-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OzoldyPGFClhf++vH3jzXIZZPzFWsD5wAT50U6nfhjX93eWu8PlkvNT9Fj93ZmwS kRROSjyjq2priD+Y57JkHA== 0000912057-99-006934.txt : 19991122 0000912057-99-006934.hdr.sgml : 19991122 ACCESSION NUMBER: 0000912057-99-006934 CONFORMED SUBMISSION TYPE: S-3/A PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 19991119 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ELECTRONICS BOUTIQUE HOLDINGS CORP CENTRAL INDEX KEY: 0001057746 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-COMPUTER & COMPUTER SOFTWARE STORES [5734] IRS NUMBER: 510379406 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: S-3/A SEC ACT: SEC FILE NUMBER: 333-88561 FILM NUMBER: 99761449 BUSINESS ADDRESS: STREET 1: 103 FOULK ROAD STREET 2: STE 202 CITY: WILMINGTON STATE: DE ZIP: 19803 BUSINESS PHONE: 3027784778 MAIL ADDRESS: STREET 1: 931 MATLACK ST CITY: WEST CHESTER STATE: PA ZIP: 19382 S-3/A 1 FORM S-3/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 19, 1999. REGISTRATION NO. 333-88561 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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) DELAWARE 5734 51-0379406 (State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Incorporation or Organization) Classification Code Number) Identification Number)
------------------------ 931 SOUTH MATLACK STREET WEST CHESTER, PENNSYLVANIA 19382 (610) 430-8100 (Address, Including Zip Code and Telephone Number, Including Area Code, of Registrant's Principal Executive Offices) ------------------------------ JOSEPH J. FIRESTONE, PRESIDENT AND CHIEF EXECUTIVE OFFICER 931 SOUTH MATLACK STREET WEST CHESTER, PENNSYLVANIA 19382 (610) 430-8100 (Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent For Service) ------------------------------ Copies to: 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
------------------------ 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. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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. SUBJECT TO COMPLETION--NOVEMBER 19, 1999 PROSPECTUS - -------------------------------------------------------------------------------- 3,500,000 Shares [LOGO] ELECTRONICS BOUTIQUE HOLDINGS CORP. Common Stock
- -------------------------------------------------------------------------------- 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.
Per Share Total Public offering price.............................. $ $ Underwriting discounts and commissions............. $ $ Proceeds, before expenses, to Electronics Boutique......................................... $ $ Proceeds to selling stockholder.................... $ $
SEE "RISK FACTORS" ON PAGES 5 TO 10 FOR FACTORS THAT SHOULD BE CONSIDERED BEFORE INVESTING IN THE SHARES OF ELECTRONICS BOUTIQUE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 [PHOTOS, MAPS, ETC.] TABLE OF CONTENTS
PAGE -------- 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
PAGE -------- 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
- -------------------------------------------------------------------------------- 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. 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. THE OFFERING 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
(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 SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA (IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
TWENTY-SIX WEEKS YEAR ENDED ENDED --------------------------------------- -------------------- FEBRUARY 1, JANUARY 31, JANUARY 30, AUGUST 1, JULY 31, 1997 1998 1999 1998 1999 ----------- ----------- ----------- --------- -------- (UNAUDITED) 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 ======== ======== ======== ========
3
TWENTY-SIX WEEKS YEAR ENDED ENDED --------------------------------------- -------------------- FEBRUARY 1, JANUARY 31, JANUARY 30, AUGUST 1, JULY 31, 1997 1998 1999 1998 1999 ----------- ----------- ----------- --------- -------- (UNAUDITED) 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
JULY 31, 1999 ------------------------------------- ACTUAL AS ADJUSTED(8) -------- -------------------------- (UNAUDITED) 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
- ------------------------------ (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 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 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 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 - 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 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.
DATE OF AVAILABILITY FOR RESALE NUMBER OF SHARES INTO PUBLIC MARKET - ---------------- --------------------------------------------- 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.
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 - 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 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 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.
HIGH LOW -------- -------- 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
On November 18, 1999, the last reported sale price of the common stock in the Nasdaq National Market was $23.0625 per share. 12 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.
JULY 31, 1999 ------------- 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 ======= =======
- ------------------------ (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 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.
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) 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 ========
14
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) 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
JANUARY 28, FEBRUARY 3, FEBRUARY 1, JANUARY 31, JANUARY 30, JULY 31, 1995 1996 1997 1998 1999 1999 ----------- ----------- ----------- ----------- ----------- ----------- (UNAUDITED) 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
- ------------------------------ (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 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:
TWENTY-SIX WEEKS ENDED ------------------------------ JULY 31, 1999 AUGUST 1, 1998 ------------- -------------- 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% ===== =====
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 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 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:
YEAR ENDED --------------------------------------- FEBRUARY 1, JANUARY 31, JANUARY 30, 1997 1998 1999 ----------- ----------- ----------- 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% ===== ===== =====
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 18 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. 19 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 20 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.
FISCAL 1998 ----------------------------------------- 1ST 2ND 3RD 4TH QUARTER QUARTER QUARTER QUARTER -------- -------- -------- -------- (IN THOUSANDS, EXCEPT FOR NUMBER OF STORES) 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 FISCAL 1999 FISCAL 2000 ----------------------------------------- ------------------- 1ST 2ND 3RD 4TH 1ST 2ND QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER -------- -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT FOR NUMBER OF STORES) 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
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. 21 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 22 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)
COMPLEXITY ------------------- Y2K Y2K Y2K COMPLIANT PRIORITY COUNT UNIT(1) READY(2) TESTED(3) COMPLIANT(4) BY(5) - -------- -------- -------- -------- --------- ------------ ---------- 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%
- ------------------------ (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 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 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. 25 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 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 27 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. 28 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 29 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. 30 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 31 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 32 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 33 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 34 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. 35 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 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 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS Electronics Boutique's executive officers and directors are as follows:
NAME AGE POSITION - ---- -------- -------- 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
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 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 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).
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 - ------------------------------------------- ---------- -------- --------- ---------- -------- 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)
- ------------------------ * 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 (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 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:
NUMBER UNDERWRITERS OF SHARES - ------------ --------- Prudential Securities Incorporated ......................... Banc of America Securities LLC ............................. Gerard Klauer Mattison & Co., Inc. ......................... PrudentialSecurities.com ................................... ----- Total................................................... =====
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:
TOTAL FEES --------------------------------------------- FEE WITHOUT EXERCISE OF FULL EXERCISE OF PER SHARE OVER-ALLOTMENT OPTION OVER-ALLOTMENT OPTION --------- --------------------- --------------------- Fees paid by us.............................. $ $ $ Fees paid by the selling stockholder......... $ $ $
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 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 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 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 ELECTRONICS BOUTIQUE HOLDINGS CORP. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE -------- 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
F-1 ELECTRONICS BOUTIQUE HOLDINGS CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
JANUARY 30, JULY 31, 1999 1999 ------------ ------------ (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 ============ ============
See accompanying notes to consolidated financial statements. F-2 ELECTRONICS BOUTIQUE HOLDINGS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
TWENTY-SIX WEEKS ENDED --------------------------- AUGUST 1, JULY 31, 1998 1999 ------------ ------------ 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 ============
See accompanying notes to consolidated financial statements. F-3 ELECTRONICS BOUTIQUE HOLDINGS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
TWENTY-SIX WEEKS ENDED --------------------------- AUGUST 1, JULY 31, 1998 1999 ------------ ------------ 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 ============ ============
See accompanying notes to consolidated financial statements. F-4 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 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:
TWENTY-SIX WEEKS ENDED ----------------------- AUGUST 1, JULY 31, 1998 1999 ---------- ---------- Net income........................................... $2,188,185 $3,421,953 Foreign currency translation adjustment.............. 120,227 211,748 ---------- ---------- Comprehensive income................................. $2,308,412 $3,633,701 ========== ==========
F-6 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 ELECTRONICS BOUTIQUE HOLDINGS CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
JANUARY 31, JANUARY 30, 1998 1999 ------------ ------------ 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 ============ ============
See accompanying notes to consolidated financial statements. F-8 ELECTRONICS BOUTIQUE HOLDINGS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED ------------------------------------------ FEBRUARY 1, JANUARY 31, JANUARY 30, 1997 1998 1999 ------------ ------------ ------------ 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 ============ ============ ============
See accompanying notes to consolidated financial statements. F-9 ELECTRONICS BOUTIQUE HOLDINGS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
PREFERRED CLASS A CLASS B STOCK COMMON STOCK COMMON STOCK COMMON STOCK ------------------- ------------------- ------------------- --------------------- SHARE AMOUNT SHARE AMOUNT SHARE AMOUNT SHARE AMOUNT -------- -------- -------- -------- -------- -------- ---------- -------- 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 === ==== ====== ===== ======= ======= ========== ========
ACCUMULATED PARTNERS' CAPITAL ADDITIONAL OTHER TOTAL OF EB SERVICES PAID-IN COMPREHENSIVE RETAINED STOCKHOLDERS' COMPANY LLP CAPITAL INCOME EARNINGS EQUITY ----------------- ----------- -------------- ----------- ------------- 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 ======= =========== =========== =========== ============
F-10 ELECTRONICS BOUTIQUE HOLDINGS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED ----------------------------------------- FEBRUARY 1, JANUARY 31, JANUARY 30, 1997 1998 1999 ----------- ------------ ------------ 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
See accompanying notes to consolidated financial statements. F-11 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 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: Leasehold improvements............... Lesser of 10 years or the lease term Furniture and Fixtures............... 5 years Computer equipment................... 3 years Building............................. 30 years
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 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 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 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:
RETAIL STORE DISTRIBUTION TOTAL LEASE LOCATIONS FACILITIES COMMITMENTS ------------ ------------ ------------ 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 ============ ========== ============
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:
JANUARY 31, JANUARY 30, 1998 1999 ----------- ----------- 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 =========== ===========
F-16 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:
JANUARY 31, JANUARY 30, 1998 1999 ----------- ----------- 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 =========== ========
(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 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:
FISCAL 1997 FISCAL 1998 FISCAL 1999 ----------- ----------- ----------- 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) ========= ========== =========
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 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 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:
FEBRUARY 1, JANUARY 31, 1997 1998 ------------ ------------ 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 ============ ============
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 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.
FISCAL 1997 FISCAL 1998 FISCAL 1999 ----------- ----------- ----------- 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% ===== ===== =====
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:
FISCAL 1997 FISCAL 1998 FISCAL 1999 ----------- ----------- ----------- 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 ========== =========== ===========
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 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 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:
FISCAL 1999 ----------- 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
A summary of the Company's stock option activity, and related information for the fiscal year ended January 30, 1999 follows:
WEIGHTED AVERAGE EXERCISE OPTIONS PRICE --------- -------- 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 ======
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:
FISCAL 1997 FISCAL 1998 FISCAL 1999 ----------- ----------- ----------- 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 ========== =========== ===========
F-23 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:
FISCAL 1997 FISCAL 1998 FISCAL 1999 ----------- ----------- ----------- 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 ======== ======== ===========
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. 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 ==========
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 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:
FISCAL 1997 FISCAL 1998 FISCAL 1999 ----------- ----------- ----------- 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 ========== =========== ===========
F-25 - -------------------------------------------------------------------------------- [LOGO] PRUDENTIAL SECURITIES BANC OF AMERICA SECURITIES LLC GERARD KLAUER MATTISON & CO., INC. PRUDENTIALSECURITIES.COM - -------------------------------------------------------------------------------- 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. 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 ========
- ------------------------ * 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: 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)
II-1 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)
- ------------------------ * 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 (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 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. ELECTRONICS BOUTIQUE HOLDINGS CORP. By: /s/ JOSEPH J. FIRESTONE ----------------------------------------- Joseph J. Firestone PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below on November 19, 1999 by the following persons in the capacities indicated:
SIGNATURE TITLE --------- ----- 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)
* By: Joseph J. Firestone, as power of attorney II-4 EXHIBIT INDEX
EXHIBITS -------- 1.1 Form of Underwriting Agreement 5.1 Opinion of Klehr, Harrison, Harvey, Branzburg & Ellers, LLP 23.1 Consent of KPMG LLP
EX-1.1 2 EXHIBIT 1.1 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. 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 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 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 (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 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, 6 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). 7 (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 8 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 9 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 10 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 11 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. 12 (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 13 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. 14 (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 15 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 16 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 17 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 18 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. 19 (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 20 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 21 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 22 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 23 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. 24 (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. 25 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 26 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: 27 (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 28 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. 29 (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. 30 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 31 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 32 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 33 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 34 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 35 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 36 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 37 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 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 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 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. SCHEDULE I UNDERWRITERS
Number of Firm Number of Option Securities Securities Underwriter to be purchased to be purchased - ----------- --------------- --------------- Prudential Securities Incorporated _________ __________ Banc of America Securities LLC _________ __________ Gerard Klauer Mattison & Co. Inc.. _________ __________ PrudentialSecurities.com _________ __________
EX-5.1 3 EXHIBIT 5.1 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. 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 EX-23.1 4 EXHIBIT 23.1 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 -----END PRIVACY-ENHANCED MESSAGE-----