
included in this prospectus. The information presented below under the captions
"Statement of Income Data" for the twenty-six weeks ended August 1, 1998 and
July 31, 1999 and "Balance Sheet Data" as of July 31, 1999 are derived from our
unaudited interim financial statements included in this prospectus. In the
opinion of management, our unaudited financial information contains all
adjustments (which consist only of normal recurring adjustments) necessary to
present fairly the financial position and results of operations of Electronics
Boutique as of such dates and for such periods. The selected financial data
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the consolidated financial
statements and notes thereto included in this prospectus.
<TABLE>
<CAPTION>
TWENTY-SIX WEEKS
YEAR ENDED ENDED
------------------------------------------------------------------- --------------------
JANUARY 28, FEBRUARY 3, FEBRUARY 1, JANUARY 31, JANUARY 30, AUGUST 1, JULY 31,
1995 1996 1997 1998 1999 1998 1999
----------- ----------- ----------- ----------- ----------- --------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales.......................... $249,552 $268,956 $337,059 $449,180 $570,514 $208,660 $235,119
Management fees.................... 1,158 1,905 2,526 4,792 3,405 1,101 1,581
-------- -------- -------- -------- -------- -------- --------
Total revenues..................... 250,710 270,861 339,585 453,972 573,919 209,761 236,700
Cost of goods sold................. 182,505 199,226 252,813 338,498 431,744 155,424 172,777
-------- -------- -------- -------- -------- -------- --------
Gross profit....................... 68,205 71,635 86,772 115,474 142,175 54,337 63,923
Operating expenses................. 56,594 58,989 69,828 87,003 99,972 46,330 53,000
Depreciation and amortization...... 5,324 6,047 6,615 7,997 9,775 4,659 5,547
-------- -------- -------- -------- -------- -------- --------
Income from operations............. 6,287 6,599 10,329 20,474 32,428 3,348 5,376
Equity in earnings (loss) of
affiliates....................... (634) (1,319) (573) 2,903 (161) (161) --
Interest expense (income), net..... 1,727 1,818 1,298 1,380 289 808 (252)
Preacquisition loss of
subsidiaries(1).................. -- -- -- 913 -- -- --
-------- -------- -------- -------- -------- -------- --------
Income before income tax expense... 3,926 3,462 8,458 22,910 31,978 2,379 5,628
Income tax expense(2).............. 286 280 550 846 11,693 191 2,206
-------- -------- -------- -------- -------- -------- --------
Net income......................... $ 3,640 $ 3,182 $ 7,908 $ 22,064 $ 20,285 $ 2,188 $ 3,422
======== ======== ======== ======== ======== ======== ========
Net income per share--basic........ $ .17
========
Weighted average shares
outstanding--basic............... 20,169
========
Net income per share--diluted $ .17
========
Weighted average shares
outstanding--diluted............. 20,334
========
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
TWENTY-SIX WEEKS
YEAR ENDED ENDED
------------------------------------------------------------------- --------------------
JANUARY 28, FEBRUARY 3, FEBRUARY 1, JANUARY 31, JANUARY 30, AUGUST 1, JULY 31,
1995 1996 1997 1998 1999 1998 1999
----------- ----------- ----------- ----------- ----------- --------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
PRO FORMA INCOME DATA(2):
Income before income taxes......... $ 8,458 $ 22,910 $ 31,978 $ 2,379
Pro forma income taxes............. 3,514 9,415 11,866 932
-------- -------- -------- --------
Pro forma net income(3)............ $ 4,944 $ 13,495 $ 20,112 $ 1,447
Pro forma net income per
share--basic..................... $ .31 $ .85 $ 1.12 $ .09
======== ======== ======== ========
Pro forma weighted average shares
outstanding--basic(4)............ 15,794 15,794 18,030 15,890
======== ======== ======== ========
Pro forma net income per share--
diluted.......................... $ .31 $ .85 $ 1.11 $ .09
======== ======== ======== ========
Pro forma weighted average shares
outstanding--diluted(4).......... 15,794 15,794 18,084 15,890
======== ======== ======== ========
OPERATING DATA(5):
Stores open at beginning of
period(6)........................ 311 325 341 390 452 452 528
Stores open at end of period....... 325 341 360 452 528 474 564
Sales per square foot(7)........... $ 721 $ 729 $ 831 $ 926 $ 1,016 $ 390 $ 359
Average sales per store............ $ 785 $ 808 $ 962 $ 1,106 $ 1,213 $ 466 $ 437
Comparable store sales increase
(decrease)....................... (6.6%) 3.5% 20.8% 15.3% 14.1% 17.8% (1.2%)
Inventory turnover................. 3.6x 3.7x 5.0x 5.2x 5.6x 2.5x 2.3x
</TABLE>
<TABLE>
<CAPTION>
JANUARY 28, FEBRUARY 3, FEBRUARY 1, JANUARY 31, JANUARY 30, JULY 31,
1995 1996 1997 1998 1999 1999
----------- ----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)................. $3,344 $(11,038) $ 9,893 $(17,728) $ (3,091) $ (7,904)
Total assets.............................. 82,900 95,515 139,244 142,791 172,047 152,436
Total liabilities......................... 66,833 78,066 118,887 114,392 123,205 99,950
Stockholders' equity...................... 16,067 17,449 20,357 28,399 48,842 52,486
</TABLE>
- ------------------------------
(1) The results of operations of two subsidiaries, EB International, Inc. and
Electronics Boutique Canada, Inc., have been consolidated since the
beginning of fiscal 1998. Preacquisition loss of subsidiaries represents
losses in EB International, Inc. and Electronics Boutique Canada, Inc. prior
to their acquisition by Electronics Boutique. See the notes to the
consolidated financial statements which are included in this prospectus.
(2) Prior to Electronics Boutique's initial public offering, its predecessors
were taxed as an S Corporation and a partnership. As a result, their taxable
income was passed through to their partners and shareholders for federal
income tax purposes. Accordingly, for periods prior to the initial public
offering on July 28, 1998, the financial statements do not include a
provision for federal income taxes. Additionally, a predecessor to
Electronics Boutique 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 prior to July 28, 1998, provide for income
taxes in some states. See the notes to the consolidated financial statements
which are included in this prospectus.
(3) The pro forma net income gives effect to the application of the pro forma
income tax expense that would have been reported had The Electronics
Boutique, Inc. and EB Services Company LLP been subject to federal and all
state income taxes for fiscal years 1997, 1998 and 1999 and the twenty-six
weeks ended August 1, 1998. See the notes to the consolidated financial
statements which are included in this prospectus.
(4) Pro forma weighted average shares outstanding gives effect to the number of
shares which would have been outstanding upon completion of the initial
public offering and related transactions for periods prior to the initial
public offering. See the notes to the consolidated financial statements
which are included in this prospectus.
(5) Does not reflect stores operated by EB-UK and Waldensoftware for which
Electronics Boutique provides management services. See "Business--Management
Services."
(6) As of February 2, 1997, stores open at beginning of period reflects the
consolidation of Electronics Boutique's domestic stores and its
international stores.
(7) Calculated based on stores open for the entire fiscal period presented.
15
<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 financial statements and accompanying notes which are included in
this prospectus.
OVERVIEW
We believe that we are among the world's largest specialty retailers of
electronic games. Our primary products are video games and PC entertainment
software, supported by the sale of video game hardware, PC productivity
software, PC accessories and related products. As of September 30, 1999, we
operated 576 stores in 46 states, Puerto Rico, Canada, Australia and South
Korea, primarily under the names Electronics Boutique and Stop 'N Save Software.
Our stores are primarily located in high traffic areas in regional shopping
malls and average 1,200 square feet in size. Through our web site at
WWW.EBWORLD.COM, we also offer a broad selection of the most popular electronic
games, hardware and accessories, most of which are available for immediate
delivery. As of September 30, 1999, we provided management services for EB-UK,
which operated 271 stores and 18 department store-based concessions in the
United Kingdom, Ireland and Sweden. As of September 30, 1999, we also managed 15
mall-based Waldensoftware stores for Borders Group, Inc. Electronics Boutique is
a holding company and does not have any significant assets or liabilities, other
than all of the outstanding capital stock of its subsidiaries.
The fiscal year of Electronics Boutique ends on the Saturday nearest
January 31. Accordingly, the financial statements for the years ended
February 1, 1997 ("fiscal 1997"), January 31, 1998 ("fiscal 1998") and
January 30, 1999 ("fiscal 1999") each include 52 weeks of operations.
RESULTS OF OPERATIONS
The following table sets forth certain income statement items as a
percentage of total revenues for the periods indicated:
<TABLE>
<CAPTION>
TWENTY-SIX WEEKS ENDED
------------------------------
JULY 31, 1999 AUGUST 1, 1998
------------- --------------
<S> <C> <C>
Net sales.......................................... 99.3% 99.5%
Management fees.................................... 0.7 0.5
----- -----
Total revenues..................................... 100.0 100.0
Cost of goods sold................................. 73.0 74.1
----- -----
Gross profit....................................... 27.0 25.9
Operating expenses................................. 22.4 22.1
Depreciation and amortization...................... 2.3 2.2
----- -----
Income from operations............................. 2.3 1.6
Equity in loss of affiliates....................... 0.0 (0.1)
Interest (income) expense, net..................... (0.1) 0.4
----- -----
Income before income tax expense................... 2.4 1.1
Income tax expense................................. 0.9 0.1
----- -----
Net income......................................... 1.5% 1.0%
===== =====
</TABLE>
TWENTY-SIX WEEKS ENDED JULY 31, 1999 COMPARED TO TWENTY-SIX WEEKS ENDED
AUGUST 1, 1998
Net sales increased by 12.7% from $208.7 million in the twenty-six weeks
ended August 1, 1998 to $235.1 million in the twenty-six weeks ended July 31,
1999. The increase in net sales was due primarily
16
<PAGE>
to new stores opened since August 1, 1998 and was partially offset by a 1.2%
decrease in comparable store sales. Strong demand for Nintendo Game Boy software
and hardware, PC entertainment software, toys and software-related action
figures positively impacted comparable store sales. Sales of Sony PlayStation
and Nintendo 64 video game software were negatively impacted by a relatively
weak selection of new-release titles throughout the current year and by the
delay in the release of several major titles into the third quarter of this
year, while last year's results were positively impacted by sales of a few very
successful titles. However, sales of Sony PlayStation and Nintendo 64 video game
hardware were below last year's sales primarily due to a price reduction in
June 1998 that significantly increased unit sales during last year's comparable
period. Electronics Boutique expects sales to be positively impacted in the
third quarter of fiscal 2000 by the introduction of a new video game hardware
system, Sega Dreamcast, which took place on September 9, 1999.
Management fees increased by 43.5% from $1.1 million in the twenty-six weeks
ended August 1, 1998 to $1.6 million in the twenty-six weeks ended July 31,
1999. The increase was primarily attributable to an additional $248,000 for a
performance fee earned for fiscal 1999 under the consulting agreement with
Border's Group, Inc. and to $245,000 of additional management fees earned from
EB-UK due to increased sales from a newly acquired competitor which occurred in
May 1999.
Cost of goods sold increased by 11.2% from $155.4 million in the twenty-six
weeks ended August 1, 1998 to $172.8 million in the twenty-six weeks ended
July 31, 1999. As a percentage of net sales, cost of goods sold decreased from
74.5% in the twenty-six weeks ended August 1, 1998 to 73.5% in the twenty-six
weeks ended July 31, 1999. The decrease in cost of goods sold as a percentage of
net sales was primarily attributable to increases in sales of Nintendo Game Boy
software and hardware, toys and software-related action figures that carry
higher overall margins than the console video game category, which experienced
reduced sales in the current fiscal year.
Selling, general and administrative expense increased by 14.4% from
$46.3 million in the twenty-six weeks ended August 1, 1998 to $53.0 million in
the twenty-six weeks ended July 31, 1999. As a percentage of total revenues,
selling, general and administrative expense increased from 22.1% in 1998 to
22.4% in 1999. The $6.7 million increase was attributable to the increase in the
Company's domestic and international store base and the associated increases in
store, distribution, and headquarter operating expenses, which was partially
offset by an increase in promotional and marketing reimbursements. The increase
in selling, general and administrative expenses as a percentage of total
revenues were primarily attributable to expenses associated with the addition of
90 net new stores since August 1, 1998 and for expected new store openings in
fiscal 2000.
Depreciation and amortization expense increased by 19.1% from $4.7 million
in the twenty-six weeks ended August 1, 1998 to $5.5 million in the twenty-six
weeks ended July 31, 1999. This increase was primarily attributable to
capitalized expenditures for leasehold improvements and furniture and fixtures
for new store openings.
Operating income increased by 60.6% from $3.3 million in the twenty-six
weeks ended August 1, 1998 to $5.4 million in the twenty-six weeks ended
July 31, 1999. As a percentage of total revenues, operating income increased
from 1.6% in 1998 to 2.3% in 1999, as the decrease in cost of goods sold as a
percentage of total revenues more than offset the increase in operating expenses
as a percentage of total revenues.
Interest (income) expense, net, improved from an expense of $0.8 million in
the twenty-six weeks ended August 1, 1998 to income of $0.3 million in the
twenty-six weeks ended July 31, 1999. The change was primarily attributable to
the repayment of Electronics Boutique's debt with the proceeds of the initial
public offering and the interest income generated by investing excess cash in
short term investments, partially offset by a modest level of borrowing under
the company's credit facility.
17
<PAGE>
As a result of all the above factors, Electronics Boutique's income before
income taxes increased by 136.6% from $2.4 million in the twenty-six weeks ended
August 1, 1998 to $5.6 million in the twenty-six weeks ended July 31, 1999.
The following table sets forth certain income statement items as a
percentage of total revenues for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------------------
FEBRUARY 1, JANUARY 31, JANUARY 30,
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Net sales................................................... 99.3% 98.9% 99.4%
Management fees............................................. 0.7 1.1 0.6
----- ----- -----
Total revenues.............................................. 100.0 100.0 100.0
Cost of goods sold.......................................... 74.5 74.6 75.2
----- ----- -----
Gross profit................................................ 25.5 25.4 24.8
Operating expenses.......................................... 20.5 19.1 17.4
Depreciation and amortization............................... 1.9 1.8 1.7
----- ----- -----
Income from operations...................................... 3.1 4.5 5.7
Equity in earnings (loss) of affiliates..................... (0.2) 0.7 (0.0)
Interest expense, net....................................... 0.4 0.3 0.1
Preacquisition loss of subsidiaries......................... 0.0 0.2 0.0
----- ----- -----
Income before income tax expense............................ 2.5 5.1 5.6
Income tax expense.......................................... 0.2 0.2 2.0
----- ----- -----
Net income.................................................. 2.3% 4.9% 3.6%
===== ===== =====
</TABLE>
FISCAL 1999 COMPARED TO FISCAL 1998
Net sales increased by 27.0% from $449.2 million in fiscal 1998 to
$570.5 million in fiscal 1999. The increase in net sales was primarily
attributable to a 14.1% increase in comparable store sales, which resulted in a
$61.9 million increase in net sales, and the additional sales volume
attributable to 76 net new stores opened during fiscal 1999. The increase in
comparable store sales was primarily attributable to increases in video game and
PC entertainment software sales as well as continued strong demand for PC
accessory products.
Management fees decreased 28.9% from $4.8 million in fiscal 1998 to
$3.4 million in fiscal 1999. The decrease was primarily attributable to
Electronics Boutique's receipt of a $2.2 million bonus under the UK Services
Agreement recorded in fiscal 1998. Electronics Boutique did not receive a bonus
under this agreement in fiscal 1999, nor does it expect to receive such a bonus
in the future. The absence of a bonus in fiscal 1999 was partially offset by
higher recurring management fees earned in fiscal 1999 under the UK Services
Agreement.
Cost of goods sold increased by 27.6% from $338.5 million in fiscal 1998 to
$431.7 million in fiscal 1999. As a percentage of net sales, cost of goods sold
increased from 75.4% in fiscal 1998 to 75.7% in fiscal 1999. The increase in
cost of goods sold as a percentage of net sales was primarily attributable to an
increase in freight expenses and to Electronics Boutique's decision to reduce
prices on selected electronic game titles in order to increase market share and
sales volume. The increase in freight expenses was the result of several
factors. Electronics Boutique switched its primary freight carrier and
reorganized its third-party distribution framework in order to improve service
and merchandise availability to its stores. There was also an increase in the
overall number of units shipped by Electronics Boutique to its stores as a
result of a lower average cost per unit of product. These
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<PAGE>
increases to cost of goods sold were partially offset by a reduction in
inventory shortage and an increase in purchase discounts earned from vendors.
Selling, general and administrative expense increased by 14.9% from
$87.0 million in fiscal 1998 to $100.0 million in fiscal 1999. As a percentage
of total revenues, selling, general and administrative expense decreased from
19.1% in fiscal 1998 to 17.4% in fiscal 1999. The $13.0 million increase was
primarily attributable to the increase in Electronics Boutique's domestic and
international store base and the associated increases in store, distribution,
and headquarter operating expenses, which were partially offset by an increase
in promotional and marketing reimbursements. The decrease in selling, general
and administrative expense as a percentage of total revenues was primarily
attributable to an increase in net sales, which offset the impact of the above
factors on operating expenses.
Depreciation and amortization expense increased by 22.2% from $8.0 million
in fiscal 1998 to $9.8 million in fiscal 1999. This increase was primarily
attributable to capitalized expenditures for leasehold improvements and
furniture and fixtures for new store openings.
Operating income increased by 58.4% from $20.5 million in fiscal 1998 to
$32.4 million in fiscal 1999. As a percentage of total revenues, operating
income increased from 4.5% in fiscal 1998 to 5.7% in fiscal 1999, as the
increase in cost of goods sold as a percentage of total revenues was more than
offset by the decline in operating expenses as a percentage of total revenues.
Equity in earnings of affiliates decreased by $3.1 million from earnings of
$2.9 million in fiscal 1998 to a loss of $0.2 million in fiscal 1999. The
decrease was attributable to the reorganization of Electronics Boutique in
conjunction with its initial public offering pursuant to which The Electronics
Boutique, Inc., a company controlled by the Kim family, retained the 25.1%
investment in EB-UK. The loss of $0.2 million in fiscal 1999 was attributable to
this investment and was recorded prior to the July 1998 reorganization. There
will be no future equity income or loss on this investment.
Interest expense, net, decreased by 79.1% from $1.4 million in fiscal 1998
to $0.3 million in fiscal 1999. The decrease was primarily attributable to the
repayment of Electronics Boutique's debt with the proceeds of the initial public
offering and the interest income earned from investing the excess cash in short
term investments during the third and fourth quarters of fiscal 1999.
Income tax expense increased from $0.8 million in fiscal 1998 to
$11.7 million in fiscal 1999. The increase was due to Electronics Boutique being
taxed in fiscal 1999 as a C corporation instead of an S corporation after the
date of the initial public offering.
As a result of all the above factors, Electronics Boutique's income before
income taxes increased by 39.6% from $22.9 million in fiscal 1998 to
$32.0 million in fiscal 1999.
FISCAL 1998 COMPARED TO FISCAL 1997
Net sales increased by 33.3% from $337.1 million in fiscal 1997 to
$449.2 million in fiscal 1998. The increase in net sales was primarily
attributable to (i) a 15.3% increase in comparable store sales, which resulted
in a $50.1 million increase in net sales, (ii) the additional sales volume
attributable to 45 net new domestic stores, which resulted in a $29.0 million
increase in net sales, and (iii) the consolidation of $33.0 million of net sales
from international retail operations, which net sales were fully consolidated as
a result of the acquisition of interests of joint venture partners acquired in
fiscal 1998.
Management fees increased by 89.7% from $2.5 million in fiscal 1997 to
$4.8 million in fiscal 1998. This increase was primarily attributable to the
$2.2 million bonus earned by Electronics Boutique under the UK services
Agreement with EB-UK. Electronics Boutique does not anticipate receiving bonus
payments under this agreement in the future.
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Cost of goods sold increased by 33.9% from $252.8 million in fiscal 1997 to
$338.5 million in fiscal 1998. As a percentage of net sales, cost of goods sold
increased from 75.0% in fiscal 1997 to 75.4% in fiscal 1998. The increase in
cost of goods sold as a percentage of net sales was primarily attributable to
Electronics Boutique's decision to reduce prices for selected electronic game
titles in order to increase market share and sales volume.
Selling, general and administrative expense increased by 24.6% from
$69.8 million in fiscal 1997 to $87.0 million in fiscal 1998. As a percentage of
total revenues, selling, general and administrative expense decreased from 20.5%
in fiscal 1997 to 19.1% in fiscal 1998. The $17.2 million increase was primarily
a result of the increase in Electronics Boutique's store base and the associated
increases in store and headquarter operating expenses. The decrease in selling,
general and administrative expense as a percentage of total revenue was
primarily attributable to an increase in net sales and management fee income
without a proportional increase in corporate and store-level overhead.
Depreciation and amortization expense increased by 20.9% from $6.6 million
in fiscal 1997 to $8.0 million in fiscal 1998. This increase was primarily
attributable to capitalized expenditures for leasehold improvements and
furniture and fixtures for new store openings.
Operating income increased by 98.2% from $10.3 million in fiscal 1997 to
$20.5 million in fiscal 1998. As a percentage of total revenues, operating
income increased from 3.1% in fiscal 1997 to 4.5% in fiscal 1998, as the
increase in cost of goods sold as a percentage of total revenues was more than
offset by the decline in operating expenses as a percentage of total revenues.
Equity in earnings of affiliates increased by $3.5 million from a loss of
$0.6 million in fiscal 1997 to earnings of $2.9 million in fiscal 1998. The
increase was attributable to a $3.2 million increase in equity income recorded
for Electronics Boutique's 25.1% investment in EB-UK and the effect of
consolidating Electronics Boutique's equity interests in Canada and Korea
beginning in fiscal 1998.
Interest expense, net, increased by 6.2% from $1.3 million in fiscal 1997 to
$1.4 million in fiscal 1998. The increase was primarily attributable to the
inclusion of foreign operation interest expense in fiscal 1998, which was
partially offset by reduced short-term borrowings and the repayment of long-term
debt in fiscal 1998.
As a result of all the above factors, Electronics Boutique's income before
income taxes increased by 171% from $8.5 million in fiscal 1997 to
$22.9 million in fiscal 1998.
SEASONALITY AND QUARTERLY RESULTS
Electronics Boutique's business, like that of most retailers, is highly
seasonal. A significant portion of Electronics Boutique's net sales, management
fees and profits are generated during Electronics Boutique'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 Electronics Boutique's merchandise mix.
The following table sets forth certain unaudited quarterly income statement
information and other operating data for the four quarters of fiscal 1998, the
four quarters of fiscal 1999 and the first two
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<PAGE>
quarters of fiscal 2000. The unaudited quarterly information includes all normal
recurring adjustments that management considers necessary for a fair
presentation of the information shown.
<TABLE>
<CAPTION>
FISCAL 1998
-----------------------------------------
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT FOR NUMBER OF STORES)
<S> <C> <C> <C> <C>
Total revenues................. $84,176 $73,394 $ 94,239 $202,163
Gross profit................... 22,235 19,087 24,179 49,973
Income (loss) from
operations................... 2,159 (1,800) 640 19,475
Stores open at quarter end..... 393 407 439 452
<CAPTION>
FISCAL 1999 FISCAL 2000
----------------------------------------- -------------------
1ST 2ND 3RD 4TH 1ST 2ND
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT FOR NUMBER OF STORES)
<S> <C> <C> <C> <C> <C> <C>
Total revenues................. $107,301 $102,460 $111,300 $252,858 $123,605 $113,095
Gross profit................... 27,781 26,556 27,672 60,166 33,167 30,755
Income (loss) from
operations................... 3,257 90 2,519 26,562 4,435 941
Stores open at quarter end..... 465 474 500 528 550 564
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Electronics Boutique has historically financed its operations through a
combination of cash generated from operations and bank debt. Electronics
Boutique's working capital deficit increased from $3.1 million at January 30,
1999 to $7.9 million at July 31, 1999. At July 31, 1999, Electronics Boutique
had $9.0 million of borrowings under its $50 million revolving credit facility.
Electronics Boutique used $26.9 million in cash from operations in the
twenty-six week period ended July 31, 1999 and used $8.8 million of cash from
operations during the twenty-six weeks ended August 1, 1998. The $26.9 million
of cash used in operations in 1999 was primarily the result of a decrease of
$20.9 million in accounts payable, a decrease of $9.6 million in taxes payable,
a decrease of $1.8 million in accrued expenses, an increase of $1.9 million in
accounts receivable and an increase of $1.5 million in merchandise inventories,
partially offset by $9.1 million of net income and non-cash charges to net
income. The decrease in accounts payable was primarily due to payments of
outstanding balances from the end of fiscal 1999. The $8.8 million of cash used
in operations in 1998 was primarily the result of a decrease of $16.7 million in
accounts payable, an increase of $1.2 million in accounts receivable, and an
increase of $1.2 million in merchandise inventories, partially offset by
$7.1 million of net income and non-cash charges to net income, a decrease of
$2.5 million in due from affiliates, and a $1.1 million decrease in prepaid
expenses.
Electronics Boutique made capital expenditures of $13.7 million in the
twenty-six weeks ended July 31, 1999, primarily to open new stores and remodel
existing stores, for leasehold improvements at Electronics Boutique's
headquarters and primary distribution center, and for equipment and leasehold
improvements at a new customer service facility in Las Vegas, Nevada to support
Internet and catalog sales operations. Electronics Boutique expects to make
approximately $29.0 million of capital expenditures in fiscal 2000. We made
capital expenditures of $7.9 million in the twenty-six weeks ended August 1,
1998, primarily for opening new stores, to remodel existing stores and for
leasehold improvements at the corporate headquarters and primary distribution
center.
IMPACT OF INFLATION
Electronics Boutique does not believe that inflation has had a material
effect on its net sales or results of operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities"
("SFAS 133"). This statement establishes accounting and reporting standards for
derivative instruments and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measures those instruments at fair value. The adoption of
this standard is not expected to materially impact Electronics Boutique's
results of operations, financial condition or long-term liquidity.
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In June 1999, the FASB issued Statement of Financial Accounting Standards
No. 137, Accounting for Derivative Instruments and Hedging Activities--Deferral
of the Effective Date of FASB Statement No. 133 ("SFAS 137"). SFAS 137 delays
the implementation of SFAS No. 133 until the year 2002.
YEAR 2000 STRATEGY
Electronics Boutique employs a significant number of computer software
programs and computer chip controlled devices in its operations, including
applications used in inventory management, distribution, financial business
systems and various administrative functions. To the extent that these software
applications or devices contain source code that is unable to interpret
appropriately the upcoming calendar year 2000 ("Y2K") issue, Electronics
Boutique may experience varying levels of system failure or miscalculations.
Therefore, some level of modification or even possible replacement of such
source code, applications or devices will be necessary.
Y2K PROJECT METHODOLOGY AND APPROACH
Electronics Boutique's Y2K project uses a five-phase methodology and
approach, of which the first two phases have been completed The five phases of
Electronics Boutique's Y2K project are as follows:
Phase I--Inventory. Electronics Boutique collects a comprehensive list of
items that may be affected by Y2K issues. Item categories are defined as
facilities ("Facilities"), hardware ("Hardware"), software ("Software"),
vendor hardware and software ("Non-EB"), and system feeds and interfaces
("Interfaces"). As of July 31, 1999, Electronics Boutique had inventoried
100% of items that it believes may be affected by the Y2K issue.
Phase II--Assessment. Electronics Boutique evaluates the inventory to
determine which items will function properly with the change to the new
century and ranks items based on their potential impact to Electronics
Boutique. Each Item is assigned a priority as follows:
"Critical": Will potentially impair Electronics Boutique's ability to do
business should the item fail.
"Important": Will adversely affect some productivity should the item fail.
"Inconvenient": Will cause minor inconvenience should the item fail.
"Non-Essential": Will have no impact should the item fail.
Based on assigned priorities from Phase I and II, the following three phases
are being carried out to the Critical items first, followed by the Important
items, then the Inconvenient items and finally the Non-Essential items if
resources are available. Electronics Boutique currently has two remaining items
it considers Critical. These items involve the ability to ship product
effectively and to poll the store POS systems to monitor daily sales and
inventory, either of which could impact the availability of products in our
stores. We had planned to remediate all Critical and Important items before
July 31, 1999, however this goal was not accomplished due to delays caused by
external vendor software issues. Electronics Boutique resolved its remaining
Critical issues prior to October 31, 1999.
Phase III--Remediation. Electronics Boutique analyzes the items affected by
Year 2000, identifying problem areas and repairing non-compliant items.
Phase IV--Testing. Electronics Boutique performs a thorough test of all
remediated systems, including present and forward date testing to simulate
dates in Year 2000.
Phase V--Implementation. Electronics Boutique places all items that have
been remediated and successfully tested into production.
SUPPLIER ELECTRONIC DATA INTERCHANGE (EDI) STATUS
The majority of products Electronics Boutique sells are purchased from a
relatively small group of manufacturers and/or distributors. In order to
efficiently communicate with these companies, EDI was
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<PAGE>
deployed wherever possible. At the end of fiscal 1999, Electronics Boutique had
upgraded to the Y2K compliant EDI "4010" format. However, since a good portion
of Electronics Boutique's suppliers are still using non-compliant EDI formats,
Electronics Boutique will continue using the "3020" and "3040" formats with
these non-compliant suppliers. These suppliers are being tracked in Electronics
Boutique's Y2K project database, and every effort will be made to facilitate
100% Y2K compliance with these suppliers. In case some suppliers are still not
Y2K compliant by December 31, 1999, Electronics Boutique's contingency plan is
to communicate with them through facsimile, mail and/or modem transmissions.
INTERNATIONAL SUBSIDIARIES AND DOMESTIC DISTRIBUTION CENTERS
Electronics Boutique operates retail stores in Australia, Canada, Puerto
Rico and Korea with regional sales offices in all but Puerto Rico. In addition,
the Company ships products out of its own distribution centers as well as
third-party distribution centers in the continental United States. Instead of
deploying and replicating distributed systems at each of these locations,
Electronics Boutique implemented a centralized computing environment with
telecommunication networks. This approach simplified the Y2K impact to
Electronics Boutique as a whole since these locations do not have any Critical
systems with which to contend. Most, if not all, desktop applications and
computers are the same as those at Electronics Boutique's headquarters.
Accordingly, these sites should be less prone to Y2K problems. Nonetheless,
Electronics Boutique has completed the inventory and assessment of these systems
and is continuing with any necessary remediation, testing and implementation.
All locations were rid of Critical Y2K issues by October 31, 1999, and all
locations are expected to be rid of Important Y2K issues by November 30, 1999.
OVERALL Y2K PROJECT STATUS BY PRIORITY (AS OF NOVEMBER 15, 1999)
<TABLE>
<CAPTION>
COMPLEXITY
------------------- Y2K Y2K Y2K COMPLIANT
PRIORITY COUNT UNIT(1) READY(2) TESTED(3) COMPLIANT(4) BY(5)
- -------- -------- -------- -------- --------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Critical............................. 84 1,124 100.0% 100.0% 100.0% 10/31/1999
Important............................ 240 504 100.0% 90.1% 90.1% 11/30/1999
Inconvenient......................... 45 51 100.0% 100.0% 100.0% 10/31/1999
Non-essential........................ 14 23 100.0% 100.0% 100.0%
</TABLE>
- ------------------------
(1) Complexity Unit: Measures the aggregate complexity of all items within a
priority group based on resources such as people-hour, time and material
required. The scale ranges from 1 to 700 per item, with 1 representing the
least amount of complexity.
(2) Y2K Ready: The percentage of the items within a priority group as to which
Electronics Boutique has received assurances by external providers or
believes that through its own remedial action will be able to process Year
2000 dates correctly.
(3) Y2K Tested: The percentage of the items within a priority group for which
Electronics Boutique has begun internal testing for Y2K compliance.
(4) Y2K Compliant: The percentage of the items within a priority group which
Electronics Boutique believes to be Y2K compliant.
(5) Compliant By: Date by which Electronics Boutique expects that the entire
priority group will be Y2K compliant.
Electronics Boutique expects that the aggregate cost of its identification,
assessment, remediation, replacement, testing and implementation efforts related
to the Y2K issue will not exceed $850,000 and that these expenditures will be
funded from operating cash flows. As of October 30, 1999, Electronics
23
<PAGE>
Boutique had incurred costs of approximately $794,000 related to the Y2K issue,
including analysis, remediation, repair, or replacement of existing software,
and upgrades to existing software which have been expensed as incurred.
Electronics Boutique's estimates of the costs of achieving Y2K compliance and
the dates by which Y2K compliance will be completed are based on management's
best estimate and include assumptions as to the availability of technical skills
of Electronics Boutique associates and independent contractors, timely
compliance by its business partners, and other factors.
Electronics Boutique has not yet completed its analysis of the operational
problems and costs that may likely result from the failure of Electronics
Boutique to properly assess and correct all Y2K issues on a timely basis.
Therefore, Electronics Boutique has not developed a contingency plan for dealing
with the most likely worst case scenarios that could occur. Electronics Boutique
intends to complete its analysis and contingency planning by December 31, 1999.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Electronics Boutique invests cash balances in excess of operating
requirements in short-term investment grade securities, generally with
maturities of 90 days or less. In addition, Electronics Boutique's revolving
credit facility provides for borrowings which bear interest at variable rates
based on either the bank's base rate or LIBOR plus 250 basis points. Electronics
Boutique had no borrowings outstanding pursuant to the revolving credit facility
as of September 30, 1999. Electronics Boutique believes that the effect, if any,
of reasonably possible near-term changes in interest rates on Electronics
Boutique's financial position, results of operations, and cash flows should not
be material.
Electronics Boutique has retail operations in various foreign countries.
Electronics Boutique is subject to currency exchange rate and currency
devaluation risks due to these operations. Since approximately 91% of
Electronics Boutique's net sales are domestic, Electronics Boutique does not
believe that currency exchange rate fluctuations would have a material adverse
effect on Electronics Boutique's results of operations and financial condition.
Electronics Boutique intends to monitor its exposure to these risks and
reevaluate its hedging strategies as appropriate.
24
<PAGE>
BUSINESS
We believe that we are among the world's largest specialty retailers of
electronic games. Our primary products are video games and PC entertainment
software, supported by the sale of video game hardware, PC productivity
software, PC accessories and related products. As of September 30, 1999, we
operated 576 stores in 46 states, Puerto Rico, Canada, Australia and South
Korea, primarily under the names Electronics Boutique and Stop 'N Save Software.
Our stores are primarily located in high traffic areas in regional shopping
malls and average 1,200 square feet in size. Through our web site at
WWW.EBWORLD.COM, we also offer a broad selection of the most popular electronic
games, hardware and accessories, most of which are available for immediate
delivery. We also provide management services for EB-UK which, as of September
30, 1999, operated 271 stores and 18 department store-based concessions in the
United Kingdom, Ireland and Sweden. As of September 30, 1999, we also managed 15
mall-based Waldensoftware stores for Borders Group, Inc.
Our 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. We
believe that we attract the core game enthusiast due to our:
- specialty store focus on the electronic game category,
- ability to stock sought-after new releases,
- breadth of product selection, and
- knowledgeable sales associates, who are often game enthusiasts themselves
and who have extensive knowledge of game titles and features.
We place significant emphasis on offering our customers immediate access to
new releases and have designed our product merchandising strategy and
distribution systems to facilitate this access. We introduce, on average, 20 new
game titles in our stores and on our web site each week. We believe that this
"FIRST TO MARKET" strategy establishes our stores and our web site as the
destination of choice for electronic game enthusiasts. We believe that our
vendors recognize the importance of our core game enthusiast customer base in
assuring the success of a new game launch. Therefore, our vendors often reward
us with disproportionately large allocations of newly released products. Our
strict inventory management system enables us to maintain over 2,000 active
SKUs, replenish our large and geographically dispersed store base on a daily
basis and minimize mark-downs as titles mature. We support our product offerings
with a strong commitment to customer service, which we believe distinguishes us
from our 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,
known as hardware, and video game titles, known as software. Video game consoles
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. From 1996 to July 1999, the video game market was dominated by two
manufacturers, Nintendo and Sony, each of which manufactures proprietary
hardware in the form of console systems and publishes game titles that run on
their console systems but cannot run on their competitors' systems. Third-party
publishers also produce a wide range of game titles for each of these major
hardware systems. Growth in the industry has been driven by the continued
improvements in systems technology, the substantial growth in the number of
titles available across game categories and the emergence of well-capitalized
software publishers with significant advertising budgets to support new
releases.
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Total domestic retail sales of video game titles, hardware and accessories
were approximately $6.1 billion in 1998, which represents an increase of 21%
over 1997. This increase was primarily the result of an increased penetration
rate of the 32/64 bit, fourth generation of video game hardware technology,
which was introduced in 1995 and 1996 under the Sony PlayStation and Nintendo 64
brands. As with each prior generation, the introduction of a new hardware
technology has led to an increase in the installed base of game console systems.
Enhanced technological features of new hardware expand gaming capabilities,
encourage existing players to upgrade their hardware platforms, and
simultaneously attract new video game players to purchase their first systems.
We believe that Sega Dreamcast, which was introduced to the U.S. and
Canadian markets in September 1999, represents the first significant improvement
in graphics performance, processing power and audio quality over the current
32/64 bit systems. Both Sony and Nintendo have announced plans to introduce
their next-generation consoles in 2000. Sony's PlayStation 2 will feature
significant performance improvements and importantly, backward compatibility
with current-generation PlayStation software, which eliminates obsolescence of
current-generation software titles. Nintendo's console, code named Dolphin, will
also feature significant performance enhancements over the current N64 system
and will be based on DVD technology as compared to the current cartridge-based
technology. Historically, following the introduction of next-generation hardware
and software products, sales of prior-generation hardware products peak and the
sales of prior-generation software titles peak in the following year. We believe
that the current transition to next-generation platforms may result in less
cyclical sales for current-generation systems and software. This is due to:
- the continuing strong pace of introductions by software publishers of new
releases for the current 32/64 bit systems,
- significant mass media advertising and promotional activity to support new
titles,
- consumer anticipation that the next-generation Sony game console system
will be backward compatible with current-generation games, and
- the price reduction on 32/64 bit systems from $129 to $99 in August 1999.
As of the end of June 1999, the current installed base of video game
hardware systems in the United States totaled 17.6 million Sony PlayStation
units and 10.7 million Nintendo 64 units.
PC ENTERTAINMENT SOFTWARE. PC entertainment software is generally sold in
the form of CD-Roms and played on multimedia PCs featuring fast processors,
expanded memories, and enhanced graphics and audio capabilities. The market for
PC entertainment software has experienced steady growth in recent years, due
primarily to the growth in the installed base of multimedia PCs. The domestic
installed base of multimedia PCs has increased from approximately 14 million
units in 1995 to approximately 34 million units in 1998. Domestic unit sales of
PC entertainment software have increased from approximately 23 million units in
1995 to approximately 54 million units in 1998. Domestic retail sales of PC
entertainment software totaled approximately $563 million for the first six
months of 1999, an increase of approximately 6% over the same period in 1998. We
believe that multimedia PCs priced well below $1,000 will contribute to 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 and sales
of PC entertainment software has grown at a rate comparable to the rate of
growth in the United States.
CUSTOMERS. We believe the typical electronic game consumer is male, between
the ages of 14 and 34, and lives in a household with annual income in excess of
$50,000. According to the Millennium Gamer Study, owners of video game hardware
systems purchase an average of 3.2 game titles per year. We believe that many
electronic game players purchase video game titles as well as PC entertainment
software. Electronic games are principally sold through retail channels,
including specialty retailers like
26
<PAGE>
Electronics Boutique, as well as mass merchants, toy retail chains, electronics
retailers, computer retailers, wholesale clubs, the Internet and mail order.
BUSINESS STRATEGY
We seek to enhance our position as one of the world's largest specialty
retailers of video game titles and PC entertainment software.
BREADTH OF TITLE SELECTION. We offer our customers an extensive selection
of video game titles and PC entertainment software at competitive prices. Our
typical store offers approximately 1,350 titles at any given time from over 90
video game and PC entertainment software vendors. Most of these titles are also
available on our web site. We continuously update our title selection in each
store to reflect the tastes and buying patterns of the store's local market. We
carry game titles which are compatible with all major video game hardware
systems and PCs. In addition to video game titles and PC entertainment software,
we offer a complementary line of productivity and educational software and PC
and video game accessories and peripheral products, including graphics
accelerators, joysticks, memory cards, books and magazines. By offering all
major video game hardware systems and providing a broad but focused assortment
of electronic game software and accessories, we seek to establish our stores and
web site as the destination of choice for electronic game enthusiasts.
IMMEDIATE AVAILABILITY OF NEW RELEASES. We strive to be the first in our
markets to offer new video game and PC entertainment software titles upon their
release. New-release titles are often preceded by substantial publicity in the
form of print advertisements and reviews in publications and, increasingly, are
promoted through television advertisements. This publicity tends to create high
levels of demand for new releases among electronic game enthusiasts, often well
in advance of release dates. This demand has afforded us an important marketing
opportunity to create excitement surrounding our stores and our web site. To
assure our customers immediate access to new releases, we offer our customers
the opportunity to purchase video games and PC software prior to their release
through the "EB Pre-Sell Program," which guarantees customers a copy of a new
release immediately after its launch. We also have established the "EB Reserve
List," which entitles participants on this list to be notified when a game has
arrived in our stores. On average, we introduce 20 new game titles in our stores
and on our web site each week.
HIGHLY EFFECTIVE INVENTORY MANAGEMENT SYSTEM. We emphasize strict inventory
policies in order to manage over 2,000 SKUs, including video game titles, PC
entertainment software, video game consoles, accessories and related products.
Our inventory management system enables us to maximize sales of new-release
titles and avoid markdowns as titles mature. We minimize our inventory risk by:
- conducting extensive research on new-release titles to forecast
anticipated daily sell-through,
- utilizing POS polling technology to provide daily sales, margin and
inventory reports to our merchandising staff,
- managing inventory on a store-by-store basis to address local customer
merchandise preferences, and
- replenishing store-level inventories daily from our fully-automated
distribution centers.
We introduce an average of 10 new SKUs in our stores and on our web site each
day. As a result of these inventory management initiatives, we have achieved
desired in-stock positions and increased our inventory turns from 5.0x in fiscal
1997 to 5.2x in fiscal 1998 to 5.6x in fiscal 1999. In addition, our fiscal 1999
inventory shortage was less than 0.6% as a percentage of sales.
DISCIPLINED STORE OPERATIONS. Our management team exercises significant
control over all aspects of our store operations, from product research,
purchasing and distribution to real estate selection, store
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development, POS financial reporting and sales training. We believe that this
commitment to operational control enables us to:
- operate substantially all of our stores on a profitable basis,
- identify opportunities to improve store productivity quickly, and
- react to shifts in product pricing and consumer purchasing trends.
KNOWLEDGEABLE SALES ASSOCIATES. We believe that our knowledgeable sales
associates provide us with an important competitive advantage over mass
merchants, toy retail chains and office supply, computer product and consumer
electronics superstores, all of which compete with us, but generally offer much
lower levels of customer service in the electronic game category than we do. We
provide all of our sales associates extensive training on video game and PC
entertainment software products, system requirements and selling techniques.
Many of our sales associates are also electronic game enthusiasts. We facilitate
training through vendor-sponsored EB University seminars, held semi-annually for
store managers and field management associates, and through regularly scheduled
in-store seminars conducted by our District Managers. In addition, we encourage
sales associates to learn about their customers' game preferences. With this
knowledge, sales associates can introduce customers to a selection of electronic
games and accessories that may suit their preferences or enhance customers'
overall game experience. In addition, our 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
our customers and discourage comparison shopping, we maintain an everyday low
pricing policy and support this policy with our EB Pre-Sell and EB Reserve List
affinity programs, as well as a price matching policy. Our price matching
program is known as the EB Code of Honor Program. An extensive selection of
merchandise and a high level of customer service complement our "everyday low
price" policy.
GROWTH STRATEGY
DOMESTIC NEW STORE EXPANSION. We plan to expand our domestic retail
operations by opening additional Electronics Boutique and Stop 'N Save stores in
both existing and new markets. From January 31, 1999 through September 30, 1999,
we opened 29 additional domestic stores, have executed leases for an additional
20 stores and are currently negotiating additional leases. Our real estate team
applies standardized site-selection criteria to secure the best location for our
stores when entering a new market or expanding within an existing market. We
believe our store formats can operate profitably in high traffic/high rent malls
as well as in lower traffic/lower rent malls, central business districts and
strip shopping centers. This flexibility provides us with an extensive selection
of locations for future store openings.
EXPANSION OF ONLINE RETAILING. We believe our core customer base is
Internet savvy, making e-commerce a necessary and natural progression of our
retailing platform. Our web site benefits from a strong market identity and
brand name, which we believe contributes to confident e-commerce purchasing
decisions. We believe that our merchandise is ideally suited for sale on the
Internet because it is easy and cost-efficient to ship, gift-oriented, and it
benefits from vendor-sponsored promotion. Additionally, user-friendly
information is readily available on our web site for the products we sell. Our
e-commerce web site also enables us to gain access to customers who do not live
near any of our stores, especially with respect to foreign sales. As foreign
demand warrants, we intend to open international distribution centers to
increase fulfillment efficiency. We also intend to expand aggressively our
customer base through national media campaigns, advertising through Internet
properties, such as America Online, Ziff-Davis Inc. and CNET, and continued
pursuit of strategic alliances with directories, search engines and content
providers.
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STORE PRODUCTIVITY. We constantly strive to increase the productivity of
our stores by focusing on the following areas:
- Inventory Management and Controls. We use our POS and inventory management
systems, including our fully automated distribution centers, to improve our
merchandise mix and in-stock positions, increase inventory turns and drive down
shrinkage which, at less than 0.6% as a percentage of sales in fiscal 1999, we
believe is among the lowest of mall-based retailers.
- Managing Store Payroll. We seek to optimize store payroll expense by
utilizing our POS reporting systems to assure the best possible match of sales
associate floor coverage to customer traffic. In an effort to enhance our store
payroll strategy, we continue to implement a system, known as Shoppertrak, that
electronically measures store customer traffic throughout the day and provides
us with an analysis of sales conversion rates by store and by sales associate.
This system allows us to continue to improve our sales conversion rates.
- 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. We offer our 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 our stores tends to
attract our core game enthusiast customer. We believe that a significant
opportunity continues to exist to increase sales of pre-owned game titles and we
have implemented a number of marketing and merchandising programs, coupled with
incentives to our sales associates, to increase our participation in the growing
market for pre-owned titles.
INTERNATIONAL OPPORTUNITIES. We intend to open 15 stores in both Australia
and Canada during fiscal 2000. As of September 30, 1999, we operated 37 stores
in Australia, 51 stores in Canada, and four stores in South Korea. We provide
management services to EB-UK which, as of September 30, 1999, operated 271
stores and 18 department store-based concessions in the United Kingdom, Ireland
and Sweden. In fiscal 1999, we opened 14 stores in Australia and 12 stores in
Canada. We believe that our current international presence will enable us to
leverage our existing distribution and management infrastructure for further
expansion.
RETAIL OPERATIONS
As of September 30, 1999, we operated a total of 576 stores in 46 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
and EBX stores are located primarily in high traffic areas in regional shopping
malls and generally stock over 2,000 SKUs. The typical mall-based Electronics
Boutique store is approximately 1,200 square feet, but stores range in size from
450 square feet to 2,700 square feet, with retail selling space averaging
approximately 90% of total square footage. We believe that our stores generate
sales per square foot that are among the highest of any mall-based retailer.
Stop 'N Save Software stores are generally larger-format stores located in
urban areas, central business districts, and strip and power shopping centers.
We opened our first Stop 'N Save Software store in 1995. Our merchandising
strategy at our Stop 'N Save Software stores resembles our merchandising
strategy at our Electronics Boutique stores. Stop 'N Save Software stores range
in size from 1,250 to 5,000 square feet, with retail selling space averaging
approximately 90% of total square footage. In addition, we operate 11 stores
that sell sports collectibles and memorabilia under the name
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BC Sports Collectibles. We believe the customer base of BC Sports Collectibles
shares many of the same demographic characteristics as the customer base of our
Electronics Boutique stores. We believe BC Sports Collectibles stores generate
higher sales volumes if they are located in metropolitan areas which are in
close proximity to cities with several professional sports franchises. We locate
our BC Sports Collectibles stores in malls and strip and power shopping centers.
The stores generally range in size from 1,000 to 5,000 square feet.
We opened our first EBKids store in September 1999. EBKids is a new concept
we are testing in which we will offer an assortment of interactive and
developmental toys and family-friendly, non-violent software that we believe
will appeal to a younger customer, ages 4-12 years old. This new store format
and product offering is designed to give parents and young children a shopping
destination which is family-friendly, free of game titles that include mature
content and which capitalizes on the Electronics Boutique brand name.
SITE SELECTION. We visit numerous mall and strip and power shopping center
sites throughout the year in the United States and in several foreign countries
in search of suitable store locations. Our standardized site selection criteria
include:
- lease terms,
- population demographics,
- psychographics,
- traffic count,
- store-front visibility and presence,
- adjacencies,
- competition, and
- accessible parking.
We believe our store formats can operate profitably in high traffic/high
rent malls as well as lower traffic/lower rent malls and shopping centers.
Accordingly, we believe that there are a large selection of locations available
for future sites. We view lease terms as the most critical element in our site
selection process. We have used our knowledge of our market areas to negotiate
favorable lease terms at many of our store locations, which has resulted in
lower occupancy costs. We regularly review the profitability and prospects of
each of our stores and evaluate whether any underperforming stores should be
closed or relocated to more desirable locations. We negotiate with landlords to
convert desirable Waldensoftware locations into Electronics Boutique stores when
their leases terminate.
STORE ECONOMICS. We believe that our store concepts offer attractive unit
economics. We estimate that the average Electronics Boutique store had net sales
of approximately $1.2 million in fiscal 1999. From January 31, 1999 through
September 30, 1999, the average cost to open an Electronics Boutique store
(exclusive of inventory costs) was approximately $142,000. These costs include
furniture, fixtures, leasehold improvements and equipment. Our stores have an
average opening inventory of $95,000. The cost to open an international store is
approximately the same in U.S. dollars as the cost to open a domestic store.
Typically, our new stores have generated a positive store operating contribution
within the first 12 months of operations.
STORE OPERATIONS. Our North American store base (in the U.S., Canada, and
Puerto Rico) is equally divided into two geographic regions, East and West.
These regions are supervised by two Field Operations Vice Presidents, 11
Regional Vice Presidents/Directors and 46 District Managers. Each District
Manager is responsible for approximately 12 stores. Our stores in Australia and
South Korea are supervised by a Managing Director. Each of our stores has a
full-time manager and a full-time assistant manager in addition to hourly sales
associates, most of whom work part-time. The number of hourly sales associates
fluctuates depending on our seasonal needs. Our domestic stores are open seven
days per week and generally ten hours each day. We operate our international
stores in a manner substantially similar to our domestic stores.
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ONLINE RETAILING
In April 1999, we established EBWORLD.COM as a separate e-commerce
subsidiary to accelerate the growth of our Internet business. Through the
twenty-six weeks ended July 31, 1999, we recorded 6.4 million visits to our web
site, which we believe represents significantly more visits than in the same
period in 1998. During the twenty-six weeks ended July 31, 1999, we derived $2.6
million in revenues from our online sales, which compares to $4.3 million in
revenues for the full 1999 fiscal year. Similar to last year, we anticipate that
the majority of our online sales during this fiscal year will occur during the
fourth quarter.
The Internet represents a logical extension of our traditional store-based
retail business. We believe that our customers are generally more familiar with
the Internet and with online retailing than are most consumers. In addition, we
believe that our web site's detailed product reviews, game previews, new release
schedules, product notification services, industry news and advanced search
capabilities will appeal to a worldwide audience of game enthusiasts. Our
experience in store-based retailing provides us with a significant advantage
over online only competitors. We believe that the breadth of our store-based
operations and the strength of the Electronics Boutique brand name will
differentiate EBWORLD.COM from other online competition. EBWORLD.COM utilizes
our merchandising expertise to leverage our strong vendor relationships and
provide online customers with an extensive selection of titles. Further,
EBWORLD.COM leverages our distribution and order fulfillment capabilities, which
have supported our direct-to-consumer catalog operations for more than 10 years.
To date, our marketing strategy for EBWORLD.COM has consisted of alliances
with directories, search engines, content providers and related web sites which
feature electronic games. As an example, EBWORLD.COM is the exclusive commerce
provider for the IGN.com network of web sites and IGN.com provides EBWORLD.COM
with electronic game-related content. IGN.com is a leading online provider of
entertainment content. EBWORLD.COM is launching a new marketing campaign during
the third quarter of fiscal 2000 which is designed to increase customer
awareness of EBWORLD.COM among game enthusiasts. The marketing campaign will
feature an assortment of current, popular products, and will be targeted to
attract the mass market as well as the avid gaming community. It will be
supported through national print, radio and television advertising. We
anticipate that this advertising campaign will also drive sales at our stores
through association with the Electronics Boutique brand name, as the stores have
traditionally depended on mall traffic, and not company-sponsored advertising,
to draw customers.
We have implemented many initiatives designed to maintain the competitive
position of EBWORLD.COM and to ensure that the online store can support
significant further growth in customer traffic, sales and earnings. These
initiatives include:
IMPROVED CUSTOMER SERVICE. We have expanded our customer service
capabilities by opening a customer contact center located in Las Vegas, Nevada,
during the second quarter of fiscal 2000. The customer contact center is open 24
hours a day, seven days a week, and is staffed by trained customer sales
representatives who respond to EBWORLD.COM customer inquiries via telephone,
e-mail or instant messaging. The center is designed to provide a high level of
customer service comparable to that available within our stores.
ENHANCED ORDER FULFILLMENT AND DISTRIBUTION. To enhance our order
fulfillment capabilities, we began shipping from our Louisville, Kentucky
distribution center in the third quarter of fiscal 2000. We have also expanded
our capacity for processing orders by upgrading our order fulfillment software
and increasing staffing and equipment dedicated to online order fulfillment.
UPGRADED WEB SITE. We have upgraded our web site to increase performance
and customer usability. The new web site design provides customers with a faster
and more convenient shopping experience through more efficient use of graphics
and straightforward navigation. To best accommodate
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our increased Internet traffic, we have moved our web site to an external
hosting data center, which allows us to add hardware and increase bandwidth as
necessary to maintain peak performance.
MANAGEMENT SERVICES
As of September 30, 1999, we provided management services to 304 specialty
electronic game stores in the United States, the United Kingdom, Ireland and
Sweden.
EB-UK STORES. As of September 30, 1999, we provided management services for
271 stores and 18 department store-based concessions in the United Kingdom,
Ireland and Sweden under a contract with EB-UK, a corporation organized under
the laws of the United Kingdom.
EB-UK is one of the leading specialty retailers of electronic games in the
United Kingdom and Ireland. EB-UK's business strategy is substantially similar
to our business strategy. 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, 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
malls and "high street" shopping districts.
Under the terms of the UK Services Agreement, we provide management services
to EB-UK, including assistance with ordering and purchasing inventory, store
design and acquisition, advertising, promotion, publicity and information
systems. In exchange, EB-UK is responsible for the payment of fees, payable, at
our option, in cash or EB-UK stock, 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. In May 1999, EB-UK acquired a competitor in the United Kingdom, which
should serve to increase EB-UK's net sales in the future. The UK Services
Agreement provides for EB-UK to have a right of first refusal on any business
opportunity of which we become aware in Europe (excluding Scandinavia) relating
to electronic game retailing. The UK Services Agreement prohibits us 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. EB-UK's right to use
the Electronics Boutique name terminates six months after the UK Services
Agreement expires on January 31, 2006. The stockholders of EB-UK elected Joseph
J. Firestone, our President and Chief Executive Officer, and John R. Panichello,
our Senior Vice President and Chief Financial Officer, to serve as non-executive
Directors of EB-UK.
WALDENSOFTWARE STORES. We manage 15 Waldensoftware stores under a
management contract with Borders Group, Inc. The Waldensoftware stores are
domestic, mall-based stores that offer similar product lines as our Electronics
Boutique stores. We provide management services to Waldensoftware in exchange
for a fixed fee per store plus a bonus calculated on the basis of net income in
excess of the fixed management fee. We manage the stores in a manner
substantially similar to our Electronics Boutique stores. We negotiate with
landlords to convert desirable Waldensoftware locations into Electronics
Boutique stores when their leases terminate.
PRODUCTS
Our product line consists of video game titles, PC entertainment software
titles, video game hardware systems, related products and toys, trading cards,
and accessory products. We also market selected PC productivity and educational
software titles. Our in-store inventory at any given time consists of over 2,000
SKUs.
VIDEO GAME TITLES AND PC ENTERTAINMENT SOFTWARE. We carry over 450 video
game titles (excluding pre-owned games) and over 900 active PC entertainment
software SKUs at any given time. We purchase 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
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Entertainment, Inc. and Midway Home Entertainment, Inc. We rank as one of the
larger domestic customers of video game products from these publishers. We
currently purchase titles from approximately 90 vendors. We market electronic
games across a variety of genres, including Action, Strategy, Adventure/Role
Playing, Simulation, Sports, Children's Entertainment and Family Entertainment.
We maintain a broad selection of popular new-release titles, which we define as
titles that have been available for no more than six weeks from the date of
their release.
VIDEO GAME HARDWARE. We offer the video game hardware systems of all major
manufacturers, including the Sony PlayStation, Nintendo 64, Nintendo Game Boy
and the new Sega Dreamcast. In support of our strategy to be the destination of
choice for electronic game enthusiasts, we aggressively promote the sale of
video game hardware systems. We believe that this policy increases store traffic
and promotes customer loyalty, leading to increased sales of video game titles,
which typically have higher gross margins than video game hardware systems. We
also offer extended service agreements and extensions of manufacturer warranties
of the video game systems.
RELATED PRODUCTS AND TRADING CARDS. We offer an assortment of trading
cards, such as Pokemon and Star Wars products, that appeal to the same core
customer group as our video game customer. We also offer action figures that are
related to video game characters. We experienced an increase in the sale of
related products in the first half of fiscal 2000, driven particularly by sales
of Pokemon products.
PC EDUCATION AND PRODUCTIVITY SOFTWARE. In addition to our category
dominant assortment of video game and PC entertainment software titles, we offer
a complementary selection of educational, personal productivity and finance
software titles. We believe that these titles also appeal to our 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, we offer approximately 550
accessory product SKUs, including 3-D graphics accelerators, memory cards and
joysticks. We also market instructional books on the most popular electronic
game titles.
INVENTORY MANAGEMENT AND DISTRIBUTION
INVENTORY MANAGEMENT. We carefully manage our inventory to minimize the
risk associated with introducing new products. Our 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. Our centralized merchandising staff also analyzes the EB
Pre-Sell Program and EB Reserve List information and other data to estimate
initial demand and the life cycle for a new release. We then use our new product
analyses to plan initial allocations among our stores and web site of the total
initial purchase of a newly-released title.
We use our 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 our 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. Replenishment allocations among stores
are then made based on this data. We focus on inventory turnover by operating
our allocation, traffic, buying, distribution and third party functions on a
"just in time" replenishment basis. This focus allows us to minimize our
inventory risk and we believe provides us with a competitive advantage.
DISTRIBUTION. Our primary distribution center is a 120,000 square foot
facility located in West Chester, Pennsylvania. We opened an additional 80,000
square foot distribution facility at our West Chester, Pennsylvania site in
November 1999. In addition, in April 1999, we leased a 52,000 square foot
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distribution center in Louisville, Kentucky to support flowthrough operations on
new release and top selling products. These facilities allow us to replenish our
stores on a daily basis, thereby reducing inventory levels and increasing
inventory turns, while supporting our "FIRST TO MARKET" new-release strategy.
Our rapid processing capability in our distribution center is facilitated by
several advanced inventory management technologies, including paperless picking
and radio frequency support. Our ability to rapidly process incoming shipments
of new-release titles quickly and distribute them to all of our stores either
that same day or by the next morning enables us to meet peak demand. We also
believe that our distribution network provides a competitive advantage for
EBWORLD.COM since our distribution and inventory management systems enable us to
provide immediate delivery service to our online customers.
During peak sales periods, we may enter into short-term arrangements for
additional retail distribution centers to ensure timely restocking of all of our
stores. We have also developed a flexible third-party network to provide
additional regional distribution support for new product releases.
MARKETING
IN-STORE PROMOTIONS. Our Electronics Boutique stores are primarily located
in high traffic, high visibility areas in regional shopping malls. Accordingly,
our marketing efforts are designed to draw mall patrons into our stores through
the use of window displays and other attractions visible to shoppers in the mall
concourse. Inside the stores, we feature selected products through the use of
vendor displays, signs, fliers, point of purchase materials and end-cap
displays. We receive 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 our customers the opportunity to purchase video games and PC software
prior to their release, and the EB Reserve List entitles participants to be
notified when a game has arrived in our stores. Customers who participate in the
EB Pre-Sell Program pay for a game prior to its release and may receive a
promotional gift in connection with the purchase (such as a t-shirt or a watch).
The EB Pre-Sell Program and the EB Reserve List enable our customers to receive
a new product on the first day it is available in our stores and on our web
site, and are designed to enhance our reputation as the destination of choice
for electronic game enthusiasts.
CATALOGS. We publish six or more full color catalogs each year, which range
in size from 48 to 100 pages and feature a broad array of products. The cost of
these catalogs is funded by our software, hardware and accessories vendors. The
catalogs are available in our stores and are mailed to several hundred thousand
households from our proprietary customer lists. The catalogs are also inserted
in leading industry magazines.
EBWORLD.COM. We have continued to pursue strategic on-line alliances with
directories, search engines, content providers and web sites in order to grow
our customer base. As an example, EBWORLD.COM is the exclusive commerce provider
for the IGN.com network of web sites and IGN.com provides EBWORLD.COM with
electronic game-related content. IGN.com is a leading online provider of
entertainment content. We advertise on other networks including America Online,
Ziff-Davis Inc. and CNET. Additionally, EBWORLD.COM is a Gold Tenant in the
Electronic Gaming category of America Online's shop@home site. We also have a
similar e-commerce agreement with CNET related to their shopper.com site. We
have recently launched a new marketing initiative that is designed to increase
market penetration among game enthusiasts and broaden overall market awareness.
This campaign includes national print, radio and television advertising.
PRE-OWNED GAMES. Video game software has a useful life of thousands of
plays. As a result of the proliferation of new titles and the tendency of
electronic game players to seek new game challenges
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after mastering a particular title, a growing market for pre-owned video game
titles has evolved in recent years. We offer our customers a store credit for
their pre-owned video game titles, which can be applied towards the purchase of
new or pre-owned products. We then resell the pre-owned video game titles at
discount prices, but with gross profit margins higher than those for new video
game titles. We believe our wide assortment of pre-owned video game titles
distinguishes us from our competitors.
OTHER MARKETING PROGRAMS. We provide our customers with a liberal return
policy. Our customers can return opened software products for a full credit
within ten days after purchase. We maintain an "everyday low pricing" policy.
TRAINING AND DEVELOPMENT
We place an emphasis on training and developing our sales associates and
store managers. We believe that our training and developmental programs make our
sales associates and store managers more knowledgeable and enthusiastic about
our product offerings, providing us with an important competitive advantage over
mass merchants, toy retail chains and electronics and computer superstores. In
addition, we believe by providing extensive associate training we have a higher
employee retention rate than most mall-based specialty retailers. We provide
training and development at the store level, through regularly scheduled
seminars conducted by our District Managers, and through EB University. EB
University is a semi-annual, vendor-sponsored, multiday seminar encompassing
sales training, extensive product demonstrations and a variety of team building
exercises. In September 1999, we hosted our EB University seminar in Orlando,
Florida, where substantially all of our store and field managers were present.
This event was attended by 123 vendors, displaying and demonstrating their
latest product offerings.
MANAGEMENT INFORMATION SYSTEMS
Our primary management information system is a customized version of the
AS400-based JDA Merchandise Management System. We have made proprietary
enhancements to this program which enable us to analyze total, comparative and
new store sales 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. We operate our own
proprietary store POS and back office systems and believe this provides a
strategic advantage by allowing us to make fast enhancements to meet business
opportunities. We have integrated the Shoppertrak customer counting technology
into our POS and our AS400 system. This combination of technology provides
centralized access to store traffic and sales conversion information by store
and hour. We have this technology installed in over 200 of our stores and intend
to continue implementation aggressively. We continue to invest in our management
information system by, among other things, upgrading our global financial
reporting and analytical capabilities through the implementation of the Lawson
Associates, Inc. financial software products in fiscal 2000. We intend to
enhance our management information systems further with client server and data
warehousing applications to improve sales analysis and targeted consumer
marketing. We spent $2.0 million for information system improvements, including
"Year 2000" expenditures, in fiscal 1999 and, in the first twenty-six weeks of
fiscal 2000, have spent $1.3 million of a budgeted $2.5 million for additional
improvements.
We have completed the upgrade of all JDA programs running on the AS400
system to be "Year 2000" compliant. All other software and hardware products
have been inventoried and are being updated as necessary. We intend to complete
addressing all potential "Year 2000" problems by December 31, 1999.
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VENDORS
With the exception of certain personal productivity software titles and
accessories, we purchase substantially all of our products directly from
manufacturers and software publishers. Our top 25 vendors accounted for
approximately 77% of purchases in each of fiscal 1999 and the first twenty-six
weeks of fiscal 2000. Our largest vendors in fiscal 1999 and the first
twenty-six weeks of fiscal 2000 were Sony (11.0% and 7.9% of net sales),
Nintendo (10.8% and 12.0% of net sales), Electronic Arts (9.3% and 8.7% of net
sales) and D&H Distributing Company (6.2% and 5.7% of net sales). No other
vendor (other than Havas Interactive Inc. in fiscal 1999) accounted for more
than 5.0% of our software or accessory purchases during such periods. However,
we expect Sega, through our sales of their Dreamcast product, to account for
greater than 5% of our net sales for the third quarter of fiscal 2000. We
believe that maintaining and strengthening our long-term relationships with our
vendors is essential to our operations and continued expansion. We have no
contracts with trade vendors and conduct business on an order-by-order basis, a
practice that is typical throughout the industry. We believe that we have very
good relations with the vendor community.
COMPETITION
The electronic game industry is intensely competitive and subject to rapid
changes in consumer preferences and frequent new product introductions. We
believe that key competitive factors are:
- ability to procure high-demand product,
- knowledgeable service,
- price,
- reputation, and
- shopping environment.
We compete 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. Further, other methods of
retail distribution may emerge in the future which would result in increased
competition. Some of our competitors have longer operating histories and
significantly greater financial, managerial, creative, sales and marketing and
other resources than us. We also compete with other forms of entertainment
activities, including movies, television, theater, sporting events and family
entertainment centers. Our ability to retain our existing customers and attract
new customers depends on numerous factors, some of which are beyond our control.
These factors include the continued introduction of new and enhanced video game
and PC hardware and software, and the availability and timeliness of new product
releases at our stores.
PROPERTIES
STORE LEASES. All of our stores are leased. As of September 30, 1999, we
had 576 stores. In general, our leases have an initial term of seven to ten
years, with some leases having at least one or more five-to-seven year renewal
options.
HEADQUARTERS. We lease our headquarters and our primary distribution
center, which are located in a single 140,000 square foot building on several
acres in West Chester, Pennsylvania. The lease requires us to pay $50,000 per
month in rent and expires in May 2000.
DISTRIBUTION CENTERS. In addition to our West Chester, Pennsylvania
distribution center, in April 1999 we leased a 52,000 square foot building in
Louisville, Kentucky which supports flow through operations on new releases and
top-selling products. The lease requires us to pay $14,000 per month in rent and
expires in April 2004. We have also built an additional 80,000 square foot
distribution facility
36
<PAGE>
on several acres of land we acquired adjacent to our West Chester, Pennsylvania
site. It opened in November 1999.
TRADEMARKS/REGISTRATIONS
We possess registered trademarks for Electronics Boutique-TM-, EBX-TM- and
Stop 'N Save Software-TM-. We also possess trademarks for BC Sports
Collectibles-TM- and EBWORLD.COM-TM- as well as other registered trademarks and
service marks, both in the United States and in certain foreign jurisdictions.
We have a trademark application for EBKids pending.
We believe our trademarks are valuable and intend to maintain our trademarks
and their related registrations. We do not know of any pending claims of
infringement or other challenges to our right to use our marks in the United
States or elsewhere. We have no patents, licenses, franchises or other
concessions which are considered material to our operations.
ASSOCIATES
As of September 30, 1999, we had approximately 4,600 non-seasonal
associates, of which approximately 2,700 were employed on a part-time basis. In
addition, during the calendar 1998 peak holiday shopping season, we hired
approximately 640 temporary associates. We believe that our relationship with
our associates is good. None of our associates is represented by a labor union
or is a member of a collective bargaining unit.
LEGAL PROCEEDINGS
We are involved from time to time in legal proceedings arising in the
ordinary course of our business. In the opinion of management, no pending
proceedings will have a material adverse effect on our results of operations or
financial condition.
37
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Electronics Boutique's executive officers and directors are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- --------
<S> <C> <C>
James J. Kim........................... 63 Chairman of the Board
Joseph J. Firestone.................... 68 President, Chief Executive Officer and Director
Jeffrey W. Griffiths................... 48 Senior Vice President of Merchandising and Distribution;
President, EB Kids
Seth P. Levy........................... 42 Senior Vice President and Chief Information Officer;
President, EBWORLD.COM
John R. Panichello..................... 38 Senior Vice President and Chief Financial Officer;
President, BC Sports Collectibles
Dean S. Adler.......................... 42 Director
Susan Y. Kim........................... 36 Director
Louis J. Siana......................... 67 Director
Stanley Steinberg...................... 66 Director
</TABLE>
JAMES J. KIM. Mr. Kim has served as Electronics Boutique's Chairman and a
Class III Director since March 1998. Mr. Kim founded Electronics Boutique's
predecessor 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. and
Amkor Electronics, Inc. since September 1997 and 1968, respectively. In
April 1998, Amkor Electronics merged with and into Amkor Technology. Amkor
Technology is a semiconductor packaging and test service company. Mr. Kim also
serves as the Chairman of the Anam group of companies, which consists
principally of companies in South Korea in the electronics industries. Mr. Kim
also serves as the Chairman and Chief Executive Officer of Forte Systems, LLC, 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. Mr. Kim is a member of the
Compensation Committee of the Board of Directors.
JOSEPH J. FIRESTONE. Mr. Firestone has served as the President, Chief
Executive Officer and a Class III Director of Electronics Boutique since
March 1998. Mr. Firestone has served as the President of Electronics Boutique's
predecessor since February 1984, and its President and Chief Executive Officer
since February 1995. Mr. Firestone has served as a director of EB-UK since
May 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 Electronics Boutique's
Senior Vice President of Merchandising and Distribution since March 1998 and
President of our EBKids division since March 1999. Mr. Griffiths has served as
Senior Vice President of Merchandising and Distribution of Electronics
Boutique's predecessor since March 1996. From March 1987 to February 1996,
Mr. Griffiths served as Vice President of Merchandising of Electronics
Boutique's predecessor and, from April 1984 to February 1987, he served as the
Merchandise Manager of Electronics Boutique's predecessor. Mr. Griffiths earned
a B.A. degree in History from Albright College and an M.B.A. degree from Temple
University.
SETH P. LEVY. Mr. Levy has served as Senior Vice President and Chief
Information Officer and the President of our EBWORLD.COM division since
March 1999. From February 1997 to March 1999, Mr. Levy served as our Vice
President and Chief Information Officer. From 1991 until February 1997,
Mr. Levy served as the Director of System Development for the May Merchandising
and May Department International divisions of May Department Stores. Mr. Levy
earned a B.A. degree from the University of California at San Diego.
38
<PAGE>
JOHN R. PANICHELLO. Mr. Panichello has served as the Senior Vice President
and Chief Financial Officer of Electronics Boutique since March 1998.
Mr. Panichello has served as the Senior Vice President of Finance of Electronics
Boutique's predecessor and the President of our BC Sports Collectibles division
since March 1997. From March 1996 to February 1997, Mr. Panichello served as
Electronics Boutique's predecessor's Senior Vice President of Finance and, from
June 1994 to February 1996, he served as its Vice President and Treasurer.
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.
DEAN S. ADLER. Mr. Adler has served as a Class II Director of Electronics
Boutique 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. Mr. Adler is a member of the Compensation Committee
of the Board of Directors.
SUSAN Y. KIM. Ms. Kim has served as a Class I Director of Electronics
Boutique since March 1998. Ms. Kim served as a Senior District Manager of
Electronics Boutique's predecessor from 1991 to 1992, as its Personnel Manager
from 1989 to 1991, as a Buyer for Electronics Boutique's predecessor from 1986
to 1989, and as a Field Manager from 1985 to 1986. Ms. Kim serves as a Director
of The Electronics Boutique, Inc. 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 Electronics
Boutique since March 1998. Mr. Siana is a certified public accountant and a
senior partner in the accounting firm of Siana, Carr & O'Conner LLP. Mr. Siana
earned a B.S. degree in Accounting from LaSalle University. Mr. Siana is a
member of the Audit and Compensation Committees of the Board of Directors.
STANLEY STEINBERG. Mr. Steinberg has served as a Class I Director of
Electronics Boutique since September 1998. Mr. Steinberg has served as a
consultant to Sony Corp. of America since June 1998. From August 1994 to
June 1998, Mr. Steinberg served as Chairman of Sony Retail Entertainment. From
1989 until 1994, Mr. Steinberg served as Executive Vice President and Chief
Operating Officer of Walt Disney Imagineering. Mr. Steinberg serves on the Board
of Directors of AMC, Inc. and served on the Board of Directors of Loews Cineplex
Entertainment until September 1999. Mr. Steinberg is a member of the Audit
Committee of the Board of Directors.
Electronics Boutique's Certificate of Incorporation provides for a
classified Board of Directors 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
the meeting will be elected for a three-year term and the directors in the other
two classes will continue in office. Each class holds office until the date of
the third annual meeting for the election of directors following the annual
meeting at which the director was elected, except that the initial term of
Class I expired on the date of the annual meeting in 1999 (and Ms. Kim and
Mr. Steinberg were re-elected for a term that expires on the date of Electronics
Boutique's annual meeting in 2002) and the initial terms of Class II and
Class III expire on the date of the annual meeting in 2000 or 2001,
respectively.
Executive officers are elected by, and serve at the discretion of, the Board
of Directors.
39
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the common stock as of September 30, 1999 and as
adjusted to reflect the completion of this offering by:
- each of our directors and executive officers,
- all of our directors and executive officers as a group, and
- each person who is known by us to own beneficially more than five percent
of the outstanding shares of the common stock (including the selling
stockholder).
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
THE OFFERING SHARES THE OFFERING
--------------------- BEING ---------------------
NAME AND ADDRESS OF BENEFICIAL OWNER(1) NUMBER(2) PERCENT OFFERED NUMBER(2) PERCENT
- ------------------------------------------- ---------- -------- --------- ---------- --------
<S> <C> <C> <C> <C> <C>
EB Nevada Inc.(3)(4) 15,169,100 75.1% 1,500,000 13,669,100 61.6%
2255-A Renaissance Drive, Suite 4,
Las Vegas, Nevada 89119
James J. and Agnes C. Kim(3)(4)(5) 15,169,200 75.1% 1,500,000 13,669,200 61.6%
931 South Matlack Street
West Chester, Pennsylvania 19382
Dresdner Bank AG 1,299,000 6.4% -- 1,299,000 5.9%
Jurgen Ponto Platz 1
60301 Frankfurt, Germany
Joseph J. Firestone(6) 149,357 * -- 149,357 *
John R. Panichello(5)(6) 43,870 * -- 43,870 *
Jeffrey W. Griffiths(6) 51,000 * -- 51,000 *
Seth Levy(6) 11,714 * -- 11,714 *
Dean S. Adler(6) 5,000 * -- 5,000 *
Susan Y. Kim(3)(5)(6) 43,870 * -- 43,870 *
Louis J. Siana(6) 5,000 * -- 5,000 *
Stanley Steinberg(6) 6,000 * -- 6,000 *
All directors and executive officers as a 314,798 1.5% 314,798 1.4%
group
(9 persons)(6)(7)
</TABLE>
- ------------------------
* Less than 1.0%.
(1) Unless otherwise noted, we believe that all persons named in the above table
have sole voting and investment power with respect to the shares
beneficially owned by them.
(2) For purposes of this table, a person is deemed to be the "beneficial owner"
of any shares that he or she has the right to acquire within 60 days,
including upon the exercise of stock options. For purposes of computing the
percentage of outstanding shares held by each person named above on a given
date, any security that a person has the right to acquire within 60 days is
deemed to be outstanding, but is not deemed to be outstanding for the
purpose of computing the percentage ownership of any other person.
40
<PAGE>
(3) EB Nevada Inc. is a wholly owned subsidiary of The Electronics
Boutique, Inc., all of the outstanding capital stock of which is owned by
James J. Kim, Agnes C. Kim and the Kim Trusts, which are the David D. Kim
Trust of December 31, 1987, the John T. Kim Trust of December 31, 1987 and
the Susan Y. Kim Trust of December 31, 1987. Each of the Kim Trusts has in
common Susan Y. Kim and John F.A. Earley as co-trustees, in addition to a
third trustee (John T. Kim in the case of the Susan Y. Kim trust and the
John T. Kim trust and David D. Kim in the case of the David D. Kim trust).
The trustees of each trust may be deemed to be the beneficial owners of the
shares held by each trust. In addition, the trust agreement for each of
these trusts encourages the trustees of the trusts to vote the shares of
common stock held by them, in their discretion, in concert with James J.
Kim's family. Accordingly, the trusts, together with their respective
trustees and James J. and Agnes C. Kim, may be considered a "group" under
Section 13(d) of the Exchange Act. This group may be deemed to have
beneficial ownership of the shares owned by EB Nevada Inc.
(4) If the over-allotment option is exercised in full, the number of shares
being offered would be 2,025,000 and the number and percent of shares
beneficially owned by EB Nevada Inc. would be 13,144,100 and 59.2%,
respectively, and the number and percent of shares beneficially owned by
James J. and Agnes C. Kim after the offering would be 13,144,200 and 59.2%,
respectively.
(5) James J. Kim and Agnes C. Kim are the parents of Susan Y. Kim. John R.
Panichello and Susan Y. Kim are husband and wife.
(6) Represents (or otherwise includes) shares of common stock which may be
acquired upon the exercise of options granted by Electronics Boutique under
the Equity Participation Plan.
(7) Excludes shares which may be deemed to be beneficially owned by James J.
Kim.
41
<PAGE>
UNDERWRITING
We have entered into an underwriting agreement with the underwriters named
below, for whom Prudential Securities Incorporated, Banc of America Securities
LLC, Gerard Klauer Mattison & Co., Inc., and PrudentialSecurities.com, a
division of Prudential Securities Incorporated, are acting as representatives.
We and the selling stockholder are obligated to sell, and the underwriters are
obligated to purchase, all of the shares offered on the cover page of this
prospectus, if any are purchased. Subject to conditions of the underwriting
agreement, each underwriter has severally agreed to purchase the shares
indicated opposite its name:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
- ------------ ---------
<S> <C>
Prudential Securities Incorporated .........................
Banc of America Securities LLC .............................
Gerard Klauer Mattison & Co., Inc. .........................
PrudentialSecurities.com ...................................
-----
Total...................................................
=====
</TABLE>
The underwriters may sell more shares than the total number of shares
offered on the cover page of this prospectus and they have, for a period of
30 days from the date of this prospectus, an over-allotment option to purchase
up to additional shares from the selling stockholder. If any additional
shares are purchased, the underwriters will severally purchase the shares in the
same proportion as per the table above.
The representatives of the underwriters have advised us that the shares will
be offered to the public at the offering price indicated on the cover page of
this prospectus. The underwriters may allow to selected dealers a concession not
in excess of $ per share and such dealers may reallow a concession not in
excess of $ per share to certain other dealers. After the shares are
released for sale to the public, the representatives may change the offering
price and the concessions.
We and the selling stockholder have agreed to pay to the underwriters the
following fees, assuming both no exercise and full exercise of the underwriters'
over-allotment option to purchase additional shares:
<TABLE>
<CAPTION>
TOTAL FEES
---------------------------------------------
FEE WITHOUT EXERCISE OF FULL EXERCISE OF
PER SHARE OVER-ALLOTMENT OPTION OVER-ALLOTMENT OPTION
--------- --------------------- ---------------------
<S> <C> <C> <C>
Fees paid by us.............................. $ $ $
Fees paid by the selling stockholder......... $ $ $
</TABLE>
In addition, we estimate that we will spend approximately $ in expenses
for this offering, including those of the selling stockholder. We and the
selling stockholder have agreed to indemnify the underwriters against certain
liabilities, including liabilities under the Securities Act, or contribute to
payments that the underwriters may be required to make in respect of these
liabilities.
We, our officers and directors, and certain stockholders, including the
selling stockholder, of Electronics Boutique have entered into lock-up
agreements pursuant to which we and they have agreed not to offer or sell any
shares of common stock or securities convertible into or exchangeable or
exercisable for shares of common stock for a period of 120 days from the date of
this prospectus without the prior written consent of Prudential Securities, on
behalf of the underwriters. Prudential Securities may, at any time and without
notice, waive the terms of these lock-up agreements specified in the
underwriting agreement.
42
<PAGE>
Prudential Securities, on behalf of the underwriters, may engage in the
following activities in accordance with applicable securities rules:
- Over-allotments involving sales in excess of the offering size, creating a
short position. Prudential Securities may elect to reduce this short
position by exercising some or all of the over-allotment option.
- Stabilizing and short covering; stabilizing bids to purchase the shares
are permitted if they do not exceed a specified maximum price. After the
distribution of shares has been completed, short covering purchases in the
open market may also reduce the short position. These activities may cause
the price of the shares to be higher than would otherwise exist in the
open market.
- Penalty bids permitting the representatives to reclaim concessions from a
syndicate member for the shares purchased in the stabilizing or short
covering transactions.
Such activities, which may be commenced and discontinued at any time, may be
effected on the Nasdaq National Market, in the over-the-counter market or
otherwise. Also and prior to the pricing of the shares, and until such time when
a stabilizing bid may have been made, some of the underwriters who are market
makers in the shares may make bids for or purchases of shares subject to certain
restrictions, known as passive market making activities.
Each underwriter has represented that it has complied and will comply with
all applicable laws and regulations in connection with the offer, sale or
delivery of the shares and related offering materials in the United Kingdom,
including:
- the Public Offers of Securities Regulations 1995,
- the Financial Services Act 1986, and
- the Financial Services Act 1986, (Investment Advertisements) (Exemptions)
Order 1996 (as amended).
Prudential Securities Incorporated facilitates the marketing of new issues
online through its PrudentialSecurities.com division. Clients of Prudential
Advisor-TM-, a full service brokerage firm program, may view offering terms and
a prospectus online and place orders through their financial advisors.
Prudential Securities has, from time to time, performed various investment
banking and financial advisory services for Electronics Boutique.
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for Electronics Boutique and the selling stockholder by Klehr, Harrison,
Harvey, Branzburg & Ellers LLP, Philadelphia, Pennsylvania, and for the
underwriters by King & Spalding, New York, New York.
EXPERTS
The financial statements of Electronics Boutique Holdings Corp. and
subsidiaries as of January 31, 1998 and January 30, 1999 and for each of the
fiscal years in the three year period ended January 30, 1999 included herein and
in the registration statement have been included in reliance on the report of
KPMG LLP, independent certified public accountants, appearing elsewhere herein,
and upon the authority of KPMG LLP as experts in auditing and accounting.
43
<PAGE>
AVAILABLE INFORMATION
Electronics Boutique is subject to the informational requirements of the
Exchange Act, and, accordingly, files reports, proxy statements and other
information with the SEC. Those reports, proxy statements and other information
filed by us can be inspected and copied at prescribed rates at the Public
Reference Section of the SEC at 450 Fifth Street, N.W., Room 1024, Judiciary
Plaza, Washington, D.C. 20549, and at the SEC's regional offices located at 7
World Trade Center, New York, New York 10048, and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Our common stock is
listed on the Nasdaq National Market and such reports, proxy statements and
other information concerning us may be inspected at the offices of the Nasdaq
National Market. The reports and other information can also be reviewed through
the SEC's Electronic Data Gathering Analysis and Retrieval System, which is
publicly available through the SEC's web site (http://www.sec.gov). Please call
the SEC at 1-800-SEC-0330 for further information regarding the operation of the
public reference rooms and the SEC's web site.
We have filed with the SEC a registration statement on Form S-3 under the
Securities Act of 1933, as amended, with respect to the shares of common stock
being offered. This prospectus does not contain all the information set forth in
the registration statement, certain parts of which are omitted in accordance
with the rules and regulations of the SEC. For further information with respect
to Electronics Boutique and the shares of common stock offered by this
prospectus, we direct you to the registration statement. Statements contained in
this prospectus as to the contents of any document filed with, or incorporated
by reference in, the registration statement are not necessarily complete. For
further information, please review the registration statement in its entirety
including the documents incorporated by reference.
INCORPORATION OF DOCUMENTS BY REFERENCE
The following documents filed by Electronics Boutique with the Securities
and Exchange Commission are incorporated by reference in this Prospectus:
(a) our Annual Report on Form 10-K for the fiscal year ended January 30,
1999;
(b) our Quarterly Report on Form 10-Q for the quarterly period ended May 1,
1999;
(c) our Quarterly Report on Form 10-Q for the quarterly period ended
July 31, 1999;
(d) our Current Report on Form 8-K dated November 15, 1999;
(e) our Proxy Statement on Schedule 14A, dated May 27, 1999; and
(f) the description of our common stock contained in our Registration
Statement on Form 8-A, dated July 8, 1998, including all amendments and
reports filed for the purpose of updating such description.
All reports and other documents filed by us pursuant to Section 13(a),
13(c), 14 and 15(d) of the Securities Exchange Act of 1934, as amended, after
the date of this prospectus and prior to the termination of the offering shall
be deemed to be incorporated by reference herein and to be a part hereof from
the date of the filing of the referenced reports and documents. Any statement
contained in a document incorporated by reference herein shall be modified or
superseded for all purposes to the extent that a statement contained herein or
in any other subsequently filed document which also is incorporated by reference
herein modifies or supersedes such earlier statement. Any statement so modified
or superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this prospectus.
We will furnish, without charge, to each person to whom a copy of this
prospectus has been delivered, upon the written or oral request of such person,
a copy of any or all documents specifically
44
<PAGE>
incorporated by reference in this prospectus, other than exhibits to such
documents unless such exhibits are specifically incorporated by reference
therein. Requests should be directed to John Panichello, Corporate Secretary,
931 South Matlack Street, West Chester, Pennsylvania 19382 (telephone
610-430-8100).
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES
With respect to indemnification for liabilities arising under the Securities
Act which may be provided to Electronics Boutique directors, officers and
controlling persons, Electronics Boutique has been advised that in the opinion
of the SEC, indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
45
<PAGE>
ELECTRONICS BOUTIQUE HOLDINGS CORP. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Consolidated Balance Sheets as of January 30, 1999 and July
31, 1999 (unaudited)...................................... F-2
Consolidated Statements of Income (unaudited) for the
twenty-six weeks ended August 1, 1998 and July 31, 1999... F-3
Consolidated Statements of Cash Flows (unaudited) for the
twenty-six weeks ended August 1, 1998 and July 31,
1999...................................................... F-4
Notes to Consolidated Financial Statements (unaudited)...... F-5
Independent Auditors' Report................................ F-7
Consolidated Balance Sheets as of January 31, 1998 and
January 30, 1999.......................................... F-8
Consolidated Statements of Income for the years ended
February 1, 1997, January 31, 1998 and January 30, 1999... F-9
Consolidated Statements of Stockholders' Equity for the
years ended February 1, 1997, January 31, 1998 and
January 30, 1999.......................................... F-10
Consolidated Statements of Cash Flows for the years ended
February 1, 1997, January 31, 1998 and January 30, 1999... F-11
Notes to Consolidated Financial Statements.................. F-12
</TABLE>
F-1
<PAGE>
ELECTRONICS BOUTIQUE HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 30, JULY 31,
1999 1999
------------ ------------
<S> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 42,006,179 $ 10,389,943
Accounts receivable:
Trade and vendors....................................... 4,010,293 6,142,320
Other................................................... 1,516,085 1,285,974
Due from affiliates....................................... 984,096 483,144
Merchandise inventories................................... 65,433,008 67,099,070
Deferred tax asset........................................ 2,694,000 2,694,000
Prepaid expenses.......................................... 969,949 1,462,098
------------ ------------
Total current assets........................................ 117,613,610 89,556,549
------------ ------------
Property and equipment:
Leasehold improvements.................................... 46,933,403 51,471,602
Fixtures and equipment.................................... 32,362,909 37,459,576
Land...................................................... -- 908,000
Construction in progress.................................. 1,087,964 2,700,439
------------ ------------
80,384,276 92,539,617
Less accumulated depreciation and amortization............ 37,349,298 41,139,083
------------ ------------
Net property and equipment.................................. 43,034,978 51,400,534
Goodwill and other intangible assets........................ 1,898,395 1,700,890
Deferred tax asset.......................................... 6,319,000 6,414,680
Other assets................................................ 3,181,566 3,363,365
------------ ------------
Total assets................................................ $172,047,549 $152,436,018
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving credit facility................................. $ -- $ 8,989,523
Current portion of long-term debt......................... 99,996 58,351
Accounts payable.......................................... 90,835,578 68,048,585
Accrued expenses.......................................... 19,625,068 19,834,191
Income taxes payable...................................... 10,144,023 530,169
------------ ------------
Total current liabilities................................... 120,704,665 97,460,819
------------ ------------
Long-term liabilities:
Notes payable............................................. 8,353 --
Deferred rent............................................. 2,492,140 2,489,307
------------ ------------
Total liabilities........................................... 123,205,158 99,950,126
------------ ------------
Stockholders' equity
Preferred stock--authorized 25,000,000 shares; $.01 par
value; no shares issued and outstanding at July 31,
1999.................................................... -- --
Common stock--authorized 100,000,000 shares; $.01 par
value; 20,169,900 shares issued and outstanding at July
31, 1999................................................ 201,692 201,699
Additional paid-in capital................................ 31,541,428 31,551,221
Accumulated other comprehensive expense................... (686,920) (475,172)
Retained earnings......................................... 17,786,191 21,208,144
------------ ------------
Total stockholders' equity.................................. 48,842,391 52,485,892
------------ ------------
Total liabilities and stockholders' equity.................. $172,047,549 $152,436,018
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
ELECTRONICS BOUTIQUE HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
TWENTY-SIX WEEKS ENDED
---------------------------
AUGUST 1, JULY 31,
1998 1999
------------ ------------
<S> <C> <C>
Net sales................................................... $208,659,885 $235,119,361
Management fees............................................. 1,101,545 1,580,586
------------ ------------
Total revenues.............................................. $209,761,430 $236,699,947
------------ ------------
Costs and expenses:
Costs of merchandise sold, including freight.............. 155,424,067 172,777,557
Selling, general and administrative....................... 46,330,229 52,999,798
Depreciation and amortization............................. 4,659,088 5,546,753
------------ ------------
Operating income............................................ 3,348,046 5,375,839
Equity in loss of affiliates................................ (160,575) --
Interest (income) expense, net.............................. 808,580 (252,374)
------------ ------------
Income before income taxes.................................. 2,378,891 5,628,213
Income tax expense.......................................... 190,706 2,206,260
------------ ------------
Net income.................................................. $ 2,188,185 $ 3,421,953
============ ============
Net income per share--basic................................. $ 0.17
============
Weighted average shares outstanding--basic.................. 20,169,208
============
Net income per share--diluted............................... $ 0.17
============
Weighted average shares outstanding--diluted................ 20,334,126
============
Pro Forma Data:
Income before income tax expense............................ $ 2,378,891
Pro forma income tax expense................................ 932,525
------------
Pro forma net income........................................ $ 1,447,366
============
Pro forma net income per share--basic and diluted........... $ 0.09
============
Pro forma weighted average shares outstanding--basic and
diluted................................................... 15,890,354
============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
ELECTRONICS BOUTIQUE HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
TWENTY-SIX WEEKS ENDED
---------------------------
AUGUST 1, JULY 31,
1998 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 2,188,185 $ 3,421,953
Adjustments to reconcile net income to cash used in
operating activities:
Depreciation of property and equipment.................. 4,489,441 5,461,294
Amortization of other assets............................ 169,647 85,459
Loss on disposal of property and equipment.............. 129,360 137,859
Equity in loss of affiliates............................ 160,575 --
Changes in assets and liabilities:
Decrease (increase) in:
Accounts receivable................................. (1,209,879) (1,899,253)
Due from affiliates................................. 2,548,360 501,116
Merchandise inventories............................. (1,184,460) (1,499,917)
Prepaid expenses.................................... 1,116,321 (487,380)
Other long-term assets.............................. (640,227) (273,970)
(Decrease) increase in:
Accounts payable.................................... (16,731,153) (20,884,704)
Accrued expenses.................................... 465,367 (1,798,831)
Due to affiliate.................................... -- (6,781)
Income taxes payable................................ (195,247) (9,615,347)
Deferred rent....................................... (80,531) (13,659)
------------ ------------
Net cash used in operating activities....................... (8,774,241) (26,872,161)
------------ ------------
Cash flows used in investing activities:
Purchases of property and equipment..................... (7,862,515) (13,703,258)
Proceeds from disposition of assets..................... 54,074 335
------------ ------------
Net cash used in investing activities....................... (7,808,441) (13,702,923)
------------ ------------
Cash flows from financing activities:
Distributions........................................... (13,891,545) --
Proceeds from exercise of stock options................. -- 9,800
Proceeds from equity offering........................... 55,462,500 --
Net cash retained by predecessor company................ (12,375,535) --
Net proceeds under revolving credit facility............ -- 8,989,523
Repayments of long-term debt............................ (9,516,898) (49,998)
------------ ------------
Net cash provided by financing activities................... 19,678,522 8,949,325
------------ ------------
Effects of exchange rates on cash........................... 204,460 9,523
Net increase (decrease) in cash and cash equivalents........ 3,300,300 (31,616,236)
Cash and cash equivalents, beginning of period.............. 20,639,610 42,006,179
------------ ------------
Cash and cash equivalents, end of period.................... $ 23,939,910 $ 10,389,943
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
ELECTRONICS BOUTIQUE HOLDINGS CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Electronics
Boutique Holdings Corp. and its wholly owned subsidiaries (collectively, the
"Company"). All intercompany transactions have been eliminated in consolidation.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included. The
Company completed its initial public offering on July 28, 1998. Historical
financial statements prior to that date include the results of operations of the
Company's predecessors.
The accompanying unaudited consolidated financial statements of the Company
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the Article 10 of Regulation S-X
except that they do not include the statements of income for the thirteen week
periods ended August 1, 1998 and July 31, 1999. Accordingly, they do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. These financial statements should
be read in conjunction with the more complete disclosures contained in the
consolidated financial statements and notes thereto for the fiscal year ended
January 30, 1999 contained in the Company's Form 10-K filed with the Securities
and Exchange Commission. Operating results for the twenty-six week period ended
July 31, 1999 are not necessarily indicative of the results that may be expected
for the fiscal year ending January 29, 2000.
The pro forma data presented in the unaudited consolidated statement of
income for the twenty-six weeks ended August 1, 1998 is included in order to
reflect the change in tax status as described in Note 3 below.
(2) NET INCOME PER SHARE
Basic net income per share is computed on the basis of the weighted average
number of shares outstanding during the period. Diluted net income per share is
computed on the basis of the weighted average number of shares outstanding
during the period plus the dilutive effect of stock options. Pro forma net
income per share amounts for all relevant periods have been presented.
(3) INCOME TAXES
The Company is subject to federal and state income taxes as a C corporation
whereas the predecessors to the Company (the EB Group) were taxed as an S
corporation and a partnership for federal and certain state income tax purposes
resulting in taxable income being passed through to the shareholders and
partners. For purposes of comparison, a tax charge has been reflected in the pro
forma data on the statement of income for the twenty-six week period ended
August 1, 1998 to show the results of operations as if the EB Group had been
subject to taxes as a C corporation.
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
F-5
<PAGE>
ELECTRONICS BOUTIQUE HOLDINGS CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(4) DEBT
The Company has available a revolving credit facility with Fleet Capital
Corporation for maximum borrowings of $50.0 million. As of July 31, 1999, $9.0
million was outstanding on this facility.
(5) COMPREHENSIVE INCOME
Effective February 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." This statement
requires that all items recognized under accounting standards as components of
comprehensive income be reported in an annual financial statement that is
displayed with the same prominence as other financial statements. Comprehensive
income is computed as follows:
<TABLE>
<CAPTION>
TWENTY-SIX WEEKS ENDED
-----------------------
AUGUST 1, JULY 31,
1998 1999
---------- ----------
<S> <C> <C>
Net income........................................... $2,188,185 $3,421,953
Foreign currency translation adjustment.............. 120,227 211,748
---------- ----------
Comprehensive income................................. $2,308,412 $3,633,701
========== ==========
</TABLE>
F-6
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Electronics Boutique Holdings Corp.:
We have audited the accompanying consolidated balance sheets of Electronics
Boutique Holdings Corp. and subsidiaries as of January 31, 1998 and January 30,
1999, and the related consolidated statements of income, stockholders' equity,
and cash flows for each of the years in the three-year period ended January 30,
1999. The consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Electronics
Boutique Holdings Corp. and subsidiaries as of January 31, 1998 and January 30,
1999, and the results of their operations and their cash flows for each of the
years in the three-year period ended January 30, 1999, in conformity with
generally accepted accounting principles.
/s/ KPMG LLP
Philadelphia, PA
March 16, 1999
F-7
<PAGE>
ELECTRONICS BOUTIQUE HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 31, JANUARY 30,
1998 1999
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 20,639,610 $ 42,006,179
Accounts receivable:
Trade and vendors....................................... 2,618,382 4,010,293
Other................................................... 1,754,691 1,516,085
Due from affiliates (note 8).............................. 2,890,554 984,096
Merchandise inventories................................... 52,973,314 65,433,008
Deferred tax asset (note 13).............................. -- 2,694,000
Prepaid expenses.......................................... 2,837,647 969,949
------------ ------------
Total current assets........................................ 83,714,198 117,613,610
------------ ------------
Property and equipment:
Leasehold improvements.................................... 40,226,726 46,933,403
Fixtures and equipment.................................... 24,884,217 32,362,909
Building.................................................. 6,200,950 --
Land...................................................... 632,806 --
Construction in progress.................................. 556,663 1,087,964
------------ ------------
72,501,362 80,384,276
Less accumulated depreciation and amortization............ 32,535,305 37,349,298
------------ ------------
Net property and equipment.................................. 39,966,057 43,034,978
Investment in affiliated company (note 8)................... 11,025,345 --
Goodwill and other intangible assets, net of accumulated
amortization of $120,151 and $482,961 as of January 31,
1998 and January 30, 1999................................. 2,190,766 1,898,395
Deferred tax asset (note 13)................................ -- 6,319,000
Other assets................................................ 5,894,374 3,181,566
------------ ------------
Total assets (note 4)....................................... $142,790,740 $172,047,549
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving credit facility (note 4)........................ $ -- $ --
Current portion of long-term debt (note 4)................ 2,400,396 99,996
Accounts payable.......................................... 83,713,983 90,835,578
Accrued expenses (note 3)................................. 14,545,119 19,625,068
Income taxes payable...................................... 782,988 10,144,023
------------ ------------
Total current liabilities................................... 101,442,486 120,704,665
------------ ------------
Long-term liabilities:
Notes payable (note 4).................................... 10,541,149 8,353
Deferred rent............................................. 2,408,579 2,492,140
------------ ------------
Total liabilities........................................... 114,392,214 123,205,158
------------ ------------
Commitments (note 2)
Stockholders' equity (notes 10 and 12)
Preferred stock--authorized 25,000,000 shares; $.01 par
value; no shares issued and outstanding at January 30,
1999.................................................... -- --
Common stock--authorized 100,000,000 shares; $.01 par
value; 20,169,200 shares issued and outstanding at
January 30, 1999........................................ -- 201,692
Common stock:
Class A--authorized 5,000 shares; $.10 par value; 1,900
shares issued and outstanding at January 31, 1998...... 190 --
Class B--authorized 25,000 shares; $.10 par value;
21,000 shares issued and outstanding at January 31,
1998................................................... 2,100 --
Partners' capital of EB Services Company LLP at January
31, 1998................................................ 1,000 --
Additional paid-in capital................................ 7,584,365 31,541,428
Accumulated other comprehensive expense................... (1,023,493) (686,920)
Retained earnings......................................... 21,834,364 17,786,191
------------ ------------
Total stockholders' equity.................................. 28,398,526 48,842,391
------------ ------------
Total liabilities and stockholders' equity.................. $142,790,740 $172,047,549
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
ELECTRONICS BOUTIQUE HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED
------------------------------------------
FEBRUARY 1, JANUARY 31, JANUARY 30,
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Net sales.......................................... $337,058,946 $449,179,603 $570,514,060
Management fees.................................... 2,526,107 4,791,553 3,404,862
------------ ------------ ------------
Total revenues..................................... $339,585,053 $453,971,156 $573,918,922
------------ ------------ ------------
Costs and expenses:
Costs of merchandise sold, including freight..... 252,812,925 338,497,642 431,743,771
Selling, general and administrative (notes 5 and
6)............................................. 69,827,537 87,002,305 99,972,451
Depreciation and amortization (notes 7 and 8).... 6,615,268 7,996,506 9,774,388
------------ ------------ ------------
Operating income................................... 10,329,323 20,474,703 32,428,312
Equity in earnings (loss) of affiliates (note 5)... (573,462) 2,902,780 (160,575)
Interest expense, net of interest income of
$1,121,562, $1,217,337 and $829,631 in fiscal
years 1997, 1998 and 1999, respectively.......... 1,298,296 1,380,046 289,188
Preacquisition loss of subsidiaries................ -- 913,028 --
------------ ------------ ------------
Income before income taxes......................... 8,457,565 22,910,465 31,978,549
Income tax expense (note 13)....................... 550,000 846,280 11,693,270
------------ ------------ ------------
Net income......................................... $ 7,907,565 $ 22,064,185 $ 20,285,279
============ ============ ============
PRO FORMA DATA (UNAUDITED) (NOTE 9):
Income before income taxes......................... $ 8,457,565 $ 22,910,465 $ 31,978,549
Pro forma income taxes............................. 3,513,265 9,415,631 11,866,084
------------ ------------ ------------
Pro forma net income............................... $ 4,944,300 $ 13,494,834 $ 20,112,465
============ ============ ============
Pro forma net income per share--basic.............. $ 0.31 $ 0.85 $ 1.12
============ ============ ============
Pro forma weighted average shares
outstanding--basic............................... 15,794,200 15,794,200 18,029,777
============ ============ ============
Pro forma net income per share--diluted............ $ 0.31 $ 0.85 $ 1.11
============ ============ ============
Pro forma weighted average shares
outstanding--diluted............................. 15,794,200 15,794,200 18,084,109
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE>
ELECTRONICS BOUTIQUE HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED CLASS A CLASS B
STOCK COMMON STOCK COMMON STOCK COMMON STOCK
------------------- ------------------- ------------------- ---------------------
SHARE AMOUNT SHARE AMOUNT SHARE AMOUNT SHARE AMOUNT
-------- -------- -------- -------- -------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, Feb. 3, 1996................... -- $ -- 1,900 $ 190 21,000 $ 2,100 -- $ --
Net income.............................. -- -- -- -- -- -- -- --
Distributions........................... -- -- -- -- -- -- -- --
--- ---- ------ ----- ------- ------- ---------- --------
Balance, Feb. 1, 1997................... -- -- 1,900 190 21,000 2,100 -- --
Capital contribution.................... -- -- -- -- -- -- -- --
Comprehensive income:
Net income............................ -- -- -- -- -- -- -- --
Foreign currency translation.......... -- -- -- -- -- -- -- --
Total comprehensive income
Distributions........................... -- -- -- -- -- -- -- --
--- ---- ------ ----- ------- ------- ---------- --------
Balance, Jan. 31, 1998.................. -- -- 1,900 190 21,000 2,100 -- --
Effects of reorganization (note 1)...... -- -- (1,900) (190) (21,000) (2,100) 20,169,200 201,692
Comprehensive income:
Net income............................ -- -- -- -- -- -- -- --
Foreign currency translation.......... -- -- -- -- -- -- -- --
Total comprehensive income
Distributions........................... -- -- -- -- -- -- -- --
--- ---- ------ ----- ------- ------- ---------- --------
Balance Jan. 30, 1999................... -- $ -- -- $ -- -- $ -- 20,169,200 $201,692
=== ==== ====== ===== ======= ======= ========== ========
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED
PARTNERS' CAPITAL ADDITIONAL OTHER TOTAL
OF EB SERVICES PAID-IN COMPREHENSIVE RETAINED STOCKHOLDERS'
COMPANY LLP CAPITAL INCOME EARNINGS EQUITY
----------------- ----------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance, Feb. 3, 1996................. $ -- $ 7,584,365 $ -- $ 9,862,614 $ 17,449,269
Net income............................ -- -- -- 7,907,565 7,907,565
Distributions......................... -- -- -- (5,000,000) (5,000,000)
------- ----------- ----------- ----------- ------------
Balance, Feb. 1, 1997................. 7,584,365 12,770,179 20,356,834
Capital contribution.................. 1,000 -- -- -- 1,000
Comprehensive income:
Net income.......................... -- -- -- 22,064,185 22,064,185
Foreign currency translation........ -- -- (1,023,493) -- (1,023,493)
------------
Total comprehensive income............ 21,040,692
============
Distributions......................... -- -- -- (13,000,000) (13,000,000)
------- ----------- ----------- ----------- ------------
Balance, Jan. 31, 1998................ 1,000 7,584,365 (1,023,493) 21,834,364 28,398,526
Effects of reorganization (note 1).... (1,000) 23,957,063 -- (3,813,796) 20,341,669
Comprehensive income:
Net income.......................... -- -- -- 20,285,279 20,285,279
Foreign currency translation........ -- -- 336,573 -- 336,573
------------
Total comprehensive income............ 20,621,852
============
Distributions......................... -- -- -- (20,519,656) (20,519,656)
------- ----------- ----------- ----------- ------------
Balance Jan. 30, 1999................. $ -- $31,541,428 $ (686,920) $17,786,191 $ 48,842,391
======= =========== =========== =========== ============
</TABLE>
F-10
<PAGE>
ELECTRONICS BOUTIQUE HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED
-----------------------------------------
FEBRUARY 1, JANUARY 31, JANUARY 30,
1997 1998 1999
----------- ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income......................................... $ 7,907,565 $ 22,064,185 $ 20,285,279
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation of property and equipment........... 6,555,142 7,571,301 9,375,766
Amortization of other assets..................... 60,126 425,205 398,622
Loss on disposal of property and equipment....... 1,170,182 620,916 292,623
Equity in loss of affiliates..................... 126,975 (2,902,780) 160,575
Loss on investment in affiliated companies....... 446,487 -- --
Changes in assets and liabilities:
Decrease (increase) in:
Accounts receivable............................ (471,533) 385,737 (828,692)
Due from affiliates............................ (688,891) (2,142,774) 1,906,739
Merchandise inventories........................ (5,646,658) 95,212 (12,309,661)
Prepaid expenses............................... 2,279 (27,311) 1,882,619
Other long-term assets......................... 173,570 (1,641,573) (1,247,378)
(Decrease) increase in:
Accounts payable............................... 21,806,206 8,348,016 4,993,290
Accrued expenses............................... 4,832,902 1,619,154 7,071,901
Due to affiliate............................... 402,478 (1,981,194) (9,453,597)
Income taxes payable........................... 455,187 213,047 8,168,826
Deferred rent.................................. (74,711) (368,059) 79,647
----------- ------------ ------------
Net cash provided by operating activities............ 37,057,306 32,279,082 30,776,559
----------- ------------ ------------
Cash flows used in investing activities:
Purchases of property and equipment................ (8,610,265) (18,470,432) (19,573,171)
Proceeds from disposition of assets................ 275,722 12,455 132,592
Net cash from businesses acquired.................. -- 2,922,411 --
Purchase of investment securities in affiliate..... -- (2,215,933) --
----------- ------------ ------------
Net cash used in investing activities................ (8,334,543) (17,751,499) (19,440,579)
----------- ------------ ------------
Cash flows from financing activities:
Distributions...................................... (5,000,000) (13,000,000) (19,950,573)
Net payments under revolving credit facility....... (10,000,000) -- --
Proceeds from (repayments of) long-term debt....... 23,400,004 (24,514,276) (12,896,594)
Proceeds from equity offering...................... -- -- 54,962,500
Capital contribution............................... -- 1,000 --
Net cash retained by predecessors.................. -- -- (12,375,535)
----------- ------------ ------------
Net cash provided by (used in) financing
activities......................................... 8,400,004 (37,513,276) 9,739,798
----------- ------------ ------------
Effects of exchange rates on cash.................... -- (1,102,543) 290,791
Net increase (decrease) in cash and cash
equivalents........................................ 37,122,767 (24,088,236) 21,366,569
Cash and cash equivalents, beginning of period....... 7,605,079 44,727,846 20,639,610
----------- ------------ ------------
Cash and cash equivalents, end of period............. $44,727,846 $ 20,639,610 $ 42,006,179
=========== ============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest......................................... $ 2,970,932 $ 2,714,593 $ 1,207,210
Income taxes..................................... 89,659 672,842 2,853,773
</TABLE>
See accompanying notes to consolidated financial statements.
F-11
<PAGE>
ELECTRONICS BOUTIQUE HOLDINGS CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FORMATION OF THE COMPANY
Immediately prior to its initial public offering, Electronics Boutique
Holdings Corp. and its subsidiaries (collectively, the "Company") was formed and
acquired substantially all of the operating assets and liabilities of its
predecessors, The Electronics Boutique, Inc. and its subsidiaries and EB
Services Company LLP (collectively, "EB Group") for shares of the Company. This
acquisition has been treated as an acquisition between entities under common
control and, therefore, reflected at historical cost. The EB Group retained
certain assets including cash, accounts receivable, real estate, the cash
surrender value of certain split dollar life insurance policies and the
ownership of approximately 25% of Electronics Boutique Plc.
DESCRIPTION OF BUSINESS
The Company is among the world's largest specialty retailers of electronic
games. The Company operates in only one business segment, as substantially all
of its revenues, net income and assets are derived from its primary products of
video games and personal computer entertainment software, supported by the sale
of video game hardware, PC productivity software and accessories.
The Company and its predecessors had 360, 452 and 528 operating retail
stores throughout the United States, Puerto Rico, Canada, Australia and South
Korea at February 1, 1997, January 31, 1998 and January 30, 1999, respectively.
Total revenues from the U.S. and foreign operations were 91% and 9%,
respectively, in fiscal 1999. Long-lived assets located in the United States and
foreign countries were 89% and 11%, respectively, in fiscal 1999. The Company
also operates a mail order business and sells product via the World Wide Web.
Approximately 30%, 36% and 31% of fiscal 1997, fiscal 1998, and fiscal 1999
sales, respectively, were generated from merchandise purchased from its three
largest vendors.
FISCAL YEAR-END
The fiscal year ends on the Saturday nearest January 31. Accordingly, the
financial statements for the years ended February 1, 1997 (fiscal "1997"),
January 31, 1998 (fiscal "1998") and January 30, 1999 (fiscal "1999") each
include 52 weeks of operations.
PRINCIPLES OF CONSOLIDATION AND COMBINATION
The consolidated financial statements include the financial position and
results of operations of the Company since its initial public offering on
July 28, 1998. Prior to that date, the consolidated financial statements include
the financial position and results of operations of the EB Group. All
intercompany transactions have been eliminated in consolidation. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included.
REVENUE RECOGNITION
Retail sales are recognized as revenue at point of sale. Mail order and
Internet sales are recognized as revenue upon shipment. Management fees are
recognized in the period that related services are provided. Sales are recorded
net of estimated allowance for sales returns and allowances.
F-12
<PAGE>
ELECTRONICS BOUTIQUE HOLDINGS CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
The Company 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
Furniture and Fixtures............... 5 years
Computer equipment................... 3 years
Building............................. 30 years
</TABLE>
Included in selling, general and administrative costs for fiscal years 1997,
1998, and 1999, are losses of $1,170,000, $556,000 and $293,000, respectively,
primarily related to the write-off of the net book value of property and
equipment associated with the closing of nine stores in each of fiscal 1997 and
1998 and ten stores fiscal 1999 and the remodeling of several stores each year.
DEFERRED REVENUE
The Company defers revenue related to the sale of frequent buyer cards which
entitle the cardholder to receive discounts on purchases for one year from the
date of purchase. Revenue is recognized over the one year period the card is
valid based on expected usage.
Amounts received under the Company's pre-sell program are recorded as a
liability. Revenue is recognized when the customer receives the related product.
Certain affinity programs include promotional gifts to customers that are
supplied by vendors at no cost to the Company.
GOODWILL AND OTHER INTANGIBLES
Costs in excess of fair value of net assets acquired are being amortized on
a straight-line basis over periods of up to ten years. The Company 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.
F-13
<PAGE>
ELECTRONICS BOUTIQUE HOLDINGS CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPUTER SOFTWARE COSTS
The Company capitalizes significant costs to acquire management information
systems software and significant external costs of system improvements. Computer
software costs are amortized over estimated useful lives of three to five years.
RETAINED EARNINGS
Retained earnings, which represent undistributed earnings of Electronics
Boutique Plc, totaled approximately $1,900,000 at January 31, 1998.
LEASING EXPENSES
The Company recognizes lease expense on a straight-line basis over the term
of the lease when lease agreements provide for increasing fixed rentals. The
difference between lease expense recognized and actual payments made is included
in deferred rent and prepaid expenses on the balance sheet.
PREOPENING COSTS AND ADVERTISING EXPENSE
Preopening and start-up costs for new stores are charged to operations as
incurred. Costs of advertising and sales promotion programs are charged to
operations, offset by vendor reimbursements, as incurred.
VENDOR PROGRAMS
The Company receives manufacturer reimbursements for certain training,
promotional and marketing activities that offset the expenses of these
activities. The expenses and reimbursements are reflected in selling, general
and administrative expenses, as incurred or received.
FOREIGN CURRENCY
The accounts of the foreign subsidiaries are translated in accordance with
Statement of Financial Accounting Standard No. 52, Foreign Currency Translation,
which requires that assets and liabilities of international operations be
translated using the exchange rate in effect at the balance sheet date. The
results of operations are translated using an average exchange rate for the
year. The effects of rate fluctuations in translating assets and liabilities of
international operations into U.S. dollars are accumulated and reflected as a
foreign currency translation adjustment in the statements of stockholders'
equity. Transaction gains and losses are included in net income.
The Company currently does not hedge currency exchange rate risk and does
not currently believe that currency exchange rate fluctuations have a material
adverse effect on its results of operations and financial condition.
COMPREHENSIVE INCOME
Effective February 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." This statement
requires that all items recognized under accounting standards as components of
comprehensive income be reported in an annual financial
F-14
<PAGE>
ELECTRONICS BOUTIQUE HOLDINGS CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
statement that is displayed with the same prominence as other financial
statements. The Company has included the required information in the Statement
of Stockholders' Equity. Accumulated Other Comprehensive Expense includes
foreign currency translation adjustments.
INCOME TAXES
The Company is subject to federal and state income taxes as a C corporation
whereas the EB Group had been treated as an S corporation and a partnership for
federal and certain state income tax purposes resulting in taxable income being
passed through to the shareholders and partners. For purposes of comparison, a
pro forma tax charge has been reflected on the statements of income to show the
results of operations as if the EB Group had been subject to taxes as a C
corporation.
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
NET INCOME PER SHARE
Basic income per share is calculated by dividing net income by the weighted
average number of shares of the Company's Common Stock outstanding during the
period. Diluted income per share is calculated by adjusting the weighted average
common shares outstanding for the dilutive effect of common stock equivalents
related to stock options.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company'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 Company 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. The fair market value of the investment in affiliated
company is described in note 8.
F-15
<PAGE>
ELECTRONICS BOUTIQUE HOLDINGS CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) COMMITMENTS
LEASE COMMITMENTS
At January 30, 1999, 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>
Fiscal 2000.......................................... $ 24,575,877 $ 905,105 $ 25,480,982
Fiscal 2001.......................................... 22,964,358 403,833 23,368,191
Fiscal 2002.......................................... 21,536,184 101,361 21,637,545
Fiscal 2003.......................................... 19,661,521 44,730 19,706,251
Fiscal 2004.......................................... 16,903,742 -- 16,903,742
Thereafter........................................... 49,625,741 -- 49,625,741
------------ ---------- ------------
$155,267,424 $1,455,029 $156,722,453
============ ========== ============
</TABLE>
The total future minimum lease payments include lease commitments for new
retail locations not in operation at January 30, 1999, and exclude contingent
rentals based upon sales volume and owner expense reimbursements. The terms of
the operating leases for the retail locations provide that, in addition to the
minimum lease payments, the Company 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 Company's proportionate share
of the landlord's costs and expenses incurred in the maintenance and operation
of the shopping mall. Contingent rentals were approximately $5,422,000,
$8,132,000 and $10,695,000 in fiscal 1997, fiscal 1998, and fiscal 1999,
respectively. Rent expense, including contingent rental amounts, was
approximately $28,448,000, $35,138,000 and $43,008,000 in fiscal 1997, fiscal
1998 and fiscal 1999, respectively.
Certain of the Company'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 $75,000, $368,000 and ($84,000)
for fiscal 1997, fiscal 1998 and fiscal 1999, respectively.
(3) ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
JANUARY 31, JANUARY 30,
1998 1999
----------- -----------
<S> <C> <C>
Employee compensation and related taxes..................... $ 4,442,430 $ 5,801,742
Gift certificates, customer deposits and deferred revenue... 3,231,958 4,758,197
Accrued rent................................................ 3,179,749 4,152,666
Other accrued liabilities................................... 3,690,982 4,912,463
----------- -----------
Total....................................................... $14,545,119 $19,625,068
=========== ===========
</TABLE>
F-16
<PAGE>
ELECTRONICS BOUTIQUE HOLDINGS CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) DEBT
The EB Group had available a revolving credit facility allowing for maximum
borrowings of $17,000,000 at January 31, 1998. There were no outstanding amounts
at January 31, 1998 on this facility. The EB Group had a second revolving credit
facility allowing for maximum borrowings of $1,000,000 at January 31, 1998.
There was no outstanding balance at January 31, 1998 on this facility. The
Company had available a revolving credit facility allowing for maximum
borrowings of $50,000,000 at January 30, 1999. The revolving credit facility
expires and is repayable on March 16, 2001. Interest accrues on borrowings at a
per annum rate equal to either LIBOR plus 250 basis points or the bank's base
rate of interest, at the Company's option. The revolving credit agreement
contains restrictive covenants regarding transactions with affiliates, the
payment of dividends, and other financial and non-financial matters and is
secured by certain assets, including accounts receivable, inventory, fixtures
and equipment. There was no outstanding balance at January 30, 1999 on this
facility.
Long-term debt at January 31, 1998 and January 30, 1999 is summarized as
follows:
<TABLE>
<CAPTION>
JANUARY 31, JANUARY 30,
1998 1999
----------- -----------
<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............................ $ 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...................................................... 4,000,000 --
Promissory note, maturing on February 1, 2000 with interest
and principal payable monthly at 6.00% as of January 31,
1998 and January 30, 1999................................. 208,345 108,349
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...................... 3,733,200 --
----------- --------
12,941,545 108,349
Less current installments................................... 2,400,396 99,996
----------- --------
$10,541,149 $ 8,353
=========== ========
</TABLE>
(5) RELATED PARTY TRANSACTIONS
LOANS AND ADVANCES FROM AFFILIATES
During fiscal 1997, the EB Group borrowed varying amounts from a company
affiliated through common ownership. The advances bear interest at the prime
rate plus 0.25%. The EB Group and Electronics Boutique Holdings Corp. had no
outstanding borrowings from affiliates at January 31, 1998 and January 30, 1999,
respectively. Interest expense on affiliate borrowings was approximately
$250,000 for fiscal 1997 and $0 for fiscal 1998 and fiscal 1999.
F-17
<PAGE>
ELECTRONICS BOUTIQUE HOLDINGS CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) RELATED PARTY TRANSACTIONS (CONTINUED)
TRANSACTIONS WITH AFFILIATES
Insurance and other expenses are paid to an affiliated company through
intercompany billings. The amount of these expenses was approximately $575,000,
$431,000 and $41,000 for fiscal 1997, fiscal 1998 and fiscal 1999, respectively,
and is included in selling, general and administrative expenses.
Equity in earnings (loss) of affiliates includes the following:
<TABLE>
<CAPTION>
FISCAL 1997 FISCAL 1998 FISCAL 1999
----------- ----------- -----------
<S> <C> <C> <C>
EB International, Inc...................... $(373,031) $ -- $ --
Electronics Boutique Canada, Inc........... (73,456) -- --
Electronics Boutique, Plc.................. (126,975) 2,902,780 (160,575)
--------- ---------- ---------
$(573,462) $2,902,780 $(160,575)
========= ========== =========
</TABLE>
The Company leases 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, from a majority shareholder. The lease has a two
year term expiring on May 30, 2000 and includes an option to purchase the
property for $6.7 million.
(6) CONSULTING AGREEMENT
In July 1993, the EB Group entered into a consulting agreement with a
business that owns and operates retail stores. The Company provides consulting,
management, administrative, marketing, and advertising assistance to this retail
business. The Company received $641,000, $633,000 and $476,000 during fiscal
1997, fiscal 1998 and fiscal 1999, respectively, as reimbursement for
incremental costs incurred based on a formula as defined. Amounts owed to the
Company for these items and trade credit at January 31, 1998 and January 30,
1999 are included in accounts receivable. Reimbursements offset selling, general
and administrative expenses. Based on certain performance criteria as defined,
the Company can also earn a performance fee. No performance fee was earned for
fiscal 1997 and fiscal 1998 and $400,000 was earned for fiscal 1999.
(7) ACQUISITIONS
EB CANADA
In September 1993, the EB Group 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. The EB Group
purchased the remaining 50% of EB Canada in October 1997 for $727,000 and now
owns 100% of EB Canada. The fair value of assets acquired totaled $3,879,000,
while liabilities assumed totaled $4,332,000 resulting in goodwill of
$1,180,000, which is being amortized over the expected period of benefit of ten
years. The EB Group consolidated the results of operations of EB Canada since
the beginning of fiscal 1998. The $236,000 loss of EB Canada prior to the
acquisition of
F-18
<PAGE>
ELECTRONICS BOUTIQUE HOLDINGS CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) ACQUISITIONS (CONTINUED)
the remaining 50% by the EB Group in fiscal 1998 has been included in
preacquisition loss of subsidiaries on the consolidated and combined statement
of income. The pro forma effect of the acquisition is not material to fiscal
1997. Prior to fiscal 1998, 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.
EB INTERNATIONAL
In fiscal 1996, the EB Group formed a subsidiary, EB International, Inc., to
establish a 50% interest in a joint venture with a Korean company to operate a
chain of retail stores that sells computer software, video games, accessories,
and supplies in South Korea. Prior to fiscal 1998, the investment in the joint
venture was accounted for under the equity method of accounting and,
accordingly, the EB Group's proportionate interest in net income and losses has
been reflected in the statements of income. In fiscal 1998 EB International
acquired the remaining 50% interest in the joint venture with $611,000 of
additional funds provided by the EB Group. The fair value of assets acquired
totaled $3,579,000, while liabilities assumed totaled $3,497,000 resulting in
goodwill of $529,000 that is being amortized over the expected period of benefit
of ten years. The EB Group has consolidated the results of operations of the
joint venture since the beginning of fiscal 1998. The $677,000 loss of the joint
venture prior to the acquisition of the remaining 50% by the EB Group in fiscal
1998 has been included in preacquisition loss of subsidiaries on the
consolidated statement of income. The pro forma effect of the acquisition is not
material to fiscal 1997.
(8) INVESTMENT IN AFFILIATED COMPANY
In fiscal 1996, the EB Group acquired 25 percent of the outstanding shares
of Electronics Boutique Plc (formerly Rhino Group Plc). The EB Group accounted
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 fiscal
1996.
The goodwill has been amortized over the expected period of benefit of 10
years. The $3,200,000 of goodwill from this transaction resulted in amortization
expense of $321,000 in each of fiscal 1997 and fiscal 1998, and $161,000 in
fiscal 1999. The carrying value of the investment exceeded the EB Group's 25
percent share of the underlying net assets of Electronics Boutique Plc by the
amount of goodwill.
At January 31, 1998 the fair market value of the investment was $52,615,000
based on the closing market price quotation of the London Stock Exchange. The
investment in Electronics Boutique Plc was retained by a predecessor company
prior to completion of the initial public offering by the Company in July, 1998.
F-19
<PAGE>
ELECTRONICS BOUTIQUE HOLDINGS CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) INVESTMENT IN AFFILIATED COMPANY (CONTINUED)
In fiscal 1996, the EB Group entered into a services agreement with
Electronics Boutique plc to provide consulting, management, training, and
advertising assistance which expires on January 31, 2006. The agreement was
assigned to the Company. The agreement provides for a fee to be paid to the EB
Group based on a formula of 1% of adjusted sales and if budgeted profits are
exceeded for the year, a bonus equal to 25% of such excess. For fiscal 1998, a
bonus was earned in the amount of $2,206,000. The management fee receivable,
which is included in due from affiliates, was $2,826,000 and $879,000 at January
31, 1998 and January 30, 1999. Included in management fees for fiscal 1997,
fiscal 1998 and fiscal 1999 was $1,092,000, $1,953,000 and $2,529,000,
respectively. Additionally, the agreement provides that the Company is to be
reimbursed by Electronics Boutique Plc for all reasonable travel and subsistence
expenses incurred by employees of the Company during their performance of the
agreement. At January 31, 1998 and January 30, 1999, amounts outstanding for
these expenses were $52,000 and $105,000, respectively, and are included in due
from affiliates.
Summary financial information for Electronics Boutique Plc, a UK company, as
of and for the years ended February 1, 1997 and January 31, 1998, are as
follows:
<TABLE>
<CAPTION>
FEBRUARY 1, JANUARY 31,
1997 1998
------------ ------------
<S> <C> <C>
Current Assets.............................................. $ 29,486,000 $ 49,404,000
Current Liabilities......................................... 22,201,000 31,338,000
------------ ------------
Working Capital............................................. 7,285,000 18,016,000
Property, Plant and Equipment, Net.......................... 13,698,000 15,987,000
------------ ------------
Other Assets................................................ 80,000 --
Long-Term Debt.............................................. 2,086,000 1,825,000
------------ ------------
Stockholders' Equity........................................ $ 18,977,000 $ 32,178,000
Sales....................................................... $116,341,000 $203,596,000
============ ============
Net Income.................................................. $ 777,000 $ 12,895,000
============ ============
</TABLE>
The summary balance sheet amounts have been converted from UK pounds to U.S.
dollars at year-end published exchange rates. Summary income statement amounts
have been converted using average exchange rates prevailing during the
respective periods.
F-20
<PAGE>
ELECTRONICS BOUTIQUE HOLDINGS CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) PRO FORMA STATEMENT OF INCOME INFORMATION (UNAUDITED)
For purposes of comparison, the following pro forma information for fiscal
1997, fiscal 1998 and fiscal 1999, respectively, is presented to show pro forma
income on an after-tax basis as if the EB Group had been subject to taxes as a C
corporation.
<TABLE>
<CAPTION>
FISCAL 1997 FISCAL 1998 FISCAL 1999
----------- ----------- -----------
<S> <C> <C> <C>
Federal statutory tax rate.................................. 34.00% 35.00% 35.00%
State income taxes, net of federal benefit.................. 5.36 3.74 3.18
Loss of foreign subsidiaries................................ 1.80 0.51 --
Other....................................................... 0.38 1.85 3.34
Change in valuation allowance............................... -- -- (4.41)
----- ----- -----
Pro forma income tax rate................................... 41.54% 41.10% 37.11%
===== ===== =====
</TABLE>
Set forth below are pro forma results operations for fiscal 1997, fiscal
1998 and fiscal 1999. The following table sets forth the calculation of basic
and diluted net income per share:
<TABLE>
<CAPTION>
FISCAL 1997 FISCAL 1998 FISCAL 1999
----------- ----------- -----------
<S> <C> <C> <C>
Income before income taxes............................. $8,457,565 $22,910,465 $31,978,549
Pro forma income taxes................................. 3,513,265 9,415,631 $11,866,084
---------- ----------- -----------
Pro forma net income................................... 4,944,300 13,494,834 20,112,465
========== =========== ===========
Pro forma net income per share--basic.................. $ 0.31 $ 0.85 $ 1.12
========== =========== ===========
Pro forma weighted average shares outstanding--basic... 15,794,200 15,794,200 18,029,777
========== =========== ===========
Pro forma net income per share--diluted................ $ 0.31 $ 0.85 $ 1.11
========== =========== ===========
Pro forma weighted average shares
outstanding--diluted................................. 15,794,200 15,794,200 18,084,109
========== =========== ===========
</TABLE>
The pro forma weighted average shares outstanding--basic reflects the effect
of shares issued by the Company for the acquisition of substantially all the
operating assets and liabilities of the EB Group for periods prior to the
initial public offering. The pro forma weighted average shares outstanding -
diluted additionally include the effect of dilutive stock options.
(10) CAPITAL STOCK
As of January 31, 1998, the capital structure of the EB Group consists of
two classes of Common Stock, Class A and Class B. The rights, duties and
privileges of the Class A and Class B common stock are identical in all respects
except that the Class A shares have voting rights and Class B shares have no
voting rights. In addition, preferred stock is authorized that contains a 10%
non-cumulative dividend and is non-participating, non-convertible,
non-redeemable and preferred as to the rights of the holders of the Class A and
Class B common stock in the event of a liquidation of the EB Group.
On July 28, 1998, the Company completed its reorganization and an initial
public offering of 5,000,000 shares of its common stock. Of the 5,000,000 shares
sold, 4,375,000 shares were for the account of the Company and 625,000 were for
the account of the selling shareholder. The net proceeds to the Company, after
deducting underwriting discounts and commissions and expenses were
F-21
<PAGE>
ELECTRONICS BOUTIQUE HOLDINGS CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(10) CAPITAL STOCK (CONTINUED)
$54,962,500. The net proceeds were recorded as an increase to additional paid in
capital and common stock. The proceeds were used, in part, to retire debt under
the Company's revolving credit facility and to repay an outstanding demand note
to the Company's Chairman.
(11) EMPLOYEES' RETIREMENT PLAN
The Company 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. Company
contributions are at the Company's discretion and may not exceed 15% of an
eligible employee's compensation. Company contributions to the plan are fully
vested for eligible employees with five years or more of service. Contributions
under this plan were approximately $357,000, $302,000 and $389,000 in fiscal
1997, fiscal 1998 and fiscal 1999, respectively.
(12) EQUITY PARTICIPATION PLAN
The Company, in connection with its initial public offering, adopted an
equity participation plan pursuant to which 2,100,000 shares of common stock
were reserved for issuance upon the exercise of stock options granted to
employees, consultants and directors. The exercise price of option granted under
this plan may not be less than fair market value per share of common stock at
grant date; options become exercisable one to three years after the grant date
and expire over a period of not more than ten years. Exercisability is
accelerated on a change in control of the Company, as defined in the plan.
Pro forma information regarding net income and income per share is required
by Statement of Financial Accounting Standard ("FAS") No.123, and has been
determined as if the Company had accounted for its employee stock options under
the fair value method of that Statement. The fair value for these options was
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted average assumptions for fiscal 1999: risk free interest
rate of 4.55%; dividend yield of 0.0%; volatility factors of the expected market
price of the Company's common stock of 50.0%; and a weighted average expected
life of the options of 3.5 years.
The Company's relatively limited period of time as a public company makes
the determination of volatility difficult. For purposes of the FAS 123
calculation, the estimated volatility was determined by reviewing the
volatilities of publicly traded retail companies with similar characteristics.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
F-22
<PAGE>
ELECTRONICS BOUTIQUE HOLDINGS CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(12) EQUITY PARTICIPATION PLAN (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:
<TABLE>
<CAPTION>
FISCAL 1999
-----------
<S> <C>
Net income:
As reported (pro forma)................................... $20,112,465
Pro forma net income...................................... $19,234,620
Pro forma income per common share:
Basic..................................................... $ 1.07
Diluted................................................... $ 1.06
</TABLE>
A summary of the Company's stock option activity, and related information
for the fiscal year ended January 30, 1999 follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
OPTIONS PRICE
--------- --------
<S> <C> <C>
Outstanding at beginning of year......................... -- $ --
Granted.................................................. 1,599,133 14.00
Forfeited................................................ 37,800 14.00
--------- ------
Outstanding at end of year............................... 1,561,333 $14.00
========= ======
Exercisable at end of year............................... -- --
========= ======
Weighted average fair value of options granted during the
year................................................... $ 5.75
======
</TABLE>
The exercise price for all options outstanding as of January 30, 1999 was
$14.00. The average remaining contractual life of those options is 9.5 years.
(13) INCOME TAXES
As discussed in notes 1 and 9, the Company is subject to federal and state
income taxes as a C corporation whereas its predecessors had been treated as an
S corporation and a partnership for federal and certain state income tax
purposes resulting in taxable income being passed through to the shareholders
and partners.
Income before income taxes were as follows:
<TABLE>
<CAPTION>
FISCAL 1997 FISCAL 1998 FISCAL 1999
----------- ----------- -----------
<S> <C> <C> <C>
Domestic............................... $8,457,565 $21,354,205 $31,331,801
Foreign................................ -- 1,556,260 646,748
---------- ----------- -----------
Total.................................. $8,457,565 $22,910,465 $31,978,549
========== =========== ===========
</TABLE>
F-23
<PAGE>
ELECTRONICS BOUTIQUE HOLDINGS CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(13) INCOME TAXES (CONTINUED)
The provision for income taxes for fiscal 1997, fiscal 1998 and fiscal 1999
consists of the following:
<TABLE>
<CAPTION>
FISCAL 1997 FISCAL 1998 FISCAL 1999
----------- ----------- -----------
<S> <C> <C> <C>
Federal statutory tax rate................................. 34.00% 35.00% 35.00%
State income taxes, net of federal benefit................. 6.50 3.69 3.18
S corporation earnings not subject to federal taxation..... (34.00) (35.00) (0.22)
Other...................................................... -- -- 3.02
Change in valuation allowance.............................. -- -- (4.41)
-------- -------- -----------
Income tax expense......................................... 6.50% 3.69% 36.57%
======== ======== ===========
Current:
Domestic--Federal........................................ $ -- $ -- $ 9,767,127
Domestic--State.......................................... 550,000 840,000 3,050,653
Foreign.................................................. -- -- 60,528
Deferred:
Domestic--Federal........................................ -- -- 159,331
Domestic--State.......................................... -- -- (719,669)
Foreign.................................................. -- 6,280 (624,700)
-------- -------- -----------
Income tax expense......................................... $550,000 $846,280 $11,693,270
======== ======== ===========
</TABLE>
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The following is a
summary of the significant components of the Company's deferred tax assets and
liabilities as of January 30, 1999.
<TABLE>
<S> <C>
Deferred tax assets:
Inventory capitalized costs............................... $1,632,000
Accrued expenses.......................................... 705,000
Fixed assets.............................................. 4,962,000
Deferred rent............................................. 922,000
Amortization of goodwill.................................. 167,000
Foreign net operating loss................................ 839,000
----------
Total gross deferred tax asset............................ 9,227,000
Valuation allowance....................................... (214,000)
----------
Net deferred tax asset.................................... $9,013,000
==========
</TABLE>
As a result of the acquisition described in Note 1, tax assets were acquired
exceeding book basis, resulting in deferred tax assets of $7,828,000, net of a
valuation allowance of $1,622,000. The change in the valuation allowance of
$1,408,000 results from management's assessment that taxable income will more
likely than not be sufficient to realize the net deferred tax assets of
$9,013,000 as of January 30, 1999.
F-24
<PAGE>
ELECTRONICS BOUTIQUE HOLDINGS CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(14) PRO FORMA NET INCOME PER SHARE
The following table presents the computation of basic and diluted pro forma
net income per share:
<TABLE>
<CAPTION>
FISCAL 1997 FISCAL 1998 FISCAL 1999
----------- ----------- -----------
<S> <C> <C> <C>
Basic pro forma net income per share:
Pro forma net income................................. $4,944,300 $13,494,834 $20,112,465
========== =========== ===========
Pro forma weighted average shares outstanding........ 15,794,200 15,794,200 18,029,777
========== =========== ===========
Pro forma net income per share -basic................ $ 0.31 $ 0.85 $ 1.12
========== =========== ===========
Diluted pro forma net income per share:
Pro forma net income................................. $4,944,300 $13,494,834 $20,112,465
========== =========== ===========
Pro forma weighted average shares outstanding........ 15,794,200 15,794,200 18,029,777
Diluted effect of stock options...................... -- -- 54,332
---------- ----------- -----------
Pro forma weighted average shares outstanding........ 15,794,200 15,794,200 18,084,109
========== =========== ===========
Pro forma net income per share -diluted.............. $ 0.31 $ 0.85 $ 1.11
========== =========== ===========
</TABLE>
F-25
<PAGE>
- --------------------------------------------------------------------------------
[LOGO]
PRUDENTIAL SECURITIES
BANC OF AMERICA SECURITIES LLC
GERARD KLAUER MATTISON & CO., INC.
PRUDENTIALSECURITIES.COM
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. 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................................. $ 25,806
NASD Filing Fee............................................. 9,783
NASDAQ National Market Fee.................................. 17,500
EDGAR and Printing Expenses*................................ 65,911
Legal Fees and Expenses*.................................... 150,000
Accounting Fees and Expenses*............................... 100,000
Blue Sky Fees and Expenses*................................. 5,000
Transfer Agent's Fees and Expenses*......................... 1,000
Miscellaneous Expenses*..................................... 25,000
--------
Total*...................................................... 400,000
========
</TABLE>
- ------------------------
* Estimate
ITEM 15. 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.
Our Certificate of Incorporation provides for the indemnification of
directors to the fullest extent permissible under Delaware Law.
Our Bylaws provide for the indemnification of officers, directors and third
parties acting on behalf of Electronics Boutique if such person acted in good
faith and in a manner reasonably believed to be in and not opposed to the best
interest of Electronics Boutique, and, with respect to any criminal action or
proceeding, the indemnified party had no reason to believe his or her conduct
was unlawful.
We have entered into indemnification agreements with its directors and
executive officers in addition to the indemnification provided for in our
Bylaws, and intend 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 our directors and officers in certain circumstances as
provided therein.
We have procured insurance which provides our officers and directors with
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 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement*
4.1 Specimen Stock Certificate(1)
5.1 Opinion of Klehr, Harrison, Harvey, Branzburg & Ellers LLP*
10.1 Form of Indemnification Agreement for Directors and
Officers(1)
</TABLE>
II-1
<PAGE>
<TABLE>
<C> <S>
10.2 Form of 1998 Equity Participation Plan(1)
10.3 Services Agreement, dated October 13, 1995, by and between
The Electronics Boutique, Inc. and Electronics Boutique plc
(f/k/a Rhino Group plc)(1)
10.4 Loan and Security Agreement, dated March 16, 1998, by and
between The Electronics Boutique, Inc. and Fleet Capital
Corporation(1)
10.5 Joinder Agreement by and between Electronics Boutique of
America, Inc. and Fleet Capital Corporation(1)
10.6 Form of Employment Agreement by and between Electronics
Boutique Holdings Corp. and Joseph J. Firestone(1)
10.7 Form of Employment Agreement by and between Electronics
Boutique Holdings Corp. and John R. Panichello(1)
10.8 Form of Employment Agreement by and between Electronics
Boutique Holdings Corp. and Jeffrey W. Griffiths(1)
10.9 Assignment, Bill of Sale, and Assumption Agreement, dated
May 31, 1998, by and between The Electronics Boutique, Inc.
and Electronics Boutique of America, Inc.(1)
10.10 Form of Registration Rights Agreement between Electronics
Boutique Holdings Corp. and EB Nevada(1)
10.11 Form of Demand Note by and between James J. Kim and
Electronics Boutique of America, Inc.(1)
10.12 Assignment of Trademarks, dated May 31, 1998, by and between
The Electronics Boutique, Inc. and Elbo, Inc.(1)
10.13 Addendum to Assignment of Trademarks by and between The
Electronics Boutique, Inc. and Elbo, Inc.(1)
10.14 Form of Agreement of Lease by and between The Electronics
Boutique, Inc. and Electronics Boutique of America, Inc.(1)
10.15 Agreement and Bill of Sale, dated as of July 13, 1998, by
and between Electronics Boutique Holdings Corp. and EB
Nevada(1)
10.16 Agreement and Consent to Assignment and Assumption of
Partnership Interests, dated as of July 13, 1998(1)
10.17 Amendment No. 1 to Loan and Security Agreement by and among
The Electronics Boutique, Inc., Electronics Boutique of
America, Inc. and Fleet Capital Corporation(1)
10.18 Amendment No. 2 to Loan and Security Agreement by and among
The Electronics Boutique, Inc., Electronics Boutique of
America, Inc. and Fleet Capital Corporation(1)
10.19 Form of Employment Agreement by and between Electronics
Boutique Holdings Corp. and Seth P. Levy(2)
23.1 Consent of KPMG LLP*
23.2 Consent of Klehr, Harrison, Harvey, Branzburg & Ellers LLP
(included in Exhibit 5.1)*
24.1 Powers of Attorney (included in the signature page
hereto)(3)
27.1 Financial Data Schedule(2)
</TABLE>
- ------------------------
* Filed herewith.
(1) Incorporated by reference from the applicable exhibits of Electronics
Boutique's Registration Statement on Form S-1 (Reg. No. 333-48523)
(2) Incorporated by reference from the applicable exhibits of Electronics
Boutique's Annual Report on Form 10-Q for the quarterly period ended
July 31, 1999
II-2
<PAGE>
(3) Incorporated by reference from the applicable exhibit of Electronics
Boutique's Registration Statement on Form S-3 (Reg. No. 333-88561)
(b) Consolidated Financial Statement Schedules
None
ITEM 17. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes:
(i) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(A) to include any prospectus required by section 10(a)(3) of the
Securities Act;
(B) to reflect in the Prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the Registration Statement.
(C) to include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement;
provided, however, that paragraphs (i)(A) and (i)(B) do not apply if the
information required to be included in a post-effective amendment by
those paragraphs is contained in periodic reports filed by the registrant
pursuant to Section 13 or Section 15(d) of the Exchange Act that are
incorporated by reference in the Registration Statement.
(ii) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment 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.
(iii) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(iv) For purposes of determining any liability under the Securities Act,
each filing of the registrant's annual report pursuant to Section 13(a) or
15(d) of the Exchange Act that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered herein, and the offering of such
securities at that time shall be deemed to be the initial BONA FIDE offering
thereof.
(b) Insofar as indemnification for liabilities arising under the Securities
Act 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 Commission such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-3
<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 November 19, 1999.
<TABLE>
<S> <C> <C>
ELECTRONICS BOUTIQUE HOLDINGS CORP.
By: /s/ JOSEPH J. FIRESTONE
-----------------------------------------
Joseph J. Firestone
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below on November 19, 1999 by the
following persons in the capacities indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
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
Director
-------------------------------------------
Susan Y. Kim
/s/ LOUIS J. SIANA* Director
-------------------------------------------
Louis J. Siana
/s/ STANLEY STEINBERG* Director
-------------------------------------------
Stanley Steinberg
/s/ JOHN R. PANICHELLO Senior Vice President and Chief Financial
------------------------------------------- Officer (Principal Financial and Accounting
John R. Panichello Officer)
</TABLE>
* By: Joseph J. Firestone, as power of attorney
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBITS
--------
<C> <S>
1.1 Form of Underwriting Agreement
5.1 Opinion of Klehr, Harrison, Harvey, Branzburg & Ellers, LLP
23.1 Consent of KPMG LLP
</TABLE>
<PAGE>
Exhibit 1.1
ELECTRONICS BOUTIQUE HOLDINGS CORP.
3,500,000(1)
Common Stock
UNDERWRITING AGREEMENT
November __, 1999
PRUDENTIAL SECURITIES INCORPORATED
BANC OF AMERICA SECURITIES LLC
GERARD KLAUER MATTISON & CO., INC.
PRUDENTIALSECURITIES.COM
As Representatives of the several Underwriters
c/o Prudential Securities Incorporated
One New York Plaza
New York, New York 10292
Dear Ladies and Gentlemen:
Electronics Boutique Holdings Corp., a Delaware corporation (the
"COMPANY") and EB Nevada Inc., a Nevada corporation (the "SELLING
SECURITYHOLDER"), hereby confirm their agreement with the several underwriters
named in Schedule I hereto (the "UNDERWRITERS"), for whom you have been duly
authorized to act as representatives (in such capacities, the
"REPRESENTATIVES"), as set forth below. If you are the only Underwriters, all
references herein to the Representatives shall be deemed to be to the
Underwriters.
1. SECURITIES. Subject to the terms and conditions herein contained,
the Company and the Selling Securityholder propose to issue and sell to the
several Underwriters an aggregate of 3,500,000 shares (the "FIRM SECURITIES") of
the Company's common stock, par value $.01 per share ("COMMON STOCK"), of which
2,000,000 shares will be issued and sold by the Company (the "COMPANY'S FIRM
SECURITIES") and 1,500,000 shares will be sold by the Selling Securityholder
(the "SELLING SECURITYHOLDER'S FIRM SECURITIES"). The Selling Securityholder
also propose to sell to the several Underwriters not more than 525,000
additional shares of Common Stock if requested by the Representatives as
provided in Section 3 of this Agreement.
- ----------------------------
(1) Plus an option to purchase from the Selling Securityholder up to
525,000 additional shares to cover over-allotments.
<PAGE>
Any and all shares of Common Stock to be purchased by the Underwriters pursuant
to such option are referred to herein as the "OPTION SECURITIES," and the Firm
Securities and any Option Securities are collectively referred to herein as the
"SECURITIES."
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
(a) The Company represents and warrants to, and agrees with, each of
the several Underwriters and the Selling Securityholder that:
(i) The Company meets the requirements for use of Form S-3 under
the Securities Act of 1933, as amended (the "ACT"). A registration
statement on such Form (File No. 333- 88561) with respect to the
Securities, including a prospectus subject to completion, has been
filed by the Company with the Securities and Exchange Commission (the
"COMMISSION") under the Act, and one or more amendments to such
registration statement may have been so filed. After the execution of
this Agreement, the Company will file with the Commission either (A) if
such registration statement, as it may have been amended, has been
declared by the Commission to be effective under the Act, either (1) if
the Company relies on Rule 434 under the Act, a Term Sheet (as
hereinafter defined) relating to the Securities, that shall identify
the Preliminary Prospectus (as hereinafter defined) that it supplements
and, if required to be filed pursuant to Rules 434(c)(2) and 424 (b),
an Integrated Prospectus (as hereinafter defined), in either case,
containing such information as is required or permitted by Rules 434,
430A and 424(b) under the Act or (2) if the Company does not rely on
Rule 434 under the Act, a prospectus in the form most recently included
in an amendment to such registration statement (or, if no such
amendment shall have been filed, in such registration statement), with
such changes or insertions as are required by Rule 430A under the Act
or permitted by Rule 424(b) under the Act, and in the case of either
clause (A)(1) or (A)(2) of this sentence as have been provided to and
approved by the Representatives prior to the execution of this
Agreement, or (B) if such registration statement, as it may have been
amended, has not been declared by the Commission to be effective under
the Act, an amendment to such registration statement, including a form
of prospectus, a copy of which amendment has been furnished to and
approved by the Representatives prior to the execution of this
Agreement. The Company may also file a related registration statement
with the Commission pursuant to Rule 462(b) under the Act for the
purpose of registering certain additional Securities, which
registration shall be effective upon filing with the Commission. As
used in this Agreement, the term "ORIGINAL REGISTRATION STATEMENT"
means the registration statement initially filed relating to the
Securities, as amended at the time when it was or is declared
effective, including (A) all financial schedules and exhibits thereto,
(B) all documents incorporated therein filed under the Securities
Exchange Act of 1934 (the "EXCHANGE ACT") and (C) any information
omitted therefrom pursuant to Rule 430A under the Act and included in
the Prospectus (as hereinafter defined) or, if required to be filed
pursuant to Rule 434(c)(2) and 424(b), in the Integrated Prospectus;
the term "RULE 462(B) REGISTRATION STATEMENT" means any registration
statement filed with the Commission pursuant to Rule 462(b) under the
Act (including the Registration Statement and any Preliminary
Prospectus or
2
<PAGE>
Prospectus incorporated therein at the time such Registration Statement
becomes effective); the term "REGISTRATION STATEMENT" includes both the
Original Registration Statement and any Rule 462(b) Registration
Statement; the term "PRELIMINARY PROSPECTUS" means each prospectus
subject to completion filed with the Registration Statement or any
amendment thereto (including the prospectus subject to completion, if
any, included in the Registration Statement or any amendment thereto at
the time it was or is declared effective); the term "PROSPECTUS" means:
(A) If the Company relies on Rule 434 under the Act, the Term
Sheet relating to the Securities that is first filed pursuant to
Rule 424(b)(7) under the Act, together with the Preliminary
Prospectus identified therein that such Term Sheet supplements;
(B) if the Company does not rely on Rule 434 under the Act,
the prospectus first filed with the Commission pursuant to Rule
424(b) under the Act; or
(C) if the Company does not rely on Rule 434 under the Act and
if no prospectus is required to be filed pursuant to Rule 424(b)
under the Act, the prospectus included in the Registration
Statement, including, in the case of clauses (A), (B) and (C) of
this sentence, all documents incorporated by reference therein
filed under the Exchange Act; the term "INTEGRATED PROSPECTUS"
means a prospectus first filed with the Commission pursuant to
Rules 434(c)(2) and 424(b) under the Act; and the term "Term Sheet"
means any abbreviated term sheet that satisfies the requirements of
Rule 434 under the Act. Any reference in this Agreement to an
"amendment or supplement" to any Preliminary Prospectus, the
Prospectus or any Integrated Prospectus or an "amendment" to any
registration statement (including the Registration Statement) shall
be deemed to include any document incorporated by reference therein
that is filed with the Commission under the Exchange Act after the
date of such Preliminary Prospectus, Prospectus, Integrated
Prospectus or registration statement, as the case may be; any
reference herein to the "date" of a Prospectus that includes a Term
Sheet shall mean the date of such Term Sheet. For purposes of the
preceding sentence, any reference to the "effective date" of an
amendment to a registration statement shall, if such amendment is
effected by means of the filing with the Commission under the
Exchange Act of a document incorporated by reference in such
registration statement, be deemed to refer to the date on which
such document was so filed with the Commission.
(ii) The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus. When any Preliminary
Prospectus and any amendment or supplement thereto was filed with the
Commission it (A) contained all statements required to be stated
therein in accordance with, and complied in all material respects with
the requirements of, the Act and the rules and regulations of the
Commission thereunder and (B) did not include any untrue statement of a
material fact or omit to state any material fact necessary in order to
make the statements therein, in the light of the circumstances under
which they were made, not misleading. When the Registration
3
<PAGE>
Statement or any amendment thereto was or is declared effective, it (A)
contained or will contain all statements required to be stated therein
in accordance with, and complied or will comply in all material
respects with the requirements of the Act and the rules and regulations
of the Commission thereunder and (B) did not or will not include any
untrue statement of a material fact or omit to state any material fact
necessary to make the statements therein not misleading. When the
Prospectus or any Term Sheet that is a part thereof or any Integrated
Prospectus or any amendment or supplement to the Prospectus is filed
with the Commission pursuant to Rule 424(b) (or, if the Prospectus or
part thereof or such amendment or supplement is not required to be so
filed, when the Registration Statement or the amendment thereto
containing such amendment or supplement to the Prospectus was or is
declared effective) and on the Firm Closing Date and any Option Closing
Date (both as hereinafter defined), each of the Prospectus, and, if
required to be filed pursuant to Rules 434(c(2) and 424(b) under the
Act, the Integrated Prospectus as amended or supplemented at any such
time, (A) contained or will contain all statements required to be
stated therein in accordance with, and complied or will comply in all
material respects with the requirements of, the Act and the respective
rules and regulations of the Commission thereunder and (B) did not or
will not include any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made,
not misleading. The foregoing provisions of this paragraph (ii) do not
apply to statements or omissions made in any Preliminary Prospectus or
any amendment or supplement thereto, the Registration Statement or any
amendment thereto, the Prospectus or, if required to be filed pursuant
to Rules 434(c)(2) and 424(b) under the Act, the Integrated Prospectus
or any amendment or supplement thereto in reliance upon and in
conformity with written information furnished to the Company by any
Underwriter through the Representatives specifically for use therein.
(iii) If the Company has elected to rely on Rule 462(b) and the
Rule 462(b) Registration Statement has not been declared effective (A)
the Company has filed a Rule 462(b) Registration Statement in
compliance with and that is effective upon filing pursuant to Rule
462(b) and has received confirmation of its receipt and (B) the Company
has given irrevocable instructions for transmission of the applicable
filing fee in connection with the filing of the Rule 462(b)
Registration Statement, in compliance with Rule 111 promulgated under
the Act or the Commission has received payment of such filing fee.
(iv) The Company and each of its subsidiaries have been duly
organized and are validly existing as corporations under the laws of
their respective jurisdictions and are duly qualified to transact
business as foreign corporations and are in good standing under the
laws of all other jurisdictions where the ownership or leasing of their
respective properties or the conduct of their respective businesses
requires such qualification, except where the failure to be so
qualified does not amount to a material liability or disability to the
Company and each of its subsidiaries, taken as a whole.
4
<PAGE>
(v) Except as otherwise described in the Registration Statement,
each of the Prospectus and any Integrated Prospectus (or, if the
Prospectus and any required Integrated Prospectus are not in existence,
the most recent Preliminary Prospectus) the Company and each of its
subsidiaries have full power (corporate and other) to own or lease
their respective properties and conduct their respective businesses,
and the Company has full power (corporate and other) to enter into this
Agreement and to carry out all the terms and provisions hereof to be
carried out by it.
(vi) The Company has an authorized, issued and outstanding
capitalization as set forth in the Prospectus and any Integrated
Prospectus (or, if the Prospectus and any required Integrated
Prospectus are not in existence, the most recent Preliminary
Prospectus). All of the issued shares of capital stock of the Company
(including but not limited to the Securities being sold by the Selling
Securityholder) have been duly authorized and validly issued and are
fully paid and nonassessable. The Firm Securities and Option Securities
have been duly authorized and at the Firm Closing Date or the related
Option Closing Date (as the case may be), after payment therefor in
accordance herewith, will be validly issued, fully paid and
nonassessable. No holders of outstanding shares of capital stock of the
Company are entitled as such to any preemptive or other rights to
subscribe for any of the Securities, and no holder of securities of the
Company has any right which has not been fully exercised or waived to
require the Company to register the offer or sale of any securities
owned by such holder under the Act in the public contemplated by this
Agreement.
(vii) The issued and outstanding shares of capital stock of each of
the Company's subsidiaries have been duly authorized and validly
issued, are fully paid and nonassessable and are owned beneficially by
the Company, free and clear of security interests, liens, encumbrances,
equities or claims.
(viii) Except for the shares of capital stock of each of its
subsidiaries, the Company does not, directly or indirectly, own any
shares of stock or any other equity securities of any corporation or
have any equity interest in any firm, partnership, association or other
entity, except as described in or contemplated by the Prospectus and
any Integrated Prospectus (or, if the Prospectus and any required
Integrated Prospectus are not in existence, the most recent Preliminary
Prospectus).
(ix) The capital stock of the Company conforms to the description
thereof contained in each of the Prospectus and any Integrated
Prospectus or, if the Prospectus and any required Integrated Prospectus
are not in existence, the most recent Preliminary Prospectus.
(x) The consolidated financial statements and schedules of the
Company and its consolidated subsidiaries included or incorporated by
reference in the Registration Statement and each of the Prospectus and
any Integrated Prospectus (or, if the Prospectus and any required
Integrated Prospectus are not in existence, the most recent Preliminary
Prospectus) fairly present the financial position of the Company and
its consolidated
5
<PAGE>
subsidiaries and the results of operations and changes in financial
condition as of the dates and periods therein specified. Such financial
statements and schedules have been prepared in accordance with
generally accepted accounting principles consistently applied
throughout the periods involved (except as otherwise noted therein).
The selected consolidated financial data set forth under the caption
"Selected Consolidated Financial and Operating Data" in each of the
Prospectus and any Integrated Prospectus (or, if the Prospectus and any
required Integrated Prospectus are not in existence, the most recent
Preliminary Prospectus) and in the Company's Annual Report on Form 10-K
for the fiscal year ended January 30, 1999 (the "ANNUAL REPORT") fairly
present, on the basis stated in each of the Prospectus and any
Integrated Prospectus (or such Preliminary Prospectus) and such Annual
Report, the information included therein.
(xi) KPMG LLP, who have audited certain financial statements of the
Company and its consolidated subsidiaries and delivered their report
with respect to the audited consolidated and combined financial
statements and schedules included in the Registration Statement and
each of the Prospectus and any Integrated Prospectus (or, if the
Prospectus and any required Integrated Prospectus are not in existence,
the most recent Preliminary Prospectus), are independent public
accountants as required by the Act and the applicable rules and
regulations thereunder.
(xii) The execution and delivery of this Agreement have been duly
authorized by the Company, and this Agreement has been duly executed
and delivered by the Company and is the valid and binding agreement of
the Company, enforceable against the Company in accordance with its
terms, except as such enforceability may be limited by bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium or similar
laws affecting the rights and remedies of creditors generally and
subject to general principles of equity whether in a court of law or
equity.
(xiii) No legal or governmental proceedings are pending to which
the Company or any of its subsidiaries is a party or to which the
property of the Company or any of its subsidiaries is subject that
are required to be described in the Registration Statement and each of
the Prospectus and any Integrated Prospectus, and are not described
therein (or, if the Prospectus and any required Integrated Prospectus
are not in existence, the most recent Preliminary Prospectus), and, no
such proceedings have been threatened against the Company or any of its
subsidiaries or with respect to any of its properties; and no contract
or other document is required to be described in the Registration
Statement and each of the Prospectus and any Integrated Prospectus, or
to be filed as an exhibit to the Registration Statement that is not
described therein (or, if the Prospectus and any required Integrated
Prospectus are not in existence, the most recent Preliminary
Prospectus) or filed as required.
(xiv) The issuance, offering and sale of the Securities being
issued and sold by the Company to the Underwriters pursuant to this
Agreement, the compliance by the Company with the other provisions of
this Agreement and the consummation of the other transactions
contemplated do not (A) require the consent, approval, authorization,
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<PAGE>
registration or qualification of or with any governmental authority,
except such as have been obtained, such as may be required under state
securities or blue sky laws and, if the registration statement filed
with respect to the Securities (as amended) is not effective under the
Act as of the time of the execution hereof, such as may be required
(and shall be obtained as provided in this Agreement) under the Act or
(B) except as otherwise described in the Registration Statement, the
Prospectus and any Integrated Prospectus, (or, if the Prospectus and
any required Integrated Prospectus are not in existence, the most
recent Preliminary Prospectus), conflict with or result in a breach or
violation of any terms and provisions of, or constitute a default
under, any indenture, mortgage, deed of trust, lease or other agreement
or instrument to which the Company or any of its subsidiaries is a
party or by which the Company or any of its subsidiaries or any of its
properties are bound, or the charter documents or bylaws of the Company
or any of its subsidiaries or any statute or any judgment, decree,
order, rule or regulation of any court or other governmental authority
or any arbitrator applicable to the Company or any of its subsidiaries.
(xv) Subsequent to the respective dates as of which information is
given in the Registration Statement, the Prospectus or any Integrated
Prospectus (or, if the Prospectus and any required Integrated
Prospectus are not in existence, the most recent Preliminary
Prospectus), (A) neither the Company nor any of its subsidiaries has
sustained any material loss or interference with its business or
properties from fire, flood, hurricane, accident or other calamity,
whether or not covered by insurance, or from any labor dispute or any
legal or governmental proceeding and there has not been any material
adverse change, or any development involving a prospective material
adverse change, in the condition (financial or otherwise), management,
business prospects, net worth or results of operations of the Company
or any of its subsidiaries; (B) neither the Company nor its
subsidiaries, if applicable, has incurred any material liability or
obligation, direct or contingent, nor entered into any material
transaction, not in the ordinary course of business; (C) neither the
Company nor any of its subsidiaries has purchased any of its
outstanding capital stock, or declared, paid or otherwise made any
dividend or distribution of any kind on its capital stock; and (D)
there has not been any material change in the capital stock, short-term
debt or long-term debt of the Company and its consolidated
subsidiaries, except in each case of this paragraph (xv) as described
in or contemplated by each of the Prospectus and any Integrated
Prospectus or, if the Prospectus and any required Integrated Prospectus
are not in existence, the most recent Preliminary Prospectus.
(xvi) The Company has not, directly or indirectly, (A) taken any
action designed to cause or to result in, or that has constituted or
which might reasonably be expected to constitute, the stabilization or
manipulation of the price of any security of the Company to facilitate
the sale or resale of the Securities or (B) since the filing of the
Registration Statement (1) sold, bid for, purchased or paid anyone any
compensation for soliciting purchases of, the Securities or (2) paid or
agreed to pay to any person any compensation for soliciting another to
purchase any other securities of the Company (except for the sale of
Securities by the Selling Securityholder under this Agreement).
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<PAGE>
(xvii) The Company and each of its subsidiaries have good and
marketable title in fee simple to all items of real property and
marketable title to all personal property owned by each of them, in
each case free and clear of any security interests, liens,
encumbrances, claims and other defects, except such as do not
materially and adversely affect the value of such property and do not
interfere with the use made or proposed to be made of such property by
the Company or any such subsidiary and any real property and buildings
held under lease by the Company or any such subsidiary are held under
valid, subsisting and enforceable leases, with such exceptions as are
not material and do not interfere with the use made or proposed to be
made of such property and buildings by the Company or any such
subsidiary, in each case of this paragraph (xvii) except as described
in or contemplated by each of the Prospectus and any Integrated
Prospectus (or, if the Prospectus and any required Integrated
Prospectus are not in existence, the most recent Preliminary
Prospectus).
(xviii) No labor dispute with the employees of the Company or any
of its subsidiaries exists or, to the best of the Company's knowledge,
is threatened or imminent that would have a material adverse effect on
the condition (financial or otherwise), management, business
prospects, net worth or results of operations of the Company and its
subsidiaries, except as described in or contemplated by each of the
Prospectus and any Integrated Prospectus (or, if the Prospectus and
any required Integrated Prospectus are not in existence, the most
recent Preliminary Prospectus).
(xix) The Company and its subsidiaries own or possess, or can
acquire on reasonable terms, all material patents, patent applications,
trademarks, service marks, trade names, licenses, copyrights and
proprietary or other confidential information currently used by them in
connection with their respective businesses, and neither the Company
nor any such subsidiary has received any notice of, or has any
reasonable belief that its use constitutes, an infringement of or
conflict with asserted rights of any third party with respect to any of
the foregoing which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would have a material adverse
effect on the condition (financial or otherwise), management, business
prospects, net worth or results of operations of the Company or such
subsidiary, except as described in or contemplated by each of the
Prospectus and any Integrated Prospectus (or, if the Prospectus and any
required Integrated Prospectus are not in existence, the most recent
Preliminary Prospectus).
(xx) The Company and each of its subsidiaries are insured by
insurers of recognized financial responsibility against such losses and
risks and in such amounts as are prudent and customary in the business
in which they are engaged; neither the Company nor any such subsidiary
has been refused any insurance coverage sought or applied for; and the
neither Company nor any such subsidiary has reason to believe that it
will not be able to renew its existing insurance coverage as and when
such coverage expires or to obtain similar coverage from similar
insurers as may be necessary to continue its business at a cost that
would not have a material adverse effect on the condition (financial or
otherwise), management, business prospects, net worth or results of
operations of the
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<PAGE>
Company and its subsidiaries, except as described in or contemplated by
each of the Prospectus and any Integrated Prospectus (or, if the
Prospectus and any required Integrated Prospectus are not in existence,
the most recent Preliminary Prospectus).
(xxi) The Company and its subsidiaries possess all certificates,
authorizations and permits issued by the appropriate federal, state or
foreign regulatory authorities necessary to conduct its business except
where failure to possess such certificates, authorizations and permits
would not have a material adverse effect on the condition (financial or
otherwise), management, business prospects, net worth or results of
operations of the Company or any of its subsidiaries, and neither the
Company nor any such subsidiary has received any notice of proceedings
relating to the revocation or modification of any such certificate,
authorization or permit which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, would have a
material adverse effect on the condition (financial or otherwise),
management, business prospects, net worth or results of operations of
the Company and its subsidiaries, except as described in or
contemplated by each of the Prospectus and any Integrated Prospectus
(or, if the Prospectus and any required Integrated Prospectus are not
in existence, the most recent Preliminary Prospectus).
(xxii) The Company will conduct its operations in a manner that
will not subject it to registration as an investment company under the
Investment Company Act of 1940, as amended (the "Investment Company
Act"), and consummation of the transactions herein contemplated will
not cause the Company to become an investment company subject to
registration under the Investment Company Act.
(xxiii) The Company and its subsidiaries have filed all foreign,
federal, state and local tax returns that are required to be filed or
have requested extensions thereof (except in any case in which the
failure so to file would not have a material adverse effect on the
condition (financial or otherwise), management, business prospects, net
worth or results of operations of the Company or any of its
subsidiaries and have paid all taxes required to be paid by them and
any other assessment, fine or penalty levied against them, to the
extent that any of the foregoing is due and payable, except for any
such assessment, fine or penalty that is currently being contested in
good faith or as described in or contemplated by each of the Prospectus
and any Integrated Prospectus (or, if the Prospectus and any required
Integrated Prospectus are not in existence, the most recent Preliminary
Prospectus) or except as would not otherwise have a material adverse
effect on the condition (financial or otherwise), management, business
prospects, net worth or results of operations of the Company and its
subsidiaries.
(xxiv) Neither the Company nor any of its subsidiaries is in
violation of any federal or state law or regulation relating to (A) the
environment or hazardous or toxic substances or wastes, pollutants or
contaminants or to the storage, handling or transportation of hazardous
or toxic materials ("Environmental Laws") or (B) occupational safety
and health and the Company and its subsidiaries have received all
permits, licenses or other approvals required of it under applicable
federal and state Environmental Laws and
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<PAGE>
occupational safety and health laws and regulations to conduct their
respective businesses, and the Company and each such subsidiary is in
compliance with all terms and conditions of any such permit, license or
approval, except for any such violation of law or regulation, failure
to receive required permits, licenses or other approvals or failure to
comply with the terms and conditions of such permits, licenses or
approvals which would not, singly or in the aggregate, have a material
adverse effect on the condition (financial or otherwise), management,
business prospects, net worth or results of operations of the Company
and its subsidiaries, except as described in or contemplated by each of
the Prospectus and any Integrated Prospectus (or, if the Prospectus and
any required Integrated Prospectus are not in existence, the most
recent Preliminary Prospectus). Neither the Company nor any of its
subsidiaries has any pending or, to the best of the Company's
knowledge, threatened environmental or occupational safety and health
claims against it nor are there circumstances with respect to any
property or operations of the Company or any such subsidiary that could
reasonably be anticipated to form the basis of a claim against the
Company under any Environmental Laws or occupational health and safety
laws and regulations which, singly or in the aggregate, would have a
material adverse effect on the condition (financial or otherwise),
management, business prospects, net worth or results of operations of
the Company and its subsidiaries, except as described in or
contemplated by each of the Prospectus and any Integrated Prospectus
(or, if the Prospectus and any required Integrated Prospectus are not
in existence, the most recent Preliminary Prospectus).
(xxv) Each certificate signed by any officer of the Company in his
or her capacity as such and delivered to the Representatives or counsel
for the Underwriters shall be deemed to be a representation and
warranty by the Company to each Underwriter as to the matters covered
thereby.
(xxvi) The Company and each of its subsidiaries maintain a system
of internal accounting controls sufficient to provide reasonable
assurance that (A) transactions are executed in accordance with
management's general or specific authorizations; (B) transactions are
recorded as necessary to permit preparation of financial statements
in conformity with generally accepted accounting principles and to
maintain asset accountability; (C) access to assets is permitted only
in accordance with management's general or specific authorization;
and (D) the recorded accountability for assets is compared with the
existing assets at reasonable intervals and appropriate action is
taken with respect to any differences.
(xxvii) Except as disclosed in each of the Prospectus and any
Integrated Prospectus (or, if the Prospectus and any required
Integrated Prospectus are not in existence, the most recent Preliminary
Prospectus), no default exists, and no event has occurred which, with
notice or lapse of time or both, would constitute a default in the due
performance and observance of any term, covenant or condition of any
indenture, mortgage, deed of trust, lease or other agreement or
instrument to which the Company or any of its subsidiaries is a party
or by which the Company or any of its subsidiaries or any of their
respective properties is bound, except any such default that would not
have a material
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<PAGE>
adverse effect on the condition (financial or otherwise), management,
business prospects, net worth or results of operations of the Company
and its subsidiaries.
(xxviii) Except as disclosed in each of the Prospectus and any
Integrated Prospectus (or, if the Prospectus and any required
Integrated Prospectus are not in existence, the most recent Preliminary
Prospectus), there are no outstanding (A) securities or obligations of
the Company or any of its subsidiaries convertible into or exchangeable
for any capital stock of the Company or any such subsidiary, (B)
warrants, rights or options to subscribe for or purchase from the
Company or any such subsidiary any such capital stock or any such
convertible or exchangeable securities or obligations or (C)
obligations of the Company or any such subsidiary to issue any shares
of capital stock, any such convertible or exchangeable securities or
obligations, or any such warrants, rights or options.
(xxix) The Company has not distributed and, prior to the later of
(A) the Firm Closing Date and (B) the completion of the distribution of
the Securities, will not distribute any offering material in connection
with the offering and sale of the Securities other than the
Registration Statement or any amendment thereto, any Preliminary
Prospectus or the Prospectus, or any materials, if any, permitted by
the Act.
(xxx) No subsidiary of the Company is currently prohibited,
directly or indirectly, from paying any dividends to the Company,
from making any other distribution on such subsidiary's capital
stock, from repaying to the Company any loans or advances to such
subsidiary from the Company or from transferring any of such
subsidiary's property or assets to the Company or any other
subsidiary of the Company, except as to the restriction set forth in
the Company's existing credit agreement or as described in or
contemplated by each of the Prospectus and any Integrated Prospectus
(or, if the Prospectus and any required Integrated Prospectus are not
in existence, the most recent Preliminary Prospectus).
(b) The Selling Securityholder represents and warrants to, and agrees
with, each of the several Underwriters that:
(i) The Selling Securityholder has been duly organized and is
validly existing as a corporation under the laws of its jurisdiction of
incorporation and is duly qualified to transact business as a foreign
corporation and is in good standing under the laws of all other
jurisdictions where the ownership or leasing of its properties or the
conduct of its business requires such qualification, except where the
failure to be so qualified does not amount to a material liability or
disability to such Selling Securityholder.
(ii) Such Selling Securityholder has full power and authority
(corporate and other) to enter into this Agreement and to sell, assign,
transfer and deliver to the Underwriters the Securities to be sold by
such Selling Securityholder hereunder in accordance with the terms of
this Agreement; and this Agreement has been duly executed and delivered
by such Selling Securityholder and is the valid and binding agreement
of such Selling
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<PAGE>
Securityholder, enforceable against such Selling Securityholder in
accordance with its terms, except as such enforceability may be limited
by bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium or similar laws affecting the rights and remedies of
creditors generally and subject to general principles of equity whether
in a court of law or equity.
(iii) Such Selling Securityholder has duly executed and delivered
a power of attorney and custody agreement (with respect to such Selling
Securityholder, the "Custody Agreement") in the form heretofore
delivered to the Representatives, appointing James J. Kim, Joseph J.
Firestone, John R. Panichello and each of them as such Selling
Securityholder's attorney-in-fact (the "Attorneys-in-Fact") with
authority to execute, deliver and perform this Agreement on behalf of
the Selling Securityholder and appointing First Chicago Trust Company
of New York as custodian thereunder (the "Custodian"). Certificates in
negotiable form, endorsed in blank or accompanied by blank stock powers
duly executed, with signatures appropriately guaranteed, representing
the Securities to be sold by such Selling Securityholder hereunder have
been deposited with the Custodian pursuant to the Custody Agreement for
the purpose of delivery pursuant to this Agreement. Such Selling
Securityholder has full power and authority (corporate and other) to
enter into the Custody Agreement and to perform its obligations under
the Custody Agreement. The Custody Agreement has been duly executed and
delivered by such Selling Securityholder and, assuming due
authorization, execution and delivery by the Custodian, is the valid
and binding agreement of such Selling Securityholder, enforceable
against such Selling Securityholder in accordance with its terms,
except as such enforceability may be limited by bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium or similar laws
affecting the rights and remedies of creditors generally and subject to
general principles of equity whether in a court of law or equity.
(iv) Such Selling Securityholder agrees that each of the
Securities represented by the certificates held in custody under the
Custody Agreement is subject to the interests of the Underwriters
hereunder, that the arrangements made for such custody, the
appointment of the Attorneys-in-Fact and the right, power and
authority of the Attorneys-in-Fact to execute and deliver this
Agreement, to agree on the price at which the Securities (including
the Selling Securityholder's Securities) are to be sold to the
Underwriters, and to carry out the terms of this Agreement, are to
the extent provided in the Custody Agreement irrevocable and that the
obligations of the Selling Securityholder hereunder shall not be
terminated, except as provided in this Agreement or the Custody
Agreement, by any act of the Selling Securityholder, by operation of
law or otherwise.
(v) Such Selling Securityholder is the lawful record and
beneficial owner of the Securities to be sold by the Selling
Securityholder hereunder and upon sale and delivery of, and payment
for, such Securities as provided herein, the Selling Securityholder
will convey good and marketable title to such Securities, free and
clear of any security interests, liens, encumbrances, claims or other
defects.
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<PAGE>
(vi) Such Selling Securityholder has not, directly or indirectly,
(A) taken any action designed to cause or result in, or that has
constituted or which might reasonably be expected to constitute, the
stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Securities or (B) since
the filing of the Registration Statement (1) sold, bid for, purchased
or paid anyone any compensation for soliciting purchases of, the
Securities or (2) paid or agreed to pay to any person any compensation
for soliciting another to purchase any other securities of the Company
(except for the sale of Securities by such Selling Securityholder under
this Agreement).
(vii) The sale by such Selling Securityholder of Securities
pursuant hereto is not prompted by any adverse information concerning
the Company that is not set forth in the Registration Statement, the
Prospectus or any Integrated Prospectus (or, if the Prospectus and any
required Integrated Prospectus are not in existence, the most recent
Preliminary Prospectus).
(viii) The sale of the Securities to the Underwriters by such
Selling Securityholder pursuant to this Agreement, the compliance by
such Selling Securityholder with the other provisions of this Agreement
and the Custody Agreement and the consummation of the other
transactions contemplated hereby do not (A) require the consent,
approval, authorization, registration or qualification of or with any
governmental authority, except such as has been obtained, such as may
be required under state securities or blue sky laws and, if the
registration statement filed with respect to the Securities (as
amended) is not effective under the Act as of the time of execution
hereof, such as may be required (and shall be obtained as provided in
this Agreement) under the Act or (B) conflict with or result in a
breach or violation of any of the terms and provisions of, or
constitute a default under any indenture, mortgage, deed of trust,
lease or other material agreement or instrument to which such Selling
Securityholder is a party or by which such Selling Securityholder or
any of such Selling Securityholder's properties are bound, or any
statute or any judgment, decree, order, rule or regulation of any court
or other governmental authority or any arbitrator applicable to such
Selling Securityholder.
(ix) To the extent that any statements or omissions are made in
the Registration Statement, any Preliminary Prospectus, the Prospectus
or any Integrated Prospectus or any amendment or supplement thereto in
reliance upon and in conformity with written information furnished to
the Company by such Selling Securityholder specifically for use
therein, such information in the Preliminary Prospectus, the
Registration Statement, the Prospectus or any Integrated Prospectus and
any amendments or supplements thereto, when they become effective or
are filed with the Commission, as the case may be, did and will conform
in all material respects to the requirements of the Act and the rules
and regulations of the Commission thereunder and will not contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they are made,
not misleading. Such Selling Securityholder has reviewed each of the
Prospectus and any Integrated Prospectus (or if the Prospectus and any
required Integrated Prospectus are not in existence, the most recent
Preliminary Prospectus) and the Registration Statement, and
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<PAGE>
the information regarding such Selling Securityholder set forth therein
under the caption "Principal and Selling Stockholders" is complete and
accurate.
(x) Such Selling Securityholder has not distributed and, prior to
the later of (A) the Firm Closing Date and (B) the completion of the
distribution of the Securities, will not distribute any offering
material in connection with the offering and sale of the Securities
other than the Registration Statement or any amendment thereto, any
Preliminary Prospectus and the Prospectus or any supplement or
amendment thereto, or any materials, if any, permitted by the Act.
3. PURCHASE, SALE AND DELIVERY OF THE SECURITIES.
(a) On the basis of the representations, warranties, agreements and
covenants herein contained and subject to the terms and conditions herein set
forth, the Company agrees to issue and sell to, and the Selling Securityholder
agrees to sell to, each of the Underwriters, and each of the Underwriters,
severally and not jointly, agrees to purchase from the Company and the Selling
Securityholder at a purchase price of ___ per share, the number of Firm
Securities set forth opposite the name of such Underwriter in Schedule 1 hereto.
The Company's Firm Securities shall consist of 2,000,000 shares of Common Stock
and the Selling Securityholder's Firm Securities shall consist of 1,500,000
shares of Common Stock. The number of Firm Securities to be purchased by each
Underwriter from the Company and the Selling Securityholder shall be as nearly
as practicable in the same proportion to the total number of Firm Securities
being sold by the Company and the Selling Securityholder (with the number of
shares to be sold by the Selling Securityholder being set forth opposite such
Selling Securityholder's name in Schedule 2 hereto) as the total number of Firm
Securities to be purchased by such Underwriter bears to the total number of Firm
Securities to be purchased by the Underwriters hereunder. One or more
certificates in definitive form for the Firm Securities that the several
Underwriters have agreed to purchase hereunder, and in such denomination or
denominations and registered in such name or names as the Representatives
request upon notice to the Company and the Selling Securityholder at least 48
hours prior to the Firm Closing Date, shall be delivered by or on behalf of the
Company and the Selling Securityholder to the Representatives for the respective
accounts of the Underwriters, against payment by or on behalf of the
Underwriters of the purchase price therefor by wire transfer payable in same-day
funds (the "Wired Funds") to the account of the Company in the case of the
Company's Firm Securities and to the order of the Custodian in the case of the
Selling Securityholder's Firm Securities. Such delivery of and payment for the
Firm Securities shall be made at the offices of King & Spalding, 1185 Avenue of
the Americas, New York, New York 10036-4003 at 9:30 A.M., New York City time, on
________; or at such other place, time or date as the Representatives and the
Company may agree upon or as the Representatives may determine pursuant to
Section 9 hereof, such time and date of delivery against payment being herein
referred to as the "Firm Closing Date". The Company and the Selling
Securityholder will make such certificate or certificates for the Firm
Securities available for checking and packaging by the Representatives at the
offices of the Company's transfer agent or registrar or of Prudential Securities
Incorporated in New York, New York at least 24 hours prior to the Firm Closing
Date.
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<PAGE>
(b) For the purpose of covering any over-allotments in connection with
the distribution and sale of the Firm Securities as contemplated by the
Prospectus, the Selling Securityholder hereby grants to the several Underwriters
an option to purchase, severally and not jointly, the Option Securities. The
purchase price to be paid for any Option Securities shall be the same price per
share as the price per share for the Firm Securities set forth above in
paragraph (a) of this Section 3, plus if the purchase and sale of any Option
Securities takes place after the Firm Closing Date and after the Firm Securities
are trading "ex- dividend", an amount equal to the dividend payable on such
Option Securities. The option granted hereby may be exercised as to all or any
part of the Option Securities from time to time within thirty days after the
date of the Prospectus (or, if such 30th day shall be a Saturday or Sunday or a
holiday, on the next business day thereafter when the Nasdaq Stock Market's
National Market (the "Nasdaq National Market") is open for trading). The
Underwriters shall not be under any obligation to purchase any of the Option
Securities prior to the exercise of such option. The Representatives may from
time to time exercise the option granted hereby by giving notice in writing or
by telephone (confirmed in writing) to the Selling Securityholder setting forth
the aggregate number of Option Securities as to which the several Underwriters
are then exercising the option and the date and time for delivery of and payment
for such Option Securities. Any such date of delivery shall be determined by the
Representatives but shall not be earlier than two business days or later than
five business days after such exercise of the option and, in any event, shall
not be earlier than the Firm Closing Date. The time and date set forth in such
notice, or such other time on such other date as the Representatives and the
Selling Securityholder may agree upon or as the Representatives may determine
pursuant to Section 9 hereof, is herein called the "Option Closing Date" with
respect to such Option Securities. Upon exercise of the option as provided
herein, the Selling Securityholder shall become obligated to sell to each of the
several Underwriters, and, subject to the terms and conditions herein set forth,
each of the Underwriters (severally and not jointly) shall become obligated to
purchase from the Company, the same percentage of the total number of the Option
Securities as to which the several Underwriters are then exercising the option
as such Underwriter is obligated to purchase of the aggregate number of Firm
Securities, as adjusted by the Representatives in such manner as they deem
advisable to avoid fractional shares. If the option is exercised as to all or
any portion of the Option Securities, one or more certificates in definitive
form for such Option Securities, and payment therefor, shall be delivered on the
related Option Closing Date in the manner, and upon the terms and conditions,
set forth in paragraph (a) of this Section 3 with respect to the sale of the
Firm Securities, except that reference therein to the Firm Securities and the
Firm Closing Date shall be deemed, for purposes of this paragraph (b), to refer
to such Option Securities and Option Closing Date, respectively.
(c) The Company and the Selling Securityholder hereby acknowledge that
the wire transfer by or on behalf of the Underwriters of the purchase price for
any Securities does not constitute the closing of a purchase and sale of the
Securities. Only execution and delivery of a receipt for Securities by the
Underwriters indicates completion of the closing of a purchase of the Securities
from the Company and the Selling Securityholder. Furthermore, in the event that
the Underwriters wire funds to the Company and the Selling Securityholder prior
to the completion of the closing of a purchase of the Securities, the Company
and the Selling Securityholder hereby acknowledge that until the Underwriters
execute and deliver a receipt for the Securities, by facsimile or otherwise, the
Company and the Selling Securityholder will not be entitled to the
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<PAGE>
Wired Funds and shall return the Wired Funds to the Underwriters as soon as
practicable (by wire transfer of same-day funds) upon demand. In the event that
the closing of a purchase of the Securities is not completed and the Wired Funds
are not returned by the Company and the Selling Securityholder to the
Underwriters on the same day the Wired Funds were received by the Company and
the Selling Securityholder, the Company and the Selling Securityholder agree to
pay to the Underwriters in respect of each day the Wired Funds are not returned
by it, in same-day funds, interest on the amount of Wired Funds in an amount
representing the Underwriters' cost of financing as reasonably determined by
Prudential Securities Incorporated. Upon satisfactory receipt of the Securities
by the Underwriters in accordance with all the terms of this Agreement and the
compliance by the Company and the Selling Securityholder with all terms of this
Agreement to be performed on or before the Closing Date, the Underwriters shall
execute the receipt described above for the Securities.
(d) It is understood that any of you, individually and not as one of
the Representatives, may (but shall not be obligated to) make payment on behalf
of any Underwriter or Underwriters for any of the Securities to be purchased by
such Underwriter or Underwriters. No such payment shall relieve such Underwriter
or Underwriters from any of its or their obligations hereunder.
4. OFFERING BY THE UNDERWRITERS. Upon your authorization of the release
of the Firm Securities, the several Underwriters propose to offer the Firm
Securities for sale to the public upon the terms set forth in the Prospectus.
5. COVENANTS OF THE COMPANY AND THE SELLING SECURITYHOLDER.
(a) The Company covenants and agrees with each of the Underwriters
that:
(i) The Company will use its best efforts to cause the
Registration Statement, if not effective at the time of execution of
this Agreement, and any amendments thereto to become effective as
promptly as possible. If required, the Company will file the
Prospectus or any Term Sheet that constitutes a part thereof and any
amendment or supplement thereto with the Commission in the manner and
within the time period required by Rules 434 and 424(b) under the
Act. During any time when a prospectus relating to the Securities is
required to be delivered under the Act, the Company (A) will comply
with all requirements imposed upon it by the Act and the rules and
regulations of the Commission thereunder to the extent necessary to
permit the continuance of sales of or dealings in the Securities in
accordance with the provisions hereof and of each of the Prospectus
and any Integrated Prospectus, as then amended or supplemented, and
(B) will not file with the Commission the Prospectus, Term Sheet or
the amendment referred to in the second sentence of Section 2(a)(i)
hereof, any amendment or supplement to such Prospectus, Term Sheet or
any amendment to the Registration Statement or any Rule 462(b)
Registration Statement of which the Representatives previously have
been advised and furnished with a copy for a reasonable period of
time prior to the proposed filing and as to which filing the
Representatives shall not have given their consent, which consent
shall not have been unreasonably withheld. The Company will prepare
and file with the Commission, in accordance with the rules and
regulations of the Commission, promptly
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upon request by the Representatives or counsel for the Underwriters,
any amendments to the Registration Statement or any Rule 462(b)
Registration Statement or amendments or supplements to the Prospectus
and any Integrated Prospectus that may be necessary or advisable in
connection with the distribution of the Securities by the several
Underwriters, and will use its best efforts to cause any such amendment
to the Registration Statement to be declared effective by the
Commission as promptly as possible. The Company will advise the
Representatives, promptly after receiving notice thereof, of the time
when the Registration Statement or any amendment thereto has been filed
or declared effective or the Prospectus and any Integrated Prospectus
or any amendment or supplement thereto has been filed and will provide
evidence reasonably satisfactory to the Representatives of each such
filing or effectiveness.
(ii) The Company will advise the Representatives, promptly after
receiving notice or obtaining knowledge thereof, of (A) the issuance by
the Commission of any stop order suspending the effectiveness of the
Original Registration Statement or any Rule 462(b) Registration
Statement or any amendment thereto or any order directed at any
document incorporated by reference in the Registration Statement or if
the Prospectus and any required Integrated Prospectus or any amendment
or supplement thereto is subject to any order preventing or suspending
the use of any Preliminary Prospectus, Prospectus and any Integrated
Prospectus or any amendment or supplement thereto, (B) the suspension
of the qualification of the Securities for offering or sale in any
jurisdiction, (C) the institution, threatening or contemplation of any
proceeding for any such purpose or (D) any request made by the
Commission for amending the Original Registration Statement or any Rule
462(b) Registration Statement, for amending or supplementing any
Preliminary Prospectus, the Prospectus and any Integrated Prospectus or
for additional information. The Company will use its best efforts to
prevent the issuance of any such stop order and, if any such stop order
is issued, to obtain the withdrawal thereof as promptly as possible.
(iii) The Company will arrange for the qualification of the
Securities for offering and sale under the securities or blue sky laws
of such jurisdictions as the Representatives may designate and will
continue such qualifications in effect for as long as may be necessary
to complete the distribution of the Securities; PROVIDED, HOWEVER, that
in connection therewith the Company shall not be required to qualify as
a foreign corporation or to execute a general consent to service of
process in any jurisdiction.
(iv) If, at any time prior to the later of (A) the final date when
a prospectus relating to the Securities is required to be delivered
under the Act or (B) the Option Closing Date, any event occurs as a
result of which each of the Prospectus and any Integrated Prospectus,
as then amended or supplemented, would include any untrue statement of
a material fact or omit to state a material fact necessary in order to
make the statements therein, in the light of the circumstances under
which they were made, not misleading, or if for any other reason it is
necessary at any time to amend or supplement the Prospectus or any
Integrated Prospectus to comply with the Act or the rules or
regulations of the Commission thereunder, the Company will promptly
notify the Representatives thereof
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and, subject to Section 5(a)(i) hereof, will prepare and file with the
Commission, at the Company's expense, an amendment to the Registration
Statement or an amendment or supplement to the Prospectus or any
Integrated Prospectus that corrects such statement or omission or
effects such compliance.
(v) The Company will, without charge, provide (A) to each of the
Representatives and counsel for the Underwriters a signed copy of the
registration statement originally filed with respect to the Securities
and each amendment thereto and any Rule 462(b) Registration Statement
(in each case including exhibits thereto), (B) to each other
Underwriter, a conformed copy of such registration statement or any
Rule 462(b) Registration Statement and each amendment thereto (in each
case without exhibits thereto) and (C) so long as a prospectus relating
to the Securities is required to be delivered under the Act, as many
copies of each Preliminary Prospectus, the Prospectus or any Integrated
Prospectus any amendment or supplement thereto as the Representatives
may reasonably request; without limiting the application of clause (C)
of this sentence, the Company, not later than (1) 6:00 PM, New York
City time, on the date of determination of the public offering price,
if such determination occurred at or prior to 10:00 AM, New York City
time, on such date or (2) 2:00 PM, New York City time, on the business
day following the date of determination of the public offering price,
if such determination occurred after 10:00 AM, New York City time, on
such date, will deliver to the Underwriters, without charge, as many
copies of the Prospectus and any amendment or supplement thereto as the
Representatives may reasonably request for purposes of confirming
orders that are expected to settle on the Firm Closing Date.
(vi) The Company, as soon as practicable, will make generally
available to its securityholders and to the Representatives a
consolidated earnings statement of the Company and its subsidiaries
that satisfies the provisions of Section 11(a) of the Act and Rule 158
thereunder.
(vii) The Company will apply the net proceeds from the sale of the
Securities as set forth under "Use of Proceeds" in the Prospectus or
any Integrated Prospectus.
(viii) The Company will not, directly or indirectly, without the
prior written consent of Prudential Securities Incorporated, on behalf
of the Underwriters, offer, sell, offer to sell, contract to sell,
pledge, grant any option to purchase or otherwise sell or dispose (or
announce any offer, sale, offer of sale, contract of sale, pledge,
grant of any option to purchase or other sale or disposition) of any
shares of Common Stock or any securities convertible into, or
exchangeable or exercisable for, shares of Common Stock or other
capital stock of the Company, or any right to purchase or acquire
Common Stock or other capital stock of the Company for a period of 120
days after the date hereof, except (A) pursuant to this Agreement and
(B) (i) for issuances of options pursuant to stock option plans and
employment agreements in existence on the date hereof (including any
possible increases in the number of options awardable thereunder), (ii)
the issuance of shares of Common Stock to employees in connection with
an employee stock purchase plan which may be adopted after the date
hereof, or (iii) as disclosed in the Prospectus and any
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Integrated Prospectus (or if the Prospectus and any required Integrated
Prospectus are not in existence, the most recent Preliminary
Prospectus); provided, however, that in the case of (B)(i) or (B)(ii),
to the extent the recipient of any such options or shares is a person
or Shareholder identified in Section 7(g) hereof, then such person or
Shareholder shall agree to have such options or shares, as the case may
be, covered by the agreement referred to in Section 7(g) hereof prior
to the issuance of such options or shares.
(ix) The Company will not, directly or indirectly, (A) take any
action designed to cause or to result in, or that has constituted or
which might reasonably be expected to constitute, the stabilization or
manipulation of the price of any security of the Company to facilitate
the sale or resale of the Securities or (B) (1) sell, bid for,
purchase, or pay anyone any compensation for soliciting purchases of,
the Securities or (2) pay or agree to pay to any person any
compensation for soliciting another to purchase any other securities of
the Company (except for the sale of Securities by the Selling
Securityholder under this Agreement).
(x) If at any time during the 25-day period after the Registration
Statement becomes effective or the period prior to the Option Closing
Date, any rumor, publication or event relating to or affecting the
Company or its subsidiaries shall occur as a result of which in your
reasonable opinion the market price of the Common Stock has been or is
likely to be materially affected (regardless of whether such rumor,
publication or event necessitates a supplement to or amendment of the
Prospectus and any Integrated Prospectus), the Company will, after
notice from you advising the Company to the effect set forth above,
forthwith prepare, consult with you concerning the substance of, and
disseminate a press release or other public statement, reasonably
satisfactory to you, responding to or commenting on such rumor,
publication or event.
(xi) The Company will obtain the agreements described in Section
7(g) hereof from all persons other than the Selling Securityholder
prior to the Firm Closing Date.
(xii) The Company will cause the Securities to be issued and sold
by it to be duly included for quotation on the Nasdaq National Market
prior to the Firm Closing Date. The Company will ensure that the
Securities remain included for quotation on the Nasdaq National Market
or will be listed on a national exchange following the Firm Closing
Date for a period of at least two years.
(xiii) During a period of five years from the effective date of
the Registration Statement, the Company will furnish to you and, upon
request, to each of the other Underwriters, without charge, (A) copies
of all reports or other communications (financial or other) furnished
to securityholders, (B) as soon as they are available, copies of any
reports and financial statements furnished to or filed with the
Commission or any national securities exchange and (C) such additional
publicly available information concerning the business and financial
condition of the Company and its subsidiaries, if any, as you may
reasonably request.
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(xiv) If the Company elects to rely on Rule 462(b), the Company
shall both file a Rule 462(b) Registration Statement with the
Commission in compliance with Rule 462(b) and pay the applicable fees
in accordance with Rule 111 promulgated under the Act by the earlier of
(A) 10:00 P.M. Eastern time on the date of this Agreement and (B) the
time confirmations are sent or given, as specified by Rule 462(b)(2).
(b) The Selling Securityholder covenants and agrees with each of the
Underwriters that:
(i) Such Selling Securityholder will not, directly or indirectly,
without the prior written consent of Prudential Securities
Incorporated, on behalf of the Underwriters, offer, sell, offer to
sell, contract to sell, pledge, grant any option to purchase or
otherwise sell or dispose (or announce any offer, sale, offer of sale,
contract of sale, pledge, grant of any option to purchase or other sale
or disposition) of any shares of Common Stock or any securities
convertible into, or exchangeable or exercisable for, Common Stock or
other capital stock of the Company, or any right to purchase or acquire
Common Stock or other capital stock of the Company for a period of 120
days after the date hereof, except (A) pursuant to this Agreement or
(B) as consented to in writing by Prudential Securities Incorporated.
(ii) Such Selling Securityholder will not, directly or indirectly,
(A) take any action designed to cause or to result in, or that has
constituted or which might reasonably be expected to constitute, the
stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Securities or (B) (1)
sell, bid for, purchase, or pay anyone any compensation for soliciting
purchases of, the Securities or (2) pay or agree to pay to any person
any compensation for soliciting another to purchase any other
securities of the Company (except for the sale of Securities by the
Selling Securityholder under this Agreement).
(iii) In order to document the Underwriters' compliance with the
reporting and withholding provisions of the Internal Revenue Code of
1986, as amended, with respect to the transactions herein contemplated,
such Selling Securityholder agrees to deliver to the Representatives
prior to or on the Firm Closing Date a properly completed and executed
United States Treasury Department Form W-8 or W-9 (or other applicable
form or statement specified by the Treasury Department regulations in
lieu thereof).
6. EXPENSES. The Company will pay all costs and expenses incident to
the performance of the obligations of the Company and the Selling Securityholder
under this Agreement, whether or not the transactions contemplated herein are
consummated or this Agreement is terminated pursuant to Section 12 hereof,
including all costs and expenses incident to (a) the printing or other
production of documents with respect to the transactions, including any costs of
printing the registration statement originally filed with respect to the
Securities and any amendment thereto, any Rule 462(b) Registration Statement,
any Preliminary Prospectus, the Prospectus and any Integrated Prospectus and any
amendment or supplement thereto, this Agreement and any blue sky memoranda, (b)
all arrangements relating to the delivery to the Underwriters of copies of the
foregoing documents, (c) the fees and disbursements of the counsel, the
accountants and
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any other experts or advisors retained by the Company, (d) preparation, issuance
and delivery to the Underwriters of any certificates evidencing the Securities,
including transfer agent's and registrar's fees and the Custodian's fees, (e)
the qualification of the Securities under state securities and blue sky laws,
including filing fees and reasonable fees and disbursements of counsel for the
Underwriters relating thereto, (f) the filing fees of the Commission and the
National Association of Securities Dealers, Inc. relating to the Securities, (g)
the listing of the Securities on the Nasdaq National Market, (h) any meetings
with prospective investors in the Securities (other than as shall have been
specifically approved by the Representatives to be paid for by the Underwriters)
and (i) advertising relating to the offering of the Securities (other than as
shall have been specifically approved by the Representatives to be paid for by
the Underwriters). Any transfer taxes imposed on the sale of the Securities to
the several Underwriters will be paid by the Company and the Selling
Securityholder pro rata. If the sale of the Securities provided for herein is
not consummated because any condition to the obligations of the Underwriters set
forth in Section 7 hereof is not satisfied, because this Agreement is terminated
pursuant to Section 12 hereof (other than Section 12(a)(v) hereof) or because of
any failure, refusal or inability on the part of the Company or the Selling
Securityholder to perform all obligations and satisfy all conditions on its part
to be performed or satisfied hereunder other than by reason of a default by any
of the Underwriters, the Company will reimburse the Underwriters upon demand for
all reasonable out-of-pocket expenses (including reasonable counsel fees and
disbursements) that shall have been incurred by them in connection with the
proposed purchase and sale of the Securities. The Company and the Selling
Securityholder shall not in any event be liable to any of the Underwriters for
the loss of anticipated profits from the transactions covered by this Agreement.
7. CONDITIONS OF THE UNDERWRITERS' OBLIGATIONS. The obligations of the
several Underwriters to purchase and pay for the Firm Securities shall be
subject, in the Representatives' sole discretion, to the accuracy of the
representations and warranties of the Company and the Selling Securityholder
contained herein as of the date hereof and as of the Firm Closing Date, as if
made on and as of the Firm Closing Date, to the accuracy of the statements of
the Company's officers made pursuant to the provisions hereof, to the
performance by the Company and the Selling Securityholder of its covenants and
agreements hereunder and to the following additional conditions:
(a) If the Original Registration Statement or any amendment thereto
filed prior to the Firm Closing Date has not been declared effective as of the
time of execution hereof, the Original Registration Statement or such amendment
and, if the Company has elected to rely upon Rule 462(b), the Rule 462(b)
Registration Statement shall have been declared effective not later than the
earlier of (i) 11:00 A.M., New York time, on the date on which the amendment to
the registration statement originally filed with respect to the Securities or to
the Registration Statement, as the case may be, containing information regarding
the public offering price of the Securities has been filed with the Commission
and (ii) the time confirmations are sent or given as specified by Rule 462(b)(2)
or, with respect to the Original Registration Statement, such later time and
date as shall have been consented to by the Representatives; if required, the
Prospectus and any Integrated Prospectus or any Term Sheet that constitutes a
part thereof and any amendment or
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supplement thereto shall have been filed with the Commission in the manner and
within the time period required by Rules 434 and 424(b) under the Act; no stop
order suspending the effectiveness of the Registration Statement, or the
Prospectus or any Integrated Prospectus or any amendment thereto shall have been
issued, and no proceedings for that purpose shall have been instituted or
threatened or, to the knowledge of the Company or the Representatives, shall be
contemplated by the Commission; and the Company shall have complied with any
request of the Commission for additional information (to be included in the
Registration Statement, the Prospectus or any Integrated Prospectus or
otherwise).
(b) The Representatives shall have received an opinion, dated the Firm
Closing Date, of Klehr, Harrison, Harvey, Branzburg & Ellers LLP, counsel for
the Company, to the effect that:
(i) The Company, and each of its domestic subsidiaries (the
"DOMESTIC SUBSIDIARIES") have been duly organized and are validly
existing as corporations in good standing under the laws of their
respective jurisdictions and are duly qualified to transact business as
foreign corporations and are in good standing under the laws of all
other jurisdictions where the ownership or leasing of their respective
properties or the conduct of their respective businesses requires such
qualification, except where the failure to be so qualified would not
have a material adverse effect on the condition (financial or
otherwise), management, business prospects, net worth or results of
operations of the Company and its subsidiaries.
(ii) Except as disclosed in the Prospectus, the Company and each
of the Company's Domestic Subsidiaries listed in the Company's Annual
Report have the corporate power to own or lease their respective
properties and conduct their respective businesses as described in the
Registration Statement and the Prospectus or any Integrated Prospectus,
and the Company has the corporate power to enter into this Agreement
and to carry out all the terms and provisions hereof to be carried out
by it.
(iii) The Company has an authorized, issued and outstanding
capitalization as set forth in each of the Prospectus or any Integrated
Prospectus; all of the issued shares of capital stock of the Company
(including but not limited to the Securities being sold by the Selling
Securityholder) have been duly authorized and validly issued and are
fully paid and nonassessable, have been issued in compliance with all
applicable federal and state securities laws and were not issued in
violation of or subject to any statutory or, to such counsel's
knowledge, contractual preemptive rights or other rights to subscribe
for or purchase securities; the Securities being issued and sold by the
Company have been duly authorized by all necessary corporate action of
the Company and, when issued and delivered to and paid for by the
Underwriters pursuant to this Agreement, will be validly issued, fully
paid and nonassessable; the Securities have been duly listed for
trading on the Nasdaq National Market; no holders of outstanding shares
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of capital stock of the Company are entitled as such to any preemptive
or other rights to subscribe for any of the Securities; and, except as
disclosed in the Prospectus or any Integrated Prospectus, no holders of
securities of the Company are entitled to have such securities
registered under the Registration Statement.
(iv)(A) the issued and outstanding shares of capital stock of each
of the Domestic Subsidiaries have been duly authorized and validly
issued and are fully paid and nonassessable and, to the knowledge of
such counsel, are owned beneficially by the Company free and clear of
security interests, liens, encumbrances or claims and (B) to the
knowledge of such counsel, other than the subsidiaries listed in the
Annual Report (the "SUBSIDIARIES"), the Company does not directly or
indirectly own any shares of stock or any other equity securities of
any corporation or have any direct or indirect equity interest in any
firm, partnership, association or other entity, which corporation,
firm, partnership, association or other entity would, individually or
when aggregated with all such other corporations, firms, partnerships,
associations or other entities, be considered a "significant
subsidiary" within the meaning of Rule 1-02 of Regulation S-X under the
Act.
(v) The capital stock of the Company conforms as to legal matters
in all material respects to the description thereof contained in each
of the Prospectus and any Integrated Prospectus under the heading
"Business - Legal Proceedings" in each of the Prospectus and any
Integrated Prospectus, insofar as such statements constitute a summary
of the legal matters, documents and proceedings referred to therein,
provide a fair summary of such legal matters, documents and
proceedings.
(vi) The execution and delivery of this Agreement have been duly
authorized by all necessary corporate action of the Company, and this
Agreement has been duly executed and delivered by the Company.
(vii) To such counsel's knowledge, (A) no legal or governmental
proceedings are pending to which the Company or any of the Subsidiaries
is a party or to which the property of the Company or any of the
Subsidiaries is subject that are required to be described in the
Registration Statement, the Prospectus and any Integrated Prospectus
and are not described therein, no such proceedings have been threatened
against the Company or any of the Subsidiaries or with respect to any
of their respective properties and (B) all contracts or other documents
required by Item 601 of Regulation S-K to be filed as exhibits to the
Registration Statement have been so filed.
(viii) Except as disclosed in the Prospectus, the issuance,
offering and sale of the Securities being issued and sold by the
Company to the Underwriters pursuant to this Agreement, the compliance
by the Company with the other provisions of this Agreement and the
consummation of the transactions herein contemplated do
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not (A) require the consent, approval, authorization, registration or
qualification of or with any governmental authority, except such as
have been obtained and such as may be required under state securities
or blue sky laws or (B) conflict with or result in a breach or
violation of any of the terms and provisions of, or constitute a
default under, (1) any indenture, mortgage, deed of trust, lease or
other agreement or instrument filed as an exhibit to the Registration
Statement or any other material agreement otherwise known to such
counsel to which the Company or any of the Subsidiaries is a party or
by which the Company or any of the Subsidiaries or any of their
respective properties are bound, (2) the charter documents or by-laws
of the Company or any of the Subsidiaries, or (3) any statute, rule or
regulation, or any judgment, decree or order of any court or other
governmental authority or any arbitrator known to such counsel, and
applicable to the Company or any of the Subsidiaries.
(ix) To the knowledge of such counsel, (A) the Company and the
Subsidiaries possess all certificates, authorizations and permits
issued by the appropriate federal, state or foreign regulatory
authorities necessary to conduct their respective businesses, the
absence of which could have a material adverse effect on the condition
(financial or otherwise), management, business prospects, net worth or
results of operations of the Company and the Subsidiaries, and (B)
neither the Company nor any of the Subsidiaries has received any notice
of proceedings relating to the revocation or modification of any such
certificate, authorization or permit which, singly or in the aggregate,
if the subject of an unfavorable decision, ruling or finding, would
have a material adverse effect on the condition (financial or
otherwise), management, business prospects, net worth or results of
operations of the Company and the Subsidiaries, except, in all cases,
as described in or contemplated by the Prospectus and any Integrated
Prospectus.
(x) The Registration Statement is effective under the Act; any
required filing of the Prospectus and any Integrated Prospectus, or any
Term Sheet that constitutes a part thereof, pursuant to Rules 434 and
424(b) has been made in the manner and within the time period required
by Rules 434 and 424(b); and, to such counsel's knowledge, no stop
order suspending the effectiveness of the Registration Statement or any
amendment thereto has been issued, and no proceedings for that purpose
have been instituted or, to the knowledge of such counsel, are
contemplated or threatened by the Commission.
(xi) The registration statement originally filed with respect to
the Securities and each amendment thereto, any Rule 462(b)
Registration Statement, the Prospectus and any Integrated Prospectus
(in each case other than the financial statements and other financial
information contained therein, as to which such counsel need express
no opinion) comply as to form in all material respects with the
applicable requirements of the Act and the rules and regulations of
the Commission thereunder.
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(xii) The Company is not an "investment company" under the
Investment Company Act, and consummation of the transactions herein
contemplated will not cause the Company to become an investment company
subject to registration under the Investment Company Act.
(xiii) To such counsel's knowledge, except as disclosed in the
Prospectus and any Integrated Prospectus, there are no outstanding (A)
securities or obligations of the Company convertible into or
exchangeable for any capital stock of the Company, (B) warrants, rights
or options to subscribe for or purchase from the Company any such
capital stock or any such convertible or exchangeable securities or
obligations, or (C) obligations of the Company to issue any shares of
capital stock, any such convertible or exchangeable securities or
obligations, or any such warrants, rights or options.
(xiv) If the Company elects to rely on Rule 434, the Prospectus is
not "materially different," as such term is used in Rule 434, from the
prospectus included in the Registration Statement at the time of its
effectiveness or any effective post-effective amendment thereto
(including such information that is permitted to be omitted pursuant to
Rule 430A).
Such counsel shall also state that they have participated in
conferences with officers and representatives of the Company at which the
contents of the Prospectus, and Integrated Prospectus and the Registration
Statement and related matters and documents were discussed. The limitations
inherent in the review of factual and other matters included in or contemplated
by the Prospectus, and Integrated Prospectus and the Registration Statement and
the character of determinations involved in the registration process are such,
however, that such counsel does not make any warranty or representation
concerning, or assume any responsibility for, the accuracy, completeness or
fairness of the statements contained in the Prospectus and the Registration
Statement (other than as set forth in Section 7(b)(v) hereof). Based upon and
subject to the foregoing, nothing has come to such counsel's attention which
would lead them to believe that (A) the Registration Statement and any amendment
thereto (other than the financial statements, including the notes thereto, and
schedules and other financial and statistical data included therein, as to which
they express no belief nor render any opinion), as of its respective effective
date, contained any untrue statement of a material fact or omitted to state any
material fact required to be stated therein or necessary in order to make the
statements therein not misleading, or (B) the Prospectus and any Integrated
Prospectus (other than the financial statements, including the notes thereto,
and schedules and other financial and statistical data included therein, as to
which they express no belief nor render any opinion), as of its date or the date
of such opinion, contained or contains any untrue statement of a material fact
or omitted or omits to state any material fact necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
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In rendering any such opinion, such counsel may rely, as to matters of
fact, to the extent such counsel deems proper, on certificates of responsible
officers of the Company and public officials.
References to the Registration Statement, the Prospectus and any
Integrated Prospectus in this paragraph (b) shall include any amendment or
supplement thereto at the date of such opinion.
(c) The Representatives shall have received an opinion, dated the Firm
Closing Date of, Klehr, Harrison, Harvey, Branzburg & Ellers LLP, counsel for
the Selling Securityholder, to the effect that:
(i) Such Selling Securityholder has been duly incorporated and is
validly existing as a corporation under the laws of its jurisdiction of
incorporation and has the corporate power to own, lease and operate its
properties and to execute, deliver and perform this Agreement and the
Custody Agreement.
(ii) Such Selling Securityholder has full corporate power and
authority to enter into this Agreement and the Custody Agreement. Such
Selling Securityholder has duly authorized, executed and delivered this
Agreement and the Custody Agreement, and the Custody Agreement
constitutes the valid and binding agreement of such Selling
Securityholder enforceable against such Selling Securityholder in
accordance with its respective terms, except as such enforceability may
be limited by bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium or similar laws now or hereafter in effect
relating to creditors' rights generally and subject to general
principles of equity (regardless of whether enforceability is
considered in a proceeding at law or in equity).
(iii) Immediately prior to the delivery of the Securities being
sold by such Selling Securityholder, such Selling Securityholder was
the sole registered owner of such Securities and, upon registration
of such Securities in the names of the purchasers thereof or their
nominees, assuming that such purchasers purchased such Securities for
value, in good faith without notice of any adverse claim (as defined
in Section 8- 102 and as specified in Section 8-105 of the Uniform
Commercial Code in effect in the state of New York), such purchasers
will have acquired all the rights of such Selling Securityholder in
such Securities free of any adverse claim, any lien in favor of the
Company or restrictions on transfer imposed by the Company.
(iv) Except as disclosed in the Prospectus and any Integrated
Prospectus, the sale of the Securities to the Underwriters by the
Selling Securityholder pursuant to this Agreement, the compliance by
the Selling Securityholder with the other provisions of this Agreement
and the Custody Agreement and the consummation of the other
transactions herein contemplated do not (A) require the consent,
approval, authorization, registration or qualification of or with any
governmental authority, except such as has been obtained and such as
may be required under state securities or blue sky laws or (B) conflict
with or
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result in a breach or violation of any of the terms and provisions of,
or constitute a default under any indenture, mortgage, deed of trust,
lease or other material agreement or instrument to which a Selling
Securityholder is a party or by which a Selling Securityholder or any
of such Selling Securityholder's properties are bound, or any statute
or any judgment, decree, order, rule or regulation of any court or
other governmental authority or any arbitrator known to such counsel
applicable to such Selling Securityholder.
In rendering any such opinion, such counsel may rely, as to matters of
fact, to the extent such counsel deems proper, on certificates of responsible
officers of the Company, the Selling Securityholder and public officials.
References to the Registration Statement, the Prospectus and any
Integrated Prospectus in this paragraph (c) shall include any amendment or
supplement thereto at the date of such opinion.
(d) The Representatives shall have received an opinion, dated the Firm
Closing Date, of King & Spalding, counsel for the Underwriters, with respect to
the issuance and sale of the Firm Securities, the Registration Statement, the
Prospectus, and Integrated Prospectus and such other related matters as the
Representatives may reasonably require, and the Company shall have furnished to
such counsel such documents as they may reasonably request for the purpose of
enabling them to pass upon such matters.
(e) The Representatives shall have received from KPMG LLP a letter or
letters dated, respectively, the date hereof and the Firm Closing Date, in form
and substance satisfactory to the Representatives, to the effect that:
(i) they are independent accountants with respect to the Company
and its consolidated subsidiaries within the meaning of the Act and
the applicable rules and regulations thereunder;
(ii) in their opinion, the audited consolidated and combined
financial statements and schedules of the Company included in the
Registration Statement and the Prospectus and any Integrated Prospectus
comply in form in all material respects with the applicable accounting
requirements of the Act and the related published rules and
regulations;
(iii) on the basis of (A) a reading of the interim consolidated
and combined financial data for the period from the date of the latest
balance sheet included in the Registration Statement and the Prospectus
to the date of the latest available interim consolidated financial
data, (B) a reading of the minute books of the stockholders, the board
of directors and any committees thereof of the Company and its
consolidated subsidiaries, from January 30, 1999 through a date not
more than five days prior to the date of such letter, and (C) inquiries
of certain officials of the Company and its consolidated subsidiaries
who have responsibility for financial and accounting matters, nothing
came to their attention that caused them to believe that:
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(Y) at the date of the latest available interim consolidated
financial data and at a specific date not more than five business
days prior to the date of such letter, there was any change in
long-term or short-term debt of the Company and its consolidated
subsidiaries or any decreases in net current assets (working
capital) or stockholders' equity of the Company and its
consolidated subsidiaries, in each case compared with amounts
shown on the January 30, 1999 audited consolidated and combined
balance sheet included in the Registration Statement and the
Prospectus, or for the period from January 30, 1999 to such
specified date there were any decreases, as compared with the
prior comparable period, in net sales or income before income
taxes or total or per share amounts of net income of the Company
and its consolidated subsidiaries, except in all instances for
changes, decreases or increases set forth in such letter; and
(iv) they have carried out certain specified procedures (as
requested by the Representatives), not constituting an audit, with
respect to certain amounts, percentages and financial information that
are derived from the general accounting records of the Company and its
consolidated subsidiaries and are included in the Registration
Statement, the Prospectus and any Integrated Prospectus and have
compared such amounts, percentages and financial information with such
records of the Company and its consolidated subsidiaries and with
information derived from such records and have found them to be in
agreement, excluding any questions of legal interpretation.
In the event that the letters referred to above set forth any
such changes, decreases or increases, it shall be a further condition
to the obligations of the Underwriters that (A) such letters shall be
accompanied by a written explanation from the Company as to the
significance thereof, unless the Representatives deem such explanation
unnecessary, and (B) such changes, decreases or increases do not, in
the sole judgment of the Representatives, make it impractical or
inadvisable to proceed with the purchase and delivery of the Securities
as contemplated by the Registration Statement, as amended as of the
date hereof.
References to the Registration Statement, and the Prospectus
and any Integrated Prospectus in this paragraph (f) with respect to
either letter referred to above shall include any amendment or
supplement thereto at the date of such letter.
(f) The Representatives shall have received a certificate, dated the
Firm Closing Date, of the principal executive officer and the principal
financial or accounting officer of the Company to the effect that:
(i) the representations and warranties of the Company in this
Agreement are true and correct as if made on and as of the Firm Closing
Date; the Registration Statement, as amended as of the Firm Closing
Date, does not include any untrue statement of a material
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fact or omit to state any material fact necessary to make the
statements therein not misleading, and the Prospectus and any
Integrated Prospectus, as amended or supplemented as of the Firm
Closing Date, does not include any untrue statement of a material fact
or omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they
were made, not misleading; and the Company has performed all covenants
and agreements and satisfied all conditions on its part to be performed
or satisfied at or prior to the Firm Closing Date;
(ii) no stop order suspending the effectiveness of the
Registration Statement or any amendment thereto has been issued, and
no proceedings for that purpose have been instituted or, to the best
of such officer's knowledge, are contemplated or threatened by the
Commission; and
(iii) subsequent to the respective dates as of which information
is given in the Registration Statement, the Prospectus and any
Integrated Prospectus, (A) neither the Company nor any of its
subsidiaries has sustained any material loss or interference with its
business or properties from fire, flood, hurricane, accident or other
calamity, whether or not covered by insurance, or from any labor
dispute or any legal or governmental proceeding, and there has not
been any material adverse change, or any development involving a
prospective material adverse change, in the condition (financial or
otherwise), management, business prospects, net worth or results of
operations of the Company or its subsidiaries; (B) neither the
Company nor any of its subsidiaries has incurred any material
liability or obligation, direct or contingent, or entered into any
material transaction not in the ordinary course of business;
(C) neither the Company nor any of its subsidiaries has purchased any
of its outstanding capital stock, or declared, paid or otherwise made
any dividend or distribution of any kind on its capital stock; and
(D) there has not been any material change in the capital stock,
short-term debt or long-term debt of the Company and its consolidated
subsidiaries, except in each case as described in or contemplated by
the Prospectus and any Integrated Prospectus (exclusive of any
amendment or supplement thereto).
(g) The Representatives shall have received from the Selling
Securityholder, the Shareholders listed on Annex A hereto (collectively, the
"KIM SHAREHOLDERS") and each executive officer and director of the Company an
agreement to the effect that such person or entity will not, directly or
indirectly, without the prior written consent of Prudential Securities
Incorporated, on behalf of the Underwriters, offer, sell, offer to sell,
contract to sell, pledge, grant any option to purchase or otherwise sell or
dispose (or announce any offer, sale, offer of sale, contract of sale, pledge,
granted any option to purchase or other sale or disposition) of any shares of
Common Stock or any securities convertible into, or exchangeable or exercisable
for, shares of Common Stock or other capital stock of the Company, or any right
to purchase or acquire Common Stock or other capital stock of the Company for a
period of 120 days after the date of this Agreement, except (A) pursuant to this
Agreement and (B) for issuances of options pursuant to stock option plans and
employment agreements in existence on the date hereof.
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<PAGE>
(h) On or before the Firm Closing Date, the Representatives and
counsel for the Underwriters shall have received such further certificates,
documents or other information as they may have reasonably requested from the
Company.
(i) Prior to the commencement of the offering of the Securities, the
Securities to be issued and sold by the Company shall have been included for
quotation on the Nasdaq National Market.
(j) The Underwriters shall have received a certificate from the
Selling Securityholder, signed by the Selling Securityholder, dated the Firm
Closing Date, to the effect that:
(i) the representations and warranties of the Selling
Securityholder in this Agreement are true and correct as if made on
and as of the Firm Closing Date;
(ii) with respect to statements or omissions in (A) the
Registration Statement, as amended as of the Firm Closing Date, made
in reliance upon and in conformity with written information furnished
to the Company by the Selling Securityholder specifically for use
therein, the Registration Statement does not include any untrue
statement of a material fact or omit to state any material fact
necessary to make the statements therein not misleading, and (B) the
Prospectus and any Integrated Prospectus, each as of the Firm Closing
Date, made in reliance upon and in conformity with written information
furnished to the Company by the Selling Securityholder specifically
for use therein does not include any untrue statement of a material
fact or omit to state any material fact necessary in order to make
the statement therein, in the light of the circumstances under which
they were made, not misleading; and
(iii) the Selling Securityholder has performed all covenants and
agreements on its part to be performed or satisfied at or prior to the
Firm Closing Date.
All opinions, certificates, letters and documents delivered pursuant to
this Agreement will comply with the provisions hereof only if they are
reasonably satisfactory in all material respects to the Representatives and
counsel for the Underwriters. The Company shall furnish to the Representatives
such conformed copies of such opinions, certificates, letters and documents in
such quantities as the Representatives and counsel for the Underwriters shall
reasonably request.
The respective obligations of the several Underwriters to purchase and
pay for any Option Securities shall be subject, in their discretion, to each of
the foregoing conditions to purchase the Firm Securities, except that all
references to the Firm Securities and the Firm Closing Date shall be deemed to
refer to such Option Securities and the related Option Closing Date,
respectively.
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8. INDEMNIFICATION AND CONTRIBUTION.
(a) Except as provided in Section 8(e), the Company, the Kim
Shareholders and the Selling Securityholder, jointly and severally, agree to
indemnify and hold harmless (except, in respect of the Selling Securityholder
and the Kim Shareholders, such agreement shall not apply as to clause (iv)
below) each Underwriter and each person, if any, who controls any Underwriter
within the meaning of Section 15 of the Act or Section 20 of the Securities and
Exchange Act of 1934, as amended (the "Exchange Act"), against any losses,
claims, damages or liabilities, joint or several, to which such Underwriter or
such controlling person may become subject under the Act or otherwise, insofar
as such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon:
(i) any untrue statement or alleged untrue statement made by the
Company or the Selling Securityholder in Section 2 of this Agreement,
(ii) any untrue statement or alleged untrue statement of any
material fact contained in (A) the Registration Statement or any
amendment thereto, any Preliminary Prospectus, the Prospectus and any
Integrated Prospectus, or any amendment or supplement thereto or (B)
any application or other document, or any amendment or supplement
thereto, executed by the Company or based upon written information
furnished by or on behalf of the Company filed in any jurisdiction in
order to qualify the Securities under the securities or blue sky laws
thereof or filed with the Commission or any securities association or
securities exchange (each an "Application"),
(iii) the omission or alleged omission to state in the
Registration Statement or any amendment thereto, any Preliminary
Prospectus, the Prospectus and any Integrated Prospectus, or any
amendment or supplement thereto, or any Application a material fact
required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made,
not misleading, or
(iv) any untrue statement or alleged untrue statement of any
material fact contained in any audio or visual materials provided by
the Company or in written information furnished by or on behalf of the
Company, including without limitation, slides, videos, films and tape
recordings used in connection with the marketing of the Securities,
including without limitation, statements communicated to securities
analysts employed by the Underwriters,
and will reimburse, as incurred, each Underwriter and each such controlling
person for any legal or other expenses reasonably incurred by such Underwriter
or such controlling person in connection with investigating, defending against
or appearing as a third-party witness in connection with any such loss, claim,
damage, liability or action; PROVIDED, HOWEVER, that the Company and the Selling
Securityholder will not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon any untrue
statement or alleged untrue statement or omission or alleged omission made in
such Registration Statement or any amendment thereto, any Preliminary
Prospectus, the Prospectus, any Integrated Prospectus
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or any amendment or supplement thereto or any Application in reliance upon and
in conformity with written information furnished to the Company, or the Selling
Securityholder by such Underwriter through the Representatives specifically for
use therein. This indemnity agreement will be in addition to any liability which
the Company or the Selling Securityholder may otherwise have. The Company and
the Selling Securityholder will not, without the prior written consent of the
Underwriter or Underwriters purchasing, in the aggregate, more than fifty
percent (50%) of the Securities, settle or compromise or consent to the entry of
any judgment in any pending or threatened claim, action, suit or proceeding in
respect of which indemnification may be sought hereunder (whether or not any
such Underwriter or any person who controls any such Underwriter within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act is a party to
such claim, action, suit or proceeding), unless such settlement, compromise or
consent includes an unconditional release of all of the Underwriters and such
controlling persons from all liability arising out of such claim, action, suit
or proceeding.
(b) Each Underwriter, severally and not jointly, will indemnify and
hold harmless the Company, each of its directors, each of its officers who
signed the Registration Statement, the Selling Securityholder, the Kim
Shareholders and each person, if any, who controls the Company within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act against any
losses, claims, damages or liabilities to which the Company or any such
director or officer of the Company, the Selling Securityholder, the Kim
Shareholders or any such controlling person of the Company or the Selling
Securityholder may become subject under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise
out of or are based upon (i) any untrue statement or alleged untrue statement
of any material fact contained in the Registration Statement or any amendment
thereto, any Preliminary Prospectus, the Prospectus, any Integrated Prospectus
or any amendment or supplement thereto, or any Application or (ii) the
omission or the alleged omission to state therein a material fact required to
be stated in the Registration Statement or any amendment thereto, any
Preliminary Prospectus, the Prospectus, any Integrated Prospectus or any
amendment or supplement thereto, or any Application necessary to make the
statements therein not misleading, in each case to the extent, but only to the
extent, that such untrue statement or alleged untrue statement or omission or
alleged omission was made in reliance upon and in conformity with written
information furnished to the Company by such Underwriter through the
Representatives specifically for use therein; and, subject to the limitation
set forth immediately preceding this clause, will reimburse, as incurred, any
legal or other expenses reasonably incurred by the Company or any such
director, officer or controlling person or the Selling Securityholder or the
Kim Shareholders in connection with investigating or defending any such loss,
claim, damage, liability or any action in respect thereof. This indemnity
agreement will be in addition to any liability which such Underwriter may
otherwise have.
(c) Promptly after receipt by an indemnified party under this
Section 8 of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying
party under this Section 8, notify the indemnifying party of the commencement
thereof; but the omission so to notify the indemnifying party will not relieve
it from any liability which it may have to any indemnified party otherwise than
under this Section 8, except to the extent that the indemnifying party has been
materially prejudiced by
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<PAGE>
such omission. In case any such action is brought against any indemnified party,
and it notifies the indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate therein and, to the extent
that it may wish, jointly with any other indemnifying party similarly notified,
to assume the defense thereof, with counsel satisfactory to such indemnified
party; PROVIDED, HOWEVER, that if the defendants in any such action include both
the indemnified party and the indemnifying party and the indemnified party shall
have reasonably concluded that there may be one or more legal defenses available
to it and/or other indemnified parties which are different from or additional to
those available to the indemnifying party, the indemnifying party shall not have
the right to direct the defense of such action on behalf of such indemnified
party or parties and such indemnified party or parties shall have the right to
select separate counsel to defend such action on behalf of such indemnified
party or parties. After notice from the indemnifying party to such indemnified
party of its election so to assume the defense thereof and approval by such
indemnified party of counsel appointed to defend such action, the indemnifying
party will not be liable to such indemnified party under this Section 8 for any
legal or other expenses, other than reasonable costs of investigation,
subsequently incurred by such indemnified party in connection with the defense
thereof, unless (i) the indemnified party shall have employed separate counsel
in accordance with the proviso to the next preceding sentence (it being
understood, however, that in connection with such action the indemnifying party
shall not be liable for the expenses of more than one separate counsel (in
addition to local counsel) in any one action or separate but substantially
similar actions in the same jurisdiction arising out of the same general
allegations or circumstances, designated by the Representatives in the case of
paragraph (a) of this Section 8, representing the indemnified parties under such
paragraph (a) who are parties to such action or actions) or (ii) the
indemnifying party does not promptly retain counsel reasonably satisfactory to
the indemnified party or (iii) the indemnifying party has authorized the
employment of counsel for the indemnified party at the expense of the
indemnifying party. After such notice from the indemnifying party to such
indemnified party, the indemnifying party will not be liable for the costs and
expenses of any settlement of such action effected by such indemnified party
without the consent of the indemnifying party.
(d) In circumstances in which the indemnity agreement provided for in
the preceding paragraphs of this Section 8 is unavailable or insufficient, for
any reason, to hold harmless an indemnified party in respect of any losses,
claims, damages or liabilities (or actions in respect thereof), each
indemnifying party, in order to provide for just and equitable contribution,
shall contribute to the amount paid or payable by such indemnified party as a
result of such losses, claims, damages or liabilities (or actions in respect
thereof) in such proportion as is appropriate to reflect (i) the relative
benefits received by the indemnifying party or parties on the one hand and the
indemnified party on the other from the offering of the Securities or (ii) if
the allocation provided by the foregoing clause (i) is not permitted by
applicable law, not only such relative benefits but also the relative fault of
the indemnifying party or parties on the one hand and the indemnified party on
the other in connection with the statements or omissions or alleged statements
or omissions that resulted in such losses, claims, damages or liabilities (or
actions in respect thereof), as well as any other relevant equitable
considerations. The relative benefits received by the Company, the Selling
Securityholder and the Kim Shareholders on the one hand and the Underwriters on
the other shall be deemed to be in the same proportion as the total proceeds
from the offering (before deducting expenses) received by the Company, the
Selling
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Securityholder and the Kim Shareholders bear to the total underwriting discounts
and commissions received by the Underwriters. The relative fault of the parties
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by the Company, the
Selling Securityholder or the Underwriters, the parties' relative intents,
knowledge, access to information and opportunity to correct or prevent such
statement or omission, and any other equitable considerations appropriate in the
circumstances. The Company, the Selling Securityholder and the Underwriters
agree that it would not be equitable if the amount of such contribution were
determined by pro rata or per capita allocation (even if the Underwriters were
treated as one entity for such purpose) or by any other method of allocation
that does not take into account the equitable considerations referred to above
in this paragraph (d). Notwithstanding any other provision of this paragraph
(d), no Underwriter shall be obligated to make contributions hereunder that in
the aggregate exceed the total public offering price of the Securities purchased
by such Underwriter under this Agreement, less the aggregate amount of any
damages that such Underwriter has otherwise been required to pay in respect of
the same or any substantially similar claim, and no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations to contribute hereunder are
several in proportion to their respective underwriting obligations and not
joint, and contributions among Underwriters shall be governed by the provisions
of the Prudential Securities Incorporated Master Agreement Among Underwriters.
For purposes of this paragraph (d), each person, if any, who controls an
Underwriter within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act shall have the same rights to contribution as such Underwriter, and
each director of the Company, each officer of the Company who signed the
Registration Statement and each person, if any, who controls the Company within
the meaning of Section 15 of the Act or Section 20 of the Exchange Act, shall
have the same rights to contribution as the Company.
(e) Notwithstanding anything contained herein to the contrary, the
liability of the Kim Shareholders and the Selling Securityholder under the
indemnity and contribution agreements contained in this Section 8 shall be
limited to an amount equal to the public offering price of the Securities to be
sold by the Selling Securityholder to the Underwriters less the amount of the
underwriting discount and commission paid thereon to the Underwriters by the
Selling Securityholder.
9. DEFAULT OF UNDERWRITERS. If one or more Underwriters default in
their obligations to purchase Firm Securities or Option Securities hereunder and
the aggregate number of such Securities that such defaulting Underwriter or
Underwriters agreed but failed to purchase is ten percent or less of the
aggregate number of Firm Securities or Option Securities to be purchased by all
of the Underwriters at such time hereunder, the other Underwriters may make
arrangements satisfactory to the Representatives for the purchase of such
Securities by other persons (who may include one or more of the non-defaulting
Underwriters, including the Representatives), but if no such arrangements are
made by the Firm Closing Date or the related Option Closing Date, as the case
may be, the other Underwriters shall be obligated severally in proportion to
their respective commitments hereunder to purchase the Firm Securities or Option
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Securities that such defaulting Underwriter or Underwriters agreed but failed to
purchase. If one or more Underwriters so default with respect to an aggregate
number of Securities that is more than ten percent of the aggregate number of
Firm Securities or Option Securities, as the case may be, to be purchased by all
of the Underwriters at such time hereunder, and if arrangements satisfactory to
the Representatives are not made within 36 hours after such default for the
purchase by other persons (who may include one or more of the non-defaulting
Underwriters, including the Representatives) of the Securities with respect to
which such default occurs, this Agreement will terminate without liability on
the part of any non-defaulting Underwriter or the Company other than as provided
in Section 11 hereof. Nothing contained herein shall relieve a defaulting
Underwriter of any liability it may have to the Company or the Selling
Securityholder for damages caused by its default. In the event of any default by
one or more Underwriters as described in this Section 9, the Representatives
shall have the right to postpone the Firm Closing Date or the Option Closing
Date, as the case may be, established as provided in Section 3 hereof for not
more than seven business days in order that any necessary changes may be made in
the arrangements or documents for the purchase and delivery of the Firm
Securities or Option Securities, as the case may be. As used in this Agreement,
the term "Underwriter" includes any person substituted for an Underwriter under
this Section 9. Nothing herein shall relieve any defaulting Underwriter from
liability for its default.
10. DEFAULT BY SELLING SECURITYHOLDER . If on either the Firm Closing
Date or the Option Closing Date, the Selling Securityholder fails to sell the
Firm Securities or the Option Securities, whichever is applicable, that the
Selling Securityholder has agreed to sell on such date as set forth herein, the
Company agrees that it will sell that number of shares of Common Stock to the
Underwriters which represents either the Selling Securityholder's Firm
Securities or Option Securities, whichever is applicable, that the Selling
Securityholder has failed to so sell or such lesser number as may be requested
by you.
11. SURVIVAL. The respective representations, warranties, agreements,
covenants, indemnities and other statements of the Company and its officers, the
Selling Securityholder and the several Underwriters set forth in this Agreement
or made by or on behalf of them, respectively, pursuant to this Agreement shall
remain in full force and effect, regardless of (i) any investigation made by or
on behalf of the Company, any of its officers or directors, the Selling
Securityholder, any Underwriter or any controlling person referred to in Section
8 hereof and (ii) delivery of and payment for the Securities. The respective
agreements, covenants, indemnities and other statements set forth in Sections 6
and 8 hereof shall remain in full force and effect, regardless of any
termination or cancellation of this Agreement.
12. TERMINATION.
(a) This Agreement may be terminated with respect to the Firm
Securities or any Option Securities in the sole discretion of the
Representatives by notice to the Company or the Selling Securityholder given
prior to the Firm Closing Date or the related Option Closing Date,
respectively, in the event that the Company or the Selling Securityholder
shall have failed, refused or been unable to perform all obligations and
satisfy all conditions on their part to be
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performed or satisfied hereunder at or prior thereto or, if at or prior to the
Firm Closing Date or such Option Closing Date, respectively,
(i) the Company or any of its subsidiaries shall have, in the sole
judgment of the Representatives, sustained any material loss or
interference with its business or properties from fire, flood,
hurricane, accident or other calamity, whether or not covered by
insurance, or from any labor dispute or any legal or governmental
proceeding or there shall have been any material adverse change, or any
development involving a prospective material adverse change (including
without limitation a change in management or control of the Company),
in the condition (financial or otherwise), management, business
prospects, net worth or results of operations of the Company and its
subsidiaries, except in each case as described in or contemplated by
the Prospectus and any Integrated Prospectus (exclusive of any
subsequent amendment or supplement thereto);
(ii) trading in the Common Stock shall have been suspended by the
Commission or the Nasdaq National Market;
(iii) trading in securities generally on the Nasdaq National
Market shall have been suspended or minimum or maximum prices shall
have been established on any such exchange or market system;
(iv) a banking moratorium shall have been declared by New York or
United States authorities; or
(v) there shall have been (A) an outbreak or escalation of
hostilities between the United States and any foreign power, (B) an
outbreak or escalation of any other insurrection or armed conflict
involving the United States or (C) any other calamity or crisis or
material adverse change in general economic, political or financial
conditions having an effect on the United States financial markets
that, in the sole judgment of the Representatives, makes it impractical
or inadvisable to proceed with the public offering or the delivery of
the Securities as contemplated by the Registration Statement, as
amended as of the date hereof.
(b) Termination of this Agreement pursuant to this Section 12 shall be
without liability of any party to any other party except as provided in Section
11 hereof.
13. INFORMATION SUPPLIED BY UNDERWRITERS. The statements set forth in
the last paragraph on the front cover page and in the first, third and ninth
paragraphs under the heading "Underwriting" in any Preliminary Prospectus, the
Prospectus and any Integrated Prospectus (to the extent such statements relate
to the Underwriters) constitute the only information furnished by any
Underwriter through the Representatives to the Company for the purposes of
Sections 2(a)(ii) and 8 hereof. The Underwriters confirm that such statements
(to such extent) are correct.
14. NOTICES. All communications hereunder shall be in writing and, if
sent to any of the Underwriters, shall be delivered or sent by mail, telex or
facsimile transmission and confirmed in
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writing to Prudential Securities Incorporated, One New York Plaza, New York, New
York 10292, Attention: Equity Transactions Group; if sent to the Company, shall
be delivered or sent by mail, telex or facsimile transmission and confirmed in
writing to the Company at 931 South Matlack Street, West Chester, Pennsylvania
19382, Attention: Chief Executive Officer and President; if sent to the Selling
Securityholder, shall be delivered or sent by mail, telex or facsimile
transmission and confirmed in writing to the Selling Securityholder at 931 South
Matlack Street, West Chester, Pennsylvania 19382, Attention: President.
15. SUCCESSORS. This Agreement shall inure to the benefit of and shall
be binding upon the several Underwriters, the Company, the Selling
Securityholder and their respective successors and legal representatives, and
nothing expressed or mentioned in this Agreement is intended or shall be
construed to give any other person any legal or equitable right, remedy or claim
under or in respect of this Agreement, or any provisions herein contained, this
Agreement and all conditions and provisions hereof being intended to be and
being for the sole and exclusive benefit of such persons and for the benefit of
no other person except that (i) the indemnities of the Company and the Selling
Securityholder contained in Section 8 of this Agreement shall also be for the
benefit of any person or persons who control any Underwriter within the meaning
of Section 15 of the Act or Section 20 of the Exchange Act and (ii) the
indemnities of the Underwriters contained in Section 8 of this Agreement shall
also be for the benefit of the directors of the Company and the Selling
Securityholder, the officers of the Company who have signed the Registration
Statement and any person or persons who control the Company or the Selling
Securityholder within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act. No purchaser of Securities from any Underwriter shall be deemed a
successor because of such purchase.
16. APPLICABLE LAW. The validity and interpretation of this Agreement,
and the terms and conditions set forth herein, shall be governed by and
construed in accordance with the laws of the State of New York, without giving
effect to any provisions relating to conflicts of laws.
17. CONSENT TO JURISDICTION AND SERVICE OF PROCESS. All judicial
proceedings arising out of or relating to this Agreement may be brought in any
state or federal court of competent jurisdiction in the State of New York, and
by execution and delivery of this Agreement, each Selling Securityholder accepts
for itself and in connection with its properties, generally and unconditionally,
the nonexclusive jurisdiction of the aforesaid courts and waives any defense of
FORUM NON CONVENIENS and irrevocably agrees to be bound by any judgment rendered
thereby in connection with this Agreement. The Selling Securityholder designates
and appoints James J. Kim, and such other persons as may hereafter be selected
by the Selling Securityholder irrevocably agreeing in writing to so serve, as
its agent to receive on its behalf service of all process in any such
proceedings in any such court, such service being hereby acknowledged by the
Selling Securityholder to be effective and binding service in every respect. A
copy of any such process so served shall be mailed by registered mail to the
Selling Securityholder at the address provided in Section 14 hereof; PROVIDED,
HOWEVER, that, unless otherwise provided by applicable law, any failure to mail
such copy shall not affect the validity of service of such process. If any agent
appointed by the Selling Securityholder refuses to accept service, the Selling
Securityholder hereby agrees that service of process sufficient for personal
jurisdiction in
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any action against the Selling Securityholder in the State of New York may be
made by registered or certified mail, return receipt requested, to the Selling
Securityholder at its address provided in Section 14 hereof, and the Selling
Securityholder hereby acknowledges that such service shall be effective and
binding in every respect. Nothing herein shall affect the right to serve process
in any other manner permitted by law or shall limit the right of any Underwriter
to bring proceedings against the Selling Securityholder in the courts of any
other jurisdiction.
18. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
38
<PAGE>
If the foregoing correctly sets forth our understanding, please
indicate your acceptance thereof in the space provided below for that purpose,
whereupon this letter shall constitute an agreement binding the Company and each
of the several Underwriters.
Very truly yours,
ELECTRONICS BOUTIQUE HOLDINGS CORP.
By:
-------------------------------------------
Name: Joseph J. Firestone
Title: President, Chief Executive Officer
EB NEVADA, INC.
By:
-------------------------------------------
Name: Joseph J. Firestone
Title: Attorney-in-fact acting on behalf
of the Selling Securityholder
KIM SHAREHOLDERS
By:
-------------------------------------------
Name: James J. Kim
By:
-------------------------------------------
Name: Agnes C. Kim
<PAGE>
Trust of Susan Y. Kim
Dated December 31, 1987,
By:
-------------------------------------------
Name: Susan Y. Kim
Title: Trustee
By:
-------------------------------------------
Name: John T. Kim
Title: Trustee
By:
-------------------------------------------
Name: John F.A. Earley
Title: Trustee
Trust of David D. Kim
Dated December 31, 1987
By:
-------------------------------------------
Name: Susan Y. Kim
Title: Trustee
By:
-------------------------------------------
Name: David D. Kim
Title: Trustee
By:
-------------------------------------------
Name: John F.A. Earley
Title: Trustee
<PAGE>
Trust of John T. Kim
Dated December 31, 1987
By:
-------------------------------------------
Name: Susan Y. Kim
Title: Trustee
By
-------------------------------------------
Name: John T. Kim
Title: Trustee
By
-------------------------------------------
Name: John F.A. Earley
Title: Trustee
The foregoing Agreement is hereby
confirmed and accepted as of the date
first above written.
PRUDENTIAL SECURITIES INCORPORATED
BANC OF AMERICA SECURITIES LLC
GERARD KLAUER MATTISON & CO., INC.
PRUDENTIALSECURITIES.COM
By: PRUDENTIAL SECURITIES INCORPORATED
By:
-------------------------------
Name: Jean-Claude Canfin
Title: Managing Director
For itself and on behalf of the Underwriters.
<PAGE>
SCHEDULE I
UNDERWRITERS
<TABLE>
<CAPTION>
Number of Firm Number of Option
Securities Securities
Underwriter to be purchased to be purchased
- ----------- --------------- ---------------
<S> <C> <C> <C>
Prudential Securities Incorporated _________ __________
Banc of America Securities LLC _________ __________
Gerard Klauer Mattison & Co. Inc.. _________ __________
PrudentialSecurities.com _________ __________
</TABLE>
<PAGE>
Exhibit 5.1
[Letterhead of Klehr, Harrison, Harvey, Branzburg and Ellers LLP]
November 19, 1999
Board of Directors
Electronics Boutique Holdings corp.
931 South Matlack Street
West Chester, PA 19382
Gentlemen:
We have acted as counsel to Electronics Boutique Holdings Corp., a
Delaware corporation (the "Company"), in connection with the preparation of the
Company's Registration Statement on Form S-3 (File No. 333-88561) (the
Registration Statement, as amended at the time it is declared effective by the
Securities and Exchange Commission (the "SEC"), being referred to as the
"Registration Statement") filed with the SEC under the Securities Act of 1933,
as amended, covering 4,025,000 shares of the Company's common stock, par value
$.01 per share (the "Common Stock"), comprised of (i) 2,000,000 shares of Common
Stock to be sold by the Company (the "Company Shares") to the underwriters for
whom Prudential Securities Incorporated, Banc of America Securities LLC, Gerard
Klauer Mattison & Co., Inc., and PrudentialSecurities.com are acting as
representatives (collectively, the "Underwriters"), (ii) 1,500,000 shares of
Common Stock to be sold by EB Nevada Inc., the Company's parent, to the
Underwriters (the "Selling Shareholder Shares") and (iii) up to 525,000 shares
of Common Stock (the "Optional Shares") which the Underwriters will have a right
to purchase from EB Nevada Inc. to cover over-allotments, if any.
In connection therewith, we have examined the originals or copies,
certified or otherwise identified to our satisfaction, of (i) the Company's
Certificate of Incorporation and Bylaws, each as amended through the date of
this opinion; (ii) resolutions adopted by the Company's Board of Directors with
respect to the issuance and role of the Company Shares; and (iii) resolutions
adopted by the Board of Directors of EB Nevada Inc. with respect to the issuance
and sale of the Selling Shareholder Shares and the Optional Shares. We have also
examined originals or copies, certified or otherwise identified to our
satisfaction, of such records of the Company and such certificates of public
officials, and such other documents, certificates and records as we have deemed
necessary or appropriate as a basis for the opinions set forth herein.
In our examination, we have assumed: the genuineness of all signatures,
the authenticity of all documents submitted to us as originals, the conformity
to original documents of all documents submitted to us as certified or
photostatic copies and the authenticity of the originals of such latter
documents. As to any facts material to the opinions expressed herein that were
not independently established or verified, we have relied upon oral or written
statements and representations of officers of the Company.
<PAGE>
Board of Directors
November 19, 1999
Page 2
Based upon and subject to the foregoing, we are of the opinion that (i)
the Company Shares are duly authorized and, when issued and sold in accordance
with and in the manner described in the plan of distribution set forth in the
Registration Statement, will be validly issued, fully paid and non-assessable;
and (ii) the Selling Shareholder Shares and the Optional Shares to be sold to
the Underwriters are duly authorized, validly issued, fully paid and
non-assessable.
We are members of the Bar of the Commonwealth of Pennsylvania and do
not opine as to the laws of any jurisdiction other than Pennsylvania and the
General Corporation Law of the State of Delaware.
We hereby consent to the reference to our firm in the Registration
Statement under the prospectus caption "Legal Matters" and to the inclusion of
this opinion as an exhibit to the Registration Statement. In giving such
consent, we do not admit hereby that we come within the category of persons
whose consent is required under Section 7 of the Securities Act, or the rules
and regulations promulgated thereunder.
Very truly yours,
/s/ Klehr, Harrison, Harvey, Branzburg & Ellers LLP
<PAGE>
Consent of Independent Accountants
The Board of Directors and Stockholders
Electronics Boutique Holdings Corp.:
We consent to the use of our reports dated March 16, 1999 included and
incorporated by reference herein and to the reference to our firm under
heading "Experts" in the prospectus.
/s/ KPMG LLP
Philadelphia, PA
November 18, 1999
