-----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, CmCjLZ0BoxEQFcHWMFMq3vy6WcIUon/UR7T1FDlDVNxI2faU5vGqlBg3x3hGoo14 4EArzsT0lCXzjj8zXTW/Dw== 0001047469-98-011166.txt : 19980325 0001047469-98-011166.hdr.sgml : 19980325 ACCESSION NUMBER: 0001047469-98-011166 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 19980324 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ELECTRONICS BOUTIQUE HOLDINGS CORP CENTRAL INDEX KEY: 0001057746 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 510379406 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-48523 FILM NUMBER: 98571775 BUSINESS ADDRESS: STREET 1: 931 MATLACK ST CITY: WEST CHESTER STATE: PA ZIP: 19382 BUSINESS PHONE: 6104308100 MAIL ADDRESS: STREET 1: 931 MATLACK ST CITY: WEST CHESTER STATE: PA ZIP: 19382 S-1 1 S-1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 24, 1998. REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------- FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------------------- ELECTRONICS BOUTIQUE HOLDINGS CORP. (Exact Name of Registrant as Specified in Its Charter) DELAWARE (State or Other Jurisdiction of Incorporation or Organization) 5734 (Primary Standard Industrial Classification Number) 51-0379406 (I.R.S. Employer Identification Number) 931 SOUTH MATLACK STREET WEST CHESTER, PENNSYLVANIA 19382 (610) 430-8100 (Address, Including Zip Code and Telephone Number, Including Area Code, of Registrant's Principal Executive Offices) ------------------------------ JOSEPH J. FIRESTONE, PRESIDENT AND CHIEF EXECUTIVE OFFICER 931 SOUTH MATLACK STREET WEST CHESTER, PENNSYLVANIA 19382 (610) 430-8100 (Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent For Service) ------------------------------ Copies to: STEPHEN T. BURDUMY, ESQUIRE MARY A. BERNARD, ESQUIRE KLEHR, HARRISON, HARVEY, BRANZBURG & ELLERS LLP KING & SPALDING 1401 WALNUT STREET 1185 AVENUE OF THE AMERICAS PHILADELPHIA, PENNSYLVANIA 19102 NEW YORK, NEW YORK 10036 (215) 568-6060 (212) 556-2100
-------------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are being offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / _____________ If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / _____________ If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / _____________ If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / -------------------------- CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION TO BE REGISTERED REGISTERED (1) SHARE (2) PRICE (2) FEE Common Stock, $.01 par value 8,625,000 $17.00 $146,625,000 $43,255
(1) Includes up to 1,125,000 shares that may be purchased from the Company and the Selling Shareholders, pro rata, at the option of the Underwriters solely to cover over-allotments, if any. (2) Estimated solely for purposes of calculating registration fee in accordance with Rule 457(a) under the Securities Act of 1933, as amended. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION--DATED MARCH 24, 1998 PROSPECTUS - -------------------------------------------------------------------------------- 7,500,000 Shares ELECTRONICS BOUTIQUE HOLDINGS CORP. [Logo] Common Stock - ------------------------------------------------------------ Of the 7,500,000 shares of common stock, par value $.01 per share (the "Common Stock"), offered hereby (the "Offering"), 3,750,000 shares are being sold by Electronics Boutique Holdings Corp. (the "Company"), and 3,750,000 shares are being sold by James J. Kim, the Chairman of the Company, and his wife Agnes C. Kim (the "Selling Shareholders"). The Company will not receive any proceeds from the sale of shares of Common Stock by the Selling Shareholders. See "Principal and Selling Shareholders." Prior to the Offering, there has been no public market for the Common Stock. The Company intends to apply to have the Common Stock included for quotation in The Nasdaq Stock Market's National Market (the "Nasdaq National Market") under the symbol "ELBO." It is currently anticipated that the initial public offering price will be between $15.00 and $17.00 per share. See "Underwriting" for a discussion of the factors to be considered in determining the initial public offering price. SEE "RISK FACTORS" ON PAGES 7 TO 11 FOR A DISCUSSION OF CERTAIN MATERIAL FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY. - -------------------------------------------------------------------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Underwriting Proceeds to Price to Discounts and Proceeds to Selling Public Commissions(1) Company(2) Shareholders Per Share............................ $ $ $ $ Total(3)............................. $ $ $ $
(1) The Company, the Selling Shareholders and certain trusts established for the benefit of the children of James J. Kim and Agnes C. Kim (the "Kim Trusts," and, together with the "Selling Shareholders," the "Kim Shareholders") have agreed to indemnify the several Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting expenses estimated to be $650,000, all of which are payable by the Company. (3) The Company and the Selling Shareholders have granted the several Underwriters a 30-day over-allotment option to purchase up to 1,125,000 additional shares of Common Stock, pro rata, on the same terms and conditions as set forth above. If all such additional shares are purchased by the Underwriters, the total Price to Public will be $ , the total Underwriting Discounts and Commissions will be $ , the total Proceeds to Company will be $ and the total Proceeds to Selling Shareholders will be $ . See "Underwriting." - -------------------------------------------------------------------------------- The shares of Common Stock are offered by the several Underwriters subject to delivery by the Company and the Selling Shareholders and acceptance by the Underwriters, to prior sale and to withdrawal, cancellation or modification of the offer without notice. Delivery of the shares to the Underwriters is expected to be made through the facilities of the Depository Trust Company, New York, New York, on or about , 1998. PRUDENTIAL SECURITIES INCORPORATED SALOMON SMITH BARNEY , 1998 [PHOTOS, MAPS, ETC.] CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET PRICE, PURCHASES OF THE COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN THE COMMON STOCK MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, ALL REFERENCES IN THIS PROSPECTUS (I) TO THE "COMPANY" MEAN ELECTRONICS BOUTIQUE HOLDINGS CORP., A DELAWARE CORPORATION, AND ITS SUBSIDIARIES, (II) TO "EB" MEAN THE ELECTRONICS BOUTIQUE, INC., A PENNSYLVANIA CORPORATION, AND A WHOLLY OWNED SUBSIDIARY OF THE COMPANY, AND (III) TO THE COMPANY'S ELECTRONICS BOUTIQUE STORES INCLUDES THE COMPANY'S SIMILARLY-FORMATTED EBX STORES. THE COMPANY'S FISCAL YEAR ENDS ON THE SATURDAY NEAREST JANUARY 31. UNLESS OTHERWISE INDICATED, ALL REFERENCES IN THIS PROSPECTUS TO ANY YEAR REFERS TO THE FISCAL YEAR OF THE COMPANY ENDED OR ENDING IN JANUARY OR FEBRUARY, AS THE CASE MAY BE, OF THE FOLLOWING CALENDAR YEAR (E.G., THE FISCAL YEAR ENDED JANUARY 31, 1998 IS REFERRED TO HEREIN AS "1997"). 1997 AND 1996 CONSISTED OF 52 WEEKS AND 1995 CONSISTED OF 53 WEEKS. UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION WILL NOT BE EXERCISED. THE COMPANY The Company is among the world's largest specialty retailers of electronic games. The Company's primary products are video games and personal computer ("PC") entertainment software, supported by the sale of video game hardware, PC productivity software and accessories. As of January 31, 1998, the Company operated 452 stores in 42 states, Puerto Rico, Canada, Australia and South Korea, primarily under the names Electronics Boutique and Stop 'N Save Software. As of such date, the Company also provided management services for an affiliate, Electronics Boutique Plc ("EB-UK"), which operated 129 stores and 17 department store-based concessions in the United Kingdom and Ireland. As of January 31, 1998, the Company also managed 39 mall-based WaldenSoftware stores for Borders Group, Inc. The Company's stores are primarily located in high traffic areas in regional shopping malls and average 1,100 square feet in size. The Company plans to open approximately 50 to 55 domestic and 30 to 35 foreign stores in each of 1998 and 1999. The Company's revenues and operating income have grown from $249.6 million and $5.7 million, respectively, in 1994, to $449.2 million and $25.1 million, respectively, in 1997. Comparable store sales increased 3.5%, 20.8% and 15.3% in 1995, 1996 and 1997, respectively. The electronic game industry is segmented into two primary product platforms: video games and PC entertainment software. This industry has experienced rapid growth in recent years due primarily to the increasing availability of sophisticated, yet affordable, video game hardware systems and multimedia PCs featuring fast processors, expanded memories, and enhanced graphics and audio capabilities. Total domestic retail sales of video game titles, hardware and accessories were approximately $5.5 billion in calendar 1997, an increase of approximately 51% over retail sales in the prior year. Domestic sales of PC entertainment software totaled approximately $1.3 billion in calendar 1997, an increase of approximately 23% over retail sales in the prior year. In addition, the domestic installed base of multimedia PCs has increased from approximately 14 million units in calendar 1995 to approximately 23 million units in calendar 1997. The Company's core customer is the electronic game enthusiast who demands immediate access to new title releases and who generally purchases more video game titles and PC entertainment software than the average electronic game consumer. The Company believes that it attracts the core game enthusiast due to the Company's: (i) specialty store focus on the electronic game category; (ii) ability to stock sought-after new releases on its stores' shelves immediately after release by publishers; (iii) breadth of product selection; and (iv) knowledgeable sales associates, who are often game enthusiasts themselves and who have extensive knowledge of game titles and features. The Company places significant emphasis on offering its customers immediate access to new releases and has designed its product merchandising strategy and distribution systems to facilitate such access. The Company introduces, on average, 20 new game titles in its stores each week. The Company believes that this FIRST TO MARKET strategy establishes its stores as the logical destination of choice for electronic game enthusiasts. The Company's strict inventory management system enables it to (i) maintain over 2,600 active stock keeping units ("SKUs"), 3 (ii) replenish a large and geographically dispersed store base on a daily basis, and (iii) minimize mark-downs as titles mature. The Company supports its product offerings with a strong commitment to customer service, which the Company believes distinguishes it from its competitors. All sales associates receive extensive training on video game and PC entertainment software products, system requirements and selling techniques. The Company believes that it was one of the first video game and PC entertainment software specialty retailers to offer a World Wide Website enabling both product review and online purchasing. The Company believes that its customer base and product mix are ideally suited for online retailing. The Company's customers are generally males who are technically proficient, a demographic which has traditionally represented the largest percentage of consumers who make online purchases. Further, the Company's products are recognizable brand name items, which serves to provide online customers with a higher degree of confidence that products purchased will meet expectations. The Company believes that the local market identity provided by its stores is a significant competitive advantage over competing online retailers. By April 1998, the Company intends to provide customers with a complete product offering, including access to the Company's database of over 7,500 items, which includes all active and inactive electronic game titles. The Company is committed to disciplined store operations, including merchandising, purchasing and distribution, real estate selection, store development, point of sale ("POS") financial reporting, and sales training. The Company believes that this commitment to operational control enables it to operate substantially all of its stores on a profitable basis, quickly identify opportunities to improve store productivity and react to shifts in product pricing and consumer purchasing trends. The Company was incorporated under the laws of the State of Delaware in March 1998 as a holding company for EB, which was incorporated in the Commonwealth of Pennsylvania in 1977. The Company's principal executive offices are located at 931 South Matlack Street, West Chester, Pennsylvania 19382 and the Company's telephone number is (610) 430-8100. 4 THE OFFERING Common Stock Offered by the Company........................... 3,750,000 shares Common Stock Offered by the Selling Shareholders.............. 3,750,000 shares Common Stock to be Outstanding after the Offering (1)......... shares Use of Proceeds by the Company................................ To fund an S corporation distribution to the Kim Shareholders, repay certain outstanding indebtedness, and for general corporate purposes, including financing new store openings. See "Use of Proceeds." Proposed Nasdaq National Market Symbol........................ ELBO
- ------------------------ (1) Excludes shares of Common Stock reserved for issuance upon the exercise of stock options outstanding as of , 1998 under the 1998 Equity Participation Plan of the Company (the "Equity Participation Plan"), which have an exercise price equal to the initial public offering price per share, and shares of Common Stock available for the future grant of stock options and other equity securities under the Equity Participation Plan. See "Management--Equity Participation Plan." RISK FACTORS Investors should consider the material risks involved in connection with an investment in the Common Stock and the impact to investors from various events that could adversely affect the Company's business. See "Risk Factors." ------------------------ Electronics Boutique-Registered Trademark-, EBX-Registered Trademark- and Stop 'N Save Software-Registered Trademark- are registered trademarks of the Company. Nintendo-Registered Trademark- and N64-Registered Trademark- are registered trademarks of Nintendo Companies Limited ("Nintendo"), Sega-Registered Trademark- and Sega Saturn-Registered Trademark- are registered trademarks of Sega Enterprises ("Sega"), and Sony-Registered Trademark- and PlayStation-Registered Trademark- are registered trademarks of Sony Computer Entertainment, Inc. ("Sony"). 5 SUMMARY CONSOLIDATED AND COMBINED FINANCIAL AND OPERATING DATA (IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
1993 1994 1995 1996 1997 ---------- ---------- ---------- ---------- ---------- STATEMENT OF INCOME DATA: Net sales............................................ $ 240,387 $ 249,552 $ 268,956 $ 337,059 $ 449,180 Cost of goods sold................................... 175,865 182,505 199,226 252,813 338,615 ---------- ---------- ---------- ---------- ---------- Gross profit......................................... 64,522 67,047 69,730 84,246 110,565 Operating expenses................................... 55,894 56,070 58,270 67,438 77,175 Depreciation and amortization........................ 4,638 5,324 6,180 6,936 8,316 ---------- ---------- ---------- ---------- ---------- Income from operations............................... 3,990 5,653 5,280 9,872 25,074 Interest expense, net................................ 1,578 1,727 1,818 1,298 1,379 ---------- ---------- ---------- ---------- ---------- Income before income tax expense..................... 2,412 3,926 3,462 8,574 23,695 Income tax expense (1)............................... 391 286 280 550 846 ---------- ---------- ---------- ---------- ---------- Net income........................................... $ 2,021 $ 3,640 $ 3,182 $ 8,024 $ 22,849 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net income per share................................. Weighted average shares outstanding.................. PRO FORMA INCOME DATA: Income before income tax expense..................... $ 2,412 $ 3,926 $ 3,462 $ 8,574 $ 23,695 Pro forma income tax provision....................... 972 1,582 1,395 3,455 9,543 ---------- ---------- ---------- ---------- ---------- Pro forma net income (2)............................. $ 1,440 $ 2,344 $ 2,067 $ 5,119 $ 14,152 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Pro forma net income per share....................... Pro forma weighted average shares outstanding (3).................................... OPERATING DATA (4): Stores open at beginning of period................... 274 311 325 341 360 Stores open at end of period......................... 311 325 341 360 452 Sales per square foot (5)............................ $ 763 $ 721 $ 729 $ 831 $ 926 Average sales per store (000s)....................... $ 822 $ 785 $ 808 $ 962 $ 1,106 Comparable store sales increase (decrease)........... (10.8%) (6.6%) 3.5% 20.8% 15.3% Inventory turnover................................... 3.0x 3.6x 3.8x 5.1x 5.3x
JANUARY 31, 1998 -------------------------- ACTUAL AS ADJUSTED(3) ---------- -------------- BALANCE SHEET DATA: Working capital (deficit)............................................................. ($ 16,532) Total assets.......................................................................... 143,170 Total liabilities..................................................................... 113,990 Stockholders' equity.................................................................. 29,180
- ------------------------ (1) Prior to the reorganization, EB elected to be treated as an S corporation and, as a result, its taxable income was passed through to its shareholders for federal income tax purposes. Accordingly, the financial statements do not include a provision for federal income taxes. EB elected to be treated as an S corporation for some states, while remaining subject to corporate tax in other states and, as a result, the financial statements provide for certain state income taxes. (2) The pro forma net income gives effect to the application of the pro forma income tax expense that would have been reported had EB been a corporation subject to federal and all state income taxes for all periods shown. See Notes 1 and 2 of Notes to Consolidated and Combined Financial Statements. (3) Adjusted to give effect to the sale by the Company of 3,750,000 shares of Common Stock offered hereby at an assumed initial public offering price of $16.00 per share (after deducting underwriting discounts and commissions and estimated Offering expenses), and after the application of the estimated net proceeds therefrom to the Company. See "Use of Proceeds" and "Capitalization." (4) Does not reflect stores operated by EB-UK and WaldenSoftware for which the Company provides management services. See "Business--Management Services." (5) Calculated based on stores open for one year or longer. 6 RISK FACTORS An investment in the shares of Common Stock offered hereby involves a high degree of risk. Prospective investors should consider carefully the following risk factors, in addition to the other information contained in this Prospectus, in connection with an investment in the Common Stock offered hereby. When used in this Prospectus, the words "expect," "estimate," "anticipate," "intend," "predict," "believe," and similar expressions and variations thereof are intended to identify forward-looking statements. Forward-looking statements appear in a number of places in this Prospectus and include statements regarding the intent, belief or current expectations of the Company, its directors or its officers with respect to, among other things: (i) trends affecting the Company's financial condition or results of operations; (ii) the Company's business and growth strategies; (iii) the use of the net proceeds to the Company of this Offering; and (iv) the declaration and payment of dividends. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results or outcomes may differ materially from those projected in the forward-looking statements as a result of various factors. The accompanying information contained in this Prospectus, including, without limitation, the information set forth under the headings "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations," and "Business" identify important factors that could cause such differences. DEPENDENCE ON NEW PRODUCT INTRODUCTIONS. The Company is highly dependent upon the continued introduction of new and enhanced video game and PC hardware and software. The failure of manufacturers to introduce new or enhanced video game systems, a decline in the continued technological development and use of multimedia PCs or the failure of software publishers to develop popular game and entertainment titles for current or future generation game systems or PCs could have a material adverse effect on the Company's results of operations and financial condition. VIDEO GAME SYSTEMS AND SOFTWARE PRODUCT CYCLES. The video game market has historically been cyclical in nature. Following the introduction of new generation systems, sales of new generation hardware and related titles steadily increase, while sales of prior generation hardware and related titles steadily decrease. New generation systems historically have been introduced every four to five years. Sales of prior generation hardware systems historically have peaked in the year of introduction of next generation systems, and sales of prior generation titles historically have peaked in the following year. The failure of the industry's leading video game systems manufacturers to introduce next generation systems, or significant enhancements to existing systems, could lead to a significant decrease in sales of hardware systems and related titles by the Company. Any such decrease could have a material adverse effect on the Company's results of operations and financial condition. See "Business--Products." TECHNOLOGICAL OBSOLESCENCE. The video game and PC industry is subject to rapid technological changes. The failure of the Company to respond quickly to such technological changes and to assess accurately their influence on customer preferences could have a material adverse effect on the Company's results of operations and financial condition. In addition, technological advances, such as the ready availability of games and other entertainment software on the Internet and the ability to down-load such games onto PCs for repeated use, could make the retail sale of video games and PC entertainment software obsolete. Further developments in these technologies or other technologies which expand the ability to access software through other sources could have a material adverse effect on the Company's results of operations and financial condition. NEW STORE OPENINGS. The Company's continued growth will depend, in part, on its ability to open and operate new stores on a profitable basis. The Company currently intends to open approximately 80 to 90 new stores in each of 1998 and 1999. The Company's ability to open new stores on a timely and profitable basis is subject to various contingencies, some of which are beyond the Company's control. These contingencies include the Company's ability to locate suitable store sites, negotiate acceptable lease terms, 7 build-out or refurbish sites on a timely and cost-effective basis, hire, train and retain skilled associates, obtain adequate capital resources and successfully integrate new stores into existing operations. In addition, the management services agreement between EB and EB-UK (the "UK Services Agreement") significantly restricts the Company's ability to open stores in Europe. See "Business--Management Services." There can be no assurance that the Company will be able to achieve its planned expansion or that its new stores will achieve levels of sales and profitability comparable to the Company's existing stores. Failure of the Company to achieve its planned expansion on a profitable basis could have a material adverse effect on the Company's results of operations and financial condition. See "Business--Retail Operations." COMPETITION. The electronic game industry is intensely competitive and subject to rapid changes in consumer preferences and frequent new product introductions. The Company competes with other video game and PC software specialty stores located in malls and other locations, as well as with mass merchants, toy retail chains, mail-order businesses, catalogs, direct sales by software publishers, online retailers, and office supply, computer product and consumer electronics superstores. Increased competition may lead to reduced profit margins on video games and PC entertainment software, which could have a material adverse effect on the Company's results of operations and financial condition. In addition, video games are available for rental from many video stores and cable television providers. Further, there can be no assurance that other methods of distribution will not emerge in the future which would result in increased competition for the Company. Most of the Company's competitors have longer operating histories and significantly greater financial, managerial, creative, sales and marketing and other resources than the Company. The Company also competes with other forms of entertainment activities, including movies, television, theater, sporting events and family entertainment centers. The Company's failure to compete effectively or a decrease in the popularity of video games and PC entertainment software would have a material adverse effect on the Company's results of operations and financial condition. See "Business-- Competition." In addition, the Company's ability to retain its existing customers and attract new customers depends on numerous factors, some of which are beyond the Company's control. These factors include: (i) the continued introduction of new and enhanced video game and PC hardware and software; (ii) the availability and timeliness of new product releases at the Company's stores; and (iii) the Company's reputation in the industry. SEASONALITY AND QUARTERLY RESULTS. The Company's business is affected by the seasonal patterns common to most retailers. Historically, its highest net sales and net income have been generated during the fourth quarter, which includes the holiday selling season. During 1997, approximately 44% of the Company's net sales and approximately 94% of the Company's operating income were generated during the fourth quarter. Accordingly, any adverse trend in net sales for such period could have a material adverse effect on the Company's results of operations for the quarter as well as for the entire year. In addition, the Company's results of operations may fluctuate from quarter to quarter depending upon, among other things, the timing of new product introductions and new store openings, net sales contributed by new stores, increases or decreases in comparable store sales, adverse weather conditions, shifts in the timing of certain holidays or promotions and changes in the Company's merchandise mix. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Seasonality and Quarterly Results." DEPENDENCE ON SUPPLIERS. The Company purchases a significant amount of products from Nintendo, Sony and Electronic Arts, Inc. ("Electronics Arts") and often receives quantities of certain products disproportionate to its market share from these suppliers upon initial release. During 1997, products purchased from Nintendo, Sony and Electronic Arts accounted for 13.5%, 13.3% and 9.4%, respectively, of the Company's net sales. The Company believes that the loss of any of these companies as a supplier could have a material adverse effect on the Company's results of operations and financial condition. In 8 addition, the Company's financial performance is in large part dependent upon the business terms it obtains from its suppliers, including unit prices, unsold product return policies, advertising and market development allowances, freight charges and payment terms. If the Company is unable to maintain favorable business terms with its suppliers, its results of operations and financial condition could be materially adversely affected. During 1997, approximately 37% of the Company's product purchases were from domestic distributors of products manufactured overseas, primarily in Asia. To the extent that the Company's distributors rely on overseas sources for a large portion of their products, any event causing a disruption of imports, including the imposition of import restrictions, could have a material adverse effect on the Company's results of operations and financial condition. In addition, in recent months, certain Asian currencies have devalued significantly in relation to the U.S. dollar and financial markets in Asia have experienced significant turmoil. There can be no assurance that the Company's ability to purchase from domestic distributors products manufactured in Asia would not be materially adversely affected by such developments. Trade restrictions in the form of tariffs or quotas, or both, applicable to such products could also affect the importation of such products generally and could increase the cost and reduce the supply of such products available to the Company. RISKS OF INTERNATIONAL RETAIL OPERATIONS. The Company has retail operations in various foreign countries, including Canada, South Korea and Australia, and intends to pursue opportunities that may arise in these and other countries. Net sales in these foreign countries represented 7.3% of the Company's net sales in 1997. The Company is subject to the risks inherent in conducting business across national boundaries, including currency exchange rate fluctuations, currency devaluations, international incidents, military outbreaks, economic downturns, government instability, nationalization of foreign assets, government protectionism and changes in governmental policy, any of which could adversely affect the Company's business in one or more of its international markets. LEASE EXPIRATIONS AND TERMINATIONS. As of January 31, 1998, 60 of the Company's stores (13.3% of all stores) were operated under leases with terms that expire in less than one year, including 13 month-to-month leases. Approximately one-half of the Company's leases contain provisions which may require the Company to obtain landlord consents to complete the Reorganization and/or the Offering. The Company does not intend to solicit landlord consents with respect to these leases; accordingly, the landlords could seek to terminate these leases. There can be no assurance that the Company will be able to maintain its existing store locations as leases expire or are terminated by landlords or to locate alternative sites on acceptable terms. Failure to maintain existing store locations or to locate alternative sites could have a material adverse effect on the Company's results of operations and financial condition. See "Business-- Properties." IMPACT OF GENERAL ECONOMIC CONDITIONS. The Company's business is sensitive to consumer spending patterns, which in turn are subject to prevailing economic conditions. Adverse local, regional or national economic conditions may cause shifts in consumer spending that could have a material adverse effect on the Company's results of operations and financial condition. CONTROL BY EXISTING SHAREHOLDERS. Upon completion of the Offering, the Kim Shareholders will beneficially own approximately % of the outstanding shares of Common Stock ( % if the Underwriters' over-allotment option is exercised in full). Accordingly, the Kim Shareholders will be able to control the Company, elect all the directors and generally direct the affairs of the Company. See "Management" and "Principal and Selling Shareholders." Under a credit facility with Fleet Capital Corporation ("Fleet"), the Kim Shareholders are obligated to own not less than 25%, in the aggregate, of the issued and outstanding shares of capital stock of the Company or the loan could be declared in default. See "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." 9 DEPENDENCE ON KEY PERSONNEL. The success of the Company will depend on its ability to attract, motivate and retain key management associates for its stores and skilled merchandising, marketing and administrative personnel at the Company's headquarters. In the past, the Company has been successful in maintaining the continuity of its management team, including its executive officers, Joseph J. Firestone, its President and Chief Executive Officer, Jeffrey W. Griffiths, its Senior Vice President of Merchandising and Distribution and John R. Panichello, its Senior Vice President and Chief Financial Officer. However, there can be no assurance that the Company will continue to be successful in attracting and retaining such personnel. The loss of the services of one or more of such persons or other key personnel could have a material adverse effect on the Company's results of operations and financial condition. See "Management." IMMEDIATE AND SUBSTANTIAL DILUTION. Purchasers of shares of Common Stock in the Offering will experience an immediate and substantial dilution in the net tangible book value of each share of Common Stock of $ per share based upon an assumed initial public offering price of $16.00. See "Dilution." SHARES ELIGIBLE FOR FUTURE SALE. Upon completion of the Offering, the Company will have shares of Common Stock outstanding ( if the Underwriters exercise their over-allotment option in full). Of those shares, a total of shares (plus 1,125,000 additional shares if the Underwriters exercise their over-allotment option in full) will be freely tradeable without restriction or further registration under the Securities Act, unless purchased or held by "affiliates" of the Company as that term is defined in Rule 144 under the Securities Act ("Rule 144"). All of the remaining shares are held by the Kim Shareholders, who are "affiliates" of the Company. Beginning 360 days after the Offering, the Kim Shareholders will be entitled to certain rights with respect to registration of such shares. If exercised, such registration rights could result in such shares being sold in greater amounts than otherwise allowable under Rule 144. See "Description of Capital Stock--Registration Rights" and "Shares Eligible for Future Sale." Under Rule 144, sales of Common Stock by affiliates of the Company are subject to the volume limitations, manner of sale, and notice requirements of Rule 144. See "Shares Eligible for Future Sale." The Company's executive officers and directors and the Kim Shareholders, including the Selling Shareholders, and the Company have agreed with the Underwriters that they will not, directly or indirectly, offer, sell, offer to sell, contract to sell, pledge, grant any option to purchase or otherwise sell or dispose (or announce any offer, sale, offer of sale, contract of sale, pledge, grant of any option to purchase or other sale or disposition) of any shares of Common Stock or other capital stock or any securities convertible into, or exercisable or exchangeable for, or any rights to purchase or acquire any shares of Common Stock, or other capital stock of the Company for a period of 360 days after the date of this Prospectus without the prior written consent of Prudential Securities Incorporated, on behalf of the Underwriters, except for options granted pursuant to the Equity Participation Plan. Prudential Securities Incorporated may, in its sole discretion, at any time and without notice, release all or any portion of the shares of Common Stock subject to such lock-up agreements. Sales of substantial amounts of Common Stock in the public market, or the perception that such sales could occur, could adversely affect the prevailing market price for the Common Stock and could impair the Company's ability to raise capital through a public offering of equity securities. See "Shares Eligible for Future Sale" and "Underwriting." NO PRIOR MARKET; POSSIBLE VOLATILITY OF STOCK PRICE. Prior to the Offering, there has been no public market for the Common Stock, and there can be no assurance that an active trading market for the Common Stock will develop or continue upon completion of the Offering. The initial public offering price will be determined by negotiations among the Company, the Selling Shareholders and the representatives of the Underwriters. See "Underwriting" for a discussion of the factors to be considered in determining the initial public offering price. There can be no assurance that after completion of the Offering the market price of the Common Stock will not decline below the initial public offering price. In addition, the 10 stock markets have experienced extreme price and volume fluctuations which may affect the market price of the Common Stock in a manner unrelated or disproportionate to the operating performance of the Company. These market fluctuations may adversely affect the market price of the Common Stock. See "Underwriting." ANTI-TAKEOVER EFFECTS OF DELAWARE LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS. Certain provisions of the Company's Certificate of Incorporation and Bylaws, as well as the Delaware General Corporation Law, could delay or make more difficult the removal of incumbent directors as well as a merger, tender offer or proxy contest involving the Company, even if such events could be viewed as beneficial by the Company's stockholders. For example, the Board of Directors of the Company is empowered to issue preferred stock in one or more series without stockholder action. Any issuance of this "blank-check" preferred stock could materially limit the rights of holders of the Common Stock and render more difficult or discourage an attempt to obtain control of the Company by means of a tender offer, merger, proxy context or otherwise. In addition, the Certificate of Incorporation and Bylaws contain a number of provisions which could impede a takeover or change in control of the Company, including, among other things, staggered terms for members of the Board, no cumulative voting, and prohibitions on the taking of any stockholder action by written consent or removing a director other than for cause. The Company is also subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which prohibits the Company from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. The application of Section 203 could have the effect of delaying or preventing a change of control of the Company. See "Description of Capital Stock." YEAR 2000 COMPLIANCE. The Company uses a significant number of computer software programs and operating systems in its internal operations, including applications used in inventory management, distribution, financial business systems and various administrative functions. To the extent that these software applications contain source code that is unable to interpret appropriately the upcoming calendar year 2000, some level of modification or even possible replacement of such source code or applications will be necessary. The Company estimates that it will incur expenses of $300,000 to make its computer software programs and operating systems "Year 2000" compliant. However, there can be no assurance that the costs necessary to update software, or potential systems interruptions, will not exceed such amount and have a material adverse effect on the Company's results of operations or financial condition. See "Business-- Management Information Systems." 11 REORGANIZATION The Company was formed in March 1998 as a holding company for EB, which was incorporated in Pennsylvania in 1977. Prior to the consummation of the Reorganization (as defined below), the Company conducted no business and held no assets or liabilities and all of the outstanding shares of capital stock of EB were owned by the Kim Shareholders. Prior to completion of the Offering, EB Services Company LLP, an affiliated partnership owned by the Kim Shareholders which provides management services for stores under management agreements with the Company, will incorporate under the laws of the state of Delaware (such corporation referred to herein as "EB Services"). As a result, the Kim Shareholders will own all of the outstanding shares of capital stock of EB Services. Thereafter, the Kim Shareholders will contribute all of the outstanding shares of capital stock of EB and EB Services in exchange for shares of Common Stock of the Company. The numbers of shares to be exchanged by each of the Kim Shareholders are as follows: (i) Agnes C. Kim will exchange 1,000 shares of Class A common stock of EB and shares of common stock of EB Services and James J. Kim will exchange 12,600 shares of Class B common stock of EB and shares of common stock of EB Services for an aggregate of shares of Common Stock to be owned jointly by them; and (ii) each of the Kim Trusts will exchange 300 shares of Class A common stock of EB, 2,800 shares of Class B common stock of EB and shares of common stock of EB Services for shares of Common Stock to be owned by each of the Kim Trusts. The foregoing contributions will be made pursuant to the terms of an exchange agreement between the Company and the Kim Shareholders (the foregoing transactions referred to herein as the "Reorganization"). See "Certain Transactions" and "Principal and Selling Shareholders." Following completion of the Reorganization and immediately prior to completion of the Offering, all of the outstanding shares of capital stock of EB and EB Services will be owned by the Company. Following completion of the Offering, the Kim Shareholders will own an aggregate of shares of Common Stock, representing approximately % of the outstanding shares of Common Stock. See "Certain Transactions" and "Principal and Selling Shareholders." TERMINATION OF S CORPORATION STATUS AND DISTRIBUTIONS Prior to completion of the Reorganization, EB had elected to be treated for federal and certain state income tax purposes as a corporation (an "S Corporation") subject to taxation under Subchapter S of the Internal Revenue Code of 1986, as amended (the "Code"). As a result, the net income of EB has been taxed for federal (and some state) income tax purposes directly to EB's shareholders rather than to EB. EB's status as an S Corporation will be terminated effective immediately prior to completion of the Offering (the "Termination Date"). EB and EB Services paid distributions aggregating $5.0 million, $13.0 million and $13.9 million during 1996, 1997 and 1998, respectively, primarily to reimburse the Kim Shareholders for federal and state income tax liabilities arising from EB's status as an S Corporation. In 1996, 1997 and 1998, EB paid dividends of $2,751,094, $6,601,310 and $7,643,382, respectively, to James J. Kim, $218,341, $502,009 and $606,618, respectively, to Agnes C. Kim, and $676,855, $1,632,227 and $1,880,575, respectively, to each of the Kim Trusts. In 1997, EB Services distributed $330,000 to each of the Kim Trusts and $10,000 to James J. Kim. Prior to the Reorganization, EB will declare a dividend in the aggregate amount of approximately $26.1 million to the Kim Shareholders (the "S Corp. Distribution"), which amount represents (i) a distribution of a portion of retained earnings which was previously taxed to the Kim Shareholders and (ii) a distribution of an amount approximating EB's earnings for the period from February 1, 1998 through the Termination Date. The S Corp. distribution will be paid upon completion of the Offering. See "Use of Proceeds." The Company, EB and the Kim Shareholders will also enter into a tax indemnification agreement providing that the Company and EB will be indemnified by the Kim Shareholders with respect to their proportionate share of any U.S. federal or state corporate income taxes attributable to the failure of EB to qualify as an S Corporation for any period in any jurisdiction for which S Corporation status was claimed through the Termination Date. The tax indemnification agreement will also provide that the Company and EB will indemnify the Kim Shareholders if such shareholders are required to pay additional taxes or other amounts attributable to taxable years on or before the Termination Date as to which EB filed or files tax returns claiming status as an S Corporation. See "Certain Transactions." 12 USE OF PROCEEDS The net proceeds to the Company from the sale of the 3,750,000 shares of Common Stock offered by the Company hereby (at an assumed initial public offering price of $16.00 per share and after deducting underwriting discounts and commissions and estimated Offering expenses) are estimated to be $55,300,000 million ($63,692,500 million if the Underwriters' over-allotment option is exercised in full). The Company will not receive any proceeds from the sale of Common Stock by the Selling Shareholders. See "Principal and Selling Shareholders." The Company intends to use (i) approximately $26.1 million of the net proceeds to fund the S Corp. Distribution, (ii) approximately $17.7 million of the net proceeds to repay borrowings outstanding under EB's revolving credit facility with Fleet and (iii) the balance of the net proceeds for general corporate purposes, including financing new store openings. On March 16, 1998, EB entered into a credit agreement with Fleet, pursuant to which Fleet agreed to make available to EB an asset based revolving credit and term loan facility in an amount up to $50.0 million. Borrowings under this facility bear interest at a per annum rate equal to either LIBOR plus 250 basis points or Fleet's base rate of interest, at EB's option. As of March 23, 1998, the Company had $17.7 million of borrowings outstanding under the revolving credit facility with Fleet, which borrowings bear interest at Fleet's base rate. The revolving credit facility expires and the term loan, if borrowed, is repayable on March 16, 2001. Of such borrowings, EB used $9.4 million to retire outstanding indebtedness and $8.3 million to pay dividends to certain of the Kim Shareholders. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." Pending application of the net proceeds of the Company from the Offering, the Company intends to invest in short-term, interest-bearing, investment grade securities or guaranteed obligations of the United States government. DIVIDEND POLICY EB and EB Services paid distributions to its shareholders aggregating $5.0 million, $13.0 million and $13.9 million in 1996, 1997 and 1998, respectively. The Company was formed in March 1998. Upon completion of the Offering, the Company will pay to the Kim Shareholders the S Corp. Distribution, which aggregates approximately $26.1 million. Except as described above, the Company has not declared or paid any cash dividends on its capital stock. Pursuant to the Fleet revolving credit and term loan facility, EB may not declare or pay any dividends or make any other distributions if (i) there is an outstanding default under such facility or (ii) EB does not have $3.5 million of availability under such facility. The Company currently intends to retain future earnings, if any, for business use and does not anticipate declaring or paying any dividends on shares of its Common Stock in the foreseeable future. The Board of Directors of the Company intends to review this policy from time to time, after taking into account various factors such as the Company's financial condition, results of operations, current and anticipated cash needs and plans for expansion. 13 CAPITALIZATION The following table sets forth the current portion of long-term debt and the capitalization of the Company at January 31, 1998 (i) on an actual basis and (ii) on an as adjusted basis to give effect to the Reorganization, the sale of 3,750,000 shares of Common Stock offered by the Company hereby (at an assumed initial public offering price of $16.00 per share) and the application of the estimated net proceeds therefrom. See "Use of Proceeds." This table should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated and Combined Financial Statements and Notes thereto appearing elsewhere in this Prospectus.
JANUARY 31, 1998 ---------------------- ACTUAL AS ADJUSTED --------- ----------- (IN THOUSANDS, EXCEPT FOR SHARE DATA) (UNAUDITED) Current portion of long-term debt......................................................... $ 2,400 $ --------- ----------- --------- ----------- Long-term debt............................................................................ $ 10,541 $ Stockholders' equity: Preferred stock, $.01 par value; 25,000,000 shares authorized; none issued and outstanding........................................................................... -- -- Common stock, $.01 par value; 100,000,000 shares authorized; shares issued and outstanding and shares issued and outstanding as adjusted (1).......................................................................... 2 Partners' capital of EB Services Company LLP.............................................. 1 Additional paid-in capital................................................................ 7,584 Foreign currency translation adjustment................................................... (1,143) Retained earnings......................................................................... 22,736 --------- ----------- Total stockholders' equity................................................................ 29,180 --------- ----------- Total capitalization...................................................................... $ 42,121 $ --------- ----------- --------- -----------
- ------------------------ (1) Excludes shares of Common Stock reserved for issuance upon the exercise of options granted pursuant to the Equity Participation Plan, and shares of Common Stock available for the future grant of stock options and other equity securities under the Equity Participation Plan. See "Management--Equity Participation Plan." 14 DILUTION Purchasers of the Common Stock offered hereby will experience an immediate and substantial dilution in the net tangible book value (total tangible assets minus total liabilities) of the Common Stock from the initial public offering price. At January 31, 1998, the net tangible book value of the Company was $21.5 million, or $ per share. After giving effect to the sale of 3,750,000 shares of Common Stock by the Company (at an assumed initial public offering price of $16.00 per share) and the application of the net proceeds therefrom, the pro forma net tangible book value of the Common Stock would have been $ million, or $ per share. This represents an immediate increase in net tangible book value of $ per share of Common Stock to existing stockholders and an immediate and substantial dilution of $ per share of Common Stock to new investors purchasing shares of Common Stock in the Offering. The following table illustrates the dilution per share: Assumed initial public offering price....................... $ 16.00 Net tangible book value before the Offering............... $ Increase attributable to new investors.................... --------- Pro forma net tangible book value after the Offering........ --------- Dilution to new investors................................... $ --------- ---------
The following table sets forth the number of shares of Common Stock sold by the Company, the total consideration paid to the Company and the average price per share paid by the existing stockholders and by the new investors purchasing shares of Common Stock in the Offering:
SHARES PURCHASED TOTAL CONSIDERATION ----------------------- ------------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ---------- ----------- ------------ ----------- ------------- Existing stockholders (1)............................ % $ 7,587,655 % $ New investors........................................ 16.00 ---------- --- ------------ --- Total........................................ 100% $ 100% ---------- --- ------------ --- ---------- --- ------------ ---
- ------------------------ (1) Excludes shares of Common Stock reserved for issuance upon the exercise of stock options outstanding as of , 1998, under the Equity Participation Plan, which have an exercise price at the initial public offering price per share, and shares of Common Stock available for the future grant of stock options and other equity securities under the Equity Participation Plan. See "Management--Equity Participation Plan." 15 SELECTED CONSOLIDATED AND COMBINED FINANCIAL AND OPERATING DATA (IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA) The following table sets forth, for the periods and at the dates indicated, summary consolidated and combined financial and operating data for the Company. The information presented below under the captions "Statement of Income Data" for 1993 through 1996 and "Balance Sheet Data" as of January 29, 1994, January 28, 1995, February 3, 1996, February 1, 1997 and January 31, 1998 is derived from the Company's audited Consolidated and Combined Financial Statements. The Company's audited financial statements for each of the three fiscal years in the period ended, and as of January 31, 1998, are included elsewhere in this Prospectus. The selected financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated and Combined Financial Statements and Notes thereto included elsewhere in this Prospectus.
1993 1994 1995 1996 1997 ---------- ---------- ---------- ---------- ----------- STATEMENT OF INCOME DATA: Net sales........................................... $ 240,387 $ 249,552 $ 268,956 $ 337,059 $ 449,180 Cost of goods sold.................................. 175,865 182,505 199,226 252,813 338,615 ---------- ---------- ---------- ---------- ----------- Gross profit........................................ 64,522 67,047 69,730 84,246 110,565 Operating expenses.................................. 55,894 56,070 58,270 67,438 77,175 Depreciation and amortization....................... 4,638 5,324 6,180 6,936 8,316 ---------- ---------- ---------- ---------- ----------- Income from operations.............................. 3,990 5,653 5,280 9,872 25,074 Interest expense, net............................... 1,578 1,727 1,818 1,298 1,379 ---------- ---------- ---------- ---------- ----------- Income before income tax expense.................... 2,412 3,926 3,462 8,574 23,695 Income tax expense (1).............................. 391 286 280 550 846 ---------- ---------- ---------- ---------- ----------- Net income.......................................... $ 2,021 $ 3,640 $ 3,182 $ 8,024 $ 22,849 ---------- ---------- ---------- ---------- ----------- ---------- ---------- ---------- ---------- ----------- Net income per share................................ Weighted average shares outstanding................. PRO FORMA INCOME DATA: Income before income tax expense.................... $ 2,412 $ 3,926 $ 3,462 $ 8,574 $ 23,695 Pro forma income tax provision...................... 972 1,582 1,395 3,455 9,543 ---------- ---------- ---------- ---------- ----------- Pro forma net income (2)............................ $ 1,440 $ 2,344 $ 2,067 $ 5,119 $ 14,152 ---------- ---------- ---------- ---------- ----------- ---------- ---------- ---------- ---------- ----------- Pro forma net income per share...................... Pro forma weighted average shares outstanding (3)................................... OPERATING DATA (4): Stores open at beginning of period.................. 274 311 325 341 360 Stores open at end of period........................ 311 325 341 360 452 Sales per square foot (5)........................... $ 763 $ 721 $ 729 $ 831 $ 926 Average sales per store (000s)...................... $ 822 $ 785 $ 808 $ 962 $ 1,106 Comparable store sales increase (decrease).......... (10.8%) (6.6%) 3.5% 20.8% 15.3% Inventory turnover.................................. 3.0x 3.6x 3.8x 5.1x 5.3x
16
JANUARY 29, JANUARY 28, FEBRUARY 3, FEBRUARY 1, JANUARY 31, 1994 1995 1996 1997 1998 ------------ ------------ ------------- ------------- ------------ BALANCE SHEET DATA: Working capital (deficit)................. $ (2,531) $ 3,344 $ (11,038) $ 9,893 $ (16,532) Total assets.............................. 80,580 82,900 95,515 139,360 143,170 Total liabilities......................... 68,153 66,833 78,066 118,887 113,990 Stockholders' equity...................... 12,427 16,067 17,449 20,473 29,180
- ------------------------ (1) Prior to the Reorganization, EB elected to be treated as an S Corporation and, as a result, its taxable income was passed through to its shareholders for federal income tax purposes. Accordingly, the financial statements do not include a provision for federal income taxes. EB elected to be treated as an S Corporation for some states, while remaining subject to corporate tax in other states and, as a result, the financial statements provide for certain state income taxes. (2) The pro forma net income gives effect to the application of the pro forma income tax expense that would have been reported had EB been a corporation subject to federal and all state income taxes for all periods shown. See Notes 1 and 2 of Notes to Consolidated and Combined Financial Statements. (3) Adjusted to give effect to the sale by the Company of 3,750,000 shares of Common Stock offered hereby at an assumed initial offering price of $16.00 per share (after deducting underwriting discounts and estimated Offering expenses), and after the application of the estimated net proceeds therefrom to the Company. See "Use of Proceeds" and "Capitalization." (4) Does not reflect stores operated by EB-UK and WaldenSoftware for which the Company provides management services. See "Business--Management Services." (5) Calculated based on stores open for one year or longer. 17 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS. OVERVIEW The Company is among the world's largest specialty retailers of electronic games. The Company's primary products are video games and PC entertainment software, supported by the sale of video game hardware, PC productivity software and accessories. As of January 31, 1998, the Company operated a total of 452 stores in 42 states, Puerto Rico, Canada, Australia and South Korea, primarily under the names Electronics Boutique and Stop 'N Save Software. As of such date, the Company also provided management services for EB-UK, which operated 129 stores and 17 department store-based concessions in the United Kingdom and Ireland. As of January 31, 1998, the Company also managed 39 mall-based WaldenSoftware stores for Borders Group, Inc. The Company is a holding company and does not have any significant assets or liabilities, other than all of the outstanding capital stock of EB and EB Services. The Company's net sales have increased in each of the last three years as a result of new store openings and sales growth in existing stores. In 1997, the Company opened 71 new stores (17 of which were in foreign markets) and expects to open 80 to 90 new stores in 1998 (30 to 35 of which are expected to be in foreign markets). The Company believes that its success in achieving sales growth and increased profitability is largely due to efficiencies created by its inventory management and distribution systems, store operating efficiencies and its knowledge of its market area and its customers. However, the Company's comparable store sales have experienced significant fluctuations in the past due to, among other things, timing of new product introductions and promotions, adverse weather conditions, shifts in the timing of certain holidays, prevailing economic conditions, changes in merchandise trends, the Company's ability to source merchandise efficiently, and the timing and concentration of store openings. The Company believes the impact of new video game hardware system introductions on comparable store sales is likely to decline in future periods due to improvements in hardware technology and the growing popularity of PC-based games. The Company regularly reviews the performance of each of its stores and may close or relocate those that are performing inadequately. Prior to 1997, the Company operated stores in Canada and South Korea with local joint venture partners. In 1997, the Company acquired its joint venture partners' interests in these operations. The results of these foreign operations are consolidated in the Company's financial statements for the entire fiscal year. Over the past two years, the video game industry has experienced substantial growth due to the introduction of next generation video game hardware systems in the latter part of 1995 and in 1996. Historically, the introduction of a next generation video game hardware system has resulted in increased sales, as the new technology encourages current video game players to update their video game hardware systems and attracts new video game players to purchase their first systems. The increased sales volume, however, is partially offset as video game hardware systems have a lower gross margin than the Company's other products. Following the introduction of next generation video game hardware systems, the market has traditionally experienced growth in the quantity and sophistication of related video game titles. In 1997, the Company reduced its gross margins on these video game titles as well as on PC entertainment titles to increase its overall sales volume. 18 RESULTS OF OPERATIONS The following table sets forth certain income statement items as a percentage of net sales for the years indicated:
1995 1996 1997 --------- --------- --------- Net sales.......................................................................... 100.0% 100.0% 100.0% Cost of goods sold................................................................. 74.1 75.0 75.4 --------- --------- --------- Gross profit....................................................................... 25.9 25.0 24.6 Operating expenses................................................................. 21.6 20.0 17.2 Depreciation and amortization...................................................... 2.3 2.1 1.8 --------- --------- --------- Income from operations............................................................. 2.0 2.9 5.6 Interest expense, net.............................................................. 0.7 0.4 0.3 --------- --------- --------- Income before income tax expense................................................... 1.3 2.5 5.3 Pro forma income tax expense....................................................... 0.5 1.0 2.1 --------- --------- --------- Pro forma net income (1)........................................................... 0.8% 1.5% 3.2% --------- --------- --------- --------- --------- ---------
- ------------------------ (1) The pro forma net income gives effect to the application of the pro forma income tax expense that would have been reported had EB been a corporation subject to federal and state income taxes for all periods shown. See Notes 1 and 2 of Notes to Consolidated and Combined Financial Statements. 1997 COMPARED TO 1996 Net sales increased by 33.3% from $337.1 million in 1996 to $449.2 million in 1997. The increase in net sales was primarily attributable to (i) the opening of 45 net new domestic stores, (ii) a 15.3% increase in comparable store sales and (iii) the consolidation of $33.0 million of net sales from international retail operations, which net sales were fully consolidated as a result of the acquisition of interests of joint venture partners acquired by the Company in 1997. Gross profit increased by 31.2% from $84.2 million in 1996 to $110.6 million in 1997. As a percentage of net sales, gross profit decreased from 25.0% in 1996 to 24.6% in 1997. The decrease in gross profit as a percentage of sales was primarily due to the Company's decision to reduce prices for selected electronic game titles in order to increase market share and sales volume. Selling, general and administrative expense increased by 14.4% from $67.4 million in 1996 to $77.2 million in 1997. As a percentage of net sales, selling, general and administrative expense decreased from 20.0% in 1996 to 17.2% in 1997. The $9.7 million increase was a result of the increase in the Company's store base and the associated increases in store and headquarter operating expenses. The decrease in selling, general and administrative expense as a percentage of net sales was primarily attributable to the increase in net sales without a proportional increase in corporate and store-level overhead. Depreciation and amortization expense increased by 19.9% from $6.9 million in 1996 to $8.3 million in 1997. This increase was primarily attributable to capitalized expenditures for leasehold improvements and furniture and fixtures for new store openings. Operating income increased by 154% from $9.9 million in 1996 to $25.1 million in 1997. As a percentage of net sales, operating income increased from 2.9% in 1996 to 5.6% in 1997, as the increase in cost of goods sold as a percentage of net sales was more than offset by the decline in operating expenses as a percentage of net sales. Interest expense, net, increased by 6.2% from $1.3 million in 1996 to $1.4 million in 1997. The increase was primarily attributable to the inclusion of foreign operation interest expense in 1997, which was partially offset by reduced short-term borrowings and the repayment of long-term debt in 1997. 19 As a result of all the above factors, the Company's income before income taxes increased by 176% from $8.6 million in 1996 to $23.7 million in 1997. 1996 COMPARED TO 1995 Net sales increased by 25.3% from $269.0 million in 1995 to $337.1 million in 1996. The increase in net sales was primarily attributable to the opening of 19 net new domestic stores and a 20.8% increase in comparable store sales. The increase in comparable store sales was primarily a result of a full year of sales of the Sony PlayStation and the Sega Saturn, which were released in calendar year 1995, and the introduction of the Nintendo N64, which was released in the fall of 1996. Gross profit increased by 20.8% from $69.7 million in 1995 to $84.2 million in 1996. As a percentage of net sales, gross profit decreased from 25.9% in 1995 to 25.0% in 1996. The decrease in gross profit as a percentage of net sales was due primarily to a greater percentage of the Company's sales mix being generated from video game hardware systems, which have a lower gross margin than the Company's other products. Selling, general and administrative expense increased by 15.7% from $58.3 million in 1995 to $67.4 million in 1996. As a percentage of net sales, selling, general and administrative expense decreased from 21.6% in 1995 to 20.0% in 1996. The $9.1 million increase was a result of the increase in the Company's store base and the associated increases in store and headquarter operating expenses. The decrease in selling, general and administrative expense as a percentage of net sales was primarily attributable to the increase in net sales without a proportional increase in corporate and store-level overhead. Depreciation and amortization expense increased by 12.2% from $6.2 million in 1996 to $6.9 million in 1997. This increase was primarily attributable to capitalized expenditures for leasehold improvements and furniture and fixtures for new store openings. Operating income increased by 87.0% from $5.3 million in 1995 to $9.9 million in 1996. As a percentage of net sales, operating income increased from 2.0% in 1995 to 2.9% in 1996, as the increase in cost of goods sold as a percentage of net sales was more than offset by the decline in operating expenses as a percentage of net sales. Interest expense, net, decreased by 28.6% from $1.8 million in 1995 to $1.3 million in 1996. This decrease is primarily attributable to reduced short-term borrowings, repayment of long-term debt and an increase in interest income during 1996. As a result of all the above factors, the Company's income before income taxes increased 148% from $3.5 million in 1995 to $8.6 million in 1996. SEASONALITY AND QUARTERLY RESULTS The Company's business, like that of most retailers, is highly seasonal. A significant portion of the Company's net sales and profits are generated during the Company's fourth fiscal quarter, which includes the holiday selling season. Results for any quarter are not necessarily indicative of the results that may be achieved for a full fiscal year. Quarterly results may fluctuate materially depending upon, among other factors, the timing of new product introductions and new store openings, net sales contributed by new stores, increases or decreases in comparable store sales, adverse weather conditions, shifts in the timing of certain holidays or promotions and changes in the Company's merchandise mix. See "Risk Factors-- Seasonality and Quarterly Results." 20 The following table sets forth certain unaudited quarterly income statement information for 1996 and 1997. The unaudited quarterly information includes all normal recurring adjustments that management considers necessary for a fair presentation of the information shown.
FISCAL QUARTER ENDED ------------------------------------------------------------------------------- MAY 4, AUG. 3, NOV. 2, FEB. 1, MAY 3, AUG. 2, NOV. 1, JAN. 31, 1996 1996 1996 1997 1997 1997 1997 1998 ------- ------- ------- -------- ------- ------- ------- -------- (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA) Net sales..................... $52,091 $51,081 $76,696 $157,191 $83,688 $72,894 $93,700 $198,898 Gross profit.................. 14,280 14,193 18,352 37,421 21,747 18,587 23,640 46,591 Operating income (loss)....... (2,274) (3,247) 839 14,554 2,408 (1,882) 988 23,560 Income (loss) before income taxes....................... (2,502) (3,696) 391 14,381 2,113 (2,278) 646 23,214 Net income (loss)............. $(2,502) $(3,696) $ 391 $ 13,831 $ 2,113 $(2,284) $ 646 $ 22,374 Net income (loss) per share....................... AS A PERCENTAGE OF NET SALES: Gross profit.................. 27.4% 27.8% 23.9% 23.8% 26.0% 25.5% 25.2% 23.4% Operating income (loss)....... (4.4) (6.4) 1.1 9.3 2.9 (2.6) 1.1 11.8 Income (loss) before income taxes....................... (4.8) (7.2) 0.5 9.1 2.5 (3.1) 0.7 11.7 Net income (loss)............. (4.8%) (7.2%) 0.5% 8.8% 2.5% (3.1%) 0.7% 11.2% Net income (loss) per share...
LIQUIDITY AND CAPITAL RESOURCES The Company has historically financed its operations through a combination of cash generated from operations and bank debt. The Company generated $11.2 million, $37.1 million and $31.1 million in cash from operations in 1995, 1996 and 1997, respectively. The $31.1 million of cash generated from operations in 1997 was primarily the result of $22.8 million of net income, $8.9 million of non-cash charges to net income, and a $9.6 million increase in accounts payable and accrued expenses, partially offset by an increase of $5.1 million in other assets, a $2.9 million increase in due from affiliates and a $2.0 million decrease in due to affiliates. The $6.0 million decrease in cash generated from operations in 1997 as compared to 1996 was primarily attributable to (i) a reduction in accounts payable and accrued expenses of $17.1 million, (ii) an increase in other assets of $5.1 million, (iii) a decrease in affiliate payables of $2.4 million and (iv) an increase in affiliate receivables of $2.2 million. Such amounts were partially offset by an increase in net income of $14.8 million and a decrease in inventory of $5.7 million. The $25.9 million increase in cash generated from operations in 1996 as compared to 1995 was primarily attributable to an increase in accounts payable and accrued expenses of $20.7 million, an increase in net income of $4.8 million, and a decrease in receivables from affiliates of $4.4 million. Such amounts were partially offset by a $4.4 million increase in inventory. In 1996, EB Canada entered into a $4.0 million term loan facility with Cho Hung Bank of Canada. At January 31, 1998, the outstanding balance on this loan was $3.7 million. The note matures on September 1, 2002 and bears interest at the bank's prime rate plus 0.125%. In 1997, EB Canada entered into a $1.0 million line of credit with Cho Hung Bank of Canada. At January 31, 1998, there was no outstanding balance on this line of credit. The line of credit expires on November 5, 1998 and bears interest at the bank's prime rate plus 0.125%. On March 16, 1998, EB entered into a credit agreement with Fleet, pursuant to which Fleet agreed to make available to EB an asset based revolving credit and term loan facility in an amount up to $50.0 million. The revolving credit facility expires and the term loan, if borrowed, is repayable on March 16, 2001. Interest accrues on borrowings at a per annum rate equal to either LIBOR plus 250 basis points or Fleet's base rate of interest, at EB's option. The revolving credit and term loan facilities are secured by accounts receivable, inventory, and equipment, and the term loan facility is also secured by the Company's 21 West Chester, Pennsylvania property. As of March 20, 1998, EB had $17.7 million of outstanding borrowings under the revolving credit facility and had not borrowed amounts under the term loan. The borrowings under the revolving credit facility bear interest at Fleet's base rate of interest. The Company intends to use $17.7 million of its net proceeds of the Offering to repay EB's obligations to Fleet. The Company made capital expenditures of $18.5 million in 1997, primarily for opening 71 new stores and to acquire its West Chester, Pennsylvania distribution center, which was previously leased by the Company. The Company expects to make capital expenditures in 1998 of approximately $21.1 million, primarily to open approximately 80 to 90 new stores. The Company believes that the net proceeds of the Offering, together with cash generated from its operating activities and available bank borrowings, will be sufficient to fund its operations and store expansion programs through the end of 1999. IMPACT OF INFLATION The Company does not believe that inflation has had a material effect on its net sales or results of operations. RECENT ACCOUNTING PRONOUNCEMENT Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," was issued in June 1997 and established standards for reporting and display of comprehensive income in financial statements. This statement is effective for the Company's financial statements for the year ended January 30, 1999. The adoption of this statement is not expected to have a material effect on the Company's financial statements. YEAR 2000 The Company uses a significant number of computer software programs and operating systems in its internal operations, including applications used in inventory management, distribution, financial business systems and various administrative functions. To the extent that these software applications contain source code that is unable to interpret appropriately the upcoming calendar year 2000, some level of modification or even possible replacement of such source code or applications will be necessary. The Company estimates that it will incur expenses of $300,000 to make its computer software programs and operating systems "Year 2000" compliant. However, there can be no assurance that the costs necessary to update software, or potential systems interruptions, will not exceed such amount and have a material adverse effect on the Company's results of operations or financial condition. 22 BUSINESS GENERAL The Company is among the world's largest specialty retailers of electronic games. The Company's primary products are video games and PC entertainment software, supported by the sale of video game hardware, PC productivity software and accessories. As of January 31, 1998, the Company operated 452 stores in 42 states, Puerto Rico, Canada, Australia and South Korea, primarily under the names Electronics Boutique and Stop 'N Save Software. As of such date, the Company also provided management services for EB-UK, which operated 129 stores and 17 department store-based concessions in the United Kingdom and Ireland. As of January 31, 1998, the Company also managed 39 mall-based WaldenSoftware stores for Borders Group, Inc. The Company's stores are primarily located in high traffic areas in regional shopping malls and average 1,100 square feet in size. The Company plans to open approximately 50 to 55 domestic and 30 to 35 foreign stores in each of 1998 and 1999. The Company's revenues and operating income have grown from $249.6 million and $5.7 million, respectively, in 1994, to $449.2 million and $25.1 million, respectively, in 1997. Comparable store sales increased 3.5%, 20.8% and 15.3% in 1995, 1996 and 1997, respectively. The Company's core customer is the electronic game enthusiast who demands immediate access to new title releases and who generally purchases more video game titles and PC entertainment software than the average electronic game consumer. The Company believes that it attracts the core game enthusiast due to the Company's: (i) specialty store focus on the electronic game category; (ii) ability to stock sought-after new releases on its stores' shelves immediately after release by publishers; (iii) breadth of product selection; and (iv) knowledgeable sales associates, who are often game enthusiasts themselves and who have extensive knowledge of game titles and features. The Company places significant emphasis on offering its customers immediate access to new releases and has designed its product merchandising strategy and distribution systems to facilitate such access. The Company introduces, on average, 20 new game titles in its stores per week. The Company believes that this FIRST TO MARKET strategy establishes its stores as the logical destination of choice for electronic game enthusiasts. The Company's strict inventory management system enables it to (i) maintain over 2,600 active SKUs, (ii) replenish its large and geographically dispersed store base on a daily basis, and (iii) minimize mark-downs as titles mature. The Company supports its product offerings with a strong commitment to customer service, which the Company believes distinguishes it from its competitors. All sales associates receive extensive training on video game and PC entertainment software products, system requirements and selling techniques. INDUSTRY OVERVIEW The electronic game industry is segmented into two primary product platforms: video games and PC entertainment software. VIDEO GAMES. Video game play requires two components, video game consoles (hardware) and video game titles (software). Video game consoles are specialized processing devices which are connected to a free-standing monitor or, typically, a television set. Video game titles are small cartridges or CD-Roms that are inserted into a video game console. The video game market is dominated by three manufacturers, Nintendo, Sega and Sony, each of which manufactures proprietary hardware (in the form of console systems) and publishes game titles which run on their systems but cannot run on those of its competitors. Third party publishers also produce a wide range of game titles for each of these major hardware systems. Growth in the video game industry has been primarily driven by the periodic introduction of new generations of hardware systems. The current 32/64 bit systems offer highly developed, three dimensional graphics capabilities, speed, and sound effects. Manufacturers have introduced next generation hardware technologies every four to five years. Sales of prior generation video game titles generally peak five years after the introduction of new hardware systems. 23 Total domestic retail sales of video game titles, hardware and accessories was approximately $5.5 billion in calendar 1997, an increase of approximately 51% over retail sales in the prior year. This increase was primarily the result of an increased penetration rate of the fourth generation of video game hardware technology (32/64 bit systems), which was introduced in calendar years 1995 and 1996. As was the case with each prior generation, the introduction of the new hardware technology has led to an increase in the total installed base of the new technology over that of the prior generation. The enhanced technological features of new hardware expand gaming capabilities, thereby encouraging existing players to upgrade their hardware platforms, and simultaneously attracting new video game players to purchase their first systems. Industry sources forecast continued growth in sales of the current generation of hardware technology and related software for calendar years 1998 and 1999. It is anticipated that the current generation of hardware systems will be replaced by a new generation of systems, beginning with the expected U.S. introduction of a new Sega system called "Katana," which Sega is targeting for release in the fall of 1999. See "Risk Factors--Video Game Systems and Software Product Life Cycles." PC ENTERTAINMENT SOFTWARE. PC entertainment software is generally sold in the form of a CD-Rom and played on multimedia PCs featuring fast processors, expanded memories, and enhanced graphics and audio capabilities. The PC entertainment software industry is more fragmented than the video game industry, with game publishers producing game titles which can be used on most PCs. The market for PC entertainment software has experienced steady growth in recent years, due primarily to the growth in the installed base of multimedia PCs. According to industry sources, the domestic installed base of multimedia PCs has increased from approximately 14 million units in calendar 1995 to approximately 23 million units in calendar 1997. Domestic unit sales of PC entertainment software have increased from approximately 23 million units in calendar 1995 to approximately 46 million units in calendar 1997. These sources estimate that domestic retail sales of PC entertainment software totaled approximately $1.3 billion in calendar 1997, an increase of approximately 23% over retail sales in the prior year. It is anticipated that the recent introduction of multimedia PCs priced at or below $1,000 will accelerate growth in PC unit sales and broaden the appeal of home PCs as an alternative source of in-home entertainment. Worldwide, the installed base of multimedia PCs as well as sales of PC entertainment software have experienced comparable increases to those experienced domestically. The typical electronic game consumer is male, between the ages of 14 and 34, and lives in a household with income in excess of $50,000. Owners of video game hardware systems purchase an average of 3.2 game titles per year. The Company believes that many electronic game players purchase video game titles as well as PC entertainment software. Electronic games are principally sold through retail channels, including mass merchants, toy retail chains, electronics retailers, computer retailers, specialty software retailers, wholesale clubs, and mail order. BUSINESS STRATEGY The Company seeks to enhance its position as one of the world's premier specialty retailers of video game titles and PC entertainment software. BREADTH OF TITLE SELECTION. The Company offers its customers an extensive selection of video game titles and PC entertainment software at competitive prices. The Company's typical store offers approximately 1,650 titles at any given time from over 120 video game and PC entertainment software vendors. The title selection in each store is continuously updated and tailored to reflect the tastes and buying patterns of the store's local market. The Company carries game titles which are compatible with all major video game hardware systems and PCs. In addition to video game titles and PC entertainment software, the Company offers a complementary line of productivity and educational software and PC and video game accessories and peripheral products, including graphics accelerators, joysticks, memory cards, books and magazines. By offering all major video game hardware systems and providing a broad but focused assortment of electronic game software and accessories, the Company seeks to establish its stores as the logical destination of choice for electronic game enthusiasts. 24 IMMEDIATE AVAILABILITY OF NEW RELEASES. The Company strives to be the first in its markets to offer new video game titles upon their release. New release titles are often preceded by substantial publicity in the form of advertisements and reviews in publications and, increasingly, are promoted through television. This publicity tends to create high levels of demand for new releases among video game enthusiasts, often well in advance of release dates. This demand has afforded the Company an important marketing opportunity to create excitement surrounding its stores. To assure its customers immediate access to new releases, the Company offers its customers the opportunity to purchase video games prior to their release (the "EB Pre-Sell Program") and has established a reserve list (the "EB Reserve List") which guarantees its customers a copy of a new release immediately after its launch. The Company introduces approximately 20 new game titles in its stores each week. The Company believes that its FIRST TO MARKET strategy establishes the Company's stores as the logical destination of choice for electronic game enthusiasts. HIGHLY EFFECTIVE INVENTORY MANAGEMENT SYSTEM. The Company emphasizes strict inventory policies in order to effectively manage over 2,600 SKUs, including video game titles, PC entertainment software, video game consoles, and accessories. The Company has developed a sophisticated inventory management system which enables it to maximize sales of new release titles and avoid markdowns as titles mature. The Company minimizes its inventory risk by: (i) conducting extensive research on new release titles to forecast anticipated daily sell-through; (ii) utilizing POS polling technology to provide daily sales, margin and inventory reports to the Company's merchandising staff; (iii) managing inventory on a store-by-store basis in order to address local customer merchandise preferences; and (iv) replenishing store-level inventories daily from its fully automated distribution center. The Company introduces an average of 10 new SKUs in its stores each day. As a result of these inventory management initiatives, the Company has been able to achieve desired in-stock positions and increase its inventory turns from 3.8x in 1995 to 5.1x in 1996 to 5.3x in 1997. In addition, the Company's 1997 inventory shortage was less than 0.8% of cost of sales. DISCIPLINED STORE OPERATIONS. The Company's management team exercises significant control over all aspects of its store operations, from product research, purchasing and distribution to real estate selection, store development, POS financial reporting, and sales training. The Company believes that this commitment to operational control enables it to operate substantially all of its stores on a profitable basis, to identify quickly opportunities to improve store productivity and to react to shifts in product pricing and consumer purchasing trends more quickly than its competitors. KNOWLEDGEABLE SALES ASSOCIATES. The Company believes that its knowledgeable sales associates provide the Company with an important competitive advantage over mass merchants, toy retail chains and electronics and computer superstores, all of which compete with the Company, but generally offer much lower levels of customer service in the electronic game category than the Company. All sales associates are given extensive training on video game and PC entertainment software products, system requirements and selling techniques. Many of the Company's sales associates are also electronic game enthusiasts. Training is facilitated through vendor-sponsored EB University seminars, held semi-annually for field management associates, as well as through regularly scheduled in-store seminars conducted by District Training Managers who provide merchandise and sales training to the Company's sales associates. In addition, sales associates are encouraged to learn about their customers' game preferences. With this knowledge, sales associates can introduce customers to a selection of electronic games and accessories which may suit their preferences or enhance the overall game experience. In addition, the Company's sales associates advise customers of pending new releases suited to the customer's expressed interests. VALUE PRICING AND AFFINITY PROGRAMS. In an effort to offer maximum value to its customers and discourage comparison shopping, the Company maintains an everyday low pricing policy and supports this policy with price matching (the "EB Code of Honor Program") and affinity programs. These affinity programs are the Frequent Buyer Card (the "EB-FBC"), the EB Pre-Sell Program, and the EB Reserve List. An extensive selection of merchandise and a high level of customer service complement the Company's everyday low price policy. 25 GROWTH STRATEGY DOMESTIC NEW STORE EXPANSION. The Company plans to expand its domestic retail operations by opening 35 to 40 Electronics Boutique stores and 10 to 12 Stop 'N Save Software stores in both existing and new markets during 1998. As of March 1, 1998, the Company had executed leases for 13 new domestic stores, and is currently negotiating with landlords with respect to 23 potential new domestic stores. The Company's real estate team applies standardized site selection criteria to secure the best location for its stores when entering a new market or expanding within an existing market. The Company believes its store formats can operate profitably in high traffic/high rent malls as well as in lower traffic/lower rent malls and strip shopping centers. This flexibility provides the Company with an extensive selection of locations for future store openings. INTERNATIONAL OPPORTUNITIES. As of January 31, 1998, the Company operated 15 stores in Australia, 27 stores in Canada, five stores in South Korea, and provided management services to an affiliate, EB-UK, which operates 129 stores and 17 department store-based concessions in the United Kingdom and Ireland. The Company intends to open 15 stores annually in both Australia and Canada during 1998 and 1999. As of March 1, 1998, the Company had executed leases for three new stores in Australia, and is currently negotiating with landlords with respect to 12 potential new stores in Australia and for four potential new stores in Canada. The Company believes that its current international presence will enable it to leverage its existing distribution and management infrastructure for further international expansion. See "Risk Factors--New Store Openings." EXPANSION OF ONLINE RETAILING. The Company believes that it was one of the first video game and PC entertainment software specialty retailers to offer a World Wide Website enabling both product review and online purchasing. The Company's core game enthusiast customer is technically proficient and, as such, the Company believes that online retailing is a natural extension of its current retail operations. Since the Company believes that its primary distribution center is well configured to enable fulfillment of online orders, the Company provides its own fulfillment function. In order to broaden its Internet presence, during the first quarter of 1998, the Company entered into a two-month arrangement with Yahoo! Inc. ("Yahoo") to promote the Company and its product lines to potential customers through direct linkages from Yahoo to the Company's Website. The Company intends to pursue aggressively other strategic alliances with directories, search engines, content providers, and sites geared toward electronic game players. By April 1998, the Company intends to provide customers with a complete product offering, including access to the Company's database of over 7,500 items, which includes all active and inactive electronic game titles. STORE PRODUCTIVITY. The Company constantly strives to increase the productivity of its stores by focusing on: - Inventory Management and Controls. Utilizing its sophisticated POS and inventory management systems, including its fully automated distribution center, the Company seeks to continuously improve the merchandise mix and in-stock positions in its stores, increase inventory turns and drive down shrinkage (which, at less than 0.8% of cost of sales in 1997, the Company believes is among the lowest of mall-based retailers). - Managing Store Payroll. The Company seeks to optimize store payroll expense by utilizing its sophisticated POS reporting systems to assure the best possible match of sales associate floor coverage to customer traffic. In an effort to further enhance its store payroll strategy, the Company is currently testing a new system which electronically measures store customer traffic throughout the day and provides management with an analysis of sales conversion rates by store and by sales associate. This system will allow management to further improve its on-going sales conversion training. 26 - Pre-owned Electronic Games. As a result of the proliferation of new titles and the tendency of electronic game players to seek new game challenges after mastering a particular title, a growing market for pre-owned video game titles has evolved in recent years. The Company offers its customers a store credit for their pre-owned video game titles. Sales of pre-owned video game titles generate higher margins than new titles and their availability in the Company's stores tends to attract the Company's core game enthusiast customer. The Company believes that a significant opportunity exists to increase sales of pre-owned game titles and is currently implementing a number of marketing and merchandising programs, coupled with incentives to its sales associates, to increase its participation in the growing market for pre-owned game titles. RETAIL OPERATIONS As of January 31, 1998, the Company operated a total of 452 stores in 42 states, Puerto Rico, Canada, Australia and South Korea, primarily under the names Electronics Boutique and Stop 'N Save Software. STORE FORMATS. Electronics Boutique stores are specialty retail stores that offer video game hardware and game titles, PC entertainment, educational and productivity software and video game and PC accessories. Electronics Boutique stores are primarily located in high traffic areas in regional shopping malls and generally stock over 2,600 SKUs. The typical mall-based Electronics Boutique store is approximately 1,100 square feet, but stores range in size from 450 square feet to 1,500 square feet, with retail sales space encompassing approximately 90% of total square footage. Stop 'N Save Software stores are generally larger format stores located in urban areas and strip and power shopping centers. The Company's merchandising strategy at its Stop 'N Save Software stores is comparable to its merchandising strategy at its Electronics Boutique stores. The Company opened its first Stop 'N Save Software store in 1995. Stop 'N Save Software stores range in size from 1,250 to 5,000 square feet, with retail sales space encompassing approximately 90% of total square footage. In addition, the Company also operates seven stores that sell sports collectibles and memorabilia under the name Brandywine Sports Collectables ("BC Collectables"). The Company is developing BC Collectables as a new concept, as it believes the customer base of BC Collectables shares many of the same demographic characteristics as the customer base of the Company's Electronics Boutique stores. BC Collectables stores are located in malls and strip and power shopping centers and generally range in size from 1,000 to 5,000 square feet. The following table sets forth information concerning the number of stores open at the end of the periods indicated:
1993 1994 1995 1996 ----- ----- ----- ----- Domestic Stores: Electronics Boutique........................................................... 311 325 338 351 Stop 'N Save Software.......................................................... 0 0 1 3 BC Collectables................................................................ 0 0 2 6 --- --- --- --- Total...................................................................... 311 325 341 360 Total International Company Stores............................................. 7 22 23 30 --- --- --- --- Total Company Stores........................................................... 318 347 364 390 --- --- --- --- --- --- --- --- 1997 ----- Domestic Stores: Electronics Boutique........................................................... 390 Stop 'N Save Software.......................................................... 8 BC Collectables................................................................ 7 --- Total...................................................................... 405 Total International Company Stores............................................. 47 --- Total Company Stores........................................................... 452 --- ---
SITE SELECTION. Company representatives visit numerous mall and power and strip shopping center sites throughout the year in the United States and in several foreign countries in search of suitable store locations. The Company's standardized site selection criteria include, but are not limited to: population demographics; psychographics; traffic count; store-front visibility and presence; adjacencies; competition; lease terms; and accessible parking. The Company believes its store formats can operate profitably in high 27 traffic/high rent malls as well as lower traffic/lower rent malls and shopping centers. The Company, therefore, believes that there is a large selection of locations available for future sites and views lease terms as the most critical element in its selection process. The Company has used its knowledge of its market areas to negotiate favorable lease terms at many of its store locations, which has resulted in lowered occupancy costs. The Company regularly reviews the profitability and prospects of each of its stores and evaluates whether any underperforming stores should be closed or relocated to more desirable locations. The Company will seek to negotiate with landlords to convert desirable WaldenSoftware locations into Company stores when their leases terminate. STORE ECONOMICS. The Company believes that its store concepts offer attractive unit economics. The Company estimates that the average Electronics Boutique store had net sales of approximately $1.1 million in 1997. The average cost to open an Electronics Boutique store (exclusive of inventory costs) is $135,000. These costs include furniture, fixtures, leasehold improvements and equipment. The Company expects such costs to remain constant in 1998. The Company's stores have an average opening inventory of $95,000. The Company's cost to open an international store is approximately the same in U.S. dollars as the cost to open a domestic store. Historically, the Company's new stores have generated a positive store operating contribution within the first 12 months of operations. STORE OPERATIONS. The Company's North American stores (in the U.S., Canada, and Puerto Rico) are divided into two geographic regions (East and West), each consisting of an area encompassing approximately 50% of the Company's stores. These regions are supervised by two Field Operations Vice Presidents, 11 Regional Vice Presidents/Directors and 42 District Managers. Each District Manager is responsible for approximately 12 stores. The Company's stores in Australia and South Korea are supervised by a Regional Vice President. The Company has recently instituted a program in the U.S. whereby each region has specialists in sales training, loss prevention and merchandising in an effort to provide on-going education and training to store associates. Each of the Company's stores has a full-time manager and a full-time assistant manager in addition to hourly sales associates, most of whom work part-time. The number of hourly sales associates fluctuates greatly depending on seasonal needs. The Company's domestic stores are open seven days per week and generally ten hours each day. The Company operates its foreign stores in a manner substantially similar to its domestic stores. 28 MANAGEMENT SERVICES As of January 31, 1998, the Company provided management services to 185 specialty electronic game stores in the United States, the United Kingdom and Ireland. EB-UK STORES. The Company provides management services for 129 stores and 17 department store-based concessions in the United Kingdom and Ireland under a contract with EB-UK, a corporation organized under the laws of the United Kingdom (and an affiliate of the Company). As of January 31, 1998, the Company owned 25.1% of the outstanding shares of capital stock of EB-UK, which stock is listed for trading on the London Stock Exchange. EB-UK is one of the leading speciality retailers of electronic games in the United Kingdom and Ireland. EB-UK's business strategy is substantially similar to that of the Company's. EB-UK strives to offer its customers an extensive selection of video games and PC entertainment software, immediate availability of new releases, knowledgeable sales associates, and value pricing and other customer incentive programs. EB-UK also has a highly effective inventory management system and distribution center. EB-UK stores are generally located in "high street" shopping districts. On October 13, 1995, EB entered into the UK Services Agreement with EB-UK. The UK Services Agreement provides that EB shall provide management services to EB-UK, including assistance with ordering and purchasing inventory, store design and acquisition, advertising, promotion and publicity information and information systems. In exchange, EB-UK is responsible for the payment of fees (payable in cash or EB-UK stock at EB's option), equal to 1.0% of net sales plus a bonus calculated on the basis of net income in excess of a pre-established target set by EB-UK. The UK Services Agreement provides for EB-UK to have a right of first refusal on any business opportunity of which EB becomes aware in Europe (excluding Scandinavia) relating to electronic game retailing. The UK Services Agreement also prohibits EB from competing with EB-UK in the United Kingdom or Ireland during the term of the UK Services Agreement, and for one year after its termination. The UK Services Agreement has an initial term expiring on January 31, 2006. The UK Services Agreement entitles EB to appoint the managing director of EB-UK. EB has designated John Steinbrecher, a Vice President of EB, as the managing director of EB-UK. The stockholders of EB-UK elected Joseph J. Firestone, the Company's President and Chief Executive Officer, and John R. Panichello, the Company's Senior Vice President and Chief Financial Officer, to serve as non-executive Directors of EB-UK. WALDENSOFTWARE STORES. The Company manages 39 WaldenSoftware stores under a management contract with Borders Group, Inc. The WaldenSoftware stores are domestic mall-based stores that offer the same product lines as the Company's Electronics Boutique stores. The Company provides management services to WaldenSoftware in exchange for a fixed fee per store. The Company manages the stores in a manner substantially similar to the Company's Electronics Boutique stores. The Company will seek to negotiate with landlords to convert desirable WaldenSoftware locations into Company stores when their leases terminate. ONLINE RETAILING The Company believes that it was one of the first electronic game specialty retailers to offer a Website that enables visitors to review a broad selection of products and make purchases online. In 1995, the Company created its Website and, in 1997, the Website was upgraded to offer online purchasing. The Company believes that its customer base and product mix are uniquely suited for online retailing. The Company's customers are generally males who are technically proficient, a demographic which has traditionally represented the largest percentage of consumers who make online purchases. Further, the Company's products are recognizable brand name items, which serves to provide online customers with a higher degree of confidence that products purchased will meet the customer's expectations. In addition, the scope of the Company's store operations enhances the reputation of the Company's Website as a 29 source for products at competitive prices. The Company believes that the local market identity provided by the Company's stores is a significant competitive advantage over competing online retailers. The Company currently is able to offer over 600 of its most popular electronic game titles and accessory products for sale through its Website. By April 1998, the Company intends to provide customers with a complete product offering, including access to the Company's database of over 7,500 items, which includes all active and inactive electronic game titles. The Company's Website also features colorful product descriptions, new release schedules, vendor promotions and other relevant product information. The Company's Website also serves as a venue for online interaction between electronic game enthusiasts and popular electronic game authors, producers and other notables. The Company continually enhances its Website to broaden its promotional appeal and has recorded a significant increase in the number of visits to the Website. During February 1998, the Company recorded nearly 211,000 unique visits to its Website, compared to a total of 884,000 unique visits during the 11 months from March 1997 through January 1998. In addition, revenues from the Company's Website in the first eight months of online purchasing (June 1997 through January 1998) were $399,000, compared to revenues of $100,000 in February 1998 alone. In order to broaden its Internet presence, during the first quarter of 1998, the Company entered into a two month arrangement with Yahoo to promote the Company and its product lines to potential customers through direct linkages from Yahoo to the Company's Website. The Company intends to pursue aggressively other strategic alliances with directories, search engines, content providers, and sites geared toward electronic game players. The Company believes that its current in-house distribution facilities afford the Company a competitive advantage by enabling it to fulfill online orders rapidly. PRODUCTS The Company's primary product line consists of video game titles, PC entertainment software titles, video game hardware systems and related accessory products. The Company also markets selected PC productivity and education software titles. The Company's in-store inventory at any given time consists of 2,600 SKUs. The following table sets forth sales mix, expressed as a percentage of total sales, for the periods indicated:
1993 1994 1995 1996 1997 --------- --------- --------- --------- --------- Video Games: Video Game Software........................................ 42% 40% 35% 33% 39% Video Game Hardware........................................ 11 10 13 16 9 PC Software: PC Entertainment Software.................................. 16 17 18 20 20 PC Productivity Software................................... 13 13 14 10 8 PC Education Software...................................... 3 4 3 4 4 Accessories and Other: Accessories................................................ 14 15 14 15 17 Other...................................................... 1 1 3 2 3 --------- --------- --------- --------- --------- Total.................................................... 100% 100% 100% 100% 100% --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
VIDEO GAME TITLES AND PC ENTERTAINMENT SOFTWARE. The Company carries over 650 video game titles (excluding pre-owned games) and over 1,000 active PC entertainment software SKUs at any given time. In 1997, the average sales price of a video game title was $41.50 and the average sales price of a PC entertainment software title was $29.60. The Company purchases video game titles directly from the leading manufacturers, which include Nintendo, Sega and Sony, as well as a variety of third-party game publishers, such as Electronic Arts, Acclaim Entertainment, Inc. and Midway Home Entertainment, Inc. The Company ranks as one of the larger domestic customers of video game products from these publishers. Within the more fragmented PC entertainment software segment, the Company purchases 30 titles from approximately 90 vendors. The Company markets electronic games across a variety of genres, including Action, Strategy, Adventure/Role Playing, Simulation, Sports, Children's Entertainment and Family Entertainment. The Company maintains a broad selection of popular new release titles, which are defined by the Company as titles which have been available for no more than six weeks from the date of their release. VIDEO GAME HARDWARE. The Company offers the video game hardware systems of all major manufacturers, including the Sony PlayStation, Nintendo N64 and Sega Saturn. In support of its strategy to be the logical destination of choice for electronic game enthusiasts, the Company aggressively promotes the sale of video game hardware systems. The Company believes that this policy increases store traffic and promotes customer loyalty, leading to increased sales of video game titles, which have higher gross margins. The Company also offers extended service agreements and extensions of manufacturer warranties of the video game systems. PC EDUCATION AND PRODUCTIVITY SOFTWARE. In addition to its category dominant assortment of video game and PC entertainment software titles, the Company offers a selection of educational, personal productivity and finance software titles. Management believes that these titles also appeal to the electronic game enthusiasts who comprise the Company's core customer base. ACCESSORIES. In recent years, the growing popularity of electronic games has led to an increase in sales of accessory products, which generally have higher gross margins than hardware and software products. Accessory products enhance the total gaming experience. Presently, the Company's stores offer approximately 500 accessory product SKUs, including 3-D graphics accelerators, memory cards and joysticks. The Company also markets instructional books on the most popular electronic game titles. INVENTORY MANAGEMENT AND DISTRIBUTION INVENTORY MANAGEMENT. The Company carefully manages its inventory to minimize the risk associated with introducing new products. The Company's merchandising staff evaluates potential products by testing many pre-release samples received from publishers, reading game reviews, interviewing customers and store associates, and studying vendor marketing plans. The Company's centralized merchandising staff also analyzes the EB Pre-Sell Program and EB Reserve List information and other data to estimate initial demand as well as the life cycle for a new release. The Company then uses its new product analyses to plan initial allocations among stores of the total initial purchase of a newly-released title (which typically ranges from 1,200 to 4,800 units, but has been as low as 500 units and as high as 60,000 units). Once initial stocking decisions have been made, the Company uses its management information system to measure, on a daily basis, SKU level sales, gross margins and inventory balances. After sales histories for a particular product are compiled, appropriate stock levels are designed for that specific product. Sales levels are continuously monitored by the merchandising staff, which receives sales and inventory reports by SKU on a daily basis through POS polling technology as well as recommended order quantities and product discontinuations from each store. Product shortages and replenishment allocations among stores are then made based on this data. By focusing on inventory turnover, the Company's allocation, traffic, buying, distribution and third party functions operate on a "just in time" replenishment basis. DISTRIBUTION. The Company's primary distribution center is located in West Chester, Pennsylvania, and supports the Company's full product line. The 120,000 square foot facility allows the Company to replenish its stores on a daily basis, thereby reducing inventory levels and increasing inventory turns, while supporting the Company's FIRST TO MARKET new release strategy. The Company's rapid processing capability in its distribution center is facilitated by several advanced inventory management technologies, including paperless picking and radio frequency support. The Company's ability to rapidly process incoming 31 shipments of new release titles quickly and distribute them to all of its stores either that same day or by the next morning enables the Company to meet peak demand. During peak sales periods, the Company enters into short-term arrangements for additional retail distribution centers to ensure timely restocking of all stores. The Company has also developed a flexible third-party network to provide regional distribution support for all new product releases. The Company believes that it maintains industry-leading distribution and inventory management systems. The Company believes that these systems promote a level of efficiency in inventory management which affords the Company an important competitive advantage. In addition, when managed effectively, stock balancing and markdown allowances offered selectively by vendors can reduce a portion of the risk associated with carrying inventory. Products that either sell poorly at launch or experience a reduction in sales after a successful launch often can achieve an acceptable rate of sale at a lower price. MARKETING IN-STORE PROMOTIONS. The Company's Electronics Boutique stores are primarily located in high traffic, high visibility areas in regional shopping malls. Accordingly, the Company's marketing efforts are designed to draw mall patrons into the Company's stores through the use of window displays and other attractions visible from the mall concourse. Inside the stores, the Company features selected products through the use of vendor displays, signs, fliers, point of purchase materials and end-cap displays. The Company receives cooperative advertising and market development funds from manufacturers, distributors, software publishers and accessory suppliers to promote their respective products. THE EB PRE-SELL PROGRAM AND THE EB RESERVE LIST. The EB Pre-Sell Program offers the Company's customers the opportunity to purchase video games prior to their release, and the EB Reserve List entitles participants to be placed on a list for notification when a game has arrived in the Company's stores. Customers who participate in the EB Pre-Sell Program pay for a game prior to its release and receive a promotional gift in connection with the purchase (e.g., a t-shirt or a watch). The EB Pre-Sell Program and the EB Reserve List enable the Company's customers to receive a new product on the first day on which it is available in the Company's stores, and are designed to enhance the reputation of the Company's stores as the logical destination of choice for electronic game enthusiasts. FREQUENT BUYER CARDS. Following an initial successful test in Canada, the Company introduced the EB-FBC in the U.S. in July 1997. For an annual fee, a cardholder is entitled to receive discounts on all purchases and to participate in exclusive EB-FBC promotions and events. As of March 1, 1998, over 70,000 EB-FBCs have been sold domestically. The Company is constructing a profile of these cardholders and intends to use this information to develop marketing programs designed specifically to meet cardholder buying needs. CATALOGS. The Company publishes six full color catalogs each year, which range in size from 48 to 100 pages. These catalogs have been fully vendor funded since 1986 and feature a broad array of products. The catalogs are available in the Company's stores and are also mailed to several hundred thousand households from the Company's proprietary customer lists. The catalogs are also inserted in leading industry magazines. PRE-OWNED GAMES. As with music compact discs, video game cartridges have useful lives of thousands of plays. As a result of the proliferation of new titles and the tendency of electronic game players to seek new game challenges after mastering a particular title, a growing market for pre-owned video game titles has evolved in recent years. The Company offers its customers a store credit for their pre-owned video game titles, which can be applied towards the purchase of new or pre-owned products. The Company then resells the pre-owned video game titles at discount prices, but with gross margins higher than those for new video game titles. The Company believes its wide assortment of pre-owned video game titles distinguishes it from its competitors. 32 OTHER MARKETING PROGRAMS. The Company provides its customers with a liberal return policy. The Company's customers can return opened software products for a full credit within ten days after purchase. In addition, the EB Code of Honor Program discourages comparison shopping, as the Company will match its competitors' prices. Further, the Company maintains an everyday low pricing strategy. MANAGEMENT INFORMATION SYSTEMS The Company's primary management information system is a customized version of the AS400-based JDA Merchandise Management System. The proprietary enhancements made by the Company to this program enable management to analyze total, comparative and new store sales data at the Company, region, district and store levels. Additional revisions to the program have enhanced analysis of top selling items, new release sales and gross margin item rankings. The Company plans to continue to invest in its management information system by, among other things, upgrading its global financial reporting and analytical capabilities through the implementation of the Lawson Associates, Inc. financial software products. The Company intends to further enhance its management information systems with client server and data warehousing applications geared towards sales analysis and targeted consumer marketing. The Company spent $1.1 million for information system improvements in 1997 and has budgeted $1.5 million for 1998 for additional improvements. The Company has contracted with a third party to upgrade all programs running on the AS400 system to be "Year 2000" compliant, with full implementation targeted for the fourth quarter of 1998. All other Company software and hardware products are being inventoried and updated as necessary. The Company intends to address all potential "Year 2000" problems in 1998 and anticipates spending approximately $300,000 in connection with its "Year 2000" compliance program. See "Risk Factors--Year 2000 Compliance." VENDORS With the exception of certain personal productivity software titles and accessories, the Company purchases substantially all of its products directly from manufacturers and software publishers. The Company's top 25 vendors accounted for approximately 77% of the Company's purchases in 1997. The Company's largest vendors in 1997 were Nintendo, Sony and Electronic Arts, which accounted for 13.5%, 13.3% and 9.4%, respectively, of the Company's net sales, with no other vendor accounting for more than 5.0% of the Company's software or accessory purchases during that year. The Company believes that maintaining and strengthening its long-term relationships with its vendors is essential to the Company's operations and expansion. The Company has no contracts with trade vendors and conducts business on an order-by-order basis, a practice that is typical throughout the industry. The Company believes that it has very good relations with the vendor community. See "Risk Factors--Dependence on Suppliers." COMPETITION The electronic game industry is intensely competitive and subject to rapid changes in consumer preferences and frequent new product introductions. The Company believes that key competitive factors are availability of product, ability to procure product in high demand, knowledgeable service, price, reputation, and shopping environment. The Company competes with other video game and PC software stores located in malls, as well as with mass merchants, toy retail chains, mail-order businesses, catalogs, direct sales by software publishers, online retailers, and office supply, computer product and consumer electronics superstores. In addition, video games are available for rental from many video stores and cable television providers. Further, other methods of retail distribution may emerge in the future which would result in increased competition for the Company. Most of the Company's competitors have longer operating histories and significantly greater financial, managerial, creative, sales and marketing and other resources than the Company. The Company also competes with other forms of entertainment activities, including movies, television, theater, sporting events and family entertainment centers. The Company's 33 ability to retain its existing customers and attract new customers depends on numerous factors, some of which are beyond the Company's control. These factors include: the continued introduction of new and enhanced video game and PC hardware and software; the availability and timeliness of new product releases at the Company's stores; and the Company's reputation in the industry. See "Risk Factors-- Competition." PROPERTIES STORE LEASES. All of the Company's stores are leased. The table below sets forth, as of January 31, 1998, the number of the Company's store leases that will expire each year (assuming the lease is not terminated by either party prior to the expiration of the term).
NUMBER OF LEASES -------------------------------- CALENDAR YEAR IN WHICH LEASE EXPIRES DOMESTIC INTERNATIONAL - --------------------------------------------------- ------------- ----------------- 1998............................................... 56(1) 4 1999............................................... 40 2 2000............................................... 35 0 2001............................................... 46 3 2002............................................... 43 3 2003............................................... 39 11 2004............................................... 24 19 2005............................................... 33 4 2006............................................... 33 0 2007............................................... 46 1 2008............................................... 7 0 2009 and thereafter................................ 3 0
- ------------------------ (1) Includes 27 leases which have been subsequently extended, 16 leases in negotiation and 13 stores currently leased on a month-to-month basis, of which four leases are pending term renewals. In general, the Company's leases have an initial term of seven to ten years, with some leases having one or more five to seven year options to extend. See "Risk Factors--Lease Expirations." HEADQUARTERS. The Company owns its headquarters and its primary distribution center, which are located in a single 140,000 square foot building on several acres in West Chester, Pennsylvania. In addition, the Company owns four acres adjacent to the distribution center that will allow the Company to expand its operations at the West Chester site as required. TRADEMARKS/REGISTRATIONS The Company owns the Electronics Boutique-Registered Trademark-, EBX-Registered Trademark- and Stop 'N Save Software-Registered Trademark- trademarks as well as other registered trademarks and service marks, both in the United States and in certain foreign jurisdictions. The Company believes its marks are valuable and, accordingly, intends to maintain its marks and the related registrations. The Company is not aware of any pending claims of infringement or other challenges to the Company's right to use its marks in the United States or elsewhere. The Company has no patents, licenses, franchises or other concessions which are considered material to its operations. ASSOCIATES As of February 1998, the Company had approximately 2,900 non-seasonal associates, of which approximately 1,500 were employed on a part-time basis. In addition, during the 1997 peak holiday 34 shopping season, the Company hired approximately 650 temporary associates. The Company believes that its relationship with its associates is very good. None of the Company's associates is represented by a labor union or is a member of a collective bargaining unit. LEGAL PROCEEDINGS The Company is involved from time to time in legal proceedings arising in the ordinary course of its business. In the opinion of management, no pending proceedings will have a material adverse effect on the Company's results of operations or financial condition. 35 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The Company's executive officers and directors are as follows:
NAME AGE POSITION - ----------------------------------------------------- --- ----------------------------------------------------- James J. Kim......................................... 62 Chairman of the Board Joseph J. Firestone.................................. 66 President and Chief Executive Officer Jeffrey W. Griffiths................................. 47 Senior Vice President of Merchandising and Distribution John R. Panichello................................... 36 Senior Vice President and Chief Financial Officer Dean S. Adler........................................ 41 Director Susan Y. Kim......................................... 35 Director Louis J. Siana....................................... 66 Director
James J. Kim. Mr. Kim has served as the Company's Chairman and a Class III Director since March 1998. Mr. Kim founded EB in 1977 and has served as its Chairman since its inception. Mr. Kim has served as Chairman and Chief Executive Officer of Amkor Technology, Inc. ("Amkor") and its principal operating subsidiary, Amkor Electronics, Inc. ("AEI") since September 1997 and 1968, respectively. Amkor and AEI are semiconductor packaging and test service companies. Mr. Kim also serves as the Chairman of the Anam group of companies, which consists principally of companies in South Korea in the electronics industries. Mr. Kim also serves as the Chairman and Chief Executive Officer of Forte Systems, Inc., ("Forte"), a company which provides information technology services, and is a director of CFM Technologies, Inc., a manufacturer of equipment used in the manufacturing process of semiconductors and flat panel displays. Joseph J. Firestone. Mr. Firestone has served as the Chief Executive Officer and a Class III Director of the Company since March 1998. Mr. Firestone has served as the President of EB since February 1984, and the President and Chief Executive Officer of EB since February 1995. Mr. Firestone has served as the non-executive Chairman of EB-UK since November 1995. Mr. Firestone also serves on the Executive Advisory Board of the Center for Retailing Education and Research of the University of Florida and as a Director of the National Retail Federation. Mr. Firestone earned a B.S. degree in Business and an M.B.A. degree from Long Island University. Jeffrey W. Griffiths. Mr. Griffiths has served as the Company's Senior Vice President of Merchandising and Distribution since March 1998. Mr. Griffiths has served as EB's Senior Vice President of Merchandising and Distribution since March 1996. From March 1987 to February 1996, Mr. Griffiths served as EB's Vice President of Merchandising and, from April 1984 to February 1987, he served as the Merchandise Manager of EB. Mr. Griffiths serves as the Chairman of the Interactive Entertainment Merchants Association. Mr. Griffiths earned a B.A. degree in History from Albright College and an M.B.A. degree from Temple University. John R. Panichello. Mr. Panichello has served as the Senior Vice President and Chief Financial Officer of the Company since March 1998. Mr. Panichello has served as the Senior Vice President of Finance of EB and the President of EB's BC Collectables division since March 1997. From March 1996 to February 1997, Mr. Panichello served as EB's Senior Vice President of Finance and, from June 1994 to February 1996, he served as the Vice President and Treasurer of EB. Mr. Panichello served as the President and Chief Executive Officer of Panichello & Company, a certified public accounting firm, from May 1990 to May 1994. Mr. Panichello has served as a director of EB-UK since May 1995. Mr. Panichello earned a B.S. degree in Accounting from West Chester University and an M.B.A. degree in Finance from Drexel University. Mr. Panichello is a Certified Public Accountant. Mr. Panichello is the husband of Susan Y. Kim and the son-in-law of James J. Kim. 36 Dean S. Adler. Mr. Adler has served as a Class II Director of the Company since March 1998. In March 1997, Mr. Adler formed Lubert/Adler Partners, LP, a limited partnership investing primarily in real estate and real estate-related ventures. For ten years prior thereto, Mr. Adler was a principal and co-head of the private equity group of CMS Companies, which specialized in acquiring operating businesses and real estate within the private equity market. Mr. Adler was also an instructor at The Wharton School of the University of Pennsylvania. Mr. Adler serves on the Boards of Directors of US Franchise Systems, Inc., Trans World Entertainment Corporation, and Developers Diversified Realty Corporation. Mr. Adler earned a B.S. degree in Finance from The Wharton School of the University of Pennsylvania and a J.D. degree from the University of Pennsylvania Law School. Susan Y. Kim. Ms. Kim has served as a Class I Director of the Company since March 1998. Ms. Kim served as a Senior District Manager of EB from 1991 to 1992, as EB's Personnel Manager from 1989 to 1991, as a Buyer for EB from 1986 to 1989, and as a Field Manager for EB from 1985 to 1986. Ms. Kim serves as a Director of EB, AEI and Forte. Ms. Kim earned a B.A. degree in Sociology from Hamilton College. Ms. Kim is the daughter of James J. Kim and the wife of John R. Panichello. Louis J. Siana. Mr. Siana has served as a Class II Director of the Company since March 1998. Mr. Siana is a certified public accountant and a senior partner in the accounting firm of Siana, Carr & O'Conner LLP. Mr. Siana serves as a Director of Amkor. Mr. Siana earned a B.S. degree in Accounting from LaSalle University. Executive officers are elected by, and serve at the discretion of, the Board of Directors. TERMS OF OFFICE AND BOARD COMMITTEES The Company's Bylaws provide that directors of the Company are divided into three classes, as nearly equal in number as possible. The initial term of office of the Class I Directors expires on the day of the first annual meeting of stockholders following the end of 1998; the initial term of office of the Class II Directors expires on the day of the annual meeting of stockholders following the end of 1999; and the initial term of office of the Class III Directors expires on the day of the annual meeting of stockholders following the end of 2000. At each annual meeting of stockholders, directors elected to succeed those directors whose terms expire shall be elected for a term of office to expire at the third succeeding annual meeting of stockholders after their election. Thus, directors stand for election only once in three years. Ms. Kim serves as a Class I director, Messrs. Adler and Siana serves as a Class II directors, and Messrs. Kim and Firestone serve as Class III directors. The Board of Directors will establish, effective upon completion of the Offering, Audit and Compensation Committees. The members of each Committee are expected to be determined at the first meeting of the Board of Directors following completion of the Offering. All of the members of the Audit Committee and at least a majority of the members of the Compensation Committee will be non-employee directors. The functions of the Audit Committee will be to recommend annually to the Board of Directors the appointment of the independent public accountants of the Company, discuss and review the scope and the fees of the prospective annual audit, to review the results thereof with the independent public accountants, review and approve non-audit services of the independent public accountants, review compliance with existing major accounting and financial policies of the Company, review the adequacy of the financial organization of the Company, review management's procedures and policies relative to the adequacy of the Company's internal accounting control, and compliance with federal and state laws relating to accounting practices and review and approve (with the concurrence of a majority of the disinterested Directors of the Company) transactions, if any, with affiliated parties. The functions of the Compensation Committee will be to review and approve annual salaries and bonuses for all officers, review, approve and recommend to the Board of Directors the terms and conditions of the Equity Participation Plan or changes thereto. 37 DIRECTOR COMPENSATION Upon completion of the Offering, each director who is not an employee of the Company will receive $1,500 for each meeting of the Board of Directors attended and for each committee meeting attended, as well as reimbursement of all reasonable out-of-pocket expenses incurred in attending such meetings. In consideration for their agreeing to serve as directors of the Company prior to the Offering, Messrs. Adler and Siana have each been granted options under the Equity Participation Plan to purchase 15,000 shares of Common Stock at a price equal to the per share offering price. Such options will vest equally over three years (the "Vesting Period"). In the event that Mr. Adler or Mr. Siana is no longer on the Board at the end of the Vesting Period, his options will be cancelled to the extent not otherwise vested. The Company intends to grant annually, commencing with the 1999 Annual Meeting of Shareholders, to each non- employee director (other than Messrs. Adler and Siana until after the Vesting Period has expired) an option to purchase 2,500 shares of Common Stock at the "fair market value" (as that term is defined in the Company's Equity Participation Plan) of such Common Stock on the date of grant. Prior to completion of the Offering, the Directors were not compensated for their services. EXECUTIVE COMPENSATION The following table sets forth certain information concerning the compensation earned by the Company's President and Chief Executive Officer and the other executive officers of the Company whose salary and bonus was in excess of $100,000 (the "Named Officers") for 1997: SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION ------------------------------------- ALL OTHER NAME AND POSITION SALARY BONUS OTHER (1) COMPENSATION - --------------------------------------------------------------- ---------- ---------- ------------- ------------- Joseph J. Firestone President, Chief Executive Officer and Director............................................... $ 397,159 $ 200,000 -- $ 102,000(2) Jeffrey W. Griffiths Senior Vice President of Merchandising and Distribution...... $ 218,110 $ 102,500 -- $ 2,000(3) John R. Panichello Senior Vice President and Chief Financial Officer.......................................... $ 169,262 $ 75,000 -- --
- ------------------------ (1) Does not include perquisites and other personal benefits, securities or property if the aggregate amount of such compensation for each of the persons listed did not exceed the lesser of (i) $50,000 or (ii) ten percent of the combined salary and bonus for such person in 1997. (2) Consists of $100,000 of deferred compensation and the Company's $2,000 matching contribution pursuant to its 401(k) defined contribution plan. (3) Consists of the Company's $2,000 matching contribution pursuant to its 401(k) defined contribution plan. EMPLOYMENT AGREEMENTS The Company has entered into employment agreements with Messrs. Firestone, Griffiths and Panichello providing for their employment as Chief Executive Officer, Senior Vice President of Merchandising and Distribution and Senior Vice President and Chief Financial Officer, respectively. The agreements are each for a period of three years and, in some cases, may be extended automatically for additional one year terms, unless terminated by either party in accordance with their terms. The agreements provide for compensation consisting of base salaries of $500,000, $247,375 and $181,500 for 38 Messrs. Firestone, Griffiths and Panichello, respectively, grants under the 1998 Equity Participation Plan of , and options, respectively and certain fringe and other employee benefits that are made available to the senior executives of the Company. In the event that employment is terminated for any reason other than death, disability or "cause" (as defined in the agreement), the executive is entitled to receive his then current base salary for the greater of his remaining term under the employment agreement or a one year period. The agreement also limits certain severance payments to an amount equal to $100 less than the maximum that could be paid to the executive and deducted by the Company under Section 280G of the Code in the event of termination of employment for any reason other than death, disability or "cause," and is related to a "change in control." In the event of disability, the agreements provide for the continuation of the executive's compensation for a period of one year, or, if greater, the remaining term of the agreement. EQUITY PARTICIPATION PLAN The Board of Directors has adopted and approved the Equity Participation Plan and reserved shares of Common Stock for stock options and other stock awards to employees of the Company and its subsidiaries and other eligible participants. The principal purpose of the Equity Participation Plan is to provide incentives for officers, employees and consultants of the Company and its subsidiaries through granting of options, restricted stock and other awards (collectively, "Awards"), thereby stimulating their personal and active interest in the Company's development and financial success, and inducing them to remain in the Company's employ. In addition to Awards made to officers, employees or consultants of the Company, the Equity Participation Plan permits the granting of stock options ("Director Options") to non-employee directors ("Independent Directors"). The Compensation Committee of the Board of Directors (the "Compensation Committee") will administer the Equity Participation Plan with respect to grants and Awards to officers, employees or consultants and the full Board of Directors will administer the Equity Participation Plan with respect to grants of Director Options to Independent Directors. The Compensation Committee will consist of at least two (2) members of the Board, each of whom is a "non-employee director" for purposes of Rule 16b-3 under the Exchange Act and an "outside director" for the purposes of Section 162(m) of the Code. The Equity Participation Plan provides that the Compensation Committee may grant or issue stock options, stock appreciation rights, restricted stock, deferred stock, dividend equivalents, performance awards, stock payments and other stock related benefits, or any combination thereof. The Compensation Committee may grant performance based awards on an individual or group basis. Generally, these Awards will be based upon specific performance targets and may be paid in cash, Common Stock or a combination of both. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION To date, executive compensation has been determined by the Company's Chief Executive Officer, whose compensation has been determined by Mr. Kim. Shortly after completion of the Offering, the Company intends to establish a Compensation Committee of the Board of Directors, a majority of whom will be independent directors. LIMITATIONS ON LIABILITY AND INDEMNIFICATION MATTERS The Company has adopted provisions in its Certificate of Incorporation that eliminate to the fullest extent permissible under Delaware law the liability of its directors to the Company for monetary damages. Such limitation of liability does not affect the availability of equitable remedies such as injunctive relief. The Bylaws provide that the Company shall indemnify its directors and officers, and may indemnify its other employees and agents, to the fullest extent permitted by Delaware law, including in circumstances in which indemnification is otherwise discretionary under Delaware law. The Company has entered into indemnification agreements with its officers and directors containing provisions that may require the 39 Company, among other things, to indemnify the officers and directors against certain liabilities that may arise by reason of their status or service as directors or officers (other than liabilities arising from willful misconduct of a culpable nature) and to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified. There is no currently pending litigation or proceeding involving a director, officer, employee or other agent of the Company in which indemnification would be required or permitted. 40 CERTAIN TRANSACTIONS In connection with the Reorganization, each of the Kim Shareholders will exchange their interests in EB and EB Services in return for shares of Common Stock. See "Reorganization." The Company also proposes to use a portion of the net proceeds of the Offering to pay the S Corp. Distribution and to enter into a tax indemnification agreement with EB and the Kim Shareholders and a registration rights agreement with the Kim Shareholders. See "Reorganization," "Use of Proceeds" and "Description of Capital Stock--Registration Rights." The Kim Shareholders collectively own all of the outstanding shares of capital stock of AEI. EB has an intercompany financing arrangement with AEI, a wholly owned subsidiary of Amkor, pursuant to which EB may borrow funds (at the prime rate of interest plus 0.25%) from AEI, subject to AEI's consent. Since 1995, the maximum amount outstanding under these intercompany loans in the ordinary course of business has been $25.1 million. In addition, in 1996, EB borrowed $50.0 million from AEI in connection with a contemplated acquisition. However, the acquisition was not consummated and EB repaid the $50.0 million to AEI 11 business days after the date on which it was borrowed. As of March 23, 1998 EB was not indebted to AEI. Since 1990, AEI has guaranteed EB's obligations to certain vendors in amounts that fluctuate from time to time. The maximum amount guaranteed by AEI to these vendors at no time has exceeded $30.0 million. In addition, AEI, Mr. Kim and Amkor-Anam, Inc., a company owned by certain of the Kim Shareholders, guaranteed EB's obligations under a $17.0 million line of credit and term loan facilities totaling $15.0 million with Seoul Bank. On January 31, 1998, EB owed an aggregate of $9.0 million under the term loan facilities. The term loans were repaid and the line of credit was terminated by EB in March 1998. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Liquidity and Capital Resources." In addition, in each of the last three years, various EB expenses were paid by AEI on behalf of EB and various AEI expenses were paid by EB on behalf of AEI. These expenses include insurance premiums, employee medical claims, interest, rent and other miscellaneous expenses. In 1995, 1996 and 1997, AEI made net advancements on behalf of EB of $604,000, $128,000 and $147,000 respectively, which were reflected in due to affiliates at the end of such years. In 1997, EB repaid AEI $2.4 million of current and prior year advancements. In 1995 and 1996, EB advanced rent, utilities and other miscellaneous expenses on behalf of Forte of $152,000 and $118,000, respectively. In addition, EB sold certain fixtures and equipment to Forte in 1996 for a total of $113,543. In September, 1993, EB entered into a joint venture agreement with Eden Electronics, Inc. ("Eden"), a Canadian corporation, with respect to EB Canada. EB Canada was created in order to operate electronic game stores in Canada. In 1996, EB, AEI and Anam Industrial Co., Inc. ("Anam"), a South Korean corporation of which the Kim Shareholders are stockholders, guaranteed the obligations of EB Canada under a $4.0 million term loan facility from Cho Hung Bank of Canada. The term loan facility matures on September 1, 2002 and bears interest at the bank's prime rate plus 0.125%. In 1997, EB purchased Eden's 50% percent interest in EB Canada for $727,000. In 1997, EB, AEI and Anam guaranteed the obligations of EB Canada under a $1.0 million revolving credit facility from Cho Hung Bank of Canada. The revolving credit facility expires on November 5, 1998, bears interest at the bank's prime rate plus 0.125% and is available to fund EB Canada's working capital needs. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." In 1995, EB International, Inc. ("EB Int'l"), a company then owned by John R. Panichello, EB's Senior Vice President and Chief Financial Officer and the son-in-law of Mr. James J. Kim and husband of Ms. Susan Y. Kim, entered into a joint venture agreement with Ssangyong Corporation, a South Korean corporation ("Ssangyong"), and Fine Land Enterprises Ltd., a Hong Kong corporation ("Fine Land"), to 41 operate electronic game stores in South Korea ("EB Korea"). To fund initial operations, EB contributed $1.0 million on behalf of EB Int'l, Ssangyong contributed $938,000, and Fine Land contributed $62,000 to EB Korea. In 1997, EB Int'l purchased the joint venture interests of Ssangyong and Fine Land for a total of $611,000, which funds were advanced to EB Int'l by EB. In January 1998, EB purchased all of the outstanding shares of capital stock of EB Int'l from Mr. Panichello for $1,000, which amount represents Mr. Panichello's capital contribution to EB Int'l. EB entered into the UK Services Agreement in 1995, and management agreements with EB Canada in 1993, EB Korea in 1995, and Borders Group, Inc. in 1993, pursuant to which the Company provides management, administrative and advertising assistance in exchange for the payment of management fees: (i) by EB-UK equal to 1.0% of net sales, plus a bonus calculated on the basis of net income in excess of a pre-established target set by EB-UK, (ii) by EB Canada equal to 5.0% of the first $10.0 million of net sales and 4.0% of any net sales in excess of $10.0 million, (iii) by EB Korea equal to 4.0% of annual net sales subsequent to April 1997 and (iv) by Borders Group, Inc. equal to a fixed dollar amount per store. See "Business--Management Services." In 1997, EB assigned each of the aforementioned agreements to EB Services. Management fees aggregating $1.9 million, $2.5 million and $3.7 million were earned by EB and EB Services during 1995, 1996 and 1997, respectively. Pursuant to the Reorganization, the Kim Shareholders will contribute all of the outstanding shares of capital stock of EB Services to the Company and the management fees paid by EB Canada and EB Korea will be eliminated in consolidation. See "Reorganization." In 1997, the Kim Trusts entered into an agreement with Rouse & Associates-931 South Matlack Limited Partnership, a Pennsylvania limited partnership, to purchase the Company's current West Chester headquarters and distribution center. The Kim Trusts subsequently assigned their right to purchase this property to EB for no consideration. In 1997, EB advanced $180,000 to pay for certain personal expenses of Ms. Susan Kim and Mr. John Panichello, which advance was repaid in full in such year by the Susan Y. Kim Trust of December 31, 1987. Members of the Kim family own all of the outstanding shares of Forte. In 1995, EB entered into an arrangement with AEI and Forte for insurance coverage. At that time, AEI was a shareholder in a captive insurance fund, which offers insurance benefits to its shareholders and pays dividends. Pursuant to the arrangement between AEI, Forte and EB, AEI paid premiums to the fund and billed EB and Forte for their share of the premiums. The amount of EB's portion of such payments was approximately $428,000, $314,000 and $274,000 for 1995, 1996 and 1997, respectively. In 1997, AEI terminated the intercompany billing relationship with EB and Forte, at which time EB purchased a share interest in the fund. As a result of this transaction, Forte now obtains insurance coverage through EB's participation in the fund. In April 1998, however, this relationship between EB and Forte will terminate. The Company has a policy to the effect that any future transactions between it and any of its officers, directors, principal stockholders or the affiliates of the foregoing persons be on terms no less favorable to the Company than could reasonably be obtained in arm's length transactions with independent third parties, and that any such transactions also be approved by the members of the Audit Committee who are disinterested in the transaction. 42 PRINCIPAL AND SELLING SHAREHOLDERS The following table sets forth certain information with respect to the beneficial ownership of the Common Stock as adjusted to reflect the sale of the shares of Common Stock, as of March 23, 1998 offered hereby, by (i) each director of the Company, (ii) each person who is known by the Company to beneficially own 5.0% or more of the outstanding shares of Common Stock, (iii) the Named Officers, (iv) the Selling Shareholders, and (v) all of the Company's executive officers and directors as a group.
SHARES BENEFICIALLY OWNED PRIOR TO THE OFFERING SHARES -------------------------------- BEING NAME AND ADDRESS OF BENEFICIAL OWNER (1) NUMBER PERCENT OFFERED - ------------------------------------------------------------------ --------------- ------- ------- Agnes C. & James J. Kim (2)(3)(4)................................. 931 South Matlack Street West Chester, PA 19382 Susan Y. Kim Trust of December 31, 1987 (4)(5).................... 1500 E. Lancaster Avenue Paoli, PA 19301 David D. Kim Trust of December 31, 1987 (4)(6).................... 1500 E. Lancaster Avenue Paoli, PA 19301 John T. Kim Trust of December 31, 1987 (4)(7)..................... 1500 E. Lancaster Avenue Paoli, PA 19301 Joseph J. Firestone (8)........................................... John R. Panichello (4)(8)......................................... Jeffrey W. Griffiths (8).......................................... Dean S. Adler (8)................................................. Susan Y. Kim (4)(5)............................................... Louis J. Siana (5)(6)(7)(8)....................................... All directors and executive officers as a group (11 persons) (8)..................................... SHARES BENEFICIALLY OWNED AFTER THE OFFERING -------------------------------- NAME AND ADDRESS OF BENEFICIAL OWNER (1) NUMBER PERCENT - ------------------------------------------------------------------ --------------- ------- Agnes C. & James J. Kim (2)(3)(4)................................. 931 South Matlack Street West Chester, PA 19382 Susan Y. Kim Trust of December 31, 1987 (4)(5).................... 1500 E. Lancaster Avenue Paoli, PA 19301 David D. Kim Trust of December 31, 1987 (4)(6).................... 1500 E. Lancaster Avenue Paoli, PA 19301 John T. Kim Trust of December 31, 1987 (4)(7)..................... 1500 E. Lancaster Avenue Paoli, PA 19301 Joseph J. Firestone (8)........................................... John R. Panichello (4)(8)......................................... Jeffrey W. Griffiths (8).......................................... Dean S. Adler (8)................................................. Susan Y. Kim (4)(5)............................................... Louis J. Siana (5)(6)(7)(8)....................................... All directors and executive officers as a group (11 persons) (8).....................................
- ------------------------ * Less than 1.0% of outstanding shares of Common Stock (1) Unless otherwise noted, the Company believes that all persons named in the above table have sole voting and investment power with respect to the shares beneficially owned by them. (2) If the overallotment option is exercised in full, the number of shares being offered would be and the number and percent of shares beneficially owned after the Offering would be and %, respectively. (3) James J. and Agnes C. Kim are husband and wife and such shares of Common Stock are owned jointly by them. (4) Susan Y. Kim, David D. Kim and John T. Kim are the children of James J. and Agnes C. Kim. John R. Panichello and Susan Y. Kim are husband and wife. (5) Susan Y. Kim, John F. A. Earley, and Louis J. Siana are co-trustees of the Susan Y. Kim Trust of December 31, 1987. As co-trustees, such persons may be deemed to beneficially own such shares in accordance with Rule 13d-3 ("Rule 13d-3") promulgated under the Securities Exchange Act of 1934, as amended. (6) David D. Kim, John F. A. Earley and Louis J. Siana are co-trustees of the David D. Kim Trust of December 31, 1987. As co-trustees, such persons may be deemed to beneficially own such shares in accordance with Rule 13d-3. (7) John T. Kim, John F. A. Earley and Louis J. Siana are co-trustees of the John T. Kim Trust of December 31, 1987. As co-trustees, such persons may be deemed to beneficially own such shares in accordance with Rule 13d-3. (8) Represents (or otherwise includes) shares of Common Stock which may be acquired upon the exercise of options granted by the Company under the Equity Participation Plan. 43 DESCRIPTION OF CAPITAL STOCK The Company's authorized capital stock consists of 100,000,000 shares of Common Stock and 25,000,000 shares of preferred stock, par value $.01 per share (the "Preferred Stock"), none of which shares of Preferred Stock are issued and outstanding. The following description of the Company's capital stock does not purport to be complete and is subject to and qualified in its entirety by the Certificate of Incorporation and the Bylaws, which are included as exhibits to the Registration Statement of which this Prospectus forms a part, and by the provisions of applicable Delaware law. COMMON STOCK Upon completion of the Reorganization, there will be shares of Common Stock outstanding, all of which will be beneficially owned by the Kim Shareholders. Holders of Common Stock are entitled to one vote per share on all matters to be voted upon by the stockholders. Holders of Common Stock do not have cumulative voting rights, and, therefore, holders of a majority of the shares voting for the election of directors can elect all of the directors. In such event, the holders of the remaining shares will not be able to elect any directors. See "Risk Factors--Anti-Takeover Effects of Delaware Law and Certain Charter and Bylaw Provisions." Holders of the Common Stock are entitled to receive such dividends as may be declared from time to time by the Board of Directors out of funds legally available therefor, subject to the terms of any existing or future agreements between the Company and its debtholders. The Company has never declared or paid cash dividends on its capital stock, expects to retain future earnings, if any, for business use, and does not anticipate declaring or paying any cash dividends on shares of its Common Stock in the foreseeable future. See "Dividend Policy." In the event of the liquidation, dissolution or winding up of the Company, the holders of Common Stock are entitled to share ratably in all assets legally available for distribution after payment of all debts and other liabilities and subject to the prior rights of any holders of Preferred Stock then outstanding. PREFERRED STOCK The Company's Board of Directors is authorized to issue 25,000,000 shares of Preferred Stock in one or more series and to fix the price, rights, preferences, privileges and restrictions thereof, including dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences and the number of shares constituting a series or the designation of such series, without any further vote or action by the Company's stockholders. The issuance of Preferred Stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of delaying, deferring or making more difficult a change in control of the Company and may adversely affect the market price of, and the voting and other rights of, the holders of Common Stock. The issuance of Preferred Stock with voting and conversion rights may adversely affect the voting power of the holders of Common Stock, including the loss of voting control to others. The Company has no current plans to issue any shares of Preferred Stock and no shares are currently outstanding. CERTAIN CERTIFICATE OF INCORPORATION AND BYLAW PROVISIONS Set forth below is a summary of certain provisions of the Company's Certificate of Incorporation and Bylaws, which could be deemed to have an anti-takeover effect. These provisions are intended to enhance the likelihood of continuity and stability in the composition of the Board of Directors and in the policies formulated by the Board of Directors and to discourage an unsolicited takeover of the Company if the Board of Directors determines that such takeover is not in the best interests of the Company and its stockholders. However, these provisions could also have the effect of discouraging certain attempts to 44 acquire the Company or remove incumbent management even if some or a majority of stockholders deemed such an attempt to be in their best interests. Insofar as the Kim Shareholders will retain a substantial percentage of the outstanding Common Stock of the Company after the Offering, the Company is not at present expected to be vulnerable to a takeover without the approval of the Kim Shareholders. The Company's Certificate of Incorporation provides for a classified Board consisting of three classes as nearly equal in size as the then authorized number of directors constituting the Board of Directors permits. At each annual meeting of stockholders, the class of directors to be elected at such meeting will be elected for a three-year term and the directors in the other two classes will continue in office. Each class shall hold office until the date of the third annual meeting for the election of directors following the annual meeting at which such director was elected, except that the initial terms of Class I, Class II and Class III expire on the date of the annual meeting in 1999, 2000 or 2001, respectively. As a result, approximately one-third of the Board will be elected each year. Under the Delaware General Corporation Law, in the case of a corporation having a classified board, stockholders may remove a director only for cause. This provision, when coupled with provisions of the Certificate of Incorporation and Bylaws authorizing the Board to fill vacant directorships, precludes a stockholder from removing incumbent directors without cause and simultaneously gaining control of the Board of Directors by filling the vacancies created by such removal with its own nominees. The Bylaws establish an advance notice procedure for the nomination, other than by or at the direction of the Board, of candidates for election as directors as well as for other stockholder proposals to be considered at annual meetings of stockholders. In general, notice must be received by the Company not less than 60 days nor more than 90 days prior to the date of the annual meeting and must contain certain specified information concerning the persons to be nominated or the matters to be brought before the meeting and concerning the stockholder submitting the proposal. The Certificate of Incorporation provides that no action may be taken by stockholders except at an annual or special meeting of stockholders and prohibits action by written consent in lieu of a meeting. The Certificate of Incorporation also authorizes the officers and directors of the Company, when exercising their respective powers, to consider the interests of other constituencies, including the Company's employees, suppliers, creditors and customers. The Certificate of Incorporation also provides that special meetings of stockholders of the Company may be called only by the Chairman of the Board, the Chief Executive Officer, the President or by a majority of the members of the Board. This provision will make it more difficult for stockholders to take action opposed by the Board. The Certificate of Incorporation also provides that the stockholders may not amend the Bylaws or the aforementioned provisions of the Certificate of Incorporation without the approval of two-thirds of the outstanding capital stock entitled to vote. EFFECT OF DELAWARE ANTI-TAKEOVER STATUTE The Company is subject to Section 203 of the Delaware General Corporation Law (the "Anti-takeover Law"), which regulates corporate acquisitions. The Anti-takeover Law prevents certain Delaware corporations, including those whose securities are included for quotation in The Nasdaq National Market, from engaging, under certain circumstances, in a "business combination" with any "interested stockholder" for three years following the date that such stockholder became an interested stockholder. For purposes of the Anti-takeover Law, a "business combination" includes, among other things, a merger or consolidation involving the Company and the interested stockholder and the sale of more than 10% of the Company's assets. In general, the Anti-takeover Law defines an "interested stockholder" as an entity or person beneficially owning 15% or more of the outstanding voting stock of the Company and any entity or person affiliated with or controlling or controlled by such entity or person. A Delaware corporation may "opt out" of the Anti-takeover Law with an express provision in its original certificate of incorporation or an express provision in its certificate of incorporation or bylaws resulting from amendments approved by the holders 45 of at least a majority of the Company's outstanding voting shares. The Company has not "opted out" of the provisions of the Anti-takeover Law. See "Risk Factors." REGISTRATION RIGHTS Pursuant to a registration rights agreement among the Company and the Kim Shareholders, the Kim Shareholders (and their transferees) were granted the right to demand that the Company register any or all of the shares of Common Stock held by the Kim Shareholders after completion of the Offering on up to three occasions, at any time commencing 360 days after the effective date of this Prospectus. In addition, the Kim Shareholders have certain "piggy-back" registration rights with respect to such shares of Common Stock. These registrations rights expire four years after the closing of the Offering. TRANSFER AGENT AND REGISTRAR The Transfer Agent and Registrar for the Common Stock is StockTrans, Inc., Ardmore, Pennsylvania. 46 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of the Offering, the Company will have shares of Common Stock outstanding ( if the Underwriters' over-allotment option is exercised in full). Of those shares, a total of ( if the Underwriters' over-allotment option is exercised in full) will be freely tradeable without restriction or further registration under the Securities Act, unless purchased or held by "affiliates" of the Company as that term is defined in Rule 144. All of the remaining shares are held by the Kim Shareholders, who are "affiliates" of the Company. In general, under Rule 144 as currently in effect, any affiliate of the Company who has beneficially owned restricted securities for at least one year would be entitled to sell within any three-month period commencing 90 days after the date of this Prospectus a number of shares that does not exceed the greater of 1.0% of the then outstanding shares of Common Stock (approximately shares based upon the number of shares assumed to be outstanding after the Offering) or the reported average weekly trading volume during the four weeks preceding the sale. Sales under Rule 144 are also subject to certain manner of sale restrictions and notice requirements and to the availability of current public information concerning the Company. All shares of Common Stock held by affiliates of the Company (including the Kim Shareholders) will be eligible for sale commencing one year after the date of this Prospectus pursuant to Rule 144, subject to the restrictions under Rule 144 referred to above and, as described below, subject to the agreement of certain holders of Common Stock to certain restrictions on their ability to sell Common Stock for a period of 360 days following the consummation of the Offering. See "Underwriting." The Kim Shareholders and their transferees are entitled to certain rights with respect to the registration of such shares under the Securities Act. See "Description of Capital Stock--Registration Rights." Pursuant to certain lock-up agreements, the Company, its executive officers and directors and the Kim Shareholders, including the Selling Shareholders, have agreed that they will not, without the prior written consent of Prudential Securities Incorporated, on behalf of the Underwriters, directly or indirectly, offer, sell, offer to sell, contract to sell, pledge, grant any option to purchase or otherwise sell or dispose (or announce any offer, sale, offer of sale, contract of sale, pledge, grant of any option to purchase or other sale or disposition) of any shares of Common Stock or any securities convertible into, or exercisable or exchangeable for, any shares of Common Stock, or other similar securities of the Company for a period of 360 days from the date of this Prospectus, except that such agreements do not prevent the Company from granting additional options under the Equity Participation Plan or from issuing shares pursuant to the Equity Participation Plan. After such 360 day period, this restriction will expire and shares permitted to be sold under Rule 144 will be eligible for sale. Prudential Securities Incorporated may, in its sole discretion, at any time and without notice, release all or any portion of the securities subject to such lock-up agreements. Within 90 days after the date of this Prospectus, the Company intends to file a Registration Statement on Form S-8 covering an aggregate of approximately shares of Common Stock (including the shares of Common Stock subject to outstanding options) that have been reserved for issuance under the Equity Participation Plan. Shares of Common Stock issued upon exercise of options after the effective date of the Form S-8 will be available for sale in the public market, subject to Rule 144 volume limitations applicable to affiliates of the Company and to the lock-up agreements. Prior to this Offering, there has been no public market for the Common Stock, and no predictions can be made with respect to the effect, if any, that future sales of shares, or the availability of shares for future sale, will have on the prevailing market price for the Common Stock. Sales of substantial amounts of Common Stock in the public market following the Offering, or the perception that such sales may occur, could adversely affect the prevailing market prices for the Common Stock and impair the Company's ability to raise capital through the sale of equity securities. See "Risk Factors--Shares Eligible for Future Sale." 47 UNDERWRITING The underwriters named below (the "Underwriters"), for whom Prudential Securities Incorporated and Smith Barney Inc. are acting as representatives (the "Representatives"), have severally agreed, subject to the terms and conditions contained in the underwiting agreement (the "Underwriting Agreement"), to purchase from the Company and the Selling Shareholders the number of shares of Common Stock set forth opposite their respective names.
NUMBER UNDERWRITER OF SHARES - --------------------------------------------------------------------------------- ---------- Prudential Securities Incorporated............................................... Smith Barney Inc. ............................................................... ---------- Total............................................................................ 7,500,000 ---------- ----------
The Company and the Selling Shareholders are obligated to sell, and the Underwriters are obligated to purchase, all the shares of Common Stock offered hereby, if any are purchased. The Underwriters, through their Representatives, have advised the Company and the Selling Shareholders that they propose to offer the Common Stock at the initial public offering price set forth on the cover page of this Prospectus; that the Underwriters may allow to selected dealers a concession of $ per share; and that such dealers may re-allow a concession of $ per share to certain other dealers. After the public offering, the initial public offering price and the concessions may be changed by the Representatives. The Company and the Selling Shareholders have granted the Underwriters an over-allotment option, exercisable for 30 days from the date of this Prospectus, to purchase in the aggregate up to 1,125,000 additional shares of Common Stock at the initial public offering price, less underwriting discounts and commissions, as set forth on the cover page of this Prospectus. The Underwriters may exercise such option solely for the purpose of covering over-allotments incurred in the sale of the shares of Common Stock offered hereby. To the extent such option to purchase is exercised, each Underwriter will become obligated, subject to certain conditions, to purchase approximately the same percentage of such additional shares as the number set forth next to such Underwriter's name in the preceding table bears to 7,500,000. The Underwriters have informed the Company that they do not intend to confirm sales to any accounts over which they exercise authority. The Company, the Kim Shareholders and the Selling Shareholders have agreed to indemnify the several Underwriters and contribute to losses arising out of certain liabilities, including liabilities under the Securities Act. The Company, its executive officers and directors and the Kim Shareholders, including the Selling Shareholders, have agreed not to, directly or indirectly, offer, sell, offer to sell, contract to sell, pledge, grant any option to purchase or otherwise sell or dispose (or announce any offer, sale, offer of sale, contract of sale, pledge, grant of any option to purchase or other sale or disposition) of any shares of Common Stock or other capital stock of the Company or any securities convertible into, or exercisable or exchangeable for, any shares of Common Stock or other capital stock of the Company or any right to purchase or acquire Common Stock or other capital stock of the Company for a period of 360 days after the date of this Prospectus without the prior written consent of Prudential Securities Incorporated, on behalf of the Underwriters, except for options granted pursuant to the Equity Participation Plan. Prudential Securities Incorporated may, in its sole discretion, at any time and without prior notice, release all shares or any portion thereof subject to such lock-up agreements. 48 Prior to the Offering, there has been no public market for the Common Stock. Consequently, the initial public offering price for the Common Stock will be determined through negotiations among the Company, the Selling Shareholders and the Underwriters. Among the factors to be considered in making such determination will be prevailing market conditions, the Company's financial and operating history and condition, its prospects and the prospects of the industry in general, the management of the Company, and the market prices of securities for companies in businesses similar to that of the Company. In connection with the Offering, certain Underwriters (and selling group members, if any) and their respective affiliates may engage in transactions that stabilize, maintain or otherwise affect the market price of the Common Stock. Such transactions may include stabilization transactions effected in accordance with Rule 104 of Regulation M, pursuant to which such persons may bid for or purchase Common Stock for the purpose of stabilizing its market price. The Underwriters also may create a short position for the account of the Underwriters by selling more Common Stock in connection with the Offering than they are committed to purchase from the Company and the Selling Stockholders, and in such case may purchase Common Stock in the open market following completion of the Offering to cover all or a portion of such short position. The Underwriters may also cover all or a portion of such short position, up to 1,125,000 shares of Common Stock, by exercising the Underwriters' over-allotment option referred to above. In addition, Prudential Securities Incorporated, on behalf of the Underwriters, may impose "penalty bids" under contractual arrangements with the Underwriters whereby it may reclaim from an Underwriter (or any selling group member participating in the Offering) for the account of the other Underwriters, the selling concession with respect to Common Stock that is distributed in the Offering but subsequently purchased for the account of the Underwriters in the open market. Any of the transactions described in this paragraph may result in the maintenance of the price for the Common Stock at a level above that which might otherwise prevail in the open market. None of the transactions described in this paragraph are required and, if they are undertaken, then they may be discontinued at any time. LEGAL MATTERS The validity of the shares of Common Stock offered hereby will be passed upon for the Company by Klehr, Harrison, Harvey, Branzburg & Ellers LLP, Philadelphia, Pennsylvania, and for the Underwriters by King & Spalding, New York, New York. EXPERTS The financial statements as of February 1, 1997 and January 31, 1998 and for the fiscal years ended February 3, 1996, February 1, 1997 and January 31, 1998 included in this Prospectus have been so included in reliance on the report of KPMG Peat Marwick LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. ADDITIONAL INFORMATION The Company has filed with the Commission a Registration Statement of Form S-1 under the Securities Act with respect to the Company's Common Stock offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto. Statements contained in the Prospectus as to the contents of any contract or other document referred to are not necessarily complete and in each instance reference is made to the Registration Statement and the exhibits and schedules thereto. The information so omitted, including exhibits and schedules, may be obtained from the Commission at its principal office in Washington, D.C. upon the payment of the prescribed fees, or may be examined without charge at the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549-1004, or at the following regional offices of the Commission: 7 World Trade Center, Suite 1300, New York, New York 10048; and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Such materials also may be accessed electronically by means of the Commission's home page on the Internet at http://www.sec.gov. The Company intends to furnish its stockholders with annual reports containing financial statements audited by independent accountants. 49 THE ELECTRONICS BOUTIQUE GROUP INDEX TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
PAGE(S) ----------- Report of Independent Accountants........................................................................ F-2 FINANCIAL STATEMENTS Consolidated and Combined Balance Sheets............................................................... F-3 Consolidated and Combined Statements of Income......................................................... F-5 Consolidated and Combined Statements of Stockholders' Equity........................................... F-6 Consolidated and Combined Statements of Cash Flows..................................................... F-7 Notes to Consolidated and Combined Financial Statements................................................ F-8
F-1 REPORT OF INDEPENDENT ACCOUNTANTS [TO BE FILED BY AMENDMENT] F-2 THE ELECTRONICS BOUTIQUE GROUP CONSOLIDATED AND COMBINED BALANCE SHEETS
FEBRUARY 1, JANUARY 31, JANUARY 31, 1997 1998 1998 -------------- -------------- -------------- PRO FORMA (NOTE 2) (UNAUDITED) ASSETS Current assets: Cash and cash equivalents..................................... $ 44,727,846 $ 20,639,610 $ 20,639,610 Account receivable: Trade and vendors........................................... 2,469,164 2,618,382 2,618,382 Other....................................................... 1,784,902 1,754,691 1,754,691 Due from affiliates (notes 5, 7 and 8)........................ 3,045,224 3,684,654 3,684,654 Merchandise inventories....................................... 47,239,297 52,973,314 52,973,314 Deferred tax asset (note 2)................................... -- -- 2,173,000 Prepaid expenses.............................................. 2,681,965 2,837,647 2,837,647 -------------- -------------- -------------- Total current assets............................................ 101,948,398 84,508,298 86,681,298 -------------- -------------- -------------- Property and equipment: Leasehold improvements........................................ 34,783,005 40,039,957 40,039,957 Fixtures and equipment........................................ 18,161,153 25,070,985 25,070,985 Building...................................................... -- 6,200,950 6,200,950 Land.......................................................... -- 632,806 632,806 Construction in progress...................................... 207,307 556,663 556,663 -------------- -------------- -------------- 53,151,465 72,501,361 72,501,361 Less accumulated depreciation and amortization................ 26,725,475 32,535,305 32,535,305 -------------- -------------- -------------- Net property and equipment...................................... 26,425,990 39,966,056 39,966,056 -------------- -------------- -------------- Due from affiliates (note 5).................................... 1,136,114 -- -- Investment in affiliated company (note 8)....................... 5,793,189 10,801,415 10,801,415 Goodwill and other intangible assets, net of accumulated amortization of $261,946 and $118,548 in 1997 and 1998, respectively.................................................. 340,866 2,000,050 2,000,050 Deferred tax asset (note 2)..................................... -- -- 4,127,000 Other assets.................................................... 3,715,765 5,894,374 5,894,374 -------------- -------------- -------------- Total assets.................................................... $ 139,360,322 $ 143,170,193 $ 149,470,193 -------------- -------------- -------------- -------------- -------------- --------------
See accompanying notes to consolidated and combined financial statements. F-3 THE ELECTRONICS BOUTIQUE GROUP CONSOLIDATED AND COMBINED BALANCE SHEETS
FEBRUARY 1, JANUARY 31, JANUARY 31, 1997 1998 1998 -------------- -------------- -------------- PRO FORMA (NOTE 2) (UNAUDITED) LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt (note 3).................... $ 6,599,996 $ 2,400,396 $ 2,400,396 Accounts payable.............................................. 71,031,406 83,713,978 83,713,978 Accrued expenses.............................................. 11,985,246 14,142,797 14,142,797 Due to affiliate (note 5)..................................... 1,981,194 -- -- Income taxes payable.......................................... 457,764 782,988 782,988 S Corporation distribution to stockholders (note 2)........... -- -- 40,000,000 -------------- -------------- -------------- Total current liabilities....................................... 92,055,606 101,040,159 141,040,159 -------------- -------------- -------------- Long-term liabilities: Notes payable (note 3)........................................ 24,208,345 10,541,149 10,541,149 Deferred rent................................................. 2,623,537 2,408,579 2,408,579 -------------- -------------- -------------- 26,831,882 12,949,728 12,949,728 -------------- -------------- -------------- Total liabilities............................................... 118,887,488 113,989,887 153,989,887 -------------- -------------- -------------- Commitments (note 4) Stockholders' equity: Preferred stock -- authorized 200,000 shares; $100.00 par value; no shares issued and outstanding..................... -- -- -- Common stock: Class A -- authorized 5,000 shares; $.10 par value; issued and outstanding 1,900 shares.............................. 190 190 190 Class B -- authorized 25,000 shares; $.10 par value; issued and outstanding 21,000 shares............................. 2,100 2,100 2,100 Partners' capital of EB Services Company LLP.................. -- 1,000 1,000 Additional paid-in capital.................................... 7,584,365 7,584,365 -- Foreign currency translation adjustment....................... -- (1,142,766) (1,142,766) Retained earnings (deficit)................................... 12,886,179 22,735,417 (3,380,218) -------------- -------------- -------------- Total stockholders' equity (deficit)............................ 20,472,834 29,180,306 (4,519,694) -------------- -------------- -------------- Total liabilities and stockholders' equity...................... $ 139,360,322 $ 143,170,193 $ 149,470,193 -------------- -------------- -------------- -------------- -------------- --------------
F-4 THE ELECTRONICS BOUTIQUE GROUP CONSOLIDATED AND COMBINED STATEMENTS OF INCOME
YEARS ENDED ---------------------------------------------- FEBRUARY 3, FEBRUARY 1, JANUARY 31, 1996 1997 1998 -------------- -------------- -------------- (UNAUDITED) Net sales....................................................... $ 268,955,902 $ 337,058,946 $ 449,179,603 Costs and expenses: Costs of merchandise sold, including freight.................. 199,225,558 252,812,925 338,614,309 Selling, general and administrative (notes 5 and 6)........... 58,270,151 67,437,742 77,174,804 Depreciation and amortization (notes 7 and 8)................. 6,180,394 6,936,418 8,316,053 -------------- -------------- -------------- 263,676,103 327,187,085 424,105,166 Operating income................................................ 5,279,799 9,871,861 25,074,437 Interest expense, net of interest income of $819,870, $1,121,562, and $1,217,337 in 1996, 1997 and 1998, respectively.................................................. 1,818,105 1,298,296 1,378,919 -------------- -------------- -------------- Income before income taxes...................................... 3,461,694 8,573,565 23,695,518 State income taxes.............................................. 280,000 550,000 846,280 -------------- -------------- -------------- Net income...................................................... $ 3,181,694 $ 8,023,565 $ 22,849,238 -------------- -------------- -------------- -------------- -------------- -------------- Pro forma information (unaudited) (note 2): Income before income taxes, as reported....................... -- -- $ 23,695,518 Pro forma income taxes........................................ -- -- 9,542,968 -------------- Pro forma net income.......................................... -- -- $ 14,152,550 -------------- -------------- Pro forma net income per share................................ -- -- -- Pro forma weighted average shares outstanding................. -- -- --
See accompanying notes to consolidated and combined financial statements. F-5 THE ELECTRONICS BOUTIQUE GROUP CONSOLIDATED AND COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
PARTNERS' CAPITAL ADDITIONAL PREFERRED CLASS A CLASS B OF EB SERVICES PAID-IN STOCK COMMON STOCK COMMON STOCK COMPANY LLP CAPITAL ------------------------ ------------------------ ------------------------ ------------------- ---------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT ----------- ----------- ----------- ----------- ----------- ----------- Balance, January 29, 1995............... -- $ -- 1,900 $ 190 21,000 $ 2,100 $ -- $7,584,365 Net income........... -- -- -- -- -- -- -- -- Distributions........ -- -- -- -- -- -- -- -- ----- ----------- ----- ----------- ----------- ----------- ------ ---------- Balance, February 3, 1996............... -- -- 1,900 190 21,000 2,100 -- 7,584,365 Net income........... -- -- -- -- -- -- -- -- Distributions........ -- -- -- -- -- -- -- -- ----- ----------- ----- ----------- ----------- ----------- ------ ---------- Balance, February 1, 1997............... -- -- 1,900 190 21,000 2,100 -- 7,584,365 Net income........... -- -- -- -- -- -- -- -- Distributions........ -- -- -- -- -- -- -- -- Capital contribution....... -- -- -- -- -- -- 1,000 -- Foreign currency translation adjustment......... -- -- -- -- -- -- -- -- ----- ----------- ----- ----------- ----------- ----------- ------ ---------- Balance, January 31, 1998............... -- $ -- 1,900 $ 190 21,000 $ 2,100 $ 1,000 $7,584,365 ----- ----------- ----- ----------- ----------- ----------- ------ ---------- ----- ----------- ----- ----------- ----------- ----------- ------ ---------- FOREIGN CURRENCY TOTAL TRANSLATION RETAINED STOCKHOLDERS' ADJUSTMENT EARNINGS EQUITY ----------- ------------ ------------ Balance, January 29, 1995............... $ -- $ 8,480,920 $16,067,575 Net income........... -- 3,181,694 3,181,694 Distributions........ -- (1,800,000) (1,800,000) ----------- ------------ ------------ Balance, February 3, 1996............... -- 9,862,614 17,449,269 Net income........... -- 8,023,565 8,023,565 Distributions........ -- (5,000,000) (5,000,000) ----------- ------------ ------------ Balance, February 1, 1997............... -- 12,886,179 20,472,834 Net income........... -- 22,849,238 22,849,238 Distributions........ -- (13,000,000) (13,000,000) Capital contribution....... -- -- 1,000 Foreign currency translation adjustment......... (1,142,766) -- (1,142,766) ----------- ------------ ------------ Balance, January 31, 1998............... $(1,142,766) $ 22,735,417 $29,180,306 ----------- ------------ ------------ ----------- ------------ ------------
See accompanying notes to consolidated and combined financial statements. F-6 THE ELECTRONICS BOUTIQUE GROUP CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED ---------------------------------------------- FEBRUARY 3, FEBRUARY 1, JANUARY 31, 1996 1997 1998 -------------- -------------- -------------- Cash flows from operating activities: Net income..................................................... $ 3,181,694 $ 8,023,565 $ 22,849,238 Adjustments to reconcile net income to cash provided by operating activities, excluding the effects of acquisitions: Depreciation of property and equipment....................... 5,984,652 6,555,142 7,571,301 Amortization of other assets................................. 195,742 381,276 744,752 Loss on disposal of property and equipment................... 126,226 1,170,182 620,916 Loss in investment in affiliated companies................... 1,186,329 155,186 -- Changes in assets and liabilities: Decrease (increase) in: Accounts receivable...................................... 832,871 (471,533) 385,737 Due from affiliates...................................... (2,279,807) (688,891) (2,936,874) Merchandise inventories.................................. (1,248,652) (5,646,658) 95,212 Prepaid expenses......................................... (594,187) 2,279 (27,311) Intangible assets........................................ -- -- (566,024) Other long-term assets................................... (3,007,421) 154,696 (5,086,599) (Decrease) increase in: Accounts payable......................................... 4,831,833 21,806,206 8,345,103 Accrued expenses......................................... 1,082,117 4,832,902 1,216,832 Due to affiliate......................................... 1,078,808 402,478 (1,981,194) Income taxes payable..................................... (152,377) 455,187 213,047 Deferred rent............................................ (15,872) (74,711) (368,059) -------------- -------------- -------------- Net cash provided by operating activities........................ 11,201,956 37,057,306 31,076,077 -------------- -------------- -------------- Cash flows used in investing activities: Purchases of property and equipment............................ (6,760,191) (8,610,265) (18,471,984) Proceeds from disposition of assets............................ 5,994 275,722 12,455 Net cash from business acquired................................ -- -- 2,149,646 Purchase of investment securities in affiliate................. (8,204,484) -- -- -------------- -------------- -------------- Net cash used in investing activities............................ (14,958,681) (8,334,543) (16,309,883) -------------- -------------- -------------- Cash flows from financing activities: Distributions.................................................. (1,800,000) (5,000,000) (13,000,000) Net proceeds from (payments under) revolving credit facility... 10,000,000 (10,000,000) -- Proceeds from long-term debt................................... 500,000 25,000,000 -- Repayment of long-term debt.................................... (6,091,663) (1,599,996) (24,514,276) Capital contribution........................................... -- -- 1,000 -------------- -------------- -------------- Net cash provided by (used in) financing activities.............. 2,608,337 8,400,004 (37,513,276) -------------- -------------- -------------- Effects of exchange rates on cash................................ -- -- (1,341,154) Net increase (decrease) in cash and cash equivalents............. (1,148,388) 37,122,767 (24,088,236) Cash and cash equivalents, beginning of year..................... 8,753,467 7,605,079 44,727,846 -------------- -------------- -------------- Cash and cash equivalents, end of year........................... $ 7,605,079 $ 44,727,846 $ 20,639,610 -------------- -------------- -------------- -------------- -------------- -------------- Supplemental disclosures of cash flow information: Cash paid during the year for: Interest..................................................... $ 1,820,492 $ 2,970,932 $ 2,714,593 Income taxes................................................. $ 432,377 $ 89,659 $ 672,842
See accompanying notes to consolidated and combined financial statements. F-7 THE ELECTRONICS BOUTIQUE GROUP NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Electronics Boutique, Inc. ("EB") is among the world's largest specialty retailers of electronic games. The Company's primary products are video games and personal computer entertainment software, supported by the sale of video game hardware, PC productivity software and accessories. EB Services Company LLP ("EB Services") provides consulting, management, administrative and advertising assistance under various management service contracts. Within these consolidated and combined financial statements, EB and EB Services are collectively referred to as the EB Group. The EB Group had 360 and 405 operating retail stores throughout the United States and Puerto Rico at February 1, 1997 and January 31, 1998, respectively. In addition, it operated 27 stores in Canada, 15 in Australia, and 5 in South Korea at January 31, 1998. The EB Group also operates a mail order business and sells product via the World Wide Web. Approximately 30% and 36% of the EB Group's 1996 and 1997 sales, respectively, were generated from merchandise purchased from its three largest vendors. FISCAL YEAR-END The fiscal year of the EB Group ends on the Saturday nearest January 31. Accordingly, the financial statements for the years ended February 3, 1996 ("1995") included 53 weeks of operations and the years ended February 1, 1997 ("1996") and January 31, 1998 ("1997") included 52 weeks of operations. PRINCIPLES OF CONSOLIDATION AND COMBINATION The consolidated and combined financial statements include the accounts of EB, its wholly owned subsidiaries and EB Services. Significant intercompany accounts and transactions have been eliminated in consolidation and combination. CASH AND CASH EQUIVALENTS EB Group considers all highly liquid investments with original maturities of three months or less to be cash equivalents for cash flow purposes. MERCHANDISE INVENTORIES Merchandise is valued at the lower of cost or market. Cost is determined principally by a weighted-average method. PROPERTY AND EQUIPMENT Property and equipment is recorded at cost and depreciated or amortized over the estimated useful life of the asset using the straight-line method. The estimated useful lives are as follows: Leasehold improvements............... Lesser of 10 years or the lease term Fixtures and equipment............... 5 years Transportation equipment............. 3 years Building............................. 30 years
Included in selling, general and administrative costs for 1995, 1996 and 1997 are losses of $125,000, $1,170,000 and $556,000, respectively, primarily related to the closing of five stores in 1995 and nine stores in each of 1996 and 1997, and the remodeling of several stores each year. F-8 THE ELECTRONICS BOUTIQUE GROUP NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED) (1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) GOODWILL AND OTHER INTANGIBLES Costs in excess of fair value of net assets acquired are being amortized on a straight-line basis over periods of up to twenty years. The EB Group assesses the recoverability of goodwill and other intangibles by determining whether the remaining balance can be recovered through projected cash flows. OTHER ASSETS Other assets consist principally of life insurance programs for certain key executives and security deposits. LEASING EXPENSES The EB Group recognizes lease expense on a straight-line basis over the term of the lease when lease agreements provide for increasing fixed rentals. The difference between lease expense recognized and actual payments made is included in deferred rent and prepaid expenses on the balance sheet. PREOPENING COSTS AND ADVERTING EXPENSE Preopening and start-up costs for new stores are charged to operations as incurred. Costs of advertising and sales promotion programs are charged to operations in the year incurred. VENDOR PROGRAMS The EB Group receives manufacturer reimbursements for certain training, promotional and marketing activities that offset the expenses incurred by the EB Group. FOREIGN CURRENCY The accounts of the foreign subsidiaries are translated in accordance with Statement of Financial Accounting Standard No. 52, Foreign Currency Translation, which requires that assets and liabilities of international operations be translated using the exchange rate in effect at the balance sheet date. The results of operations are translated using an average exchange rate for the year. The effects of rate fluctuations in translating assets and liabilities of international operations into U.S. dollars are accumulated and reflected as a foreign currency translation adjustment in the statements of stockholders' equity. Translation gains and losses are included in net income. INCOME TAXES Income taxes are payable personally by the stockholders pursuant to an election under Subchapter "S" of the Internal Revenue Code. Accordingly, no provision has been made for federal income taxes. EB elected Subchapter "S" status for some states while remaining subject to corporate tax in other states and, as a result, has provided for certain state income taxes. In accordance with the terms of EB's loan agreements, EB may declare dividends to its stockholders to pay their personal tax liabilities. EB made distributions of $1,800,000, $5,000,000 and $12,000,000 to its stockholders for taxes in 1995, 1996 and 1997, respectively. EB Services made a $1,000,000 distribution in 1997. F-9 THE ELECTRONICS BOUTIQUE GROUP NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED) (1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The tax basis of the assets and liabilities exceeded their financial reporting basis by approximately $18,200,000 at February 1, 1997, and $16,200,000 at January 31, 1998, primarily due to differences relating to depreciation, deferred rent, and other nondeductible expenses. State tax provisions have been recorded in the accompanying financial statements based on taxable income. This has resulted in an effective state income tax rate in excess of the statutory state rates. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. PRO FORMA INCOME PER SHARE Pro forma income per share is calculated using the weighted average number of shares of common stock outstanding during the year. FAIR VALUE OF FINANCIAL INSTRUMENTS The EB Group's financial instruments are accounts receivable, accounts payable, long-term debt, and certain long-term investments. The carrying value of accounts receivable and accounts payable approximates fair value due to the short maturity of these instruments. The carrying value of long-term debt approximates fair value based on current rates available to the EB Group for debt with similar maturities. The carrying value of life insurance policies included in other assets approximates fair value based on estimates received from insurance companies. (2) PRO FORMA INFORMATION (UNAUDITED) In connection with the initial public offering of the Company's Common Stock described in Note 10, EB plans to terminate its S Corporation status and make a final distribution of previously taxed earnings to its stockholders. Accordingly, the accompanying financial statements include certain pro forma information which gives effect to the events explained below. PRO FORMA BALANCE SHEET The pro forma balance sheet of the EB Group as of January 31, 1998 reflects: a) the estimated net deferred income taxes of $6,300,000 which will be recorded by the EB Group as a result of the termination of EB's S Corporation status shortly before completion of the offering. b) an estimated distribution of $40,000,000 payable to the stockholders of all taxed but undistributed S Corporation earnings of EB and EB Services, of which $13,900,000 was paid in March 1998 and the remainder will be paid from the net proceeds of the Offering to the Company. The deferred income tax asset represents the tax effect of the cumulative differences between the financial reporting and income tax bases of certain assets and liabilities as of the termination of the S Corporation status. F-10 THE ELECTRONICS BOUTIQUE GROUP NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED) (2) PRO FORMA INFORMATION (UNAUDITED) (CONTINUED) The significant items comprising the EB Group pro forma net deferred income tax assets and liabilities as of January 31, 1998 are temporary differences relating to the following: Deferred tax assets: Inventory capitalized costs..................................... $1,386,000 Accrued expenses................................................ 787,000 Fixed assets.................................................... 3,820,000 Deferred rent................................................... 870,000 Amortization of goodwill........................................ 114,000 Foreign net operating loss carryforward......................... 539,000 --------- Total gross deferred tax asset.................................. 7,516,000 Valuation allowance............................................. (539,000) --------- Deferred tax assets............................................. 6,977,000 Deferred tax liability: Basis in affiliated company..................................... 677,000 --------- Net deferred tax asset.......................................... $6,300,000 --------- ---------
Since the EB Group does not intend to repatriate the earnings of its foreign subsidiaries, no U.S. deferred taxes have been recorded on such amounts. PRO FORMA STATEMENT OF INCOME Immediately prior to completion of the initial public offering, EB will terminate its status as an S Corporation and will be subject to Federal and all state income taxes thereafter. Accordingly, for informational purposes, the statement of income for 1997 reflects pro forma earnings on an after-tax basis, assuming EB had been taxed as a C Corporation. The difference between the Federal statutory income tax rate and the pro forma income tax rate was as follows:
Federal statutory tax rate........................................... 35.0% State income taxes, net of federal benefit........................... 3.5 Income of foreign subsidiaries....................................... (1.7) Other................................................................ 3.5 --------- Pro forma income tax rate............................................ 40.3% --------- ---------
(3) DEBT EB Group had available a revolving credit facility allowing for maximum borrowings of $17,000,000 at February 1, 1997 and January 31, 1998. There were no outstanding amounts at February 1, 1997 and January 31, 1998 on this facility. The EB Group has a second revolving credit facility allowing for maximum borrowings of $1,000,000 at January 31, 1998. There was no outstanding balance at January 31, 1998 on this facility. F-11 THE ELECTRONICS BOUTIQUE GROUP NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED) (3) DEBT (CONTINUED) Long-term debt at February 1, 1997 and January 31, 1998 is summarized as follows:
FEBRUARY 1, JANUARY 31, 1997 1998 ------------- ------------- Bank term loan; interest payable monthly at the bank's prime rate (8.50% at January 31, 1998). Principal payments of $500,000 payable semi-annually, with the balance payable July 31, 1999............................................................ $ 6,000,000 $ 5,000,000 Bank term loan; interest payable monthly at the bank's prime rate (8.50% at January 31, 1998). Five semi-annual principal payments of $250,000 on every July 1 and February 1, commencing on July 1, 1996 and continuing through July 1, 1998, with the balance payable January 31, 1999............................................. 4,500,000 4,000,000 Term loan; interest payable quarterly at the average LIBOR rate for a three-month period, plus 1.5% (7% at February 1, 1997). Principal payments of $833,333 payable monthly beginning October 1, 1998 with the balance payable September 30, 2000............................................................................. 20,000,000 -- Promissory note, maturing on February 1, 2000 with interest and principal payable monthly at 6.00%................................................................. 308,341 208,345 Bank term loan; interest payable monthly at the U.S. prime rate plus 0.125% (8.625% at January 31, 1998). Principal payments of $66,700, payable monthly beginning October, 1997 with the balance payable on September 1, 2002...................... -- 3,733,200 ------------- ------------- 30,808,341 12,941,545 Less current installments.......................................................... 6,599,996 2,400,396 ------------- ------------- $ 24,208,345 $ 10,541,149 ------------- ------------- ------------- -------------
The EB Group's revolving credit agreement and term loans are guaranteed by a company affiliated through common ownership, and a stockholder, and are secured by all of the EB Group's assets. The revolving credit agreement and term loans contain restrictive covenants regarding transactions with affiliates, the payment of dividends, and other financial and nonfinancial matters. Scheduled repayments of long-term debt are as follows:
AMOUNT ------------- 1998........................................................................... $ 2,400,396 1999........................................................................... 5,408,749 2000........................................................................... 3,800,400 2001........................................................................... 800,400 2002........................................................................... 531,600 ------------- $ 12,941,545 ------------- -------------
F-12 THE ELECTRONICS BOUTIQUE GROUP NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED) (4) COMMITMENTS LEASE COMMITMENTS At January 31, 1998, the future annual minimum lease payments under operating leases for the following five fiscal years and thereafter were as follows:
RETAIL STORE DISTRIBUTION TOTAL LEASE LOCATIONS FACILITIES COMMITMENTS -------------- ----------- -------------- 1998............................................................... $ 20,327,567 $ 128,764 $ 20,456,331 1999............................................................... 19,131,737 109,358 19,241,095 2000............................................................... 17,179,036 112,617 17,291,653 2001............................................................... 15,552,449 115,104 15,667,553 2002............................................................... 13,656,361 51,620 13,707,981 Thereafter......................................................... 35,264,546 -- 35,264,546 -------------- ----------- -------------- $ 121,111,696 $ 517,463 $ 121,629,159 -------------- ----------- -------------- -------------- ----------- --------------
The total future minimum lease payments include lease commitments for new retail locations not in operation at January 31, 1998, and exclude contingent rentals based upon sales volume and owner expense reimbursements. Contingent rentals were approximately $3,640,000 and $5,422,000 and $8,132,000 in 1995, 1996 and 1997, respectively. The terms of the operating leases for the retail locations provide that, in addition to the minimum lease payments, the EB Group is required to pay additional rent to the extent retail sales, as defined, exceed amounts set forth in the lease agreements and to reimburse the landlord for the EB Group's proportionate share of the landlord's costs and expenses incurred in the maintenance and operation of the shopping mall. Rent expense, including contingent rental amounts, was approximately $25,104,000 and $28,448,000 and $35,138,000 in 1995, 1996 and 1997, respectively. Certain of the EB Group's lease agreements provide for varying lease payments over the life of the leases. For financial statement purposes, rental expense is recognized on a straight-line basis over the original term of the agreements. Actual lease payments are greater than (less than) the rental expense reflected in the statements of operations by approximately ($210,000) and ($70,000) and $139,000 for years 1995, 1996 and 1997, respectively. (5) RELATED-PARTY TRANSACTIONS DUE FROM AFFILIATES As of February 1, 1997 the EB Group had amounts due from an affiliated company (EB International, Inc.) that was wholly-owned by a member of senior management. The amounts advanced to EB International, Inc., were used to acquire a 50% interest in a joint venture which operates a chain of retail stores that sells computer software, video games, accessories, and supplies in South Korea. At February 1, 1997, amounts due from the affiliated company were $1,417,000, which included $281,000 in current assets and $1,136,000 in noncurrent assets. In 1997 the EB Group acquired 100% of the capital stock of EB International Inc., which resulted in goodwill of $337,000 that is being amortized over the expected period of benefit of ten years. The EB Group has consolidated the results of operations of EB International since the beginning of 1997. The pro forma effect of the acquisition is not material to 1996. Prior to 1997, the investment in EB International was accounted for under the equity method of accounting and, accordingly, the EB Group's proportionate interest in net income and losses has been reflected in the statements of income. F-13 THE ELECTRONICS BOUTIQUE GROUP NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED) (5) RELATED-PARTY TRANSACTIONS (CONTINUED) LOANS AND ADVANCES FROM AFFILIATES During 1995 and 1996, the EB Group borrowed varying amounts from a company affiliated through common ownership. The advances bear interest at the prime rate plus 0.25% (8.50% at February 1, 1997). The EB Group had no outstanding borrowings from affiliates at February 1, 1997 and January 31, 1998. Interest expense on affiliate borrowings was approximately $858,000, $250,000 and $0 for 1995, 1996 and 1997, respectively. TRANSACTIONS WITH AFFILIATES Insurance and other expenses are paid to an affiliated company through intercompany billings. The amount of these expenses was approximately $721,000 and $575,000 and $431,000 for 1995, 1996 and 1997, respectively, and is included in selling, general and administrative expenses. (6) CONSULTING AGREEMENT In July 1993, the EB Group entered into a consulting agreement with a business that owns and operates retail stores. The EB Group provides consulting, management, administrative, marketing, and advertising assistance to this retail business. The EB Group received $744,000, $641,000 and $633,000 during 1995, 1996, and 1997, respectively, as reimbursement for incremental costs incurred based on a formula as defined. Amounts owed to the EB Group for these items and trade credit at February 1, 1997 and January 31, 1998 are included in accounts receivable. Reimbursements offset selling, general and administrative expenses. Based on certain performance criteria as defined, the EB Group can also earn a performance fee. No performance fee was earned during 1995, 1996 and 1997. (7) EB CANADA In September 1993, EB advanced funds to obtain a 50% interest in a Canadian corporation (EB Canada) formed for the purpose of selling computer, video games and hand-held entertainment hardware, software, and related peripherals and accessories in shopping malls throughout Canada. During 1995, EB exchanged the principal amount of an outstanding shareholder note receivable and accrued interest for 286 shares of nonvoting cumulative preferred stock of EB Canada. The exchange of the shareholder notes receivable for the preferred stock had no impact on the results of operations of the EB Group. EB had a security interest in certain assets of EB Canada to secure the payment of all management fees, interest, and receivables associated with the sale of merchandise by EB to EB Canada. At February 1, 1997, EB Canada owed EB approximately $2,017,000 for trade credit, management fees, and other expenses, which is included in due from affiliates. EB purchased the remaining 50% of EB Canada in October 1997 for $727,000, resulting in goodwill of $1,180,000 which is being amortized over the expected period of benefit of ten years, and now owns 100% of EB Canada. The EB Group has consolidated the results of operations of EB Canada since the beginning of 1997. The proforma effect of the acquisition is not material to 1996. Prior to 1997, the investment in EB Canada was accounted for under the equity method of accounting and, accordingly, the EB Group's proportionate interest in net income and losses has been reflected in the statements of income. F-14 THE ELECTRONICS BOUTIQUE GROUP NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED) (8) INVESTMENT IN AFFILIATED COMPANY In 1995 the EB Group acquired 25 percent of the outstanding shares of Electronics Boutique Plc (formerly Rhino Group Plc). The EB Group accounts for the investment in Electronics Boutique Plc under the equity method, which requires the EB Group to recognize goodwill and 25 percent of the results of operations of Electronics Boutique plc from the date of acquisition in 1995. The goodwill is being amortized over the expected period of benefit of 20 years. The $6,400,000 of goodwill from this transaction resulted in amortization expense of $133,000 in 1995 and $321,000 in each of 1996 and 1997. At February 1, 1997 and January 31, 1998, the fair market value of the investment was $21,691,000 and $52,615,000, based on the closing market price quotation of the London Stock Exchange. In 1995 the EB Group entered into a services agreement with Electronics Boutique plc to provide consulting, management, training, and advertising assistance. The agreement provides for a fee to be paid to the EB Group based on a formula, as defined. The management fee receivable, which is included in due from affiliates, was $397,000 and $665,000 at February 1, 1997 and January 31, 1998. Additionally, the agreement provides that the EB Group is to be reimbursed by Electronics Boutique plc for all reasonable traveling and subsistence expenses of employees of the EB Group incurred during the performance of the agreement. At February 1, 1997 and January 31, 1998, these amounts were $435,000 and $52,000, and are included in due from affiliates. (9) EMPLOYEES' RETIREMENT PLAN The EB Group provides employees with retirement benefits under a 401(k) salary reduction plan. Generally, employees are eligible to participate in the plan after attaining age 21 and completing one year of service. Eligible employees may contribute up to 17% of their compensation to the plan. EB Group contributions are at the EB Group's discretion and may not exceed 15% of an eligible employee's compensation. EB Group contributions to the plan are fully vested for eligible employees with five years or more of service. EB Group contributions under this plan were approximately $235,000, $357,000 and $302,000 in 1995, 1996 and 1997, respectively. (10) SUBSEQUENT EVENTS In March 1998, the Company's Board of Directors authorized the filing of a Registration Statement on Form S-1 in connection with a planned initial public offering of the Company's common stock. On March 16, 1998, EB entered into a credit agreement with Fleet, pursuant to which Fleet agreed to make available to EB an asset based revolving credit and term loan facility in an amount up to $50,000,000. The revolving credit facility expires and the term loan, if borrowed, is repayable on March 16, 2001. Interest accrues on borrowings at a per annum rate equal to either LIBOR plus 250 basis points or Fleet's base rate of interest, at EB's option. The revolving credit and term loan facilities are secured by accounts receivable, inventory, and equipment, and the term loan facility is also secured by the Company's West Chester, Pennsylvania property. As of March 20, 1998, EB had $17,700,000 of outstanding borrowings under the revolving credit facility and had not borrowed amounts under the term loan. The Company intends to use $17,700,000 of its net proceeds of the Offering to repay EB's obligations to Fleet. F-15 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING SHAREHOLDERS OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY ANY SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. ------------------------ TABLE OF CONTENTS PAGE ---- Prospectus Summary........................ 3 Risk Factors.............................. 7 Reorganization............................ 12 Use of Proceeds........................... 13 Dividend Policy........................... 13 Capitalization............................ 14 Dilution.................................. 15 Selected Consolidated and Combined Financial and Operating Data............ 16 Management's Discussion and Analysis of Financial Condition and Results of Operations.............................. 18 Business.................................. 23 Management................................ 36 Certain Transactions...................... 41 Principal and Selling Shareholders........ 43 Description of Capital Stock.............. 44 Shares Eligible for Future Sale........... 47 Underwriting.............................. 48 Legal Matters............................. 49 Experts................................... 49 Additional Information.................... 49 Index to Consolidated and Combined Financial Statements.................... F-1
7,500,000 Shares [LOGO] ELECTRONICS BOUTIQUE HOLDINGS CORP. Common Stock -------------- PROSPECTUS -------------- PRUDENTIAL SECURITIES INCORPORATED SALOMON SMITH BARNEY , 1998 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the various expenses expected to be incurred in connection with the Offering. All amounts are estimates except the Commission Registration Fee, the NASD Filing Fee and the NASDAQ National Market Fee. Commission Registration Fee........................................................ $ 43,255 NASD Filing Fee.................................................................... 15,163 NASDAQ National Market Fee......................................................... * EDGAR and Printing Expenses........................................................ * Legal Fees and Expenses............................................................ * Accounting Fees and Expenses....................................................... * Blue Sky Fees and Expenses......................................................... * Transfer Agent's Fees and Expenses................................................. * Directors and Officers Insurance Premiums.......................................... * Miscellaneous Expenses............................................................. * --------- Total.............................................................................. $ * --------- ---------
- ------------------------ * To be completed by amendment. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Section 145 of the Delaware General Corporation Law permits a corporation to include in its charter documents, and in agreements between the corporation and its directors and officers, provisions expanding the scope of indemnification beyond that specifically provided by the current law. The Company's Certificate of Incorporation provides for the indemnification of directors to the fullest extent permissible under Delaware Law. The Company's Bylaws provide for the indemnification of officers, directors and third parties acting on behalf of the Company if such person acted in good faith and in a manner reasonably believed to be in and not opposed to the best interest of the Company, and, with respect to any criminal action or proceeding, the indemnified party had no reason to believe his conduct was unlawful. The Company has entered into indemnification agreements with its directors and executive officers in addition to the indemnification provided for in the Company's Bylaws, and intends to enter into indemnification agreements with any new directors and executive officers in the future. The form of Underwriting Agreement filed as an Exhibit hereto provides for the indemnification of the Company's directors and officers in certain circumstances as provided therein. The Company intends to procure insurance, which would afford officers and directors insurance coverage for losses arising from claims based on breaches of duty, negligence, error and other wrongful acts, including liabilities under the Securities Act. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. In , 1998, an aggregate of shares of Common Stock were issued to the Kim Shareholders in exchange for all of the outstanding shares of capital stock of EB and EB Services. Such issuances were made pursuant to the exemption from registration under Section 4(2) of the Securities Act. See "Reorganization." II-1 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits: * 1.1 Form of Underwriting Agreement 3.1 Certificate of Incorporation of the Company 3.2 Bylaws of the Company * 4.1 Specimen Stock Certificate * 5.1 Opinion of Klehr, Harrison, Harvey, Branzburg & Ellers LLP * 10.1 Tax Indemnification Agreement, dated as of , 1998, by and among the Company, EB and certain stockholders of the Company. * 10.2 Form of Indemnification Agreement for Directors and Officers of the Company 10.3 Form of 1998 Equity Participation Plan of the Company * 10.4 Services Agreement, dated October 13, 1995, by and between EB and EB-UK (f/k/a Rhino Group Plc) 10.5 Loan and Security Agreement, dated March 16, 1998, by and between EB and Fleet Capital Corporation ** 11.1 Statement re computation of per share earnings ** 12.1 Statement re computation of ratios 21.1 Subsidiaries of the Company * 23.1 Consent of KPMG Peat Marwick LLP * 23.2 Consent of Klehr, Harrison, Harvey, Branzburg & Ellers LLP (included in Exhibit 5.1) 25.1 Powers of Attorney (included on Signature Pages) 27.1 Financial Data Schedule
- ------------------------ * To be filed by Amendment. ** Not applicable (b) Consolidated Financial Statement Schedules None ITEM 17. UNDERTAKINGS. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question II-2 whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. II-3 The Registrant further undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial BONA FIDE offering thereof. The Registrant undertakes to provide to the underwriter at the closing specified in the underwriting agreement certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser. II-4 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the Borough of West Chester, Commonwealth of Pennsylvania, on March 13, 1998. ELECTRONICS BOUTIQUE HOLDINGS CORP. BY: /S/ JOSEPH J. FIRESTONE ----------------------------------------- Joseph J. Firestone, PRESIDENT AND CHIEF EXECUTIVE OFFICER KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Joseph J. Firestone and John R. Panichello, and either of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place, and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below on March 23, 1998 by the following persons in the capacities indicated:
SIGNATURE TITLE - ------------------------------------------------------ ------------------------------------------------------ /s/ JAMES J. KIM Chairman of the Board ------------------------------------------- James J. Kim /s/ JOSEPH J. FIRESTONE President, Chief Executive Officer and Director ------------------------------------------- (Principal Executive Officer) Joseph J. Firestone /s/ DEAN S. ADLER Director ------------------------------------------- Dean S. Adler /s/ SUSAN Y. KIM Director ------------------------------------------- Susan Y. Kim /s/ LOUIS J. SIANA Director ------------------------------------------- Louis J. Siana /s/ JOHN R. PANICHELLO Senior Vice President and Chief Financial Officer ------------------------------------------- (Principal Financial and Accounting Officer) John R. Panichello
II-4 EX-3.1 2 EXHIBIT 3.1 Exhibit 3.1 CERTIFICATE OF INCORPORATION OF ELECTRONICS BOUTIQUE HOLDINGS CORP. FIRST: The name of the Corporation is Electronics Boutique Holdings Corp. SECOND: The address of the registered office of the Corporation in the State of Delaware is 103 Springer Building, 3411 Silverside Road, Wilmington, Delaware 19810, located in the County of New Castle, Delaware. The name of its registered agent at that address is Organization Services, Inc. THIRD: The purpose of the Corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of Delaware as set forth in Title 8 of the Delaware Code (the "GCL"). FOURTH: A. The total number of shares of capital stock which the Corporation shall have authority to issue is 125,000,000 shares (the "Capital Stock"), consisting of 100,000,000 shares of common stock, par value $.01 per share (the "Common Stock"), and 25,000,000 shares of preferred stock, par value $.01 per share (the "Preferred Stock"). B. Shares of Preferred Stock may be issued from time to time in one or more series, as provided for herein or as provided for by the Board of Directors as permitted hereby. All shares of Preferred Stock shall be of equal rank and shall be identical, except as fixed by the Board of Directors for any series provided for by the Board of Directors as permitted hereby. All shares of any one series shall be identical in all respects with all the other shares of such series, except the shares of any one series issued at different times may differ as to the dates from which dividends thereon may be cumulative. The Board of Directors is hereby authorized, by resolution or resolutions, to establish, out of the unissued (including previously issued and subsequently retired) shares of Preferred Stock not then allocated to any series of Preferred Stock, additional series of Preferred Stock. Before any shares of any such additional series are issued, the Board of Directors shall fix and determine, and is hereby expressly empowered to fix and determine, by resolution or resolutions, the number of shares constituting such series and the distinguishing characteristics and the relative rights, preferences, privileges and immunities, if any, and any qualifications, limitations or restrictions thereof, so far as not inconsistent with the provisions of this Article FOURTH. Without limiting the generality of the foregoing, the Board of Directors may fix and determine: 1. The designation of such series and the number of shares which shall constitute such series of such shares; 2. The rate of dividend, if any, payable on shares of such series; 3. Whether the shares of such series shall be cumulative, non-cumulative or partially cumulative as to dividends, and the dates from which any cumulative dividends are to accumulate; 4. Whether the shares of such series may be redeemed, and, if so, the price or prices at which and the terms and conditions on which shares of such series may be redeemed; 5. The amount payable upon shares of such series in the event of the voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Corporation; 6. The sinking fund provisions, if any, for the redemption of shares of such series; 7. The voting rights, if any, of the shares of such series; 8. The terms and conditions, if any, on which shares of such series may be converted into shares of capital stock of the Corporation of any other class or series; 9. Whether the shares of such series are to be preferred over shares of capital stock of the Corporation of any other class or series as to dividends, or upon the voluntary or involuntary dissolution, liquidation, or winding up of the affairs of the Corporation, or otherwise; and 10. Any other characteristics, preferences, limitations, rights, privileges, immunities or terms not inconsistent with the provisions of this Article FOURTH. C. Except as otherwise provided in this Certificate of Incorporation, each holder of Common Stock shall be entitled to one vote for each share of Common Stock held by him on all matters submitted to stockholders for a vote and each holder of Preferred Stock of any series that is Voting Stock (as hereinafter defined) shall be entitled to such number of votes for each share held by him as may be specified in the Certificate of Designation in respect thereof. FIFTH: The name and mailing address of the sole incorporator is as follows: Brian I. Sopinsky, Esquire Klehr, Harrison, Harvey, Branzburg & Ellers LLP 1401 Walnut Street Philadelphia, PA 19102-3163 2 SIXTH: The Corporation is to have perpetual existence. SEVENTH: A. The Board of Directors shall have the power to make, adopt, alter, amend, change or repeal the Bylaws of the Corporation (the "Bylaws") by resolution adopted by the affirmative vote of a majority of the entire Board of Directors, subject to any law or Bylaw provision requiring the affirmative vote of a larger percentage of the members of the Board of Directors. B. Stockholders may not make, adopt, alter, amend, change or repeal the Bylaws of the Corporation or Articles Seventh, Eighth, Ninth, Tenth or Eleventh of this Certificate of Incorporation except upon the affirmative vote of at least 66.67% of the votes entitled to be cast by the holders of all outstanding shares then entitled to vote generally in the election of directors, voting together as a single class. EIGHTH: The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors, which shall consist of not less than three nor more than twenty directors, the exact number of directors to be determined from time to time by resolution adopted by affirmative vote of a majority of the entire Board of Directors, subject to any bylaw requiring the affirmative vote of a larger percentage of the members of the Board of Directors. The Board of Directors shall be divided as nearly equal as possible in number into three classes, designated Class I, Class II and Class III. Class I directors shall be initially elected for a term expiring at the first annual meeting of stockholders of the Corporation following the date hereof, Class II directors shall be initially elected for a term expiring at the second annual meeting of stockholders of the Corporation following the date hereof, and Class III directors shall be initially elected for a term expiring at the third annual meeting of stockholders of the Corporation following the date hereof. At each annual meeting of stockholders, beginning in 1999, successors to the class of directors whose term expires at that annual meeting shall be elected for a three year term. If the number of directors is changed, any increase or decrease shall be apportioned among the classes so as to maintain the number of directors in each class as nearly equal as possible, and any additional director of any class elected to fill a vacancy resulting from an increase in such class shall hold office for a term that shall coincide with the remaining term of that class, but in no case will a decrease in the number of directors shorten the term of any incumbent director. A director shall hold office until the annual meeting for the year in which his term expires and until his successor shall be elected and shall qualify, subject, however, to such director's prior death, resignation, retirement, disqualification or removal from office. Subject to Article III, Section 2 of the Bylaws, any vacancy on the Board of Directors that results from an increase in the number of directors and any other vacancy may only be filled by a majority of the directors then in office, even if less than a quorum, or by a sole remaining director. Any director elected to fill a vacancy not resulting from an increase in the number of directors shall have the same remaining term as that of his predecessor. NINTH: Special meetings of the stockholders of the Corporation, for any purpose or purposes, may only be called at any time by a majority of the entire Board of Directors or by either the Chairman, the Chief Executive Officer or the President of the Corporation. 3 TENTH: No stockholder action may be taken except at an annual or special meeting of stockholders of the Corporation and stockholders of the Corporation may not take any action by written consent in lieu of a meeting. ELEVENTH: Directors and officers, in exercising their respective powers with a view to the interests of the Corporation, may consider: (a) The interests of the Corporation's employees, suppliers, creditors and customers; (b) The economy of the state and nation; (c) The interests of the community and of society; and (d) The long-term as well as short-term interests of the Corporation and its stockholders, including the possibility that these interests may be best served by the continued independence of the Corporation. This Article ELEVENTH does not create or authorize any causes of action against the corporation or its directors or officers. TWELFTH: A. Subject to Section C of this Article TWELFTH, the Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that he is or was a director or officer of the Corporation, or is or was serving at the request of the Corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Corporation, or, with respect to any criminal action or proceeding, had reasonable cause to believe his conduct was unlawful. B. Subject to Section C of this Article TWELFTH, the Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he is or was a director or officer of the Corporation, or is or was serving at the request of the Corporation as a director or officer of another corporation, partnership, 4 joint venture, trust or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation; except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. C. Any indemnification under this Article TWELFTH (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the director or officer is proper in the circumstances because he has met the applicable standard of conduct set forth in Section A or Section B of this Article TWELFTH, as the case may be. Such determination shall be made (i) by a majority vote of directors who were not parties to such action, suit or proceeding, even though less than a quorum, or (ii) by a committee of such disinterested directors designated by a majority of such disinterested directors, even though less than a quorum, or (iii) if there are no such disinterested directors or if such disinterested directors so direct, by independent legal counsel in a written opinion, or (iv) by the stockholders. To the extent, however, that a director or officer of the Corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding described in Section A or Section B of this Article TWELFTH, or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith, without the necessity of authorization in the specific case. D. For purposes of any determination under Section C of this Article TWELFTH, a person shall be deemed to have acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interest of the Corporation, and, with respect to any criminal action or proceeding, to have had no reasonable cause to believe his conduct was unlawful, if his action is based on the records or books of account of the Corporation or another enterprise, or on information supplied to him by the officers of the Corporation or another enterprise in the course of their duties, or on the advice of legal counsel for the Corporation or another enterprise or on information or records given or reports made to the Corporation or another enterprise by an independent certified public accountant or by an appraiser or other expert selected with reasonable care by the Corporation or another enterprise. The term "another enterprise" as used in this Section D of Article TWELFTH shall mean any other corporation or any partnership, joint venture, trust or other enterprise of which such person is or was serving at the request of the Corporation as a director, officer, employee or agent. The provisions of this Section D shall not be deemed to be exclusive or to limit in any way the circumstances in which a person may be deemed to have met the applicable standard of conduct set forth in Sections A or B of this Article TWELFTH as the case may be. E. Notwithstanding any contrary determination in the specific case under Section C of this Article TWELFTH, and notwithstanding the absence of any determination thereunder, any 5 director or officer may apply to any court of competent jurisdiction in the State of Delaware for indemnification to the extent otherwise permissible under Sections A and B of this Article TWELFTH. The basis of such indemnification by a court shall be a determination by such court that indemnification of the director or officer is proper in the circumstances because he has met the applicable standards of conduct set forth in Sections A or B of this Article TWELFTH, as the case may be. Notice of any application for indemnification pursuant to this Section E of Article TWELFTH shall be given to the Corporation promptly upon the filing of such application. F. Expenses incurred by a director or officer of the Corporation in defending or investigating a threatened or pending action, suit or proceeding may be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of the director or officer to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Corporation as authorized in this Article TWELFTH. G. The indemnification and advancement of expenses provided by this Article TWELFTH shall not be deemed exclusive of any other rights to which any person seeking indemnification or advancement of expenses may be entitled under any Bylaw, agreement, contract, vote of stockholders or disinterested directors or pursuant to the direction (howsoever embodied) of any court of competent Jurisdiction or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, it being the policy of the Corporation that indemnification of, and advancement of expenses to, the persons specified in Sections A and B of this Article TWELFTH shall be made to the fullest extent permitted by law. The provisions of this Article TWELFTH shall not be deemed to preclude the indemnification of, and advancement of expenses to, any person who is not specified in Sections A or B of this Article TWELFTH but whom the Corporation has the power or obligation to indemnify under the provisions of the General Corporation Law of the State of Delaware, or otherwise. The indemnification provided by this Article TWELFTH shall continue as to a person who has ceased to be a director or officer and shall inure to the benefit of the heirs, executors and administrators of such person. H. The Corporation may purchase and maintain insurance on behalf of any person who is or was a director or officer of the Corporation, or, while a director or officer of the Corporation, is or was serving at the request of the Corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power or the obligation to indemnify him against such liability under the provisions of this Article TWELFTH. I. For purposes of this Article TWELFTH, reference to "the Corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors or officers, so that any person who is or was a director or officer of such constituent corporation, or is or was serving at the request of such constituent corporation as a director or officer of another corporation, partnership, 6 limited liability company, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this Article TWELFTH with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued. THIRTEENTH: Whenever a compromise or arrangement is proposed between this Corporation and its creditors or any class of them and/or between this Corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of this Corporation or of any creditor or stockholder thereof or on the application of any receiver or receivers appointed for this Corporation under the provisions of Section 291 of the GCL or on the application of trustees in dissolution or of any receiver or receivers appointed for this Corporation under the provisions of Section 279 of the GCL, order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of this Corporation as a consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders, of this Corporation, as the case may be, and also on this Corporation. FOURTEENTH: The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation. FIFTEENTH: No director of this Corporation shall be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of the law, (iii) under Section 174 of the GCL, or (iv) for any transaction from which the director derived an improper personal benefit. If the GCL is hereafter amended to authorize corporate action further limiting or eliminating the personal liability of directors, then the liability of each director of the Corporation shall be limited or eliminated to the fullest extent permitted by the GCL as so amended from time to time. I, THE UNDERSIGNED, being the sole incorporator hereinbefore named, for the purpose of forming a corporation pursuant to the General Corporation Law of the State of Delaware, do make this certificate, hereby declaring and certifying that this is my act and deed and the facts herein stated are true, and accordingly have hereunto set my hand this 13th day of March, 1998. /s/ Brian I. Sopinsky ------------------------------------ Brian I. Sopinsky, Sole Incorporator 7 EX-3.2 3 EX-3.2 Exhibit 3.2 BYLAWS OF ELECTRONICS BOUTIQUE HOLDINGS CORP. ARTICLE I. OFFICES Section 1. Registered Office. The registered office of Electronics Boutique Holdings Corp. (the "Corporation") shall be at 103 Springer Building, 3411 Silverside Road, Wilmington, Delaware 19810. Section 2. Other Offices. The Corporation may also have offices at such other places both within and without the State of Delaware as the Board of Directors of the Corporation (the "Board of Directors") may from time to time determine. ARTICLE II. MEETINGS OF STOCKHOLDERS Section 1. Place of Meetings. Meetings of the stockholders for the election of directors or for any other purpose shall be held at such time and place, either within or without the State of Delaware as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting or in a duly executed waiver of notice thereof. Section 2. Annual Meetings. The annual meeting of stockholders shall be held on such date and at such time as may be fixed by the Board of Directors and stated in the notice of the meeting, for the purpose of electing directors and for the transaction of only such other business as is properly brought before the meeting in accordance with these Bylaws (these "Bylaws"). Written notice of an annual meeting stating the place, date and hour of the meeting, shall be given to each stockholder entitled to vote at such meeting not less than ten (10) nor more than sixty (60) days before the date of the meeting. To be properly brought before the annual meeting, business must be either (i) specified in the notice of annual meeting (or any supplement or amendment thereto) given by or at the direction of the Board of Directors, (ii) otherwise brought before the annual meeting by or at the direction of the Board of Directors, or (iii) otherwise properly brought before the annual meeting by a stockholder. In addition to any other applicable requirements, for business to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the Corporation not less than sixty (60) days nor more than ninety (90) days prior to the meeting; provided, however, that in the event that less than seventy (70) days notice or prior public disclosure of the date of the annual meeting is given or made to stockholders, notice by a stockholder, to be timely, must be received no later than the close of business on the tenth (10th) day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure was made, whichever first occurs. A stockholder's notice to the Secretary shall set forth (a) as to each matter the stockholder proposes to bring before the annual meeting (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, and (ii) any material interest of the stockholder in such business, and (b) as to the stockholder giving the notice (i) the name and record address of the stockholder and (ii) the class, series and number of shares of capital stock of the Corporation which are beneficially owned by the stockholder. Notwithstanding anything in these Bylaws to the contrary, no business shall be conducted at the annual meeting except in accordance with the procedures set forth in this Article II, Section 2. The officer of the Corporation presiding at an annual meeting shall, if the facts warrant, determine and declare to the annual meeting that business was not properly brought before the annual meeting in accordance with the provisions of this Article II, Section 2, and if such officer should so determine, such officer shall so declare to the annual meeting and any such business not properly brought before the meeting shall not be transacted. Section 3. Special Meetings. Unless otherwise prescribed by law or by the Certificate of Incorporation of the Corporation (the "Certificate of Incorporation"), special meetings of stockholders, for any purpose or purposes, may only be called by a majority of the entire Board of Directors, the Chairman of the Board, the Chief Executive Officer or the President. Written notice of a special meeting stating the place, date and hour of the meeting, shall be given to each stockholder entitled to vote at such meeting not less than ten (10) nor more than sixty (60) days before the date of the meeting. Business transacted at any special meeting shall be limited to the purposes stated in the notice. Section 4. Quorum. Except as otherwise provided by law or by the Certificate of Incorporation, the holders of a majority of the capital stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the holders of a majority of the votes entitled to be cast by the stockholders entitled to vote thereat, present in person or represented by proxy may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented by proxy. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally noticed. If the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder entitled to vote at the meeting. 2 Section 5. Voting. Unless otherwise required by law, the Certificate of Incorporation, the rules or regulations of The Nasdaq National Market or any stock exchange applicable to the Corporation or these Bylaws, any question (other than the election of directors) brought before any meeting of stockholders shall be decided by the vote of the holders of a majority of the stock represented and entitled to vote thereat. At all meetings of stockholders for the election of directors, a plurality of the votes cast shall be sufficient to elect. Each stockholder represented at a meeting of stockholders shall be entitled to cast one vote for each share of the capital stock entitled to vote thereat held by such stockholder, unless otherwise provided by the Certificate of Incorporation. Such votes may be cast in person or by proxy but no proxy shall be voted after three years from its date, unless such proxy provides for a longer period. The Board of Directors, in its discretion, or the officer of the Corporation presiding at a meeting of stockholders, in his discretion, may require that any votes cast at such meeting shall be cast by written ballot. Section 6. List of Stockholders Entitled to Vote. The officer of the Corporation who has charge of the stock ledger of the Corporation shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder of the Corporation who is present. Section 7. Stock Ledger. The stock ledger of the Corporation shall be the only evidence as to who are the stockholders entitled to examine the stock ledger, the list required by Section 6 of this Article II or the books of the Corporation, or to vote in person or by proxy at any meeting of stockholders. Section 8. Adjournment. Any meeting of the stockholders, including one at which directors are to be elected, may be adjourned for such periods as the presiding officer of the meeting or the stockholders present in person or by proxy and entitled to vote shall direct. ARTICLE III. DIRECTORS Section 1. Powers; Number; Qualifications. The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors, except as may be otherwise provided by law or in the Certificate of Incorporation. The number of directors which shall constitute the Board of Directors shall be not less than three (3) nor more than twenty (20), spread as evenly as possible among the Corporation's three classes of directors. The exact number of 3 directors shall be fixed from time to time, within the limits specified in this Article III Section 1 or in the Certificate of Incorporation, or by the Board of Directors. Directors need not be stockholders of the Corporation. Section 2. Election; Term of Office; Resignation; Removal; Vacancies. Each director shall hold office until the next annual meeting of stockholders at which the term of the class to which he has been elected expires and until such director's earlier resignation, removal from office, death or incapacity. Any director may resign at any time upon written notice to the Board of Directors or to the Chief Executive Officer or the Secretary of the Corporation. Such resignation shall take effect at the time specified therein, and unless otherwise specified therein no acceptance of such resignation shall be necessary to make it effective. Any director or the entire Board of Directors may be removed, but only for cause, by the holders of a majority of the shares then entitled to vote at an election of directors. Unless otherwise provided in the Certificate of Incorporation, vacancies and newly created directorships resulting from any increase in the authorized number of directors or from any other cause may be filled by a majority of the directors then in office, although less than a quorum, or by a sole remaining director and each director so chosen shall hold office until the next annual meeting at which the term of the class to which such director has been elected expires and until such director's successor shall be duly elected and shall qualify, or until such director's earlier resignation, removal from office, death or incapacity. Section 3. Nominations. Nominations of persons for election to the Board of Directors of the Corporation at a meeting of stockholders of the Corporation may be made at such meeting by or at the direction of the Board of Directors, by any committee or persons appointed by the Board of Directors or by any stockholder of the Corporation entitled to vote for the election of directors at the meeting who complies with the notice procedures set forth in this Article III, Section 3. Such nominations by any stockholder shall be made pursuant to timely notice in writing to the Secretary of the Corporation. To be timely, a stockholder's notice shall be delivered to or mailed and received at the principal executive offices of the Corporation not less than sixty (60) days nor more than ninety (90) days prior to the meeting; provided however, that in the event that less than seventy (70) days notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder, to be timely, must be received no later than the close of business on the tenth (10th) day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made, whichever first occurs. Such stockholder's notice to the Secretary shall set forth (i) as to each person whom the stockholder proposes to nominate for election or reelection as a director, (a) the name, age, business address and residence address of the person, (b) the principal occupation or employment of the person, (c) the class and number of shares of capital stock of the Corporation which are beneficially owned by the person, and (d) any other information relating to the person that is required to be disclosed in solicitations for proxies for election of directors pursuant to the Rules and Regulations of the Securities and Exchange Commission under Section 14 of the Securities Exchange Act of 1934, as amended, and (ii) as to the stockholder giving the notice (a) the name and record address of the stockholder and (b) the class and number of shares of capital stock of the Corporation which are beneficially owned by the stockholder. The Corporation may require any proposed nominee to furnish such other information as may reasonably be required by the Corporation to determine the eligibility of such proposed nominee to serve as a 4 director of the Corporation. No person shall be eligible for election as a director of the Corporation unless nominated in accordance with the procedures set forth herein. The officer of the Corporation presiding at an annual meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the foregoing procedure, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. Section 4. Meetings. The Board of Directors of the Corporation may hold meetings, both regular and special, either within or without the State of Delaware. Regular meetings of the Board of Directors may be held without notice at such time and at such place as may from time to time be determined by the Board of Directors. Special meetings of the Board of Directors may be called by the Chairman of the Board or Chief Executive Officer or the President or Chief Operating Officer or a majority of the entire Board of Directors. Notice thereof stating the place, date and hour of the meeting shall be given to each director either by mail not less than forty-eight (48) hours before the date of the meeting, by telephone or telegram on twenty-four (24) hours notice, or on such shorter notice as the person or persons calling such meeting may deem necessary or appropriate in the circumstances. Section 5. Quorum. Except as may be otherwise specifically provided by law, the Certificate of Incorporation or these Bylaws, at all meetings of the Board of Directors or any committee thereof, a majority of the entire Board of Directors or such committee, as the case may be, shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors or such committee, as the case may be. If a quorum shall not be present at any meeting of the Board of Directors or of any committee thereof, a majority of the directors present thereat may adjourn the meeting from time to time until a quorum shall be present. Section 6. Actions of Board of Directors. Unless otherwise provided by the Certificate of Incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all the members of the Board of Directors or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board of Directors or committee. Section 7. Meetings by Means of Conference Telephone. Unless otherwise provided by the Certificate of Incorporation or these Bylaws, members of the Board of Directors of the Corporation, or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors or such committee by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this Article III, Section 7 shall constitute presence in person at such meeting. Section 8. Committees. The Board of Directors may designate one or more committees, each committee to consist of one or more of the directors of the Corporation. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any disqualified member at any meeting of any such committee. In the disqualification of a member of 5 a committee, and in the absence of a designation by the Board of Directors of an alternate member to replace the disqualified member, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any disqualified member. Any committee, to the extent allowed by law and provided in the resolution establishing such committee, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation. Each committee shall keep regular minutes and report to the Board of Directors when required. Section 9. Compensation. The directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors and may be paid a fixed amount (in cash or other form of consideration) for attendance at each meeting of the Board of Directors or a stated salary as director. No such payment shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. Section 10. Interested Directors. No contract or transaction between the Corporation and one or more of its directors or officers, or between the Corporation and any other corporation, partnership, association, or other organization in which one or more of its directors or officers are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the Board of Directors or committee thereof which authorizes the contract or transaction, or solely because his or their votes are counted for such purpose, if (i) the material facts as to his or their relationship or interest and as to the contract or transaction are disclosed or are known to the Board of Directors or the committee, and the Board of Directors or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or (ii) the material facts as to his or their relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or (iii) the contract or transaction is fair as to the Corporation as of the time it is authorized, approved or ratified, by the Board of Directors, a committee thereof or the stockholders. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee which authorizes the contract or transaction. ARTICLE IV. OFFICERS Section 1. General. The officers of the Corporation shall be elected by the Board of Directors and shall consist of: a Chairman of the Board; a Chief Executive Officer; a President; a Secretary; and a Treasurer. The Board of Directors, in its discretion, may also elect one or more Vice Presidents (including Executive Vice Presidents and Senior Vice Presidents), Assistant Secretaries, Assistant Treasurers, a Controller and such other officers as in the judgment of the Board 6 of Directors may be necessary or desirable. Any number of offices may be held by the same person and more than one person may hold the same office, unless otherwise prohibited by law, the Certificate of Incorporation or these Bylaws. The officers of the Corporation need not be stockholders of the Corporation nor, except in the case of the Chairman of the Board of Directors, need such officers be directors of the Corporation. Section 2. Election. The Board of Directors at its first meeting held after each annual meeting of stockholders shall elect the officers of the Corporation who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board of Directors; and all officers of the Corporation shall hold office until their successors are chosen and qualified, or until their earlier resignation or removal. Except as otherwise provided in this Article IV, any officer elected by the Board of Directors may be removed at any time by the affirmative vote of a majority of the Board of Directors. Any vacancy occurring in any office of the Corporation shall be filled by the Board of Directors. The salaries of all officers who are directors of the Corporation shall be fixed by the Board of Directors. Section 3. Voting Securities Owned by the Corporation. Powers of attorney, proxies, waivers of notice of meeting, consents and other instruments relating to securities owned by the Corporation may be executed in the name of and on behalf of the Corporation by the Chairman of the Board, Chief Executive Officer, President or any Vice President, and any such officer may, in the name and on behalf of the Corporation, take all such action as any such officer may deem advisable to vote in person or by proxy at any meeting of security holders of any corporation in which the Corporation may own securities and at any such meeting shall possess and may exercise any and all rights and powers incident to the ownership of such securities and which, as the owner thereof, the Corporation might have exercised and possessed if present. The Board of Directors may, by resolution, from time to time confer like powers upon any other person or persons. Section 4. Chairman of the Board. The Chairman of the Board shall be a member of the Board of Directors, and shall exercise and perform such duties and have such powers as may be prescribed by the Board of Directors or these Bylaws, all in accordance with basic policies as established by and subject to the oversight of the Board of Directors. Section 5. Chief Executive Officer. The Chief Executive Officer of the Corporation shall supervise, coordinate and manage the Corporation's business and activities and supervise, coordinate and manage its operating expenses and capital allocation, shall have general authority to exercise all the powers necessary for the Chief Executive Officer of the Corporation and shall perform such other duties and have such other powers as may be prescribed by the Board of Directors or these Bylaws, all in accordance with basic policies as established by and subject to the oversight of the Board of Directors. In the absence or disability of the Chairman of the Board, the duties of the Chairman of the Board shall be performed and the Chairman of the Board's authority may be exercised by the Chief Executive Officer and, in the event the Chief Executive Officer is absent or disabled, such duties shall be performed and such authority may be exercised by a director designated for such purpose by the Board of Directors. 7 Section 6. President. The President shall have general authority to exercise all the powers necessary for the President of the Corporation and shall perform such other duties and have such other powers as may be prescribed by the Board of Directors or these Bylaws, all in accordance with basic policies as established by and subject to the oversight of the Board of Directors, the Chairman of the Board and the Chief Executive Officer. In the absence or disability of the Chairman of the Board and Chief Executive Officer, the duties of the Chairman of the Board shall be performed and the Chairman of the Board's authority may be exercised by the President and, in the event the President is absent or disabled, such duties shall be performed and such authority may be exercised by a director designated for such purpose by the Board of Directors. Section 7. Vice Presidents. At the request of the President or in the absence of each of the Chairman of the Board, Chief Executive Officer and President, or in the event of their inability or refusal to act, the Vice President or the Vice Presidents if there is more than one (in the order designated by the Board of Directors) shall perform the duties of the Chairman of the Board, Chief Executive Officer and/or President, and when so acting, shall have all the powers of and be subject to all the restrictions upon such offices (other than as Chairman of the Board). Each Vice President shall perform such other duties and have such other powers as the Board of Directors from time to time may prescribe. If there be no Vice President, the Board of Directors shall designate the officer of the Corporation who, in the absence of each of the Chairman of the Board, Chief Executive Officer and President or in the event of the inability or refusal of such officers to act, shall perform the duties of such offices (other than as Chairman of the Board), and when so acting, shall have all the powers of and be subject to all the restrictions upon such offices (other than as Chairman of the Board). Section 8. Secretary. The Secretary shall attend all meetings of the Board of Directors and all meetings of stockholders and record all the proceedings thereat in a book or books to be kept for that purpose; the Secretary shall also perform like duties for the standing committees when required. The Secretary shall give, or cause to be given, notice of all meetings of the stockholders and special meetings of the Board of Directors, and shall perform such other duties as may be prescribed by the Board of Directors, the Chairman of the Board, the Chief Executive Officer or the President, under whose supervision the Secretary shall be. If the Secretary shall be unable or shall refuse to cause to be given notice of all meetings of the stockholders and special meetings of the Board of Directors, and if there be no Assistant Secretary, then the Board of Directors, the Chairman of the Board, the Chief Executive Officer or the President may choose another officer to cause such notice to be given. The Secretary shall have custody of the seal of the Corporation and the Secretary or any Assistant Secretary, if there be one, shall have authority to affix the same to any instrument requiring it and when so affixed, it may be attested by the signature of the Secretary or by the signature of any such Assistant Secretary. The Board of Directors may give general authority to any other officer to affix the seal of the Corporation and to attest the affixing by his signature. The Secretary shall see that all books, reports, statements, certificates and other documents and records required by law to be kept or filed are properly kept or filed, as the case may be. Section 9. Treasurer. The Treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging 8 to the Corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors. The Treasurer shall disburse the funds of the Corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the President and the Board of Directors, at its regular meetings, or when the Board of Directors so requires, an account of all his transactions as Treasurer and of the financial condition of the Corporation. If required by the Board of Directors, the Treasurer shall give the Corporation a bond in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of the duties of his office and for the restoration to the Corporation, in case of his death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the Corporation. Section 10. Assistant Secretaries. Except as may be otherwise provided in these Bylaws, Assistant Secretaries, if there be any, shall perform such duties and have such powers as from time to time may be assigned to them by the Board of Directors, the Chairman of the Board, the Chief Executive Officer, the President, any Vice President, if there be one, or the Secretary, and in the absence of the Secretary or in the event of his disability or refusal to act, shall perform the duties of the Secretary, and when so acting, shall have all the powers of and be subject to all the restrictions upon the Secretary. Section 11. Assistant Treasurers. Assistant Treasurers, if there be any, shall perform such duties and have such powers as from time to time may be assigned to them by the Board of Directors, the Chairman of the Board, the Chief Executive Officer, the President, any Vice President, if there be one, or the Treasurer, and in the absence of the Treasurer or in the event of his disability or refusal to act, shall perform the duties of the Treasurer, and when so acting, shall have all the powers of and be subject to all the restrictions upon the Treasurer. If required by the Board of Directors, an Assistant Treasurer shall give the Corporation a bond in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of the duties of his office and for the restoration to the Corporation, in case of his death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the Corporation. Section 12. Controller. The Controller shall establish and maintain the accounting records of the Corporation in accordance with generally accepted accounting principles applied on a consistent basis, maintain proper internal control of the assets of the Corporation and shall perform such other duties as the Board of Directors, the Chairman of the Board, the Chief Executive Officer, the President or any Vice President of the Corporation may prescribe. Section 13. Other Officers. Such other officers as the Board of Directors may choose shall perform such duties and have such powers as from time to time may be assigned to them by the Board of Directors. The Board of Directors may delegate to any other officer of the Corporation the power to choose such other officers and to prescribe their respective duties and powers. 9 ARTICLE V. STOCK Section 1. Form of Certificates. Every holder of stock in the Corporation shall be entitled to have a certificate signed, in the name of the Corporation (i) by the Chief Executive Officer, the President or a Vice President and (ii) by the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary of the Corporation, certifying the number of shares owned by him in the Corporation. Section 2. Signatures. Any or all of the signatures on the certificate may be a facsimile, including, but not limited to, signatures of officers of the Corporation and countersignatures of a transfer agent or registrar. In case an officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. Section 3. Lost Certificates. The Board of Directors may direct a new certificate to be issued in place of any certificate theretofore issued by the Corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate, or his legal representative, to advertise the same in such manner as the Board of Directors shall require and/or to give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost, stolen or destroyed. Section 4. Transfers. Stock of the Corporation shall be transferable in the manner prescribed by law and in these Bylaws. Transfers of stock shall be made on the books of the Corporation only by the person named in the certificate or by his attorney lawfully constituted in writing and upon the surrender of the certificate therefor, which shall be canceled before a new certificate shall be issued. 10 EX-10.3 4 EXHIBIT 10.3 THE 1998 EQUITY PARTICIPATION PLAN OF ELECTRONICS BOUTIQUE HOLDINGS CORP. Electronics Boutique Holdings Corp., a Delaware corporation, has adopted the 1998 Equity Participation Plan of Electronics Boutique Holdings Corp. (the "Plan"), effective ____________, 1998 for the benefit of its eligible employees, consultants and directors. The purposes of this Plan are as follows: (1) To provide an additional incentive for directors, key Employees and consultants to further the growth, development and financial success of the Company by personally benefiting through the ownership of Company stock and/or rights which recognize such growth, development and financial success. (2) To enable the Company to obtain and retain the services of directors, key Employees and consultants considered essential to the long range success of the Company by offering them an opportunity to own stock in the Company and/or rights which will reflect the growth, development and financial success of the Company. ARTICLE 1. DEFINITIONS 1.1. General. Wherever the following initially capitalized terms are used in this Plan they shall have the meanings specified below, unless the context clearly indicates otherwise. 1.2. Award Limit. "Award Limit" shall mean ____________________ shares of Common Stock. 1.3. Board. "Board" shall mean the Board of Directors of the Company, as comprised from time to time. 1.4. Change in Control. "Change in Control" shall mean a change in ownership or control of the Company effected through either of the following transactions. 1.4.1. any person or related group of persons (other than the Company or a person that directly or indirectly controls, is controlled by, or is under common control with, the Company) directly or indirectly acquires beneficial ownership (within the meaning of Rule 13d-3 under the Exchange Act) of securities possessing more than fifty percent (50%) of the total combined voting power of the Company's outstanding, securities pursuant to a tender or exchange offer made directly to the Company's stockholders which the Board does not recommend such stockholders to accept; or 1.4.2. there is a change in the composition of the Board over a period of thirty-six (36) consecutive months (or less) such that a majority of the Board members (rounded up to the nearest whole number) ceases, by reason of one or more proxy contests for the election of Board members, to be comprised of individuals who either (i) have been Board members continuously since the beginning of such period or (ii) have been elected or nominated for election as Board members during such period by at least a majority of the Board members described in clause (i) who were still in office at the time such election or nomination was approved hy the Board. 1.5. Code. "Code" shall mean the Internal Revenue Code of 1986, as amended. 1.6. Committee. "Committee" shall mean the Compensation Committee of the Board, appointed as provided in Section 9.1, as comprised from time to time, or such other Committee designated by the Board to administer the provisions of this Plan. 1.7. Common Stock. "Common Stock" shall mean the common stock of the Company, par value $.01 per share. 1.8. Company. "Company" shall mean Electronics Boutique Holdings Corp., a Delaware corporation. 1.9. Corporate Transaction. "Corporate Transaction" shall mean any of the following stockholder-approved transactions to which the Company is a party: (a) a merger or consolidation in which the Company is not the surviving entity, except for a transaction the principal purpose of which is to (i) change the State in which the Company is incorporated, (ii) form a holding company, or (iii) effect a similar reorganization as to form whereupon this Plan and all Options are assumed by the successor entity; (b) the sale, transfer, exchange or other disposition of all or substantially all of the assets of the Company, in complete liquidation or dissolution of the Company in a transaction not covered by the exceptions to clause (a), above; or (c) any reverse merger in which the Company is the surviving entity but in which securities possessing more than fifty percent (50%) of the total combined voting power of the Company's outstanding securities are transferred or issued to a person or persons different from those who held such securities immediately prior to such merger. 1.10. Deferred Stock. "Deferred Stock" shall mean Common Stock awarded under Article 7 of this Plan. 1.11. Director. "Director" shall mean a member of the Board. 2 1.12. Dividend Equivalent. "Dividend Equivalent" shall mean a right to receive the equivalent value (in cash or Common Stock) of dividends paid on Common Stock, awarded under Article 7 of this Plan. 1.13. Employee. "Employee" shall mean any officer or other employee (as defined in accordance with Section 3401(c) of the Code) of the Company, or of any corporation which is a Subsidiary. 1.14. Exchange Act. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. 1.15. Fair Market Value. "Fair Market Value" of a share of Common Stock, as of a given date shall be (i) the closing price of a share of Common Stock on the principal exchange on which shares of Common Stock are then trading, if any (or as reported on any composite index which includes such principal exchange), on the trading day previous to such date, or if shares were not traded on the trading day previous to such date, then on the next preceding date on which a trade occurred, or (ii) if Common Stock is not traded on an exchange but is quoted on NASDAQ or a successor quotation system, either the (i) closing sale price or (i) the mean between the closing representative bid and asked prices for the Common Stock on the trading day previous to such date as reported by NASDAQ or such successor quotation systems, as may be appropriate, or (iii) if Common Stock is not publicly traded on an exchange and not quoted on NASDAQ or a successor quotation system, the Fair Market Value of a share of Common Stock as established by the Committee (or the Board, in the case of Options granted to Independent Directors) acting in good faith. 1.16. Grantee. "Grantee" shall mean an Employee or consultant granted a Performance Award, Dividend Equivalent, Stock Payment or Stock Appreciation Right, or an award of Deferred Stock, under this Plan. 1.17. Incentive Stock Option. "Incentive Stock Option" shall mean an option which conforms to the applicable provisions of Section 422 of the Code and which is designated as an Incentive Stock Option by the Committee. 1.18. Independent Director. "Independent Director" shall mean a member of the Board who is not also an Employee of the Company. 1.19. Non-Qualified Stock Option. "Non-Qualified Stock Option" shall mean an Option which is not designated as an Incentive Stock Option by the Committee. 1.20. Option. "Option" shall mean a stock option granted under Article 3 of this Plan. An Option granted under this Plan shall, as determined by the Committee, be either a Non-Qualified Stock Option or an Incentive Stock Option; provided, however, that Options granted to Independent Directors and consultants shall be Non-Qualified Stock Options. 3 1.21. Optionee. "Optionee" shall mean an Employee, consultant or Independent Director granted an Option under this Plan. 1.22. Performance Award. "Performance Award" shall mean a cash bonus, stock bonus or other performance or incentive award that is paid in cash. Common Stock or a combination of both, awarded under Article 7 of this Plan. 1.23. Plan. "Plan" shall mean the 1998 Equity Participation Plan of Electronics Boutique Holdings Corp. 1.24. QDRO. "QDRO" shall mean a qualified domestic relations order as defined by the Code or Title I of the Employee Retirement Income Security Act of 1974, as amended, or the rules thereunder. 1.25. Restricted Stock. "Restricted Stock" shall mean Common Stock awarded under Article 6 of this Plan. 1.26. Restricted Stockholder. "Restricted Stockholder" shall mean an Employee or consultant granted an award of Restricted Stock under Article 6 of this Plan. 1.27. Rule 16b-3. "Rule 16b-3" shall mean that certain Rule 16b-3 under the Exchange Act, as such Rule may be amended from time to time. 1.28. Section 162(m) Participant. "Section 162(m) Participant" shall mean any key Employee designated by the Committee as a key Employee whose compensation for the fiscal year in which the key Employee is so designated or a future fiscal year may be subject to the limit on deductible compensation imposed by Section 162(m) of the Code. 1.29. Stock Appreciation Right. "Stock Appreciation Right" shall mean a stock appreciation right granted under Article 8 of this Plan. 1.30. Stock Payment. "Stock Payment" shall mean (i) a payment in the form of shares of Common Stock, or (ii) an option or other right to purchase shares of Common Stock, as part of a deferred compensation arrangement, made in lieu of all or any portion of the compensation, including without limitation, salary, bonuses and commissions, that would otherwise become payable to a key Employee or consultant in cash, awarded under Article 7 of this Plan. 1.31. Subsidiary. "Subsidiary" shall mean a corporation in an unbroken chain of corporations beginning with the Company if each of the corporations other than the last corporation in the unbroken chain then owns stock possessing 50 percent or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. 4 1.32. Termination of Consultancy. "Termination of Consultancy" shall mean the time when the engagement of an Optionee, Grantee or Restricted Stockholder as a consultant to the Company or a Subsidiary is terminated for any reason, with or without cause, including, but not by way of limitation, by resignation, discharge, death or retirement; but excluding terminations where there is a simultaneous commencement of employment with the Company or any Subsidiary. The Committee, in its absolute discretion, shall determine the effect of all matters and questions relating to Termination of Consultancy, including, but not by way of limitation, the question of whether a Termination of Consultancy resulted from a discharge for good cause, and all questions of whether particular leaves of absence constitute Terminations of Consultancy. Notwithstanding any other provision of this Plan, the Company or any Subsidiary has an absolute and unrestricted right to terminate a consultant's service at any time for any reason whatsoever, with or without cause, except to the extent expressly provided otherwise in writing. 1.33. Termination of Directorship. "Termination of Directorship" shall mean the time when an Optionee who is an Independent Director ceases to be a Director for any reason, including, but not by way of limitation, a termination by resignation, failure to be elected, death or retirement. The Board, in its sole and absolute discretion, shall determine the effect of all matters and questions relating to Termination of Directorship with respect to Independent Directors. 1.34. Termination of Employment. "Termination of Employment" shall mean the time when the employee-employer relationship between an Optionee, Grantee or Restricted Stockholder and the Company or any Subsidiary is terminated for any reason, with or without cause, including, but not by way of limitation, a termination by resignation, discharge, death, disability or retirement, but excluding (i) terminations where there is a simultaneous reemployment or continuing employment of an Optionee, Grantee or Restricted Stockholder by the Company or any Subsidiary, (ii) at the discretion of the Committee, terminations which result in a temporary severance of the employee-employer relationship, and (iii) at the discretion of the Committee, terminations which are followed by the simultaneous establishment of a consulting relationship by the Company or a Subsidiary with the former employee. The Committee, in its absolute discretion, shall determine the effect of all matters and questions relating to Termination of Employment, including, but not by way of limitation, the question of whether a Termination of Employment resulted from a discharge for good cause, and all questions of whether particular leaves of absence constitute Terminations of Employment, provided, however, that, unless otherwise determined by the Committee in its discretion, a leave of absence, change in status from an employee to an independent contractor or other change the employee-employer relationship shall constitute a Termination of Employment if, and to the extent that, such leave of absence, change in status or other change interrupts employment for the purposes of Section 422(a)(2) of the Code and the then applicable regulations and revenue rulings under said Section. Notwithstanding, any other provision of this Plan, the Company or any Subsidiary has an absolute and unrestricted right to terminate an Employee's employment at any time for any reason whatsoever, with or without cause, except to the extent expressly provided otherwise in writing. 5 ARTICLE 2. SHARES SUBJECT TO PLAN 2.1. Shares Subject to Plan. (a) The shares of stock subject to Options, awards of Restricted Stock, Performance Awards, Dividend Equivalents, awards of Deferred Stock, Stock Payments or Stock Appreciation Rights shall be Common Stock, initially, shares of the Company's Common Stock, par value $.01 per share. The aggregate number of such shares which may be issued upon exercise of such options or rights or upon any such awards under the Plan shall not exceed [10% of post offering outstanding]. The shares of Common Stock issuable upon exercise of such options or rights or upon any such awards may be either previously authorized but unissued shares or treasury shares. (b) The maximum number of shares which may be subject to Options, awards of Restricted Stock, Performance Awards, Dividend Equivalents, awards of Deferred Stock, Stock Payments or Stock Appreciation Rights granted under the Plan to any individual in any fiscal year shall not exceed the Award Limit. To the extent required by Section 162(m) of the Code, shares subject to Options which are canceled continue to be counted against the Award Limit and if, after grant of an Option, the price of shares subject to such Option is reduced, the transaction is treated as a cancellation of the Option and a grant of a new Option and both the Option deemed to be canceled and the Option deemed to be granted are counted against the Award Limit. Furthermore, to the extent required by Section 162(m) of the Code, if, after grant of a Stock Appreciation Right, the base amount on which stock appreciation is calculated is reduced to reflect a reduction in the Fair Market Value of the Company's Common Stock, the transaction is treated as a cancellation of the Stock Appreciation Right and a grant of a new Stock Appreciation Right and both the Stock Appreciation Right deemed to be canceled and the Stock Appreciation Right deemed to be granted are counted against the Award Limit. 2.2. Add-back of Options and Other Rights. If any Option, or other right to acquire shares of Common Stock under any other award under this Plan, expires or is canceled without having been fully exercised, or is exercised in whole or in part for cash as permitted by this Plan, the number of shares subject to such Option or other right but as to which such Option or other right was not exercised prior to its expiration, cancellation or exercise may again be optioned, granted or awarded hereunder, subject to the limitations of Section 2.1. Furthermore, any shares subject to Options or other awards which are adjusted pursuant to Section 10.3 and become exercisable with respect to shares of stock of another corporation shall be considered canceled and may again be optioned, granted or awarded hereunder, subject to the limitations of Section 2.1. Shares of Common Stock which are delivered by the Optionee or Grantee or withheld by the Company upon the exercise of any Option or other award under this Plan, in payment of the exercise price thereof, may again be optioned, granted or awarded hereunder, subject to the limitations of Section 2.1. If any share of Restricted Stock is forfeited by the Grantee or 6 repurchased by the Company pursuant to Section 6.6 hereof, such share may again be optioned, granted or awarded hereunder, subject to the limitations of Section 2.1. Notwithstanding, the provisions of this Section 2.2, no shares of Common Stock may again be optioned, granted or awarded if such action would cause an Incentive Stock Option to fail to qualify as an incentive stock option under Section 422 of the Code. ARTICLE 3. GRANTING OF OPTIONS 3.1. Eligibility. Any Employee or consultant selected by the Committee pursuant to Section 3.4.1.1 shall be eligible to be granted an Option. Each Independent Director of the Company shall be eligible to be granted Options at the times and in the manner set forth in Section 4.4.1. 3.2. Disqualification for Stock Ownership. No person may be granted an Incentive Stock Option under this Plan if such person, at the time the Incentive Stock Option is granted, owns stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any then existing Subsidiary or parent corporation (within the meaning of Section 422 of the Code) unless such Incentive Stock Option conforms to the applicable provisions of Section 422 of the Code. 3.3. Qualification of Incentive Stock Options. No Incentive Stock Option shall be granted to any person who is not an Employee. 3.4. Granting of Options. 3.4.1. The Committee shall from time to time, in its absolute discretion, and subject to applicable limitations of this Plan: 3.4.1.1. Determine which Employees are key Employees and select from among the key Employees or consultants (including Employees or consultants who have previously received Options or other awards under this Plan) such of them as in its opinion should be granted Options; 3.4.1.2. Subject to the Award Limit, determine the number of shares to be subject to such Options granted to the selected key Employees or consultants; 3.4.1.3. Subject to Section 3.3, determine whether such Options are to be Incentive Stock Options or Non-Qualified Stock Options and whether such Options are to qualify as performance-based compensation as described in Section 162(m)(4)(C) of the Code; and 7 3.4.1.4. Determine the terms and conditions of such Options, consistent with this Plan, provided, however, that the terms and conditions of Options intended to qualify as performance-based compensation as described in Section 162(m)(4)(C) of the Code shall include, but not be limited to, such terms and conditions as may be necessary to meet the applicable provisions of Section 162(m) of the Code. 3.4.2. Upon the selection of a key Employee or consultant to be granted an Option, the Committee shall instruct the Secretary of the Company to issue the Option and may impose such conditions on the grant of the Option as it deems appropriate. Without limiting the generality of the preceding sentence, the Committee may, in its discretion and on such terms as it deems appropriate, require as a condition on the grant of an Option to an Employee or consultant that the Employee or consultant surrender for cancellation some or all of the unexercised Options, awards of Restricted Stock or Deferred Stock, Performance Awards, Stock Appreciation Rights, Dividend Equivalents or Stock Payments or other rights which have been previously granted to him under this Plan or otherwise. An Option, the grant of which is conditioned upon such surrender, may have an option price lower (or higher) than the exercise price of such surrendered Option or other award, may cover the same (or a lesser or greater) number of shares as such surrendered Option or other award, may contain such other terms as the Committee deems appropriate, and shall be exercisable in accordance with its terms, without regard to the number of shares, price, exercise period or any other term or condition of such surrendered Option or other award. 3.4.3. Any Incentive Stock Option granted under this Plan may be modified by the Committee to disqualify such option from treatment as an "incentive stock option" under Section 422 of the Code. ARTICLE 4. TERMS OF OPTIONS 4.1. Option Agreement. Each Option shall be evidenced by a written Stock Option Agreement, which shall be executed by the Optionee and an authorized officer of the Company and which shall contain such terms and conditions as the Committee (or the Board, in the case of Options granted to Independent Directors) shall determine, consistent with this Plan. Stock Option Agreements evidencing Options intended to qualify as performance-based compensation as described in Section 162(m)(4)(C) of the Code shall contain such terms and conditions as may be necessary to meet the applicable provisions of Section 162(m) of the Code. Stock Option Agreements evidencing Incentive Stock Options shall contain such terms and conditions as may be necessary to meet the applicable provisions of Section 422 of the Code. 4.2. Option Price. The price per share of the shares subject to each Option shall be set by the Committee, provided, however, that such price shall be no less than the par value of a 8 share of Common Stock, unless otherwise permitted by applicable state law, and (i) in the case of Incentive Stock Options and Options intended to qualify as performance-based compensation as described in Section 162(m)(4)(C) of the Code, such price shall not be less than 100% of the Fair Market Value of a share of Common Stock on the date the Option is granted; (ii) in the case of Incentive Stock Options granted to an individual then owning (within the meaning of Section 424(d) of the Code) more than 10% of the total combined voting power of all classes of stock of the Company or any Subsidiary or parent corporation thereof (within the meaning of Section 422 of the Code) such price shall not be less than 110% of the Fair Market Value of a share of Common Stock on the date the Option is granted; and (iii) in the case of Options granted to Independent Directors, such price shall equal 100% of the Fair Market Value of a share of Common Stock on the date the Option is granted; provided, however, that the price of each share subject to each Option granted to Independent Directors on the date of the initial public offering of Common Stock shall equal the initial public offering price per share of Common Stock. 4.3. Option Term. The term of an Option shall be set by the Committee in its discretion, provided, however, that, (i) in the case of Options granted to Independent Directors, the term shall be ten (10) years from the date the Option is granted, without variation or acceleration hereunder, but subject to Section 5.6, and (ii) in the case of Incentive Stock Options, the term shall not be more than ten (10) years from the date the Incentive Stock Option granted, or five (5) years from such date if the Incentive Stock Option is granted to an individual then owning (within the meaning of Section 424(d) of the Code) more than 10% of the total combined voting power of all classes of stock of the Company or any Subsidiary or parent corporation thereof (within the meaning of Section 422 of the Code). Except as limited by requirements of Section 422 of the Code and regulations and rulings thereunder applicable to Incentive Stock Options and by Section 10.2 hereof, the Committee may extend the term of any outstanding Option in connection with any Termination of Employment or Termination of Consultancy of the Optionee, or amend any other term or condition of such Option relating to such a termination. 4.4. Option Vesting 4.4.1. The period during which the right to exercise an Option in whole or in part vests in the Optionee shall be set by the Committee and the Committee may determine that an Option may not be exercised in whole or in part for a specified period after it is granted; provided, however, that Options granted to Independent Directors (comprised of 15,000 shares each as of the closing date of the initial public offering to _______and ______, and 7,500 shares to each director as of every third year anniversary of becoming an Independent Director) shall become exercisable in cumulative annual installments of 33 1/3% on each of the first, second and third anniversaries of the date of Option grant, without variation or acceleration hereunder except as provided in Section 10.3. At any time after grant of an Option, the Committee may, in its sole and absolute discretion and subject to whatever terms and conditions it selects, accelerate the period during which an Option (except an Option granted to an Independent Director) vests. 9 4.4.2. No portion of an Option which is unexercisable at Termination of' Employment, Termination of Directorship or Termination of Consultancy, as the case may be, shall thereafter become exercisable, except as may be otherwise provided by the Committee in the case of Options granted to Employees or consultants either in the Stock Option Agreement or by action of the Committee following the grant of the Option. 4.4.3. To the extent that the aggregate Fair Market Value of stock with respect to which "incentive stock options" (within the meaning of Section 422 of the Code, but without regard to Section 422(d) of the Code) are exercisable for the first time by an Optionee during, any calendar year (under the Plan and all other incentive stock option plans of the Company and any Subsidiary) exceeds $100,000, such Options shall be treated as Non-Qualified Options to the extent required by Section 422 of the Code. The rule set forth in the preceding sentence shall be applied by taking Options into account in the order in which they were granted. For purposes of this Section 4.4.3., the Fair Market Value of stock shall be determined as of the time the Option with respect to such stock is granted. 4.5. Continued Employment. Nothing in this Plan or in any Stock Option Agreement hereunder shall confer upon any Optionee any right to continue in the employ of, or as a consultant for, the Company or any Subsidiary, or as a director of the Company, or shall interfere with or restrict in any the rights of the Company and any Subsidiary, hereby expressly reserved, to discharge any Optionee at any time for any reason whatsoever, with or without good cause. ARTICLE 5. EXERCISE OF OPTIONS 5.1. Partial Exercise. An exercisable Option may be exercised in whole or in part. However, an Option shall not be exercisable with respect to fractional shares and the Committee (or the Board, in the case of Options granted to Independent Directors) may require that, by the terms of the Option, a partial exercise can only be effective with respect to a minimum number of shares. 5.2. Manner of Exercise. All or a portion of an exercisable Option shall be deemed exercised upon delivery of all of the following to the Secretary of the Company or his office: 5.2.1. A written notice complying with the applicable rules established by the Committee (or the Board, in the case of Options granted to Independent Directors) stating that the Option, or a portion thereof, is exercised. The notice shall be signed by the Optionee or other person then entitled to exercise the Option or such portion; 5.2.2. Such representations and documents as the Committee (or the Board, in the case of Options granted to Independent Directors), in its absolute discretion, deems necessary -10- or advisable to effect compliance with all applicable provisions of the Securities Act of 1933, as amended, and any other federal or state securities laws or regulations. The Committee or Board may, in its absolute discretion, also take whatever additional actions it deems appropriate to effect such compliance including, without limitation, placing legends on share certificates and issuing stop-transfer notices to agents and registrars; 5.2.3. In the event that the Option shall be exercised pursuant to Section 10.1 by any person or persons other than the Optionee, appropriate proof of the right of such person or persons to exercise the Option (such as a copy of the appropriate court order); and 5.2.4. Full cash payment to the Secretary of the Company for the shares with respect to which the Option, or portion thereof, is exercised. However, the Committee (or the Board, in the case of Options granted to Independent Directors), may in its discretion (i) allow a delay in payment up to thirty (30) days from the date the Option, or portion thereof, is exercised, (ii) allow payment, in whole or in part, through the delivery of shares of Common Stock owned by the Optionee, duly endorsed for transfer to the Company with a Fair Market Value on the date of delivery equal to the aggregate exercise price of the Option or exercised portion thereof; (iii) allow payment, in whole or in part, through the surrender of shares of Common Stock then issuable upon exercise of the Option having a Fair Market Value on the date of Option exercise equal to the aggregate exercise price of the Option or exercised portion thereof, (iv) allow payment, in whole or in part, through the delivery of property of any kind which constitutes good and valuable consideration, (v) allow payment, in whole or in part, through the delivery of a full recourse promissory note bearing interest (at no less than such rate as shall then preclude the imputation of interest under the Code) and payable upon such terms as may be prescribed by the Committee or the Board, (vi) allow payment, in whole or in part, through the delivery of a notice that the Optionee has placed a market sell order with a broker with respect to shares of Common Stock then issuable upon exercise of the Option, and that the broker has been directed to pay a sufficient portion of the net proceeds of the sale to the Company in satisfaction of the Option exercise price; or (vii) allow payment through any combination of the consideration provided in the foregoing subparagraphs (iii), (iv), (v) and (vi). In the case of a promissory note, the Committee (or the Board, in the case of Options granted to Independent Directors) may also prescribe the form of such note and the security to be given for such note. The Option may not be exercised, however, by delivery of a promissory note or by a loan from the Company when or where such loan or other extension of credit is prohibited by law. 5.3. Conditions to Issuance of Stock Certificates. The Company shall not be required to issue or deliver any certificate or certificates for shares of stock purchased upon the exercise of any Option or portion thereof prior to fulfillment of all of the following conditions: 5.3.1. The admission of such shares to listing on all stock exchanges on which such class of stock is then listed; -11- 5.3.2. The completion of any registration or other qualification of such shares under any state or federal law, or under the rulings or regulations of the Securities and Exchange Commission or any other governmental regulatory body which the Committee or Board shall in its absolute discretion, deem necessary or advisable; 5.3.3. The obtaining of any approval or other clearance from any state or federal governmental agency or transfer agent based on Committee instructions for non-certificated shares which the Committee (or Board, in the case of Options ranted to Independent Directors) shall, in its absolute discretion, determine to be necessary or advisable. 5.3.4. The lapse of such reasonable period of time following, the exercise of the Option as the Committee (or Board, in the case of Options granted to Independent Directors) may establish from time to time for reasons of administrative convenience; and 5.3.5. The receipt by the Company of full payment for such shares, including payment of any applicable withholding tax. 5.4. Rights as Stockholders. The holders of Options shall not be, nor have any of the rights or privileges of, stockholders of the Company in respect of any shares purchasable upon the exercise of any part of an Option unless and until certificates representing such Shares have been issued by the Company to such holders. 5.5. Ownership and Transfer Restrictions. The Committee (or Board, in the case of Options granted to Independent Directors), in its absolute discretion, may impose at the time of grant such restrictions on the ownership and transferability of the shares purchasable upon the exercise of an Option as it deems appropriate. Any such restriction shall be set forth in the respective Stock Option Agreement and may be referred to on the certificates evidencing such shares. The Committee may require the Employee to give the Company prompt notice of any disposition of shares of Common Stock acquired by exercise of an Incentive Stock Option within (i) two years from the date of granting such Option to such Employee or (ii) one year after the transfer of such shares to such Employee. The Committee may direct that the certificates evidencing shares acquired by exercise of an Option refer to such requirement to give prompt notice of disposition. 5.6. Limitations on Exercise of Options. No Option granted hereunder may be exercised to any extent by anyone after the first to occur of the following events: 5.6.1. The expiration of twelve (12) months from the date of the Optionee's death; 5.6.2. The expiration of twelve (12) months from the date of the Optionee's Termination of Employment, Consulting or Directorship by reason of his permanent and total disability (within the meaning of Section 22(e)(3) of the Code); -12- 5.6.3. The expiration of three (3) months from the date of the Optionee's Termination of Directorship for any reason other than such Optionee's death or his permanent and total disability, unless the Optionee dies within said three-month period; or 5.6.4. The expiration of ten years from the date the Option was granted. ARTICLE 6. AWARD OF RESTRICTED STOCK 6.1. Award of Restricted Stock. 6.1.1. The Committee may from time to time, in its absolute discretion: 6.1.1.1. Select from among the key Employees or consultants (including Employees or consultants who have previously received other awards under this Plan) such of them as in its opinion should be awarded Restricted Stock, and 6.1.2. Determine the purchase price, if any, and other terms and conditions applicable to Such Restricted Stock, consistent with this Plan. 6.1.3. The Committee shall establish the purchase price, if any, and form of payment for Restricted Stock, however, that such purchase price shall be no less than the par value of the Common Stock to be purchased, unless otherwise permitted by applicable state law. In all cases, legal consideration shall be required for each issuance of Restricted Stock. 6.1.4. Upon the selection of a key Employee or consultant to be awarded Restricted Stock, the Committee shall instruct the Secretary of the Company to issue such Restricted Stock and may impose such conditions on the issuance of such Restricted Stock as it deems appropriate. 6.2. Restricted Stock Agreement. Restricted Stock shall be issued only pursuant to a written Restricted Stock Agreement, which shall be executed by the selected Key Employee or consultant and an authorized officer of the Company and which shall contain such terms and conditions as the Committee shall determine, consistent with this Plan. 6.3. Consideration. As consideration for the issuance of Restricted Stock, in addition to payment of any purchase price, the Restricted Stockholder shall agree, in the written Restricted Stock Agreement, to remain in the employ of, or to consult for, the Company or any Subsidiary for a period of at least [one] year after the Restricted Stock is issued (or such shorter period as may be fixed in the Restricted Stock Agreement or by action of the Committee following grant of the Restricted Stock). Nothing in this Plan or in any Restricted Stock -13- Agreement hereunder shall confer on any Restricted Stockholder any right to continue in the employ of, or as a consultant for, the Company or any Subsidiary or shall interfere with or restrict in any way the rights of the Company and any Subsidiary, which are hereby expressly reserved, to discharge any Restricted Stockholder at any time for any reason whatsoever, with or without good cause. 6.4. Rights as Stockholders. Upon delivery of the shares of Restricted Stock to the escrow holder pursuant to Section 6.7, the Restricted Stockholder shall have, unless otherwise provided by the Committee, all the rights of a stockholder with respect to said shares, subject to the restrictions in his Restricted Stock Agreement, including the right to receive all dividends and other distributions paid or made with respect to the shares, provided, however, that in the discretion of the Committee, any extraordinary, distributions with respect to the Common Stock shall be subject to the restrictions set forth in Section 6.5. 6.5. Restriction. All shares of Restricted Stock issued under this Plan (including any shares received by holders thereof with respect to shares of Restricted Stock is a result of stock dividends, stock splits or any other form of recapitalization) shall at the time of grant, in the terms of each individual Restricted Stock Agreement, be subject to such restrictions as the Committee shall provide, which restrictions may include, without limitation, restrictions concerning voting rights and transferability and restrictions based on duration of employment with the Company, Company performance and individual performance, provided, however, that by action taken the Restricted Stock is issued, the Committee may, on such terms and conditions as it may determine to be appropriate, remove any or all of the restrictions imposed by the terms of the Restricted Stock Agreement. Restricted Stock may not be sold or encumbered until all restrictions are terminated or expire. Unless provided otherwise by the Committee, if no consideration was paid by the Restricted Stockholder upon issuance, a Restricted Stockholder's rights in vested Restricted Stock shall lapse upon Termination of Employment or, applicable, upon Termination of Consultancy with the Company. 6.6. Repurchase of Restricted Stock. The Committee shall provide in the terms of each individual Restricted Stock Agreement that the Company shall have the right to repurchase from the Restricted Stockholder the Restricted Stock then subject to restrictions under the Restricted Stock Agreement immediately upon a Termination of Employment or, if applicable, upon a Termination of Consultancy between the Restricted Stockholder and the Company, at a cash price per share equal to the price paid by the Restricted Stockholder for such Restricted Stock; provided, however, that provision may be made that no such right of repurchase shall exist in the event of a Termination of Employment or Termination of Consultancy without cause, or following a change in control of the Company or because of the Restricted Stockholder's retirement, death or disability, or otherwise. 6.7. Escrow. The Secretary of the Company or such other escrow holder as the Committee may appoint shall retain physical custody of each certificate representing Restricted Stock until all of the restrictions imposed under the Restricted Stock Agreement with respect to -14- the shares evidenced by such certificate expire or shall have been removed or, with respect to non-certificated shares, until the Committee so instructs the transfer agent to remove any restriction the Committee previously had the transfer agent place on the certificates. 6.8. Legend. In order to enforce the restrictions imposed upon shares of Restricted Stock hereunder, the Committee shall cause a legend or legends to be placed on certificates representing all shares of Restricted Stock that are still subject to restrictions under Restricted Stock Agreements, which legend or legends shall make appropriate reference to the conditions imposed thereby. 6.9. Provisions Applicable to Section 162(m) Participants. 6.9.1. Notwithstanding anything in the Plan to the contrary, the Committee may grant Restricted Stock awards to a Section 162(m) Participant that vest upon the attainment of performance targets for the Company which are related to one or more of the following performance goals: (i) pre-tax income, (ii) operating income, (iii) cash flow, (iv) earnings per share, (v) return on equity, (vi) return on invested capital or assets and (vii) cost reductions or savings. 6.9.2. To the extent necessary, to comply with the performance-based compensation requirements of Section 162(m)(4)(C) of the Code, with respect to Restricted Stock which may be granted to one or more Section 162(m) Participants, no later than ninety (90) days following the commencement of any fiscal year in question or any other designated fiscal period (or such other time as may be required or permitted by Section 162(m) of the Code), the Committee shall, in writing, (i) designate one or more Section 162(m) Participants, (ii) select the performance goal or goals applicable to the fiscal year or other designated fiscal period, (iii) establish the various targets and bonus amounts which may be earned for such fiscal year or other designated fiscal period and (iv) specify the relationship between performance goals and targets and the amounts to be earned by each Section 162(m) Participant for such fiscal year or other designated fiscal period. Following the completion of each fiscal year or other designated fiscal period, the Committee shall certify in writing whether the applicable performance targets have been achieved for such fiscal year or other designated fiscal period. In determining the amount earned by a Section 162(m) Participant, the Committee shall have the right to reduce (but not to increase) the amount payable at a given level of performance to take into account additional factors that the Committee may deem relevant to the assessment of individual or corporate performance for the fiscal year or other designated fiscal period. -15- ARTICLE 7. PERFORMANCE AWARDS, DIVIDEND EQUIVALENTS, DEFERRED STOCK, STOCK PAYMENTS 7.1. Performance Awards. Any key Employee or consultant selected by the Committee may be granted one or more Performance Awards. The value of such Performance Awards may be linked to the market value, book value, net profits or other measure of the value of Common Stock or other specific performance criteria determined appropriate by the Committee, in each case on a specified date or dates or over any period or periods determined by the Committee, or may be based upon the appreciation in the market value, book value, net profits or other measure of the value of a specified number of shares of Common Stock over a fixed period or periods determined by the Committee. In making such determinations, the Committee shall consider (among such other factors as it deems relevant in light of the specific type of award) the contributions, responsibilities and other compensation of the particular key Employee or consultant. [7.2. Dividend Equivalents. Any key Employee or consultant selected by the Committee may be granted Dividend Equivalents based on the dividends declared on Common Stock, to be credited as of dividend payment dates, during the period between the date an Option, Stock Appreciation Right, Deferred Stock or Performance Award is granted, and the date such Option, Stock Appreciation Right, Deferred Stock or Performance Award is exercised, vests or expires, as determined by the Committee. Such Dividend Equivalents shall be converted to cash or additional shares of Common Stock by such formula and at such time and subject to such limitations as may be determined by the Committee. With respect to Dividend Equivalents granted with respect to Options intended to be qualified performance-based compensation for purposes of Section 162(m) of the Code, such Dividend Equivalents shall be payable regardless of whether such Option is exercised.] 7.3. Stock Payments. Any key Employee or consultant selected by the Committee may receive Stock Payments in the manner determined from time to time by the Committee. The number of shares shall be determined by the Committee and may be based upon the Fair Market Value, book value, net profits or other measure of the value of Common Stock or other specific performance criteria determined appropriate by the Committee, determined on the date such Stock Payment is made or on any date thereafter. 7.4. Deferred Stock. Any key Employee or consultant selected by the Committee may be granted an award of Deferred Stock in the manner determined from time to time by the Committee. The number of shares of Deferred Stock shall be determined by the Committee and may be linked to the market value, book value, net profits or other measure of the value of Common Stock or other specific performance criteria determined to be appropriate by the Committee, in each case on a specified date or dates or over any period or periods determined by -16- the Committee. Common Stock underlying a Deferred Stock award will not be until the Deferred Stock award has vested, pursuant to a vesting schedule or performance criteria set by the Committee. Unless otherwise provided by the Committee, a Grantee of Deferred Stock shall have no rights as a Company stockholder with respect to such Deferred Stock until such time as the award has vested and the Common Stock underlying the award has been issued. 7.5. Performance Award Agreement, Dividend Equivalent Agreement, Deferred Stock Agreement, Stock Payment Agreement. Each Performance Award, Dividend Equivalent, award of Deferred Stock and/or Stock Payment shall be evidenced by a written agreement, which shall be executed by the Grantee and an authorized Officer of the Company and which shall contain such terms and conditions as the Committee shall determine, consistent with this Plan. 7.6. Term. The term of a Performance Award, Dividend Equivalent, award of Deferred Stock and/or Stock Payment shall be set by the Committee in its discretion. 7.7. Exercise Upon Termination of Employment. A Performance Award, Dividend Equivalent, award of Deferred Stock and/or Stock Payment is exercisable or payable only while the Grantee is an Employee or consultant; provided that the Committee may at the time of grant determine that the Performance Award, Dividend Equivalent, award of Deferred Stock and/or Stock Payment may be exercised or paid subsequent to Termination of Employment or Termination of Consultancy without cause, or following a change in control of the Company, or because of the Grantee's retirement, death or disability, or otherwise. 7.8. Payment on Exercise. Payment of the amount determined under Section 7.1 or 7.2 above shall be in cash, in Common Stock or a combination of both, as determined by the Committee. To the extent any payment under this Article 7 is effected in Common Stock, it shall be made subject to satisfaction of all provisions of Section 5.3. 7.9. Consideration. In consideration of the granting of a Performance Award, Dividend Equivalent, award of Deferred Stock and/or Stock Payment, the Grantee shall agree, in a written agreement, to remain in the employ of, or to consult for, the Company or any Subsidiary for a period of at least [one] year after such Performance Award, Dividend Equivalent, award of Deferred Stock and/or Stock Payment is granted (or such shorter period as may be fixed in such agreement or by action of the Committee following such grant). Nothing in this Plan or in any agreement hereunder shall confer on any Grantee any right to continue in the employ of, or as a consultant for, the Company or any Subsidiary or shall interfere with or restrict in any way the rights of the Company and any Subsidiary, which are hereby expressly reserved, to discharge any Grantee at any time for any reason whatsoever, with or without good cause. -17- 7.10. Provisions Applicable to Section 162(m) Participants. 7.10.1. Notwithstanding anything in the Plan to the contrary, the Committee may grant any performance or incentive awards described in Article 7 to a Section 162(m) Participant that vest or become exercisable upon the attainment of performance targets for the Company which are related to one or more of the following performance goals: (i) pre-tax income, (ii) operating income, (iii) cash flow, (iv) earnings per share, (v) return on equity, (vi) return on invested capital or assets and (vii) cost reductions or savings. 7.10.2. To the extent necessary to comply with the performance-based compensation requirements of Section 162(m)(4)(C) of the Code, with respect to performance or incentive awards described in Article 7 which may be granted to one or more Section 162(m) Participants, no later than ninety (90) days following the commencement of any fiscal year in question or any other designated fiscal period (or such other time as may be required or permitted by Section 162(m) of the Code), the Committee shall, in writing, (i) designate one or more Section 162(m) Participants, (ii) select the performance goal or goals applicable to the fiscal year or other designated fiscal period, (iii) establish the various targets and bonus amounts which may be earned for such fiscal year or other designated fiscal period and (iv) specify the relationship between performance goals and targets and the amounts to be earned by each Section 162(m) Participant for such fiscal year or other designated fiscal period. Following the completion of each fiscal year or other designated fiscal period, the Committee shall certify in writing whether the applicable performance targets have been achieved for such fiscal year or other designated fiscal period. In determining the amount earned by a Section 162(m) Participant, the Committee shall have the right to reduce (but not to increase) the amount payable at a given level of performance to take into account additional factors that the Committee may deem relevant to the assessment of individual or corporate performance for the fiscal year or other designated fiscal period. ARTICLE 8. STOCK APPRECIATION RIGHTS 8.1. Grant of Stock Appreciation Rights. A Stock Appreciation Right may be granted to any key Employee or consultant selected by the Committee. A Stock Appreciation Right may be granted (i) in connection and simultaneously, with the grant of an Option, (ii) with respect to a previously granted Option, or (iii) independent of an Option. A Stock Appreciation Right shall be subject to such terms and conditions not inconsistent with this Plan as the Committee shall impose and shall be evidenced by a written Stock Appreciation Right Agreement, which shall be executed by the Grantee and an authorized officer of the Company. The Committee, in its discretion, may determine whether a Stock Appreciation Right is to qualify as performance-based compensation as described in Section 162(m)(4)(C) of the Code and Stock Appreciation Right Agreements evidencing Stock Appreciation Rights intended to so -18- qualify shall contain such terms and conditions as may be necessary, to meet the applicable provisions of Section 162(m) of the Code. Without limiting the generality of the foregoing, the Committee may, in its discretion and on such terms as it deems appropriate, require as a condition of the grant of a Stock Appreciation Right to an Employee or consultant that the Employee or consultant surrender for cancellation some or all of the unexercised Options, awards of Restricted Stock or Deferred Stock, Performance Awards, Stock Appreciation Rights, Dividend Equivalents or Stock Payments, or other rights which have been previously granted to him under this Plan or otherwise. A Stock Appreciation Right, the grant of which is conditioned upon such surrender, may have an exercise price lower (or higher) than the exercise price of the surrendered Option or other award, may cover the same (or a lesser or greater) number of shares as such surrendered Option or other award, may contain such other terms as the Committee deems appropriate, and shall be exercisable in accordance with its terms, without regard to the number of shares, price, exercise period or any other term or condition of such surrendered Option or other award. 8.2. Coupled Stock Appreciation Rights. 8.2.1. A Coupled Stock Appreciation Right ("CSAR") shall be related to a particular Option and shall be exercisable only when and to the extent the related Option is exercisable. 8.2.2. A CSAR may be granted to the Grantee for no more than the number of shares subject to the simultaneously or previously granted Option to which it is coupled. 8.2.3. A CSAR shall entitle the Grantee (or other person entitled to exercise the Option pursuant to this Plan) to surrender to the Company unexercised a portion of the Option to which the CSAR relates (to the extent then exercisable pursuant to its terms) and to receive from the Company in exchange therefor an amount determined by multiplying the difference obtained by subtracting the Option exercise price from the Fair Market Value of a share of Common Stock on the date of exercise of the CSAR by the number of shares of Common Stock with respect to which the CSAR shall have been exercised, subject to any limitations the Committee may impose. 8.3. Independent Stock Appreciation Rights. 8.3.1. An Independent Stock Appreciation Right ("ISAR") shall be unrelated to any Option and shall have a term set by the Committee. An ISAR shall be exercisable in such installments as the Committee may determine. An ISAR shall cover such number of shares of Common Stock as the Committee may determine. The exercise price per share of Common Stock subject to each ISAR shall be set by the Committee. An ISAR is exercisable only while the Grantee is an Employee or consultant ; provided that the Committee may determine that the ISAR may be exercised subsequent to Termination of Employment or Termination of -19- Consultancy without cause, or following a change in control of the Company, or because of the Grantee's retirement, death or disability, or otherwise. 8.3.2. An ISAR shall entitle the Grantee (or other person entitled to exercise the ISAR pursuant to this Plan) to exercise all or a specified portion of the ISAR (to the extent then exercisable pursuant to its terms) and to receive from the Company an amount determined by multiplying the difference obtained by subtracting the exercise price per share of the ISAR from the Fair Market Value of a share of Common Stock on the date of exercise of the ISAR by the number of shares of Common Stock with respect to which the ISAR shall have been exercised, subject to any limitations the Committee may impose. 8.4. Payment and Limitations on Exercise. 8.4.1. Payment of the amount determined under Section 8.2.3 and 8.3.2 above shall be in cash, in Common Stock (based on its Fair Market Value as of the date the Stock Appreciation Right is exercised) or a combination of both, as determined by the Committee. To the extent such payment is effected in Common Stock it shall be made subject to satisfaction of all provisions of Section 5.3 above pertaining to Options. 8.4.2. Grantees of Stock Appreciation Rights may be required to comply with any timing or other restrictions with respect to the settlement or exercise of a Stock Appreciation Right, including a window-period limitation, as may at the time of grant be imposed in the discretion of the Board or Committee. 8.5. Consideration. In consideration of the granting of a Stock Appreciation Right, the Grantee shall agree, in the written Stock Appreciation Right Agreement, to remain in the employ of, [or to consult for], the Company or any Subsidiary for a period of at least [one] year after the Stock Appreciation Right is granted (or such shorter period as may be fixed in the Stock Appreciation Right Agreement or by action of the Committee following grant of the Restricted Stock). Nothing in this Plan or in any Stock Appreciation Right Agreement hereunder shall confer on any Grantee any right to continue in the employ of, or as a consultant for, the Company or any Subsidiary or shall interfere with or restrict in any way the rights of the Company and any Subsidiary, which are hereby expressly reserved, to discharge any Grantee at any time for any reason whatsoever, with or without good cause. ARTICLE 9. ADMINISTRATION 9.1. Compensation Committee. The Compensation Committee (or another committee or a subcommittee of the Board assuming, the functions of the Committee under this Plan) shall consist solely of two or more Independent Directors appointed by and holding office at the -20- pleasure of the Board, each of whom is both a "non-employee director" as defined by Rule 16b-3 and an "outside director" for purposes of Section 162(m) of the Code. Appointment of Committee members shall be effective upon acceptance of appointment. Committee members may resign at any time by delivering written notice to the Board. Vacancies in the Committee may be filled by the Board. 9.2. Duties and Powers of Committee. It shall be the duty of the Committee to conduct the general administration of this Plan in accordance with its provisions. The Committee shall have the power to interpret this Plan and the agreements pursuant to which Options, awards of Restricted Stock or Deferred Stock, Performance Awards, Stock Appreciation Rights, Dividend Equivalents or Stock Payments are granted or awarded, and to adopt such rules for the administration, interpretation, and application of this Plan as are consistent therewith and to interpret, amend or revoke any such rules. Notwithstanding the foregoing, the full Board, acting by a majority of its members in office, shall conduct the general administration of the Plan with respect to Options granted to Independent Directors. Any such grant or award under this Plan need not be the same with respect to each Optionee, Grantee or Restricted Stockholder. Any such interpretations and rules with respect to Incentive Stock Options shall be consistent with the provisions of Section 422 of the Code. In its absolute discretion, the Board may at any time and from time to time exercise any and all rights and duties of the Committee under this Plan except with respect to matters which under Rule 16b-3 or Section 162(m) of the Code, or any regulations or rules issued thereunder, are required to be determined in the sole discretion of the Committee. 9.3. Majority Rule; Unanimous Written Consent. The Committee shall act by a majority of its members in attendance at a meeting at which a quorum is present or by a memorandum or other written instrument signed by all members of the Committee. 9.4. Compensation; Professional Assistance: Good Faith Actions. Members of the Committee shall receive such compensation for their services as members as may be determined by the Board. All expenses and liabilities which members of the Committee incur in connection with the administration of this Plan shall be borne by the Company. The Committee may, with the approval of the Board, employ attorneys, consultants, accountants, appraisers, brokers, or other persons. The Committee, the Company and the Company's officers and Directors shall be entitled to rely upon the advice, opinions or valuations of any such persons. All actions taken and all interpretations and determinations made by the Committee or the Board in good faith shall be final and binding upon all Optionees, Grantees, Restricted Stockholders, the Company and all other interested persons. No members of the Committee or Board shall be personally liable for any action, determination or interpretation made in good faith with respect to this Plan, Options, awards of Restricted Stock or Deferred Stock, Performance Awards, Stock Appreciation Rights, Dividend Equivalents or Stock Payments, and all members of the Committee and the Board shall be fully protected by the Company in respect of any such action, determination or interpretation. -21- ARTICLE 10. MISCELLANEOUS PROVISIONS 10.1. Not Transferable. Options, Restricted Stock awards, Deferred Stock awards, Performance Awards, Stock Appreciation Rights, Dividend Equivalents or Stock Payments under this Plan may not be sold, pledged, assigned, or transferred in any manner other than by will or the laws of descent and distribution or pursuant to a QDRO, unless and until such rights or awards have been exercised, or the shares underlying such rights or awards have been issued, and all restrictions applicable to such shares have lapsed. No Option, Restricted Stock Award, Deferred Stock Award, Performance Award, Stock Appreciation Right, Dividend Equivalent or Stock Payment or interest or right therein shall be liable for the debts, contracts or engagements of the Optionee, Grantee or Restricted Stockholder or his successors in interest or shall be subject to disposition by transfer, alienation, anticipation, pledge, encumbrance, assignment or any other means whether such disposition be voluntary or involuntary or by operation of law by judgment, levy, attachment, garnishment or any other legal or equitable proceedings (including bankruptcy), and any attempted disposition thereof shall be null and void and of no effect, except to the extent that such disposition is permitted by the preceding sentence. During the lifetime of the Optionee or Grantee, only he or she or his or her personal representatives may exercise an Option or other right or award (or any portion thereof) granted to him under the Plan, unless it has been disposed of pursuant to a QDRO. After the death of the Optionee or Grantee, any exercisable portion of an Option or other right or award may, prior to the time when such portion becomes unexercisable under the Plan or the applicable Stock Option Agreement or other agreement, be exercised by his personal representative or by any person empowered to do so under the deceased Optionee's or Grantee's will or under the then applicable laws of descent and distribution. 10.2. Amendment, Suspension or Termination of this Plan. Except as otherwise provided in this Section 10.2, this Plan may be wholly or partially amended or otherwise modified, suspended or terminated at any time or from time to time by the Board or the Committee. However, without the approval of the Company's stockholders given within twelve months before or after the action by the Board or the Committee, no action of the Board or the Committee may, except as provided in Section 10.3, increase the limits imposed in Section 2.1 on the maximum number of shares which may be issued under this Plan or modify the Award Limit, and no action of the Board or the Committee may be taken that would otherwise require stockholder approval as a matter of applicable law, regulation or rule. No amendment, suspension or termination of this Plan shall, without the consent of the holder of Options, Restricted Stock Awards, Deferred Stock Awards, Performance Awards, Stock Appreciation Rights, Dividend Equivalents or Stock Payments, alter or impair any rights or obligations under any Options, Restricted Stock Awards, Deferred Stock Awards, Performance Awards, Stock Appreciation Rights, Dividend Equivalents or Stock Payments theretofore granted or awarded, unless the award itself otherwise expressly so provides. No Options, Restricted Stock, Deferred -22- Stock, Performance Awards, Stock Appreciation Rights, Dividend Equivalents or Stock Payments may be granted or awarded during any period of suspension or after termination of this Plan, and in no event may any Incentive Stock Option be granted under this Plan after the first to occur of the following events: 10.2.1. The expiration of ten years from the date the Plan is adopted by the Board: or 10.2.2. The expiration of ten years from the date the Plan is approved by the Company's stockholders under Section 10.4. 10.3. Changes in Common Stock or Assets of the Company, Acquisition or Liquidation of the Company and Other Corporate Events. 10.3.1. Subject to Section 10.3, in the event that the Committee (or the Board, in the case of Options granted to Independent Directors) determines that any dividend or other distribution whether in the form of cash, Common Stock, other securities, or other property), recapitalization, reclassification, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase, liquidation, dissolution, or sale, transfer, exchange or other disposition of all or substantially all of the assets of the Company (including, but not limited to, a Corporate Transaction), or exchange of Common Stock or other securities of the Company, issuance of warrants or other rights to purchase Common Stock or other securities of the Company, or other similar corporate transaction or event, in the Committee's sole discretion (or in the case of Options granted to Independent Directors, the Board's sole discretion), affects the Common Stock such that an adjustment is determined by the Committee to be appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan or with respect to an Option, Restricted Stock Award, Performance Award, Stock Appreciation Right, Dividend Equivalent, Deferred Stock Award or Stock Payment, then the Committee (or the Board, in the case of Options granted to Independent Directors) shall, in such manner as it may deem equitable, adjust any or all of 10.3.1.1. the number and kind of shares of Common Stock (or other securities or property) with respect to which Options, Performance Awards, Stock Appreciation Rights, Dividend Equivalents or Stock Payments may be granted under the Plan, or which may be granted as Restricted Stock or Deferred Stock (including, but not limited to, adjustments of the limitations in Section 2.1 on the maximum number and kind of shares which may be issued and adjustments of the Award Limit), 10.3.1.2. the number and kind of shares of Common Stock, (or other securities or property) subject to outstanding Options, Performance Awards, Stock, Appreciation Rights, Dividend Equivalents, or Stock Payments, and in the number and kind of shares of outstanding Restricted Stock or Deferred Stock, and -23- 10.3.1.3. the grant or exercise price with respect to any Option, Performance Award, Stock Appreciation Right, Dividend Equivalent or Stock Payment. 10.3.2. Subject to Section 10.3, in the event of any Corporate Transaction or other transaction or event described in Section 10.3.1 or any unusual or nonrecurring transactions or events affecting the Company, any affiliate of the Company, or the financial statements of the Company or any affiliate, or of changes in applicable laws, regulations, or accounting principles, the Committee (or the Board, in the case of Options granted to Independent Directors) in its discretion is hereby authorized to take any one or more of the following actions whenever the Committee (or the Board, in the case of Options granted to Independent Directors) determines that such action is appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan or with respect to any option, right or other award under this Plan, to facilitate such transactions or events or to give effect to such changes in laws, regulations or principles: 10.3.2.1. In its sole and absolute discretion, and on such terms and conditions as it deems appropriate, the Committee (or the Board, in the case of Options granted to Independent Directors) may provide, either by the terms of the agreement or by action taken prior to the occurrence of such transaction or event and either automatically or upon the optionee's request, for either the purchase of any such Option, Performance Award, Stock Appreciation Right, Dividend Equivalent, or Stock Payment, or any Restricted Stock or Deferred Stock for the payment of an amount of cash equal to the amount that could have been attained upon the exercise of such option, right or award or realization of the optionee s rights had such option, right or award been currently exercisable or payable or fully vested or the replacement of such option, right or award with other rights or property selected by the Committee (or the Board, in the case of Options granted to Independent Directors) in its sole discretion; 10.3.2.2. In its sole and absolute discretion, the Committee (or the Board, in the case of Options granted to Independent Directors) may provide in terms of such Option, Performance Award, Stock Appreciation Right, Dividend Equivalent, or Stock Payment, or Restricted Stock or Deferred Stock Award that it cannot be exercised after such event; 10.3.2.3. In its sole and absolute discretion, and on such terms and conditions as it deems appropriate, the Committee (or the Board, in the case of Options granted to Independent Directors) may provide, either by the terms of such Option, Performance Award, Stock Appreciation Right, Dividend Equivalent, or Stock Payment, or Restricted Stock or Deferred Stock or by action taken prior to the occurrence of such transaction or event, that for a specified period of time prior to such transaction or event, such option, right or award shall be exercisable as to all shares covered thereby, notwithstanding anything to the contrary in (i) Section 4.4 or (ii) the provisions of such -24- Option, Performance Award, Stock Appreciation Right, Dividend Equivalent, or Stock Payment, or Restricted Stock or Deferred Stock; 10.3.2.4. In its sole and absolute discretion, and on such terms and conditions as it deems appropriate, the Committee (or the Board, in the case of Options granted to Independent Directors) may provide, either by the terms of such Option, Performance Award, Stock Appreciation Right, Dividend Equivalent, or Stock Payment, or Restricted Stock or Deferred Stock or by action taken prior to the occurrence of such transaction or event, that upon such event, such option, right or award be assumed by the successor or survivor corporation, or a parent or subsidiary thereof, or shall be substituted for by similar options, rights or awards covering the stock of the successor or survivor corporation, or a parent or subsidiary thereof, with appropriate adjustments as to the number and kind of shares and prices; and 10.3.2.5. In its sole and absolute discretion, and on such terms and conditions as it deems appropriate, the Committee (or the Board, in the case of Options granted to Independent Directors) may make adjustments in the number and type of shares of Common Stock (or other securities or Property) subject to outstanding Options, Performance Awards, Stock Appreciation Rights, Dividend Equivalents, or Stock Payments, and in the number and kind of outstanding Restricted Stock or Deferred Stock and/or in the terms and conditions of (including the grant or exercise price), and the criteria included in, outstanding options, rights and awards and options, rights and awards which may be granted in the future. 10.3.2.6. In its sole and absolute discretion, and on such terms and conditions as it deems appropriate, the Committee may provide either by the terms of a Restricted Stock Award or Deferred Stock Award or by action taken prior to the occurrence of such event that, for a specified period of time prior to such event, the restrictions imposed under a Restricted Stock Agreement or a Deferred Stock Agreement upon some or all shares of Restricted Stock or Deferred Stock may be terminated, and, in the case of Restricted Stock, some or all shares of such Restricted Stock may cease to be subject to repurchase under Section 6.6 or forfeiture under Section 6.5 after such event. 10.3.2.7. None of the foregoing discretionary actions taken under this Section 10.3 shall be permitted with respect to Options granted to Independent Directors to the extent that such discretion would be inconsistent with the applicable exemptive conditions of Rule 16b-3. In the event of a Change in Control or a Corporate Transaction, to the extent that the Board does not have the ability under Rule 16b-3 to take or to refrain from taking the discretionary actions set forth in Section 10.3(b)(iii) above, each Option granted to an Independent Director shall be exercisable as to all shares covered thereby upon such Change in Control or during the five days immediately preceding the consummation of such Corporate Transaction and subject to such consummation, notwithstanding anything to the contrary in Section 4.4 or the vesting -25- schedule of such Options. In the event of a Corporate Transaction, to the extent that the Board does not have the ability under Rule 16b-3 to take or to refrain from taking the discretionary actions set forth in Section 10.3(b)(ii) above, no Option granted to an Independent Director may be exercised following such Corporate Transaction unless such Option is, in connection with such Corporate Transaction, either assumed by the successor or survivor corporation (or parent or subsidiary thereof) or replaced with a comparable right with respect to shares of the capital stock of the successor or survivor corporation (or parent or subsidiary thereof). 10.3.3. Subject to Section 10.3.4 and 10.8, the Committee (or the Board, in the case of Options granted to Independent Directors) may, in its discretion, at the time of grant, include such further provisions and limitations in any Option, Performance Award, Stock Appreciation Right, Dividend Equivalent, or Stock Payment, or Restricted Stock or Deferred Stock agreement or certificate, as it may deem equitable and in the best interests of the Company. 10.3.4. With respect to Options, Stock Appreciation Rights and performance or incentive awards described in Article 7 which are granted to Section 162(m) Participants and are intended to qualify as performance-based compensation under Section 162(m)(4)(C), no adjustment or action described in this Section 10.3 or in any other provision of the Plan shall be authorized to the extent that such adjustment or action would cause the Plan to violate Section 422(b)(1) of the Code or would cause such option or stock appreciation right to fail to so qualify under Section 162(m)(4)(C), as the case may be, or any successor provisions thereto. Furthermore, no such adjustment or action shall be authorized to the extent such adjustment or action would result in short-swing profits liability under Section 16 or violate the exemptive conditions of Rule 16b-3 unless the Committee (or the Board, in the case of Options granted to Independent Directors) determines that the option or other award is not to comply with such exemptive conditions. The number of shares of Common Stock subject to any option, right or award shall always be rounded to the next whole number. 10.4. Approval of Plan by Stockholders. This Plan will be submitted for the approval of the Company's stockholders within twelve months after the date of the Board's initial adoption of this Plan, Options, Performance Awards, Stock Appreciation Rights, Dividend Equivalents or Stock Payments may be granted and Restricted Stock or Deferred Stock may be awarded prior to such stockholder approval, provided that such Options, Performance Awards, Stock Appreciation Rights, Dividend Equivalents or Stock Payments shall not be exercisable and such Restricted Stock or Deferred Stock shall not vest prior to the time when this Plan is approved by the stockholders, and provided further that if such approval has not been obtained at the end of said twelve-month period, all Options, Performance Awards, Stock Appreciation Rights, Dividend Equivalents or Stock Payments previously granted and all Restricted Stock or Deferred Stock previously awarded under this Plan shall thereupon be canceled and become null and void. 10.5. Tax Withholding. The Company shall be entitled to require payment in cash or deduction from other compensation payable to each Optionee, Grantee or Restricted Stockholder -26- of any sums required by federal, state or local tax law to be withheld with respect to the issuance, vesting or exercise of any Option, Restricted Stock, Deferred Stock, Performance Award, Stock Appreciation Right, Dividend Equivalent or Stock Payment. The Committee (or the Board, in the case of Options granted to Independent Directors) may in its discretion and in satisfaction of the foregoing requirement allow such Optionee, Grantee or Restricted Stockholder to elect to have the Company withhold shares of Common Stock otherwise issuable under such Option or other award (or allow the return of shares of Common Stock) having a Fair Market Value equal to the sums required to be withheld. 10.6. Loans. The Committee may, in its discretion, extend one or more loans to key Employees in connection with the exercise or receipt of an Option, Performance Award, Stock Appreciation Right, Dividend Equivalent or Stock Payment granted under this Plan, or the issuance of Restricted Stock or Deferred Stock awarded under this Plan. The terms and conditions of any such loan shall be set by the Committee. 10.7. Forfeiture Provisions. Pursuant to its general authority to determine the terms and conditions applicable to awards under the Plan, the Committee (or the Board, in the case of Options granted to Independent Directors) shall have the right (to the extent consistent with the applicable exemptive conditions of Rule 16b-3) to provide, in the terms of Options or other awards made under the Plan, or to require the recipient to agree by separate written instrument, that (i) any proceeds, gains or other economic benefit actually or constructively received by the recipient upon any receipt or exercise of the award, or upon the receipt or resale of any Common Stock underlying such award, must be paid to the Company, and (ii) the award shall terminate and any unexercised portion of such award (whether or not vested) shall be forfeited, if (a) a Termination of Employment, Termination of Consultancy or Termination of Directorship occurs prior to a specified date, or within a specified time period following receipt or exercise of the award, or (b) the recipient at any time, or during a specified time period, engages in any activity in competition with the Company, or which is inimical, contrary or harmful to the interests of the Company, as further defined by the Committee (or the Board, as applicable). 10.8. Limitations Applicable to Section 16 Persons and Performance-Based Compensation. Notwithstanding any other provision of this Plan, and any Option, Performance Award, Stock Appreciation Right, Dividend Equivalent or Stock Payment granted, or Restricted Stock or Deferred Stock awarded, to any individual who is then subject to Section 16 of the Exchange Act, shall be subject to any additional limitations set forth in any applicable exemptive rule under Section 16 of the Exchange Act (including any amendment to Rule 16b-3 of the Exchange Act) that are requirements for the application of such exemptive rule. To the extent permitted by applicable law, the Plan, Options, Performance Awards, Stock Appreciation Rights, Dividend Equivalents, Stock Payments, Restricted Stock and Deferred Stock granted or awarded hereunder shall be deemed amended to the extent necessary to conform to such applicable exemptive rule. Furthermore, notwithstanding any other provision of this Plan, any Option, Stock Appreciation Right or performance or incentive award described in Article VII which is granted to a Section 162(m) Participant and is intended to qualify as performance-based -27- compensation as described in Section 162(m)(4)(C) of the Code shall be subject to any additional limitations set forth in Section 162(m) of the Code (including any amendment to Section 162(m) of the Code) or any regulations or rulings issued thereunder that are requirements for qualification as performance-based compensation as described in Section 162(m)(4)(C) of the Code, and this Plan shall be deemed amended to the extent necessary to conform to such requirements. 10.9. Effect of Plan Upon Options and Compensation Plans. The adoption of this Plan shall not affect any other compensation or incentive plans in effect for the Company or any Subsidiary. Nothing in this Plan shall be construed to limit the right of the Company (i) to establish any other forms of incentives or compensation for Employees, Directors or Consultants of the Company or any Subsidiary or (ii) to grant or assume options or other rights otherwise than under this Plan in connection with any proper corporate purpose including but not by way of limitation, the grant or assumption of options in connection with the acquisition by purchase, lease, merger, consolidation or otherwise, of the business stock or assets of any corporation, partnership, limited liability company, firm or association. 10.10. Compliance with Laws. This Plan, the granting and vesting of Options, Restricted Stock awards, Deferred Stock Awards, Performance Awards, Stock Appreciation Rights, Dividend Equivalents or Stock Payments under this Plan and the issuance and delivery of shares of Common Stock and the payment of money under this Plan or under Options, Performance Awards, Stock Appreciation Rights, Dividend Equivalents or Stock, Payments granted or Restricted Stock or Deferred Stock awarded hereunder are subject to compliance with all applicable federal and state laws, rules and regulations (including but not limited to state and federal securities law and federal margin requirements) and to such approvals by any listing, regulatory or governmental authority as may, in the opinion of counsel for the Company, be necessary or advisable in connection therewith. Any securities delivered under this Plan shall be subject to such restrictions, and the person acquiring such securities shall, if requested by the Company, provide such assurances and representations to the Company as the Company may deem necessary or desirable to assure compliance with all applicable legal requirements. To the extent permitted by applicable law, the Plan, Options, Restricted Stock awards, Deferred Stock awards, Performance Awards, Stock Appreciation Rights, Dividend Equivalents or Stock Payments granted or awarded hereunder shall be deemed amended to the extent necessary to conform to such laws, rules and regulations. 10.11. Titles. Titles are provided herein for convenience only and are not to serve as a basis for interpretation or construction of this Plan. 10.12. Governing Law. This Plan and any agreements hereunder shall be administered, interpreted and enforced under the internal laws of the Commonwealth of Pennsylvania without regard to conflicts of laws thereof. -28- I hereby certify that the foregoing Plan was duly adopted by the Board of Directors of ___________________ on ____________, 1998. Executed on this ____ day of _________, 1998. Secretary, -29- EX-10.5 5 EXHIBIT 10.5 Exhibit 10.5 __________________________________________________ THE ELECTRONICS BOUTIQUE, INC. __________________________________________________ __________________________________________________ __________________________________________________ LOAN AND SECURITY AGREEMENT Dated: March 16, 1998 __________________________________________________ __________________________________________________ __________________________________________________ FLEET CAPITAL CORPORATION __________________________________________________ TABLE OF CONTENTS Page ---- SECTION 1. CREDIT FACILITY. . . . . . . . . . . . . . . . . . . . . . . . .1 1.1 Revolving Credit Loans . . . . . . . . . . . . . . . . . . . . . .1 1.2 Supplemental Loan. . . . . . . . . . . . . . . . . . . . . . . . .1 SECTION 2. INTEREST, FEES AND CHARGES. . . . . . . . . . . . . . . . . . . .2 2.1 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 2.2 Computation of Interest and Fees . . . . . . . . . . . . . . . . .4 2.3 Commitment Fee . . . . . . . . . . . . . . . . . . . . . . . . . .4 2.4 Collateral Management Fee. . . . . . . . . . . . . . . . . . . . .4 2.5 Audit and Appraisal Fees . . . . . . . . . . . . . . . . . . . . .4 2.6 Reimbursement of Expenses. . . . . . . . . . . . . . . . . . . . .4 2.7 Bank Charges . . . . . . . . . . . . . . . . . . . . . . . . . . .5 2.8 Indemnity re: LIBOR. . . . . . . . . . . . . . . . . . . . . . . .5 SECTION 3. LOAN ADMINISTRATION . . . . . . . . . . . . . . . . . . . . . . .5 3.1 Manner of Borrowing Revolving Credit Loans . . . . . . . . . . . .5 3.2 Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6 3.3 Mandatory and Permissive Prepayments . . . . . . . . . . . . . . .7 3.4 Application of Payments and Collections. . . . . . . . . . . . . .7 3.5 All Loans to Constitute One Obligation . . . . . . . . . . . . . .8 3.6 Loan Account . . . . . . . . . . . . . . . . . . . . . . . . . . .8 3.7 Statements of Account. . . . . . . . . . . . . . . . . . . . . . .8 SECTION 4. TERM AND TERMINATION. . . . . . . . . . . . . . . . . . . . . . .8 4.1 Term of Agreement. . . . . . . . . . . . . . . . . . . . . . . . .8 4.2 Termination. . . . . . . . . . . . . . . . . . . . . . . . . . . .9 SECTION 5. SECURITY INTERESTS. . . . . . . . . . . . . . . . . . . . . . . .9 5.1 Security Interest in Collateral. . . . . . . . . . . . . . . . . .9 5.2 Lien Perfection; Further Assurances. . . . . . . . . . . . . . . 10 5.3 Lien on Realty . . . . . . . . . . . . . . . . . . . . . . . . . 11 SECTION 6. COLLATERAL ADMINISTRATION . . . . . . . . . . . . . . . . . . . 11 6.1 General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 6.2 Administration of Accounts . . . . . . . . . . . . . . . . . . . 12 6.3 Administration of Inventory. . . . . . . . . . . . . . . . . . . 12 6.4 Administration of Equipment. . . . . . . . . . . . . . . . . . . 13 6.5 Payment of Charges . . . . . . . . . . . . . . . . . . . . . . . 13 i SECTION 7. REPRESENTATIONS AND WARRANTIES. . . . . . . . . . . . . . . . . 13 7.1 General Representations and Warranties . . . . . . . . . . . . . 13 7.2 Continuous Nature of Representations and Warranties. . . . . . . 17 7.3 Survival of Representations and Warranties . . . . . . . . . . . 17 SECTION 8. COVENANTS AND CONTINUING AGREEMENTS . . . . . . . . . . . . 18 8.1 Affirmative Covenants. . . . . . . . . . . . . . . . . . . . . . 18 8.2 Negative Covenants . . . . . . . . . . . . . . . . . . . . . . . 19 8.3 Specific Financial Covenants . . . . . . . . . . . . . . . . . . 22 8.4 Stock Ownership. . . . . . . . . . . . . . . . . . . . . . . . . 22 SECTION 9. CONDITIONS PRECEDENT . . . . . . . . . . . . . . . . . . . . . 22 9.1 Documentation. . . . . . . . . . . . . . . . . . . . . . . . . . 22 9.2 No Default . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 9.3 Other Loan Documents . . . . . . . . . . . . . . . . . . . . . . 24 9.4 Availability . . . . . . . . . . . . . . . . . . . . . . . . . . 24 9.5 No Litigation. . . . . . . . . . . . . . . . . . . . . . . . . . 24 SECTION 10. EVENTS OF DEFAULT; RIGHTS AND REMEDIES ON DEFAULT. . . . . . . . . . . . . . . . . . . . . . . . . . 24 10.1 Events of Default. . . . . . . . . . . . . . . . . . . . . . . . 24 10.2 Acceleration of the Obligations. . . . . . . . . . . . . . . . . 26 10.3 Other Remedies . . . . . . . . . . . . . . . . . . . . . . . . . 27 10.4 Remedies Cumulative; No Waiver . . . . . . . . . . . . . . . . . 28 SECTION 11. MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . . . . 28 11.1 Power of Attorney. . . . . . . . . . . . . . . . . . . . . . . . 28 11.2 Indemnity. . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 11.3 Modification of Agreement; Sale of Interest. . . . . . . . . . . 29 11.4 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . 30 11.5 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . 30 11.6 Cumulative Effect; Conflict of Terms . . . . . . . . . . . . . . 30 11.7 Execution in Counterparts. . . . . . . . . . . . . . . . . . . . 30 11.8 Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 11.9 Lender's Consent . . . . . . . . . . . . . . . . . . . . . . . . 31 11.10 Credit Inquiries. . . . . . . . . . . . . . . . . . . . . . . . 31 11.11 Time of Essence . . . . . . . . . . . . . . . . . . . . . . . . 31 11.12 Entire Agreement. . . . . . . . . . . . . . . . . . . . . . . . 31 11.13 Interpretation. . . . . . . . . . . . . . . . . . . . . . . . . 31 11.14 GOVERNING LAW; CONSENT TO FORUM . . . . . . . . . . . . . . . . 32 11.15 WAIVERS BY BORROWER . . . . . . . . . . . . . . . . . . . . . . 33 ii LOAN AND SECURITY AGREEMENT THIS LOAN AND SECURITY AGREEMENT is made this ____ day of March, 1998, by and between FLEET CAPITAL CORPORATION ("Lender"), a Rhode Island corporation with an office at 200 Glastonbury Boulevard, Glastonbury, CT 06033 and THE ELECTRONICS BOUTIQUE, INC., a Pennsylvania corporation ("Borrower"), with its chief executive office at 931 South Matlack Street, West Chester, PA 19382. Capitalized terms used in this Agreement have the meanings assigned to them in Appendix A, General Definitions. Accounting terms not otherwise specifically defined herein shall be construed in accordance with GAAP, consistently applied. SECTION 1. CREDIT FACILITY Subject to the terms and conditions of, and in reliance upon the representations and warranties made in, this Agreement and the other Loan Documents, Lender agrees to make a Total Credit Facility of up to $50,000,000.00 available upon Borrower's request therefor, as follows: 1.1 Revolving Credit Loans. Lender agrees, for so long as no Event of Default exists, to make Revolving Credit Loans to Borrower from time to time, as requested by Borrower in the manner set forth in subsection 3.1.1 hereof, up to a maximum principal amount at any time outstanding equal to the lesser of (a) an amount equal to the difference between the Maximum Revolving Credit Amount and the outstanding balance of the Supplemental Loan or (b)the Borrowing Base, which shall be repayable in accordance with the terms of the Revolving Credit Note. If the unpaid balance of the Revolving Credit Loans should exceed the Borrowing Base or any other limitation set forth in this Agreement, such Revolving Credit Loans shall nevertheless constitute Obligations that are due and payable on demand, secured by the Collateral other than the Mortgage and entitled to all benefits thereof. 1.2 Supplemental Loan. Lender agrees that upon Borrower's request and so long as (i) no Event of Default is then outstanding, (ii) Borrower then executes and delivers to lender the Supplemental Loan Note, and (iii) Borrower executes and delivers or causes to be executed and delivered to Lender the Mortgage and all other documents described in and otherwise fulfills its obligations under Section 5.3 hereof, it shall make a supplemental loan (the "Supplemental Loan") to Borrower in the principal amount of $6,000,000, which shall be repayable in accordance with the terms of the Supplemental Loan Note and shall be secured by all of the Collateral. Lender's obligation under this Section 1.2 shall terminate upon the earlier to occur of (a) the Maturity Date or (b) termination of the Revolving Credit. 1.3 Use of Proceeds. The proceeds of the Loans shall be used solely for (i) satisfaction of all existing Indebtedness of Borrower to Bank of Seoul; (ii) Borrower's working capital needs; and (iii) other corporate needs of Borrower not otherwise prohibited under the terms of Section 8.2 of this Agreement. SECTION 2. INTEREST, FEES AND CHARGES 2.1 Interest. 2.1.1 Revolving Credit Interest: (a) Rate Options. At the time of each Loan, and thereafter from time to time, Borrower shall have the right, subject to the terms and conditions of this Agreement, and provided no Event of Default has occurred and is continuing, to designate to Lender (in writing, if so requested by Lender) that all, or a portion of the Loans shall bear interest at either the (i) LIBOR Based Rate or (ii) Floating Rate. Interest on each portion thereof shall accrue and be paid at the time and rate applicable to the respective option selected by Borrower or otherwise governing under the terms of this Agreement. If for any reason the LIBOR Based Rate option is unavailable, the Floating Rate shall apply. The rate of interest on Floating Rate Loans shall increase or decrease by an amount equal to any increase or decrease in the Base Rate effective as of the opening of business on the day that any such change in the Base Rate occurs. (i) LIBOR Rate Option: (A) Requests. Provided no Event of Default has occurred and is continuing, and subject to the provisions of this Section 2.1.1 (a)(i), if Borrower desires to have the LIBOR Based Rate apply to all or a portion of the Loans, Borrower shall give Lender a written irrevocable request no later than 11:00 A.M. Eastern time on the second (2nd) Business Day prior to the requested borrowing date specifying (1) the date the LIBOR Based Rate shall apply (which shall be a Business Day), (2) the LIBOR Interest Period, and (3) the amount to be subject to the LIBOR Based Rate provided that such amount shall be an integral multiple of Five Hundred Thousand Dollars ($500,000.00). In no event may Borrower have outstanding at any time more than five (5) different tranches of LIBOR Rate Loans. 2 (B) LIBOR Interest Periods. LIBOR Rate Loans shall be selected by Borrower for a LIBOR Interest Period during which the LIBOR Based Rate is applicable; provided, however, that if the LIBOR Interest Period would otherwise end on a day which shall not be a London Business Day, such LIBOR Interest Period shall be extended to the next preceding or succeeding London Business Day as is the Lender's custom in the market to which such LIBOR Rate Loan relates. All accrued and unpaid interest on a LIBOR Rate Loan shall be paid monthly in accordance with Section 3.2.2. No LIBOR Interest Period with respect to any of the Loans may end after the Maturity Date. Subject to all of the terms and conditions applicable to a request to convert all or a portion of the Loans to a LIBOR Rate Loan, Borrower may extend a LIBOR Rate Loan as of the last day of the LIBOR Interest Period to a new LIBOR Rate Loan. If Borrower fails to notify the Lender of the LIBOR Interest Period for a subsequent LIBOR Rate Loan at least two (2) Business Days prior to the last day of the then current LIBOR Interest Period of an outstanding LIBOR Rate Loan, then such outstanding LIBOR Rate Loan shall, at the end of the applicable LIBOR Interest Period, accrue interest at the Floating Rate. (C) Adjustments. The Adjusted LIBOR Rate may be automatically adjusted by Lender on a prospective basis to take into account the additional or increased cost of maintaining any necessary reserves for Eurodollar deposits or increased costs due to changes in applicable law or regulation or the interpretation thereof occurring subsequent to the commencement of the then applicable LIBOR Interest Period, including but not limited to, changes in tax laws (except changes of general applicability in corporate income tax laws) and changes in the reserve requirements imposed by the Board of Governors of the Federal Reserve System (or any successor or other applicable governing body), excluding the Reserve Percentage and any Reserve which has resulted in a payment pursuant to Section 2.8 below, that increase the cost to Lender of funding the LIBOR Rate Loan. Lender shall promptly give Borrower notice of such a determination and adjustment, which determination shall be prima facie evidence of the correctness of the fact and the amount of such adjustment. (D) Unavailability. If Borrower shall have requested the rate based on the Adjusted LIBOR Rate in accordance with this Section 2.1.1(a)(I) and Lender shall have determined, in good faith, that Eurodollar deposits equal to the amount of the principal of the requested LIBOR Rate Loan and for the LIBOR Interest Period specified are unavailable, or that the rate based on the Adjusted LIBOR Rate will not adequately and fairly reflect the cost of the Adjusted LIBOR Rate applicable to the specified LIBOR Interest Period, of making or maintaining the principal amount of the requested LIBOR Rate Loan during the LIBOR Interest Period specified, or that by reason of circumstances affecting Eurodollar markets, adequate means do not exist for ascertaining the rate based on the Adjusted LIBOR Rate applicable to the specified LIBOR Interest Period, Lender shall promptly give notice of such determination to Borrower that the rate based on the Adjusted LIBOR Rate is not available. A determination, in good faith, by Lender hereunder shall be prima facie evidence of the correctness of the fact and amount of such additional costs or unavailability. Upon such a determination, (i) the obligation to convert to, or maintain a LIBOR Rate Loan at the rate based on the Adjusted LIBOR Rate shall be suspended until Lender shall have notified Borrower that such conditions shall have ceased to exist, and (ii) the portion of the Loans subject to the request or requested conversion shall accrue interest at the 3 Floating Rate. 2.1.2 Default Rate of Interest. Upon and after the occurrence of an Event of Default, and during the continuation thereof, and after written notice of Lender's intention to institute the Default Rate (as defined below), the principal amount of all Loans shall bear interest at a rate per annum equal to two hundred (200) basis points above the interest rate otherwise applicable thereto (the "Default Rate"). 2.1.3 Maximum Interest. In no event whatsoever shall the aggregate of all amounts deemed interest hereunder or under the Notes and charged or collected pursuant to the terms of this Agreement or pursuant to the Notes exceed the highest rate permissible under any law which a court of competent jurisdiction shall, in a final determination, deem applicable hereto. If any provisions of this Agreement or the Notes are in contravention of any such law, the rate hereunder shall automatically be reduced to the maximum rate permitted by applicable law, and Lender shall, in its discretion, to the extent permitted by applicable law, apply such excess to the principal balance of the Loans or refund such excess to Borrower, and such provisions shall be deemed amended to conform thereto. 2.2 Computation of Interest and Fees. Interest and all fees shall be calculated daily and shall be computed on the actual number of days elapsed over a year of 360 days. 2.3 Commitment Fee. Borrower shall pay to Lender on the Closing Date, a commitment fee of $100,000, which is deemed fully earned and nonrefundable on the Closing Date. 2.4 Collateral Management Fee. Borrower shall pay to Lender an annual collateral management fee of $25,000 ("Collateral Management Fee") which fee shall be fully earned, non-refundable, and payable quarterly in advance, commencing on the Closing Date and on the same day of each quarterly period thereafter. 2.5 Audit and Appraisal Fees. Borrower shall pay to Lender audit and appraisal fees in accordance with Lender's current schedule of fees in effect from time to time in connection with Lender's audits and appraisals of Borrower's books and records and such other matters as Lender shall deem appropriate, plus all out-of-pocket expenses incurred by Lender in connection with such audits and appraisals; provided that, so long as no Event of Default has occurred and is continuing, all such audit and appraisal fees incurred during each 12 month period after the Closing Date shall be limited to, and included within, the Collateral Management Fee. 2.6 Reimbursement of Expenses. If, at any time or times regardless of whether or not an Event of Default then exists, Lender incurs legal or accounting expenses or any other costs or out-of-pocket expenses in connection with (i) the analysis, negotiation and preparation of this Agreement or any of the other Loan Documents and closing on the Credit Facility described herein (provided that Borrower's reimbursement obligation for legal fees (excluding out-of-pocket expenses) relating to closing on the Credit Facility shall be capped at $17,500.00), any amendment, modification, replacement or termination of this Agreement or any of the other Loan Documents; 4 (ii) the reasonable out-of-pocket expenses incurred in the administration of this Agreement or any of the other Loan Documents and the transactions contemplated hereby and thereby (Borrower's reimbursement obligation under this clause (ii) to be limited to $5,000.00 per year absent the occurrence of an Event of Default, in which case, such reimbursement obligation shall be unlimited); (iii) any litigation, contest, dispute, suit, proceeding or action (whether instituted by Lender, Borrower or any other Person) in any way relating to the Collateral, this Agreement or any of the other Loan Documents or Borrower's affairs; (iv) any attempt (as permitted under this Agreement) following the occurrence of an Event of Default to enforce any rights of Lender against Borrower or any other Person which may be obligated to Lender by virtue of this Agreement or any of the other Loan Documents, including, without limitation, the Account Debtors; or (v) any attempt (as permitted under this Agreement) to inspect, verify, protect, preserve, restore, collect, sell, liquidate or otherwise dispose of or realize upon the Collateral; then all such legal and accounting expenses, other costs and out of pocket expenses of Lender shall be charged to Borrower. All amounts chargeable to Borrower under this Section 2.6 shall be Obligations secured by all of the Collateral, shall be payable on demand to Lender and shall bear interest from the date such demand is made until paid in full at the Floating Rate applicable to the Loans from time to time. Borrower shall also reimburse Lender for expenses incurred by Lender in its administration of the Collateral to the extent and in the manner provided in Section 6 hereof. 2.7 Bank Charges. Borrower shall pay to Lender, on demand, any and all fees, costs or expenses which Lender pays to a bank or other similar institution arising out of or in connection with (i) the forwarding to Borrower or any other Person on behalf of Borrower, by Lender of proceeds of Loans made by Lender to Borrower pursuant to this Agreement and (ii) the depositing for collection by Lender of any check or item of payment received or delivered to Lender on account of the Obligations. As of the Closing Date, the average wire transfer charges charged to Lender are approximately $20.00 per wire transfer. 2.8 Indemnity re: LIBOR. Borrower hereby indemnifies Lender and holds Lender harmless from and against any and all losses or expenses that Lender may sustain or incur as a consequence of any prepayment or any Default by Borrower in the payment of the principal of or interest on any LIBOR Rate Loan or failure by Borrower to complete a borrowing of, a prepayment of or conversion of or to a LIBOR Rate Loan after notice thereof has been given by Borrower, including (but not limited to) any interest payable by Lender to lenders of funds obtained by it in order to make or maintain its LIBOR Rate Loans hereunder, and any other loss or expense incurred by Lender by reason of the liquidation or reemployment of deposits or other funds acquired by Lender to make, continue, convert into or maintain, a LIBOR Rate Loan. SECTION 3. LOAN ADMINISTRATION 3.1 Manner of Borrowing Revolving Credit Loans. Borrowings under the Credit Facility established pursuant to Section 1 hereof shall be as follows: 3.1.1 Loan Requests. A request for a Revolving Credit Loan shall be made, or shall 5 be deemed to be made, by an Authorized Officer in the following manner: (i) Borrower may give Lender notice of the intention to borrow, in which notice Borrower shall specify the amount of the proposed borrowing and the proposed borrowing date (which shall be a Business Day), no later than 1:00 P.M. Eastern time on the proposed borrowing date, provided, however, that no such request may be made at a time when there exists an Event of Default; and (ii) the becoming due of any amount required to be paid under this Agreement or any of the Notes, whether as interest or for any other Obligation, shall be deemed irrevocably to be a request for a Revolving Credit Loan on the due date in the amount required to pay such interest or other Obligation. As an accommodation to Borrower, Lender shall permit telephonic requests for Loans and electronic transmittal of instructions, authorizations, agreements or reports to Lender by Borrower. Unless Borrower specifically directs Lender in writing not to accept or act upon telephonic or electronic communications from Borrower, Lender shall have no liability to Borrower for any loss or damage suffered by Borrower as a result of Lender's honoring of any requests, execution of any instructions, authorizations or agreements or reliance on any reports communicated to it telephonically or electronically and purporting to have been sent to Lender by Borrower and Lender shall have no duty to verify the origin of any such communication or the authority of the person sending it. 3.1.2 Disbursement. Borrower hereby irrevocably authorizes Lender to disburse the proceeds of each Loan requested, or deemed to be requested, pursuant to this subsection 3.1.2 as follows: (i) the proceeds of each Loan requested under subsection 3.1.1(i) shall be disbursed by Lender in lawful money of the United States of America in immediately available funds, in the case of the initial borrowing, in accordance with the terms of the written disbursement letter from Borrower, and in the case of each subsequent borrowing, by wire transfer to such bank account as may be agreed upon by Borrower and Lender from time to time or elsewhere if pursuant to a written direction from Borrower; and (ii) the proceeds of each Loan requested under subsection 3.1.1(ii) shall be disbursed by Lender by way of direct payment of the relevant interest or other Obligation. 3.1.3 Authorization. Borrower hereby irrevocably authorizes Lender, in Lender's sole discretion, to advance to Borrower, and to charge to Borrower's Loan Account hereunder as a Revolving Credit Loan (regardless of whether an Overadvance is thereby created) a sum sufficient to pay all interest, when due, accrued on the Obligations during the immediately preceding month, all principal when due, and all costs, fees and expenses at any time owed by Borrower to Lender hereunder. 3.1.4 Borrowing Base Certificates. Borrower shall give Lender a copy of its current inventory report as well as a current Borrowing Base Certificate on a monthly basis within ten (10) Business Days days of the end of each month. 3.2 Payments. Except where evidenced by notes or other instruments issued or made by Borrower to Lender specifically containing payment provisions which are in conflict with this Section 3.2 (in which event the conflicting provisions of said notes or other instruments shall govern and control), the Obligations shall be payable as follows: 3.2.1 Principal. Principal payable on account of Loans shall be payable by 6 Borrower to Lender immediately upon the earliest of (i) the receipt by Lender or Borrower of any proceeds of any of the Collateral to the extent of said proceeds under the conditions set forth in Section 3.3.1 below, (ii) the occurrence of an Event of Default in consequence of which Lender elects to accelerate the maturity and payment of the Obligations, or (iii) termination of this Agreement pursuant to Section 4 hereof; provided, however, that if an Overadvance shall exist at any time, Borrower shall, on demand, repay the Overadvance. 3.2.2 Interest. Interest accrued on the Loans shall be due on the earliest of (i) the first calendar day of each month (for the immediately preceding month), computed through the last calendar day of the preceding month, (ii) the occurrence of an Event of Default in consequence of which Lender elects to accelerate the maturity and payment of the Obligations or (iii) termination of this Agreement pursuant to Section 4 hereof. 3.2.3 Costs, Fees and Charges. Costs, fees and charges payable pursuant to this Agreement shall be payable by Borrower as and when provided in Section 2 hereof to Lender or to any other Person designated by Lender in writing. 3.2.4 Other Obligations. The balance of the Obligations (other than those set forth in this Section 3.2) requiring the payment of money shall be payable by Borrower to Lender as and when provided in this Agreement, the Notes, the Other Agreements or the Security Documents, or if not otherwise provided, then on demand. 3.3 Mandatory and Permissive Prepayments. 3.3.1 Proceeds of Sale, Loss, Destruction or Condemnation of Collateral. If Borrower sells any of its personal Property as permitted pursuant to this Agreement or if any of the Collateral is lost or destroyed or taken by condemnation and no Event of Default is then outstanding, the proceeds of any such sale, loss, destruction or taking (including insurance proceeds) may be retained by Borrower for any use in its business not prohibited hereunder. Under all other circumstances, all proceeds (including insurance proceeds) of any sale(s) of personal Property or of any loss, destruction, or taking of personal Property as well as all proceeds of any sale, destruction or taking of the real Property (if subject to the Mortgage) shall be immediately paid to or retained by Lender and applied as a mandatory prepayment of the Loans (first to the Supplemental Loan, then to the Revolving Credit Loans). Lender shall not be required to release its Mortgage on the Real Property in connection with any sale thereof unless the Supplemental Loan (including all accrued interest thereon) is then unconditionally paid in full. 3.3.2 LIBOR Rate Loans. No portion of the LIBOR Rate Loans may be prepaid for any reason during a LIBOR Interest Period unless Borrower first satisfies in full its obligations under Section 2.8 arising from such prepayment. 3.4 Application of Payments and Collections. Subject to subsection 2.2 of this Agreement, all items of payment received by Lender by 2:00 p.m. Eastern time, on any Business Day shall be deemed received on that Business Day. All items of payment received after 2:00 p.m. 7 Eastern time, on any Business Day shall be deemed received on the following Business Day. Until payment in full of all Obligations and termination of this Agreement, Borrower irrevocably waives (except as expressly provided for in this Agreement or otherwise by Lender) the right to direct the application of any and all payments and collections at any time or times hereafter received by Lender from or on behalf of Borrower, and Borrower does hereby irrevocably agree that Lender shall have the continuing exclusive right to apply and reapply any and all such payments and collections received at any time or times hereafter by Lender or its agent against the Obligations, in such manner as Lender may deem advisable, notwithstanding any entry by Lender upon any of its books and records. Notwithstanding the foregoing, prior to the occurrence of an Event of Default, Borrower shall be entitled to direct whether a payment of principal be applied to the Supplemental Loan or the Revolving Credit Loans provided such application does not contravene any other requirement for application expressly set forth in this Agreement. If, as the result of receipt of proceeds or collections of Collateral as authorized by subsection 6.2.6 hereof, a credit balance exists in the Loan Account, such credit balance shall not accrue interest in favor of Borrower, but shall be available to Borrower at any time or times for so long as no Default or Event of Default exists. Such credit balance may be applied to and offset any of the Obligations arising from time to time. 3.5 All Loans to Constitute One Obligation. The Loans shall constitute one general Obligation of Borrower, and shall be secured by Lender's Lien upon all of the Collateral, subject to Section 4.2.4. 3.6 Loan Account. Lender shall enter all Loans as debits to the Loan Account and shall also record in the Loan Account all payments made by Borrower on any Obligations and all proceeds of Collateral which are finally paid to Lender, and may record therein, in accordance with customary accounting practice, other debits and credits, including interest and all charges and expenses properly chargeable to Borrower. 3.7 Statements of Account. Lender will account to Borrower monthly with a statement of Loans, charges and payments made pursuant to this Agreement, and such account rendered by Lender shall be deemed final, binding and conclusive upon Borrower absent manifest error unless Lender is notified by Borrower in writing to the contrary within sixty (60) days of the date each accounting is mailed to Borrower. Such notice shall only be deemed an objection to those items specifically objected to therein. SECTION 4. TERM AND TERMINATION 4.1 Term of Agreement. Subject to Lender's right to cease making Loans to Borrower upon or after the occurrence, and during the continuance, of any Default or Event of Default, this Agreement shall be in effect for a period of three (3) years from the date hereof (the "Original Term") and this Agreement shall automatically renew itself for one-year periods thereafter (the "Renewal Terms") unless terminated as provided in Section 4.2 hereof. 4.2 Termination. 8 4.2.1 Termination by Lender. Upon at least 90 days prior written notice to Borrower, Lender may terminate this Agreement as of the last day of the Original Term or the then current Renewal Term and Lender may terminate this Agreement without notice upon or after the occurrence, and during the continuance, of an Event of Default. 4.2.2 Termination by Borrower. Upon at least 45 days prior written notice to Lender, Borrower may, at its option, terminate this Agreement; provided, however, no such termination shall be effective until Borrower has paid all of the Obligations in immediately available funds. Any notice of termination given by Borrower shall be irrevocable unless Lender otherwise agrees in writing, and Lender shall have no obligation to make any Loans on or after the termination date stated in such notice. Subject only to Section 4.2.4 below, Borrower may elect to terminate this Agreement in its entirety only and no section of this Agreement or type of Loan available hereunder may be terminated singly. 4.2.3 Effect of Termination. All of the Obligations shall be immediately due and payable upon the termination date stated in any notice of termination of this Agreement. All undertakings, agreements, covenants, warranties and representations of Borrower contained in the Loan Documents shall survive any such termination, and Lender shall retain its Liens in the Collateral and all of its rights and remedies under the Loan Documents notwithstanding such termination until Borrower has paid the Obligations to Lender, in full, in immediately available funds. Notwithstanding the payment in full of the Obligations, Lender shall not be required to terminate its security interests in the Collateral unless, with respect to any loss or damage Lender may incur as a result of dishonored checks or other items of payment received by Lender from Borrower or any Account Debtor and applied to the Obligations, Lender shall have received a written agreement in form and substance satisfactory to Lender, executed by Borrower and by any Person (whose creditworthiness for such purpose is reasonably acceptable to Lender) whose loans or other advances to Borrower are used in whole or in part to satisfy the Obligations, indemnifying Lender from any such potential loss or damage. 4.2.4 Prepayment of Supplemental Loan. Borrower may at any time prepay all or a portion of the Supplemental Loan. At such time as the Supplemental Loan is unconditionally paid in full, the Mortgage shall be satisfied and released and be of no further force and effect. SECTION 5. SECURITY INTERESTS 5.1 Security Interest in Collateral. To secure the prompt payment and performance to Lender of the Obligations, Borrower hereby grants to Lender a continuing first Lien upon the following assets of Borrower, whether now owned or existing or hereafter created, acquired or arising and wheresoever located: (i) Accounts; 9 (ii) Inventory; (iii) Equipment; (iv) Fixtures; (v) General Intangibles relating to credit card transactions and/or related to or arising from other Collateral; (vi) Instruments related to or arising from other Collateral; (vii) Documents related to or arising from other Collateral; (viii) All monies and other Property of any kind now or at any time or times hereafter in the possession or under the control of Lender or a bailee or Affiliate of Lender; (ix) All books and records (including, without limitation, customer lists, credit files, computer programs, print-outs, and other computer materials and records) of Borrower pertaining to any of (i) through (viii) above; and (x) All accessions to, substitutions for and all replacements and cash and non-cash proceeds of (i) through (ix) above, including, without limitation, proceeds of and unearned premiums with respect to insurance policies insuring any of the Collateral. 5.2 Lien Perfection; Further Assurances. Borrower shall execute such UCC-1 financing statements as are required by the Code and such other instruments, assignments or documents as are necessary to perfect Lender's Lien upon any of the Collateral and shall take such other action as may be required by applicable law to perfect or to continue the perfection of Lender's Lien upon the Collateral, including without limitation, the execution of all instruments, documents and agreements required to have Lender's Lien noted on all certificates of title for Borrower's Property for which such a certificate has been issued and delivery to Lender of all Collateral requested by Lender to be so delivered in order for Lender to obtain a perfected Lien thereon. Unless prohibited by applicable law, and following Borrower's failure to do so after written request by Lender, Borrower hereby authorizes Lender to execute and file any such financing statement on Borrower's behalf. The parties agree that a carbon, photographic or other reproduction of this Agreement shall be sufficient as a financing statement and may be filed in any appropriate office in lieu thereof. At Lender's request, Borrower shall also promptly execute or cause to be executed and shall deliver to Lender any and all documents, instruments and agreements deemed necessary by Lender to give effect to or carry out the terms or intent of the Loan Documents, including, without limitation, delivery of all landlord/ warehousemen lien subordination/waiver agreements requested by Lender. 5.3 Lien on Realty. Subject to the provisions of Section 4.2.4 hereof, the due and punctual payment and performance of the Obligations related to the Supplemental Loan shall also be secured by the Lien created by the Mortgage upon the Real Property of the Borrower described 10 therein. The Mortgage shall be executed by the Borrower in favor of Lender and shall be duly recorded, at Borrower's expense, in each office where such recording is required to constitute a fully perfected first Lien on the Real Property covered thereby. Borrower shall deliver to Lender, at Borrower's expense, mortgagee title insurance policies issued by a title insurance company satisfactory to Lender, which policies shall be in form and substance satisfactory to Lender and shall insure a valid first Lien in favor of Lender on the Real Property covered thereby, subject only to those exceptions acceptable to Lender and its counsel. Borrower shall deliver to Lender such other documents, including, without limitation, existing survey prints and flood plain certificates of the Real Property, as Lender and its counsel may request relating to the Real Property subject to the Mortgage. SECTION 6. COLLATERAL ADMINISTRATION 6.1 General 6.1.1 Location of Collateral. All Collateral, other than Inventory in transit and motor vehicles, will at all times be kept by Borrower at one or more of the locations set forth in Exhibit 6.1.1 hereto and shall not, without the prior written approval of Lender, be moved therefrom except, prior to an Event of Default and Lender's acceleration of the maturity of the Obligations in consequence thereof, for (i) transfers of Collateral among locations on such Exhibit 6.1.1, (ii) sales of Inventory in the ordinary course of business; and (iii) removals of Equipment in connection with dispositions thereof that are authorized by subsection 6.4.2 hereof. 6.1.2 Insurance of Collateral. Borrower shall maintain and pay for insurance upon all Collateral wherever located and with respect to Borrower's business, covering casualty, hazard, public liability, flood and such other risks in such amounts and with such insurance companies as are reasonably satisfactory to Lender. Borrower shall deliver the originals of such policies to Lender with satisfactory lender's loss payable endorsements, naming Lender as lender loss payee, assignee, mortgagee and/or additional insured, as appropriate and providing that all such insurance proceeds are paid to Lender. Each policy of insurance or endorsement shall contain a clause requiring the insurer to give not less than 30 days prior written notice to Lender in the event of cancellation of the policy for any reason whatsoever and a clause specifying that the interest of Lender shall not be impaired or invalidated by any act or neglect of Borrower or the owner of the Property or by the occupation of the premises for purposes more hazardous than are permitted by said policy. If Borrower fails to provide and pay for such insurance, and after written demand from Lender to do so, Lender may, at its option, but shall not be required to, procure the same and charge Borrower therefor. Borrower agrees to deliver to Lender, promptly as rendered, true copies of all reports made in any reporting forms to insurance companies. 6.1.3 Protection of Collateral. All expenses of protecting, storing, warehousing, insuring, handling, maintaining and shipping the Collateral, any and all excise, property, sales, and use taxes imposed by any state, federal, or local authority on any of the Collateral or in respect of the sale thereof shall be borne and paid by Borrower. If Borrower fails to promptly pay any portion 11 thereof when due, and Borrower fails to immediately make such past due payment after Lender requests in writing, Lender may, at its option, but shall not be required to, pay the same and charge Borrower therefor. Lender shall not be liable or responsible in any way for the safekeeping of any of the Collateral or for any loss or damage thereto or for any diminution in the value thereof, or for any act or default of any warehouseman, carrier, forwarding agency, or other person whomsoever, but the same shall be at Borrower's sole risk. 6.2 Administration of Accounts. 6.2.1 Records, Schedules and Assignments of Accounts. Borrower shall keep accurate and complete records of its Accounts (including without limitation purchases made through use of credit cards) and all payments and collections thereon and shall submit to Lender, as Lender shall request if an Event of Default is outstanding, copies of such records. 6.2.2 Collection of Accounts, Proceeds of Collateral. To expedite collection, Borrower shall endeavor in the first instance to make collection of its Accounts. If an Event of Default is outstanding, at the request of Lender, all remittances received by Borrower on account of Accounts, together with the proceeds of any other Collateral, shall be held as Lender's property by Borrower as trustee of an express trust for Lender's benefit and Borrower shall immediately remit the same in kind to Lender or to a depository account designated by Lender. Lender retains the right at all times after the occurrence of an Event of Default to notify Account Debtors that Accounts have been assigned to Lender and to collect Accounts directly in its own name and to charge the collection costs and expenses, including attorneys' fees to Borrower. Lender has no duty to protect, insure, collect or realize upon the Accounts or preserve rights therein. 6.3 Administration of Inventory. 6.3.1 Records and Reports of Inventory. Borrower shall keep accurate and complete records of its Inventory. Borrower shall continue to conduct a physical inventory in accordance with its prior procedures and shall provide to Lender a copy of its report based on each such physical inventory promptly thereafter, together with such supporting information as Lender shall request. If Lender has accelerated the Obligations following the occurrence of an Event of Default, Lender shall have the right to require Borrower to conduct a physical inventory. 6.3.2 Inventory Valuation System. Borrower shall at all times maintain an Inventory valuation system acceptable to Lender, Borrower's existing system being acceptable to Lender. 6.4 Administration of Equipment. 6.4.1 Records and Schedules of Equipment. Borrower shall keep accurate records itemizing and describing the kind, type, quality, quantity and value of its Equipment and all dispositions thereof and if an Event of Default is outstanding shall furnish Lender, upon Lender's request, with a current schedule containing the foregoing information. 12 6.4.2 Dispositions of Equipment. Borrower will not sell, lease or otherwise dispose of or transfer any of the Equipment or any part thereof (a) other than in the ordinary course of its business or (b) without the prior written consent of Lender if an Event of Default is outstanding and Lender has so required in writing. 6.5 Payment of Charges. All amounts chargeable to Borrower under Section 6 hereof shall be Obligations secured by all of the Collateral, shall be payable within 10 days following demand and shall bear interest from the date such advance was made until paid in full at the Floating Rate applicable to the Loans from time to time. SECTION 7. REPRESENTATIONS AND WARRANTIES 7.1 General Representations and Warranties. To induce Lender to enter into this Agreement and to make advances hereunder, Borrower warrants, represents and covenants to Lender that: 7.1.1. Organization and Qualification. Borrower is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation. Borrower is duly qualified and is authorized to do business and is in good standing as a foreign corporation in each state or jurisdiction listed on Exhibit 7.1.1 hereto. There is no other state or jurisdiction where the character of its Properties or the nature of its activities make such qualification necessary and Borrower's lack of qualification is likely to have a Material Adverse Effect. 7.1.2 Corporate Power and Authority. Borrower has full corporate power and authority to enter into, execute, deliver and perform this Agreement and each of the other Loan Documents to which it is a party. The execution, delivery and performance of this Agreement and each of the other Loan Documents have been duly authorized by all necessary corporate action and do not (i) require any consent or approval of the shareholders of Borrower; (ii) contravene Borrower's charter, articles or certificate of incorporation or by-laws; (iii) violate, or cause Borrower to be in default under, any provision of any law, rule, regulation, order, writ, judgment, injunction, decree, determination or award in effect having applicability to Borrower; (iv) result in a breach of or constitute a default under any indenture or loan or credit agreement or any other material agreement, lease or instrument to which Borrower is a party or by which it or its Properties may be bound or affected; or (v) result in, or require, the creation or imposition of any Lien upon or with respect to any of the Properties now owned or hereafter acquired by Borrower. 7.1.3 Legally Enforceable Agreement. This Agreement is, and each of the other Loan Documents when delivered under this Agreement will be, a legal, valid and binding obligation of Borrower enforceable against it in accordance with its respective terms. 7.1.4 Capital Structure. Exhibit 7.1.4 hereto states (i) the correct name of each of the Subsidiaries, if any, of Borrower, its jurisdiction of incorporation and the percentage of its 13 Voting Stock owned by Borrower, (ii) the name of Borrower's corporate or joint venture Affiliates and the nature of the affiliation, (iii) the number, nature and holder of all outstanding Securities of Borrower and each Subsidiary of Borrower and (iv) the number of authorized, issued and treasury shares of Borrower and each Subsidiary of Borrower. Borrower has good title to all of the shares it purports to own of the stock of each of its Subsidiaries, free and clear in each case of any Lien other than Permitted Liens. All such shares have been duly issued and are fully paid and non-assessable. Except as disclosed on Exhibit 7.1.4, there are no outstanding options to purchase, or any rights or warrants to subscribe for, or any commitments or agreements to issue or sell, or any Securities or obligations convertible into, or any powers of attorney relating to, shares of the capital stock of Borrower or any of its Subsidiaries. Except as shown on Exhibit 7.1.4, there are no outstanding agreements or instruments binding upon any shareholder of Borrower relating to the ownership of its shares of capital stock. 7.1.5 Corporate Names. Borrower has not been known as or used any corporate, fictitious or trade names except those listed on Exhibit 7.1.5 hereto during the 5 year period preceding the Closing Date. Except as set forth on Exhibit 7.1.5, Borrower has not been the surviving corporation of a merger or consolidation or acquired all or substantially all of the assets of any Person during the 5 year period preceding the Closing Date. 7.1.6 Business Locations; Agent for Process. Borrower's chief executive offices and other places of business are as listed on Exhibit 6.1.1 hereto. During the preceding 5 year period, Borrower has not had an office, place of business or agent for service of process other than as listed on Exhibit 6.1.1. Except as shown on Exhibit 6.1.1, no Inventory is stored with a bailee, warehouseman or similar party, nor is any Inventory consigned to any Person. 7.1.7 Title to Properties; Priority of Liens. Borrower has good, indefeasible and marketable title to and fee simple ownership of, or valid and subsisting leasehold interests in, all of its real Property (including the Real Property), and good title to all of the Collateral and all of its other Property, in each case, free and clear of all Liens except Permitted Liens. Borrower has paid or discharged, or reserved for, all lawful claims which, if unpaid, might become a Lien against any Properties of Borrower that is not a Permitted Lien. The Liens granted to Lender under Section 5 hereof are first priority Liens, subject only to Permitted Liens. 7.1.8 Equipment. The Equipment is in satisfactory operating condition and repair, in light of its intended use, in all material respects. 7.1.9 Financial Statements; Fiscal Year. The balance sheets of Borrower and such other Persons described therein (including the accounts of all Subsidiaries, if any, of Borrower for the respective periods during which a Subsidiary relationship existed) as of December 31, 1997 and the related statements of income, changes in stockholder's equity, and changes in financial position for the periods ended on such dates, have been prepared in accordance with GAAP and present fairly the financial positions of Borrower at such dates and the results of Borrower's operations for such period. Since December 31, 1997, there has been no material change in the condition, financial or otherwise, of Borrower and no change in the aggregate value of Equipment and real Property 14 (including the Real Property) owned by Borrower. The fiscal year of Borrower and each of its Subsidiaries ends on January 31 of each year. 7.1.10 Full Disclosure. The financial statements referred to in subsection 7.1.10 hereof do not, nor does this Agreement or any other written statement of Borrower to Lender, contain any untrue statement of a material fact or, (when taken as a whole with all other information submitted by Borrower or made available to, and reviewed by Lender), omit a material fact necessary to make the statements contained therein or herein not misleading. There is no fact which Borrower has failed to disclose to Lender in writing which is likely to have Material Adverse Effect. 7.1.11 Solvent Financial Condition. Borrower is now and, after giving effect to the Loans to be made hereunder, at all times will be, Solvent. 7.1.12 Surety Obligations. Except as set forth on Exhibit 7.1.12 hereto, Borrower is not obligated as surety or indemnitor under any surety or similar bond or other contract issued or entered into or any agreement to assure payment, performance or completion of performance of any undertaking or obligation of any Person. 7.1.13 Taxes. Borrower's federal tax identification number is shown on Exhibit 7.1.13 hereto. Borrower has filed all federal, state and local tax returns and other reports it is required by law to file and has paid, or made provision for the payment of, all taxes, assessments, fees, levies and other governmental charges upon it, its income and Properties as and when such taxes, assessments, fees, levies and charges are due and payable, unless and to the extent any thereof are being actively contested in good faith and by appropriate proceedings and Borrower maintains reasonable reserves on its books therefor. The provision for taxes on the books of Borrower is adequate for all years not closed by applicable statutes, and for its current fiscal year. 7.1.14 Brokers. There are no claims against Borrower for brokerage commissions, finder's fees or investment banking fees in connection with the transactions contemplated by this Agreement. 7.1.15 Patents, Trademarks, Copyrights and Licenses. Borrower owns or possesses all the patents, trademarks, service marks, trade names, copyrights and licenses used in and necessary for the present and planned future conduct of its business without any known conflict with the rights of others. All such patents, trademarks, service marks, tradenames, copyrights, licenses and other similar rights are listed on Exhibit 7.1.15 hereto. 7.1.16 Governmental Consents. Borrower has, and is in good standing with respect to, all governmental consents, approvals, licenses, authorizations, permits, certificates, inspections and franchises necessary to continue to conduct its business as heretofore or proposed to be conducted by it and to own or lease and operate its Properties as now owned or leased by it, except where the failure to do so would not be likely to have a Material Adverse Effect. 15 7.1.17 Compliance with Laws. Except as set forth on Exhibit 7.1.17 hereto, Borrower has duly complied with, and its Properties, business operations and leaseholds are in compliance in all material respects with, the provisions of all federal, state and local laws, rules and regulations applicable to Borrower, its Properties or the conduct of its business and there have been no citations, notices or orders of noncompliance issued to Borrower under any such law, rule or regulation except where such noncompliance would not be likely to have a Material Adverse Effect. Borrower has established and maintains an adequate monitoring system to ensure that it remains in compliance with all federal, state and local laws, regulations and rules applicable to it. To the best of Borrower's knowledge, no Inventory has been produced in violation of the Fair Labor Standards Act (29 U.S.C. Section 201 et seq.), as amended. 7.1.18 Restrictions. Borrower is not a party or subject to any contract, agreement, or charter or other corporate restriction, which materially and adversely affects its business or the use or ownership of any of its Properties. Borrower is not a party or subject to any contract or agreement which restricts its right or ability to incur Indebtedness, other than as set forth on Exhibit 7.1.18 hereto, none of which prohibit the execution of or compliance with this Agreement or the other Loan Documents by Borrower. 7.1.19 Litigation. Except as set forth on Exhibit 7.1.19 hereto, there are no actions, suits, proceedings or investigations pending, or to the knowledge of Borrower, threatened, against or affecting Borrower or the business, operations, Properties, prospects, profits or condition of Borrower. Borrower is not in default with respect to any order, writ, injunction, judgment, decree or rule of any court, governmental authority or arbitration board or tribunal. 7.1.20 No Defaults. No event has occurred and no condition exists which would, upon or after the execution and delivery of this Agreement or Borrower's performance hereunder, constitute a Default or an Event of Default. Borrower is not in default, and no event has occurred and no condition exists which constitutes, or which with the passage of time or the giving of notice or both would constitute, a default in the payment of any Indebtedness to any Person for Money Borrowed. 7.1.21 Pension Plans. Except as disclosed on Exhibit 7.1.21 hereto, Borrower does not have any Plan. Borrower is in full compliance in all material respects with the requirements of ERISA and the regulations promulgated thereunder with respect to each Plan. No fact or situation that could result in a material adverse change in the financial condition of Borrower exists in connection with any Plan. Neither Borrower nor any Subsidiary of Borrower has withdrawal liability in connection with a Multiemployer Plan. 7.1.22 Third Party Relations. There exists no actual or threatened termination, cancellation or limitation of, or any modification or change in, the business relationship between Borrower and credit card issuer having a merchant agreement with Borrower whose purchases individually or in the aggregate are material to the business of Borrower or with any material supplier, the effect of which is likely to have a Material Adverse Effect. There exists no present condition or state of facts or circumstances which would materially affect adversely Borrower or 16 prevent Borrower from conducting such business after the consummation of the transactions contemplated by this Agreement in substantially the same manner in which it has heretofore been conducted. 7.1.23 Labor Relations. Except as described on Exhibit 7.1.23 hereto, Borrower is not a party to any collective bargaining agreement. There are no material grievances, disputes or controversies with any union or any other organization of Borrower's employees, or threats of strikes, work stoppages or any asserted pending demands for collective bargaining by any union or organization. 7.2 Continuous Nature of Representations and Warranties. Each representation and warranty contained in this Agreement and the other Loan Documents shall be continuous in nature and shall, in all material respects, remain accurate, complete and not misleading at all times during the term of this Agreement. Notwithstanding the foregoing, Lender acknowledges that certain of the representations and warranties contained in this Agreement may no longer be accurate if Borrower is recapitalized (including any recapitalization reflecting the transfer of Borrower's stock to a new Delaware holding company in exchange for stock of such company) as a result of a public offering of its stock. Lender agrees that any such inaccuracy which results from such a public offering shall not constitute an Event of Default provided the change in circumstances giving rise to such inaccuracy is not likely to have a Material Adverse Effect and Borrower discloses such changed circumstances to Lender in writing within thirty (30) days of the occurrence of such changed circumstances. 7.3 Survival of Representations and Warranties. All representations and warranties of Borrower contained in this Agreement or any of the other Loan Documents shall survive the execution, delivery and acceptance thereof by Lender and the parties thereto and the closing of the transactions described therein or related thereto. SECTION 8. COVENANTS AND CONTINUING AGREEMENTS 8.1 Affirmative Covenants. During the term of this Agreement, and thereafter for so long as there are any Obligations to Lender, Borrower covenants that, unless otherwise consented to by Lender in writing, it shall: 8.1.1 Visits and Inspections. Permit representatives of Lender, from time to time, but only during normal business hours and, provided no Event of Default has occurred, no more than four (4) times annually (after the occurrence of an Event of Default, there shall be no limit on frequency) to visit and inspect the Properties of Borrower, inspect, audit and make extracts from its books and records, and discuss with its officers, its employees and its independent accountants, Borrower's business, assets, liabilities, financial condition, business prospects and results of operations. 8.1.2 Notices. Promptly notify Lender in writing of the occurrence of any event or 17 the existence of any fact which renders any representation or warranty in this Agreement or any of the other Loan Documents inaccurate, incomplete or misleading in any material respect. 8.1.3 Financial Statements. Keep adequate records and books of account with respect to its business activities in which proper entries are made reflecting all of its financial transactions; and cause to be prepared and furnished to Lender the following (all to be prepared on a consistent basis for Borrower alone without consolidation with any other Person): (i) not later than 120 days after the close of each fiscal year of Borrower, unqualified audited financial statements of Borrower as of the end of such year, certified by a firm of independent certified public accountants of recognized standing selected by Borrower but acceptable to Lender to have been prepared in accordance with GAAP; (ii) not later than 30 days after the end of each month hereafter, including the last month of Borrower's fiscal year, unaudited interim financial statements of Borrower as of the end of such month and of the portion of Borrower's fiscal year then elapsed, certified by the principal financial officer of Borrower to have been prepared in accordance with GAAP and fairly to present the financial position and results of operations of Borrower for such month and period subject only to changes from audit and year-end adjustments and except that such statements need not contain notes; (iii) promptly after the sending or filing thereof, as the case may be, copies of any proxy statements, financial statements or reports which Borrower has sent to all of its shareholders and copies of any regular, periodic and special reports or registration statements which Borrower files with the Securities and Exchange Commission or any governmental authority which may be substituted therefor, or any national securities exchange; (iv) promptly after the filing thereof, copies of any annual report to be filed under ERISA in connection with each Plan; (v) upon completion, but not later than 30 days prior to the close of each fiscal year of Borrower, financial Projections for Borrower, for Borrower's upcoming fiscal year, prepared on a month by month basis, in form acceptable to Lender; and (vi) such other data and information (financial and otherwise) as Lender, from time to time, may reasonably request, bearing upon or related to the Collateral or Borrower's financial condition or results of operations, including without limitation, detailed monthly accounts payable agings. Within 45 days after the delivery of the financial statements described in clause (i) of this subsection 8.1.3, Borrower shall forward to Lender a copy of the accountants' letter to Borrower's management that is prepared in connection with such financial statements and also shall 18 cause to be prepared and shall furnish to Lender a certificate of the aforesaid certified public accountants certifying to Lender that, based upon their examination of the financial statements of Borrower performed in connection with their examination of said financial statements, they are not aware of any Event of Default, or, if they are aware of such Event of Default, specifying the nature thereof, and acknowledging in a manner satisfactory to Lender, that they are aware that Lender is relying on such financial statements in making its decision with respect to the Loans. Concurrently with the delivery of the financial statements described in clauses (i) and (ii) of this subsection 8.1.3, or more frequently if requested by Lender, Borrower shall cause to be prepared and furnished to Lender a Compliance Certificate in the form of Exhibit 8.1.3 hereto executed by the chief financial officer of Borrower. 8.1.4 Landlord and Storage Agreements. Provide Lender, upon request by Lender, with copies of all leases and other material written agreements between Borrower and any landlord or warehouseman which owns any warehouse or distribution facility at which any Inventory may, from time to time, be kept. 8.1.5 Intentionally Omitted. 8.2 Negative Covenants. During the term of this Agreement, and thereafter for so long as there are any Obligations to Lender, Borrower covenants that, unless Lender has first consented thereto in writing, it will not: 8.2.1 Mergers; Consolidations; Acquisitions. Merge or consolidate with any Person; nor acquire all or any substantial part of the Properties of any Person if (a) Aggregate Adjusted Availability would be less than $3,500,000 after taking into effect any such transaction, (b) an Event of Default is then outstanding or would otherwise occur after taking into effect any such transaction, or (c) in the case of a merger or consolidation, Borrower is not the surviving Person. 8.2.2 Loans. Make any loans or other advances of money to any Person if (a) Aggregate Adjusted Availability would be less than $3,500,000 after taking into effect such a loan or other advance or (b) an Event of Default is then outstanding or would otherwise occur after taking into effect such a loan or other advance. 8.2.3 Total Indebtedness. Create, incur, assume, or suffer to exist any Indebtedness, except: (i) Obligations owing to Lender; (ii) Subordinated Debt; (iii) accounts payable to trade creditors and current operating expenses (other than for Money Borrowed) which are not aged beyond normal business practice of Borrower, in each case incurred in the ordinary course of business and paid within 19 the normal time period, unless the same are being actively contested in good faith and by appropriate and lawful proceedings; and Borrower shall have set aside such reserves, if any, with respect thereto as are required by GAAP and deemed adequate by such Borrower and its independent accountants; (iv) Obligations to pay Rentals permitted by subsection 8.2.13 and Capitalized Lease Obligations permitted under subsection 8.2.8; (v) Permitted Purchase Money Indebtedness; (vi) taxes not yet due or being contested in the manner described in subsection 7.1.14 hereto; (vii) contingent liabilities arising out of endorsements of checks and other negotiable instruments for deposit or collection in the ordinary course of business; and (viii) any other Indebtedness if (a) Aggregate Adjusted Availability would be at least $3,500,000 after taking into effect the incurrence of such Indebtedness and (b) no Event of Default is then outstanding or would otherwise occur after taking into effect the incurrence of such Indebtedness. 8.2.4 Affiliate Transactions. Enter into, or be a party to, any transaction with any Affiliate of Borrower or any stockholder, except (a) in the ordinary course of and pursuant to the reasonable requirements of Borrower's business and upon fair and reasonable terms which are fully disclosed to Lender and are no less favorable to Borrower than Borrower would obtain in a comparable arm's length transaction with a Person not an Affiliate or stockholder of Borrower or (b) if (i) Aggregate Adjusted Availability would be at least $3,500,000 after taking into effect such transaction and (ii) no Event of Default is then outstanding or would otherwise occur after taking into effect such transaction. 8.2.5 Limitation on Liens. Create or suffer to exist any Lien upon any of its Property, income or profits, whether now owned or hereafter acquired, except: (i) Liens at any time granted in favor of Lender; (ii) Liens for taxes (excluding any Lien imposed pursuant to any of the provisions of ERISA) not yet due, or being contested in the manner described in subsection 7.1.14 hereto, but only if in Lender's judgment such Lien does not adversely affect Lender's rights or the priority of Lender's Lien in the Collateral; (iii) such other Liens as appear on Exhibit 8.2.5 hereto; (iv) Purchase Money Liens securing Permitted Purchase Money 20 Indebtedness; (v) Liens on Borrower's real Property after the Supplemental Loan and all Obligations related thereto have been indefeasibly paid in full; and (vi) such other Liens as Lender may hereafter approve in writing. 8.2.6 Subordinated Debt. Make any payment of any part or all of any Subordinated Debt or take any other action or omit to take any other action in respect of any Subordinated Debt in contravention of the written terms of any instrument evidencing such Subordinated Debt. 8.2.7 Distributions. Declare or make any Distributions if (a) Aggregate Adjusted Availability would be less than $3,500,000 after taking into effect the proposed Distribution or (b) an Event of Default is then outstanding or would otherwise occur after taking into effect the proposed Distribution. 8.2.8 Disposition of Assets. Sell, lease or otherwise dispose of its Properties, including any disposition of Property as part of a sale and leaseback transaction, to or in favor of any Person, except (i) sales of Inventory in the ordinary course of business for so long as there has been no acceleration of the Obligations; (ii) dispositions expressly authorized by this Agreement or (iii) other dispositions if (a) Aggregate Adjusted Availability would be at least $3,500,000 after taking into account the effects of such transaction and (b) no Event of Default is then outstanding or would occur after taking into account the effects of such transaction. 8.2.9 Restricted Investment. Make or have any Restricted Investment if (a) Aggregate Adjusted Availability would be less than $3,500,000 after taking into effect such Restricted Investment or (b) an Event of Default is then outstanding or would otherwise occur after taking into effect of such Restricted Investment. 8.2.10 Tax Consolidation. File or consent to the filing of any consolidated income tax return with any Person other than a Subsidiary of Borrower. 8.3 Specific Financial Covenants. During the term of this Agreement, and thereafter for so long as there are any Obligations to Lender, Borrower covenants that, unless otherwise consented to by Lender in writing, it shall: 8.3.1 Minimum Net Worth. Maintain at all times a Net Worth of not less than $14,000,000. 8.3.2 Minimum Cash Flow. Achieve a positive Cash Flow for the four fiscal quarters ending January 31, 1998 and for the four fiscal quarter period ending on the last day of each subsequent fiscal quarter. 21 8.4 Stock Ownership. James Kim and/or any immediate family member of James Kim and/or any trust for which any such immediate family member is the beneficiary shall own and control, beneficially and of record, at least 25% in the aggregate, of the issued and outstanding capital stock (i) of Borrower, or (ii) of Borrower's parent company if the stock of Borrower is transferred to such new parent company in conjunction with an initial public offering of Borrower's stock and in which case such parent company shall at all times own all issued and outstanding capital stock of Borrower. SECTION 9. CONDITIONS PRECEDENT Notwithstanding any other provision of this Agreement or any of the other Loan Documents, and without affecting in any manner the rights of Lender under the other sections of this Agreement, Lender shall not be required to make any Loan under this Agreement unless and until each of the following conditions has been and continues to be satisfied: 9.1 Documentation. Lender shall have received, in form and substance satisfactory to Lender and its counsel, a duly executed copy of this Agreement and the other Loan Documents, together with such additional documents, instruments and certificates as Lender and its counsel shall require in connection therewith from time to time (provided however that the Supplemental Loan Note, Mortgage, Mortgagee Endorsement and the documents contemplated by subsection (I) below are to be provided contemporaneously with the making of the Supplemental Loan), all in form and substance satisfactory to Lender and its counsel, including, without limitation, the following: (A) Certified copies of Borrower's casualty insurance policies, together with loss payable endorsements on Lender's standard form of Lender Loss Payee and Mortgagee Endorsement naming Lender as lender loss payee and/or mortgagee, as applicable, and certified copies of Borrower's liability insurance policies, together with endorsements naming Lender as additional insured; (B) Certified copies of (i) resolutions of Borrower's board of directors authorizing the execution and delivery of this Agreement and the Loan Documents and the performance of all transactions contemplated hereby and thereby, (ii) Borrower's by-laws, and (iii) an incumbency certificate of Borrower; (C) A copy of the Articles or Certificate of Incorporation of Borrower, and all amendments thereto, certified by the Secretary of State or other appropriate official of its jurisdiction of incorporation; (D) Good standing certificate for Borrower, issued by the Secretary of State or other appropriate official of Borrower's jurisdiction of incorporation and each jurisdiction where the conduct of Borrower's business activities or the ownership of its Properties necessitates qualification; (E) A closing certificate signed by the chief executive officer of Borrower dated 22 as of the date hereof, stating that (i) the representations and warranties set forth in Section 7 hereof are true and correct on and as of such date, (ii) Borrower is on such date in compliance with all the terms and provisions set forth in this Agreement and (iii) on such date no Default or Event of Default has occurred or is continuing; (F) The Security Documents duly executed, accepted and acknowledged by or on behalf of each of the signatories thereto; (G) The Other Agreements duly executed and delivered by Borrower; (H) The favorable, written opinion of counsel to Borrower as to the transactions contemplated by this Agreement and any of the other Loan Documents; (I) Title insurance reports and commitments, surveys and flood plain certificates of the Real Property; (J) Written instruction from Borrower directing the application of proceeds of the initial Loans made pursuant to this Agreement and an initial Borrowing Base Certificate from Borrower; (K) Payoff agreement and UCC-3 termination statements from Borrower's existing lender; (L) Execution and delivery by holders of the Subordinated Debt of intercreditor and subordination agreements and instruments evidencing such Subordinated Debt (all on payment terms acceptable to Lender); (M) UCC-1 financing statement, state and federal tax lien and judgment searches; (N) Payment of all fees and expenses owing hereunder; and (O) Such other documents, instruments and agreements as Lender shall reasonably request in connection with the foregoing matters. 9.2 No Default. No Default or Event of Default shall exist. 9.3 Other Loan Documents. Each of the conditions precedent set forth in the other Loan Documents shall have been satisfied. 9.4 Availability. Lender shall have determined that immediately after Lender has made the initial Loans contemplated hereby and paid all closing costs incurred in connection with the transactions contemplated hereby, Aggregate Adjusted Availability on the Closing Date shall not be less than $5,000,000. 9.5 No Litigation. No action, proceeding, investigation, regulation or legislation shall 23 have been instituted, threatened or proposed before any court, governmental agency or legislative body (i) to enjoin, restrain or prohibit, or to obtain damages in respect of, or which is related to or arises out of this Agreement or the consummation of the transactions contemplated hereby or (ii) which relates to the Collateral, assets, business operations or obligations of Borrower which (in Lender's judgment) could have a material adverse effect upon the creditworthiness, condition, operations or prospects (financial or otherwise) of Borrower. SECTION 10. EVENTS OF DEFAULT; RIGHTS AND REMEDIES ON DEFAULT 10.1 Events of Default. The occurrence of one or more of the following events shall constitute an "Event of Default": 10.1.1 Payment of Obligations. Borrower shall fail to pay any Obligations owing hereunder or under the Notes, or any other of the Obligations, on the due date thereof (whether due at stated due date, maturity, on demand, upon acceleration, or otherwise). 10.1.2 Misrepresentations. Any representation, warranty or other statement made or furnished to Lender by or on behalf of Borrower or any Subsidiary of Borrower in this Agreement, any of the other Loan Documents or any instrument, certificate or financial statement furnished in compliance with or in reference thereto, proves to have been false or misleading in any material respect when made or furnished or when reaffirmed pursuant to Section 7.2 hereof. 10.1.3 Breach of Specific Covenants. Borrower shall fail or neglect to perform, keep or observe any covenant contained in Sections 5.2, 5.3, 8.1.1, 8.1.3, 8.2 or 8.3 hereof on the date that Borrower is required to perform, keep or observe such covenant. 10.1.4 Breach of Other Covenants. Borrower shall fail or neglect to perform, keep or observe any covenant contained in this Agreement (other than a covenant which is dealt with specifically elsewhere in Section 10.1 hereof) and the breach of such other covenant is not cured to Lender's satisfaction within twenty (20) days (ten (10) days in the case of a breach of the covenants contained in Section 6.1.1 hereof) after the sooner to occur of Borrower's receipt of notice of such breach from Lender or the date on which such failure or neglect first becomes known to any officer of Borrower. 10.1.5 Default Under Security Documents/Other Agreements. Any event of default shall occur under, or Borrower shall default in the performance or observance of any term, covenant, condition or agreement contained in, any of the Security Documents or the Other Agreements and such default shall continue beyond any applicable grace period. 10.1.6 Other Defaults. There shall occur any default with respect to the Subordinated Debt or any default or event of default on the part of Borrower under any agreement, document or instrument to which Borrower is a party or by which Borrower or any of its Property is bound, creating or relating to any Indebtedness (other than the Obligations) in excess of $50,000. 24 10.1.7 Uninsured Losses. Any material loss, theft, damage or destruction of any of the Collateral not fully covered (subject to such deductibles as Lender shall have permitted) by insurance. 10.1.8 Adverse Changes. There shall occur any material adverse change in the financial condition or business prospects of Borrower. 10.1.9 Insolvency and Related Proceedings. Borrower shall cease to be Solvent or shall suffer the appointment of a receiver, trustee, custodian or similar fiduciary, or shall make an assignment for the benefit of creditors, or any petition for an order for relief shall be filed by or against Borrower under the Bankruptcy Code (if against Borrower, the continuation of such proceeding for more than 30 days), or Borrower shall make any offer of settlement, extension or composition to its unsecured creditors generally. 10.1.10 Business Disruption; Condemnation. There shall occur a cessation of a substantial part of the business of Borrower for a period which significantly affects Borrower's capacity to continue its business, on a profitable basis; or Borrower shall suffer the loss or revocation of any license or permit now held or hereafter acquired by Borrower which is necessary to the continued or lawful operation of its business and which loss or revocation will have a Material Adverse Effect; or Borrower shall be enjoined, restrained or in any way prevented by court, governmental or administrative order from conducting all or any part of its business affairs which will have a Material Adverse Effect; or any lease or agreement pursuant to which Borrower leases, uses or occupies any Property shall be canceled or terminated prior to the expiration of its stated term and such cancellation or termination will have a Material Adverse Effect; or any material part of the Collateral shall be taken through condemnation or the value of such Property shall be impaired through condemnation. 10.1.11 ERISA. A Reportable Event shall occur which Lender, in its sole discretion, shall determine in good faith constitutes grounds for the termination by the Pension Benefit Guaranty Corporation of any Plan or for the appointment by the appropriate United States district court of a trustee for any Plan, or if any Plan shall be terminated in a "distress termination" pursuant to Section 4041(c) or any such trustee shall be requested or appointed, or if Borrower is in "default" (as defined in Section 4219(c)(5) of ERISA) with respect to payments to a Multiemployer Plan resulting from Borrower's complete or partial withdrawal from such Plan. 10.1.12 Challenge to Agreement. Borrower or any Subsidiary of Borrower shall challenge or contest in any action, suit or proceeding the validity or enforceability of this Agreement or any of the other Loan Documents, the legality or enforceability of any of the Obligations or the perfection or priority of any Lien granted to Lender. 10.1.13 Criminal Action or Forfeiture. Borrower shall be criminally indicted or convicted under any law or engage in any conduct which is reasonably likely to result in a forfeiture of any material Property of Borrower. 25 10.1.14 Judgments. Any money judgment in excess of $1,000,000, writ of attachment or similar process is filed against Borrower. 10.2 Acceleration of the Obligations. Without in any way limiting the right of Lender to demand payment of any portion of the Obligations payable on demand in accordance with Section 3.2 hereof, upon or at any time after the occurrence of an Event of Default, all or any portion of the Obligations shall, at the option of Lender and without presentment, demand, protest or further notice by Lender, become at once due and payable and Borrower shall forthwith pay to Lender, the full amount of such Obligations, provided, that upon the occurrence of an Event of Default specified in subsection 10.1.9 hereof, all of the Obligations shall become automatically due and payable without declaration, notice or demand by Lender. 10.3 Other Remedies. Upon and after the occurrence of an Event of Default, Lender shall have and may exercise from time to time the following rights and remedies (to the full extent permitted by applicable law): 10.3.1 All of the rights and remedies of a secured party under the Code or under other applicable law, and all other legal and equitable rights to which Lender may be entitled, all of which rights and remedies shall be cumulative and shall be in addition to any other rights or remedies contained in this Agreement or any of the other Loan Documents, and none of which shall be exclusive. 10.3.2 The right to take immediate possession of the Collateral, and to (i) require Borrower to assemble the Collateral, at Borrower's expense, and make it available to Lender at a place designated by Lender which is reasonably convenient to both parties, and (ii) enter any premises where any of the Collateral shall be located and to keep and store the Collateral on said premises until sold (and if said premises be the Property of Borrower, Borrower agrees not to charge Lender for storage thereof). 10.3.3 The right to sell or otherwise dispose of all or any Collateral in its then condition, or after any further manufacturing or processing thereof, at public or private sale or sales, with such notice as may be required by law, in lots or in bulk, for cash or on credit, all as Lender, in its sole discretion, may deem advisable. Borrower agrees that 7 days written notice to Borrower of any public or private sale or other disposition of Collateral shall be reasonable notice thereof, and such sale shall be at such locations as Lender may designate in said notice. Lender shall have the right to conduct such sales on Borrower's premises, without charge therefor, and such sales may be adjourned from time to time in accordance with applicable law. Lender shall have the right to sell, lease or otherwise dispose of the Collateral, or any part thereof, for cash, credit or any combination thereof, and Lender may purchase all or any part of the Collateral at public or, if permitted by law, private sale and, in lieu of actual payment of such purchase price, may set off the amount of such price against the Obligations. The proceeds realized from the sale of any Collateral may be applied, after allowing 2 Business Days for collection, first to the costs, expenses and attorneys' fees incurred by Lender in collecting the Obligations, in enforcing the rights of Lender under the Loan Documents 26 and in collecting, retaking, completing, protecting, removing, storing, advertising for sale, selling and delivering any Collateral; second to the interest due upon any of the Obligations; and third, to the principal of the Obligations. If any deficiency shall arise, Borrower shall remain liable to Lender therefor. 10.3.4 Lender is hereby granted a license or other right to use, without charge, Borrower's labels, patents, copyrights, rights of use of any name, trade secrets, tradenames, trademarks and advertising matter, or any Property of a similar nature, as it pertains to the Collateral, in advertising for sale and selling any Collateral and Borrower's rights under all licenses and all franchise agreements shall inure to Lender's benefit. 10.3.5 Lender may, at its option, reduce or modify the Borrowing Base, or any portion thereof or the advance rates or to take additional reserves in the Borrowing Base. 10.4 Remedies Cumulative; No Waiver. All covenants, conditions, provisions, warranties, guaranties, indemnities, and other undertakings of Borrower contained in this Agreement and the other Loan Documents, or in any document referred to herein or contained in any agreement supplementary hereto or in any schedule given to Lender or contained in any other agreement between Lender and Borrower, heretofore, concurrently, or hereafter entered into, shall be deemed cumulative to and not in derogation or substitution of any of the terms, covenants, conditions, or agreements of Borrower herein contained. The failure or delay of Lender to require strict performance by Borrower of any provision of this Agreement or to exercise or enforce any rights, Liens, powers, or remedies hereunder or under any of the aforesaid agreements or other documents or security or Collateral shall not operate as a waiver of such performance, Liens, rights, powers and remedies, but all such requirements, Liens, rights, powers, and remedies shall continue in full force and effect until all Loans and all other Obligations owing or to become owing from Borrower to Lender shall have been fully satisfied. None of the undertakings, agreements, warranties, covenants and representations of Borrower contained in this Agreement or any of the other Loan Documents and no Event of Default by Borrower under this Agreement or any other Loan Documents shall be deemed to have been suspended or waived by Lender, unless such suspension or waiver is by an instrument in writing specifying such suspension or waiver and is signed by a duly authorized representative of Lender and directed to Borrower. SECTION 11. MISCELLANEOUS 11.1 Power of Attorney. Borrower hereby irrevocably designates, makes, constitutes and appoints Lender (and all Persons designated by Lender) as Borrower's true and lawful attorney (and agent-in-fact) and Lender, or Lender's agent, may, without notice to Borrower and in either Borrower's or Lender's name, but at the cost and expense of Borrower: 11.1.1 At such time or times as Lender or said agent, in its sole discretion, may determine if an Event of Default is outstanding, endorse Borrower's name on any checks, notes, acceptances, drafts, money orders or any other evidence of payment or proceeds of the Collateral which come into the possession of Lender or under Lender's control. 27 11.1.2 At such time or times as Lender or its agent in its sole discretion may determine after Lender has accelerated the Obligations following the occurrence of an Event of Default: (i) demand payment of the Accounts from the Account Debtors, enforce payment of the Accounts by legal proceedings or otherwise, and generally exercise all of Borrower's rights and remedies with respect to the collection of the Accounts; (ii) settle, adjust, compromise, discharge or release any of the Accounts or other Collateral or any legal proceedings brought to collect any of the Accounts or other Collateral; (iii) sell or assign any of the Accounts and other Collateral upon such terms, for such amounts and at such time or times as Lender deems advisable; (iv) take control, in any manner, of any item of payment or proceeds relating to any Collateral; (v) prepare, file and sign Borrower's name to a proof of claim in bankruptcy or similar document against any Account Debtor or to any notice of lien, assignment or satisfaction of lien or similar document in connection with any of the Collateral; (vi) receive, open and dispose of all mail addressed to Borrower and to notify postal authorities to change the address for delivery thereof to such address as Lender may designate; (vii) endorse the name of Borrower upon any of the items of payment or proceeds relating to any Collateral and deposit the same to the account of Lender on account of the Obligations; (viii) endorse the name of Borrower upon any chattel paper, document, instrument, invoice, freight bill, bill of lading or similar document or agreement relating to the Accounts, Inventory and any other Collateral; (ix) use Borrower's stationery and sign the name of Borrower to verifications of the Accounts and notices thereof to Account Debtors; (x) use the information recorded on or contained in any data processing equipment and computer hardware and software relating to the Accounts, Inventory, Equipment and any other Collateral; (xi) make and adjust claims under policies of insurance; and (xii) do all other acts and things necessary, in Lender's determination, to fulfill Borrower's obligations under this Agreement. 11.2 Indemnity. Borrower hereby agrees to indemnify Lender and hold Lender harmless from and against any liability, loss, damage, suit, action or proceeding ever suffered or incurred by Lender (including attorneys' fees and legal expenses) as the result of Borrower's failure to observe, perform or discharge Borrower's duties hereunder. In addition, Borrower shall defend Lender against and save it harmless from all claims of any Person with respect to the Collateral. Without limiting the generality of the foregoing, these indemnities shall extend to any claims asserted against Lender by any Person under any Environmental Laws or similar laws by reason of Borrower's or any other Person's failure to comply with laws applicable to solid or hazardous waste materials or other toxic substances. Notwithstanding any contrary provision in this Agreement, the obligation of Borrower under this Section 11.2 shall survive the payment in full of the Obligations and the termination of this Agreement. 11.3 Modification of Agreement; Sale of Interest. This Agreement may not be modified, altered or amended, except by an agreement in writing signed by Borrower and Lender. Borrower may not sell, assign or transfer any interest in this Agreement, any of the other Loan Documents, or any of the Obligations, or any portion thereof, including, without limitation, Borrower's rights, title, interests, remedies, powers, and duties hereunder or thereunder. Borrower hereby consents to Lender's participation, sale, assignment, transfer or other disposition, at any time or times hereafter, of this Agreement and any of the other Loan Documents, or of any portion hereof or thereof, 28 including, without limitation, Lender's rights, title, interests, remedies, powers, and duties hereunder or thereunder. In the case of an assignment, the assignee shall have, to the extent of such assignment, the same rights, benefits and obligations as it would if it were "Lender" hereunder and Lender shall be relieved of all obligations hereunder upon any such assignments. Borrower agrees that it will use its best efforts to assist and cooperate with Lender in any manner reasonably requested by Lender to effect the sale of participations in or assignments of any of the Loan Documents or any portion thereof or interest therein, including, without limitation, assisting in the preparation of appropriate disclosure documents. Borrower further agrees that Lender may disclose credit information regarding Borrower to any potential participant or assignee. 11.4 Severability. Wherever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. 11.5 Successors and Assigns. This Agreement, the Other Agreements and the Security Documents shall be binding upon and inure to the benefit of the successors and assigns of Borrower and Lender. 11.6 Cumulative Effect; Conflict of Terms. The provisions of the Other Agreements and the Security Documents are hereby made cumulative with the provisions of this Agreement. Except as otherwise provided in Section 3.2 hereof and except as otherwise provided in any of the other Loan Documents by specific reference to the applicable provision of this Agreement, if any provision contained in this Agreement is in direct conflict with, or inconsistent with, any provision in any of the other Loan Documents, the provision contained in this Agreement shall govern and control. 11.7 Execution in Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which counterparts taken together shall constitute but one and the same instrument. 11.8 Notice. Except as otherwise provided herein, all notices, requests and demands to or upon a party hereto, to be effective, shall be in writing and shall be sent by certified or registered mail, return receipt requested, by personal delivery against receipt, by overnight courier or by facsimile and, unless otherwise expressly provided herein, shall be deemed to have been validly served, given or delivered immediately when delivered against receipt, one Business Day after deposit in the mail, postage prepaid, or with an overnight courier or, in the case of facsimile notice, when sent, addressed as follows: If to Lender: Fleet Capital Corporation 200 Glastonbury Boulevard Glastonbury, CT 06033 Attention: Howard Handman, Vice President Facsimile No.: 860-657-7759 29 With a copy to: Blank Rome Comisky & McCauley LLP One Logan Square Philadelphia, PA 19103 Attention: Harvey I. Forman, Esq. Facsimile No.: 215-569-5522 If to Borrower: The Electronics Boutique, Inc. 931 South Matlack St. West Chester, PA 19382 Attention: John Panichello, Chief Financial Officer Facsimile No.: 610-430-6574 With a copy to: Siana, Shields & Vaughan 961 Pottstown Pike Chester Springs, Pa 19425 Attention: Stephen Siana, Esquire Facsimile No.: 610-321-5531 or to such other address as each party may designate for itself by notice given in accordance with this Section 11.8; provided, however, that any notice, request or demand to or upon Lender pursuant to subsections 2.1.1., 3.1.1 or 4.2.2 hereof shall not be effective until received by Lender. 11.9 Lender's Consent. Whenever Lender's consent is required to be obtained under this Agreement, any of the Other Agreements or any of the Security Documents as a condition to any action, inaction, condition or event, Lender shall be authorized to give or withhold such consent in its sole and absolute discretion and to condition its consent upon the giving of additional collateral security for the Obligations, the payment of money or any other matter. 11.10 Credit Inquiries. Borrower hereby authorizes and permits Lender to respond to usual and customary credit inquiries from third parties concerning Borrower; provided, however, that Lender shall have no duty or obligation to so respond or continue to respond. 11.11 Time of Essence. Time is of the essence of this Agreement, the Other Agreements and the Security Documents. 11.12 Entire Agreement. This Agreement and the other Loan Documents, together with all other instruments, agreements and certificates executed by the parties in connection therewith or with reference thereto, embody the entire understanding and agreement between the parties hereto and thereto with respect to the subject matter hereof and thereof and supersede all prior agreements, understandings and inducements, whether express or implied, oral or written. 11.13 Interpretation. No provision of this Agreement or any of the other Loan Documents shall be construed against or interpreted to the disadvantage of any party hereto by any court or other governmental or judicial authority by reason of such party having or being deemed to have structured or dictated such provision. 30 11.14 GOVERNING LAW; CONSENT TO FORUM. THIS AGREEMENT HAS BEEN NEGOTIATED, EXECUTED AND DELIVERED AT AND SHALL BE DEEMED TO HAVE BEEN MADE IN PHILADELPHIA, PENNSYLVANIA. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE COMMONWEALTH OF PENNSYLVANIA; PROVIDED, HOWEVER, THAT IF ANY OF THE COLLATERAL SHALL BE LOCATED IN ANY JURISDICTION OTHER THAN PENNSYLVANIA, THE LAWS OF SUCH JURISDICTION SHALL GOVERN THE METHOD, MANNER AND PROCEDURE FOR FORECLOSURE OF LENDER'S LIEN UPON SUCH COLLATERAL AND THE ENFORCEMENT OF LENDER'S OTHER REMEDIES IN RESPECT OF SUCH COLLATERAL TO THE EXTENT THAT THE LAWS OF SUCH JURISDICTION ARE DIFFERENT FROM OR INCONSISTENT WITH THE LAWS OF PENNSYLVANIA. AS PART OF THE CONSIDERATION FOR NEW VALUE RECEIVED, AND REGARDLESS OF ANY PRESENT OR FUTURE DOMICILE OR PRINCIPAL PLACE OF BUSINESS OF ANY BORROWER OR LENDER, EACH BORROWER HEREBY CONSENTS AND AGREES THAT THE COMMON PLEAS COURT OF PHILADELPHIA, PENNSYLVANIA OR, AT LENDER'S OPTION, THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA, SHALL HAVE EXCLUSIVE JURISDICTION TO HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN BORROWER AND LENDER PERTAINING TO THIS AGREEMENT OR TO ANY MATTER ARISING OUT OF OR RELATED TO THIS AGREEMENT. BORROWER EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN ANY SUCH COURT, AND BORROWER HEREBY WAIVES ANY OBJECTION WHICH BORROWER MAY HAVE BASED UPON LACK OF PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM NON CONVENIENS AND HEREBY CONSENTS TO THE GRANTING OF SUCH LEGAL OR EQUITABLE RELIEF AS IS DEEMED APPROPRIATE BY SUCH COURT. BORROWER HEREBY WAIVES PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND OTHER PROCESS ISSUED IN ANY SUCH ACTION OR SUIT AND AGREES THAT SERVICE OF SUCH SUMMONS, COMPLAINT AND OTHER PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL ADDRESSED TO BORROWER AT THE ADDRESS SET FORTH IN THIS AGREEMENT AND THAT SERVICE SO MADE SHALL BE DEEMED COMPLETED UPON THE EARLIER OF BORROWER'S ACTUAL RECEIPT THEREOF OR 3 DAYS AFTER DEPOSIT IN THE U.S. MAILS, PROPER POSTAGE PREPAID. NOTHING IN THIS AGREEMENT SHALL BE DEEMED OR OPERATE TO AFFECT THE RIGHT OF LENDER TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW, OR TO PRECLUDE THE ENFORCEMENT BY LENDER OF ANY JUDGMENT OR ORDER OBTAINED IN SUCH FORUM OR THE TAKING OF ANY ACTION UNDER THIS AGREEMENT TO ENFORCE SAME IN ANY OTHER APPROPRIATE FORUM OR JURISDICTION. 31 11.15 WAIVERS BY BORROWER. BORROWER WAIVES (i) THE RIGHT TO TRIAL BY JURY (WHICH LENDER HEREBY ALSO WAIVES) IN ANY ACTION, SUIT, PROCEEDING OR COUNTERCLAIM OF ANY KIND ARISING OUT OF OR RELATED TO ANY OF THE LOAN DOCUMENTS, THE OBLIGATIONS OR THE COLLATERAL: (ii) PRESENTMENT, DEMAND AND PROTEST AND NOTICE OF PRESENTMENT, PROTEST, DEFAULT, NON PAYMENT, MATURITY, RELEASE, COMPROMISE, SETTLEMENT, EXTENSION OR RENEWAL OF ANY OR ALL COMMERCIAL PAPER, ACCOUNTS, CONTRACT RIGHTS, DOCUMENTS, INSTRUMENTS CHATTEL PAPER AND GUARANTIES AT ANY TIME HELD BY LENDER ON WHICH BORROWER MAY IN ANY WAY BE LIABLE AND HEREBY RATIFIES AND CONFIRMS WHATEVER LENDER MAY DO IN THIS REGARD; (iii) EXCEPT AS OTHERWISE EXPRESSLY PROVIDED BY THIS AGREEMENT, NOTICE PRIOR TO TAKING POSSESSION OR CONTROL OF THE COLLATERAL OR ANY BOND OR SECURITY WHICH MIGHT BE REQUIRED BY ANY COURT PRIOR TO ALLOWING LENDER TO EXERCISE ANY OF LENDER'S REMEDIES; (iv) THE BENEFIT OF ALL VALUATION, APPRAISEMENT AND EXEMPTION LAWS; AND (v) NOTICE OF ACCEPTANCE HEREOF. BORROWER ACKNOWLEDGES THAT THE FOREGOING WAIVERS ARE A MATERIAL INDUCEMENT TO LENDER'S ENTERING INTO THIS AGREEMENT AND THAT LENDER IS RELYING UPON THE FOREGOING WAIVERS IN ITS FUTURE DEALINGS WITH BORROWER. BORROWER WARRANTS AND REPRESENTS THAT IT HAS REVIEWED THE FOREGOING WAIVERS WITH ITS LEGAL COUNSEL AND HAS KNOWINGLY AND VOLUNTARILY WAIVED ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. IN WITNESS WHEREOF, this Agreement has been duly executed in Philadelphia, Pennsylvania on the day and year specified at the beginning of this Agreement. ATTEST: THE ELECTRONICS BOUTIQUE, INC. By:_________________________ By:_________________________ Secretary Title:________________________ Accepted in Philadelphia, PA FLEET CAPITAL CORPORATION By:___________________________ Title:_________________________ 32 APPENDIX A GENERAL DEFINITIONS When used in the Loan and Security Agreement dated as of _____________, 1998, by and between Fleet Capital Corporation and The Electronics Boutique, Inc. the following terms shall have the following meanings (terms defined in the singular to have the same meaning when used in the plural and vice versa): Account Debtor - any Person who is or may become obligated under or on account of an Account. Accounts - collectively, all accounts and accounts receivable, contract rights arising from Borrower's agreements with credit card issuers, whether now owned or hereafter created or acquired by Borrower or in which Borrower now has or hereafter acquired any interest. Adjusted LIBOR Rate - For any LIBOR Interest Period, as applied to a LIBOR Rate Loan, the rate per annum (rounded upwards, if necessary to the next 1/16 of 1%) determined pursuant to the following formula: Adjusted Libor Rate = Libor Rate -------------------------- (1.00 - Reserve Percentage) For purposes hereof, "Libor Rate" shall mean the arithmetic average of the rates of interest per annum (rounded upwards, if necessary to the next 1/16 of 1%) at which Bank is offered deposits of United States Dollars in the interbank eurodollar loan market on or about 2:00 P.M. New York time two (2) Business Days prior to the commencement of such LIBOR Interest Period on amounts substantially equal to the LIBOR Rate Loan as to which Borrower may elect the Adjusted LIBOR Rate to be applicable with a maturity of comparable duration to the LIBOR Interest Period selected by Borrower for such LIBOR Rate Loan. Adjusted Net Earnings From Operations - with respect to any fiscal period, means the net earnings (or loss) after provision for income taxes for such fiscal period of Borrower, as reflected on the financial statement of Borrower supplied to Lender pursuant to subsection 8.1.3 of the Agreement, but excluding: (i) any gain or loss arising from the sale of capital assets; (ii) any gain arising from any write-up of assets; (iii) earnings of any Subsidiary of Borrower accrued prior to the date it became a Subsidiary; (iv) earnings of any corporation, substantially all the assets of which have been acquired in any manner by Borrower, realized by such corporation prior to the date of such acquisition; (v) net earnings of any business entity (other than a Subsidiary of Borrower) in which Borrower has an ownership interest unless such net earnings shall have actually been received by Borrower in the form of cash distributions; (vi) any portion of the net earnings of any Subsidiary of Borrower which for any reason is unavailable for payment of dividends to Borrower; (vii) the earnings of any Person to which any assets of Borrower shall have been sold, transferred of disposed of, or into which Borrower shall have merged, or been a party to any consolidation or other form of reorganization, prior to the date of such transaction; (viii) any gain arising from the acquisition of any Securities of Borrower; and (ix) any gain arising from extraordinary or non-recurring items. Affiliate - a Person (other than a Subsidiary): (i) which directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, a Person; (ii) which beneficially owns or holds 5% or more of any class of the Voting Stock of a Person; or (iii) 5% or more of the Voting Stock (or in the case of a Person which is not a corporation, 5% or more of the equity interest) of which is beneficially owned or held by a Person or a Subsidiary of a Person. Agreement - the Loan and Security Agreement referred to in the first sentence of this Appendix A, all Exhibits thereto and this Appendix A as each of the same may be amended, modified, renewed, extended, replaced, restated or substituted from time to time. Aggregate Adjusted Availability - at the time of determination, an amount equal to the then applicable Borrowing Base less the sum of (i) the amount of Revolving Credit Loans as of such time of determination (including Loans requested to be made on such date) plus (ii) all sums then due and owing to trade creditors which remain outstanding beyond normal trade terms or other normal business practice of Borrower, plus (iii) for the purposes of such determination on the Closing Date, closing payments and expenses. Authorized Officer - any officer of Borrower authorized by resolution of the Board of Directors of Borrower to execute documents, instruments, certificates and agreements on behalf of Borrower in favor of Lender and who is identified on the incumbency certificate referenced in Section 9.1(B) herein. 2 Availability - the amount of money which Borrower is entitled to borrow from time to time as Revolving Credit Loans, such amount being the difference derived when the sum of the principal amount of Revolving Credit Loans then outstanding (including any amounts which Lender may have paid for the account of Borrower pursuant to any of the Loan Documents and which have not been reimbursed by Borrower) is subtracted from the lesser of (i) the Maximum Revolving Credit Amount (minus the outstanding balance of the Supplemental Loan) or (ii) the Borrowing Base. If the amount outstanding is equal to or greater than the Lesser of (i) Maximum Revolving Credit Amount or (ii) the Borrowing Base, Availability is 0. Bank - Fleet National Bank, or such other bank as Lender may hereafter designate. Base Rate - the rate of interest announced or quoted by Bank from time to time as its base rate for commercial loans, whether or not such rate is the lowest rate charged by Bank to its most preferred borrowers; and, if such base rate for commercial loans is discontinued by Bank as a standard, a comparable reference rate designated by Bank as a substitute therefor shall be the Base Rate. Borrowing Base - as at any date of determination thereof, an amount equal to: (a) 60% of the value of Eligible Inventory at such date calculated on the basis of the lower of cost or market on a first-in, first-out basis; MINUS (b) such reserves as Lender may have established from time to time. Borrowing Base Certificate - the certificate signed by the chief executive officer, chief financial officer, controller or accounting manager of Borrower showing the status of Borrower's Inventory, outstanding Revolving Credit Loans and other information in the form of Exhibit A-1 to the Agreement. Business Day - any day excluding Saturday, Sunday and any day which is a legal holiday under the laws of the Commonwealth of Pennsylvania or is a day on which banking institutions located in such state are closed. Capital Expenditures - cash expenditures made for the acquisition of any fixed assets or improvements, replacements, substitutions or additions thereto which have a useful life of more than one year, including the total principal portion of Capitalized Lease Obligations excluding expenditures for the replacement of any assets leased under a Capitalized Lease Obligation in connection with a casualty or loss thereof. Cash Flow - for any period, means Borrower's (i) Adjusted Net Earnings from 3 Operations for such period plus (ii) depreciation and amortization expenses for such period plus (iii) deferred taxes for such period, plus (iv) expenses incurred by Borrower in conjunction with its anticipated initial public offering, less (v) non-financed Capital Expenditures, less (vi) principal payments on account of current maturities of long-term Indebtedness and less (vii) principal payments on Capitalized Lease Obligations, less (viii) cash Distributions (excluding the first $10,000,000 in 1998), less (ix) an amount equal to the difference (if a positive number) between (a) all loans and advances to Affiliates during such period and (b) all repayments of loans and advances received from Affiliates in such period, all as determined in accordance with GAAP. There shall be excluded from the foregoing calculations all proceeds received from and disbursements (other than under clause (iv) above) made of the proceeds of Borrower's anticipated initial public offering. Capitalized Lease Obligation - any Indebtedness represented by obligations under a lease that is required to be capitalized for financial reporting purposes in accordance with GAAP. Closing Date - the date on which all of the conditions precedent in Section 9 of the Agreement are satisfied and the initial Loan is made or issued under the Agreement. Code - the Uniform Commercial Code as adopted and in force in the Commonwealth of Pennsylvania and as from time to time in effect. Collateral - all of the Property and interests in Property described in Section 5 of the Agreement, and all other Property and interests in Property that now or hereafter secure the payment and performance of any of the Obligations. Credit Facility - the Revolving Credit Facility and Supplemental Loan. Default - an event or condition, the occurrence of which would, with the lapse of time or the giving of notice, or both, become an Event of Default. Default Rate - as defined in subsection 2.1.2 of the Agreement. Distribution - in respect of any corporation means and includes: (i) the payment of any dividends or other distributions on capital stock of the corporation (except distributions in such stock) and (ii) the redemption or acquisition of Securities unless made contemporaneously from the net proceeds of the sale of Securities. Eligible Inventory - all Inventory of Borrower, unless it constitutes one of the following (the determination thereof to be in Lender's reasonable discretion): (i) it is not finished goods Inventory; or (ii) it is slow-moving, obsolete, defective, or not deemed saleable in accordance with Borrower's standard practices; or 4 (iii) it does not meet all material standards imposed by any governmental agency or authority for Inventory of its type; or (iv) it does not conform, in all material respects, to the warranties and representations applicable thereto set forth in the Agreement; or (v) it is not at all times subject to Lender's duly perfected, first priority security interest and no other Lien except a Permitted Lien; or (vi) it is not situated at a location in the United States or Puerto Rico listed on Exhibit 6.1.1 (as it may be amended, supplemented or replaced from time to time in writing) and as to which non-retail locations Lender has received a landlord's waiver or warehouseman's waiver acceptable to Lender; or (vii) it is in transit (except in transit from any of Borrower's warehouses to its retail stores or between its retail stores); or (viii) it is sports collectible Inventory. Environmental Laws - all federal, state and local laws, rules, regulations, ordinances, programs, permits, guidances, orders and consent decrees relating to environmental matters. Equipment - collectively, all machinery, apparatus, equipment, fittings, furniture, fixtures, motor vehicles and other tangible personal Property (other than Inventory) of every kind and description used in Borrower's operations or owned by Borrower or in which Borrower has an interest, whether now owned or hereafter acquired by Borrower and wherever located, and all parts, accessories and special tools and all increases and accessions thereto and substitutions and replacements therefor. ERISA - the Employee Retirement Income Security Act of 1974, as amended, and all rules and regulations from time to time promulgated thereunder. Event of Default - as defined in Section 10.1 of the Agreement. Floating Rate - the Base Rate. Floating Rate Loans - collectively, all Loans bearing interest at the Floating Rate. GAAP - generally accepted accounting principles in the United States of America in effect from time to time. General Intangibles - collectively, all personal property of Borrower (including without limitation choses in action, patents, trademarks and copyrights and applications therefor, tax and other types of refunds, deposits, licenses, contract rights, and computer 5 disks, data and software) other than goods, Accounts, Chattel Paper, Documents, Instruments, Investment Property and money, whether now owned or hereafter created or acquired by Borrower. Indebtedness - as applied to a Person means, without duplication (i) all items, which in accordance with GAAP would be included in determining total liabilities as shown on the liability side of a balance sheet of such Person as at the date as of which Indebtedness is to be determined, including, without limitation, Capitalized Lease Obligations, (ii) all obligations of other Persons which such Person has guaranteed, (iii) all reimbursement obligations in connection with letters of credit or letter of credit guaranties issued for the account of such Person, and (iv) in the case of Borrower (without duplication), the Obligations. Inventory - collectively, all Inventory of Borrower, whether now owned or hereafter acquired including, without limitation, all goods intended for sale or lease by Borrower, or for display or demonstration; all work in process; all raw materials and other materials and supplies of every nature and description used or which might be used in connection with the manufacture, printing, packing, shipping, advertising, selling, leasing or furnishing of such goods or otherwise used or consumed in Borrower's business; and all Documents evidencing and General Intangibles relating to any of the foregoing, whether now owned or hereafter acquired by Borrower. Investment Property - has the meaning ascribed thereto in the Code. LIBOR Interest Period - a period of one, two, three or six months duration during which the LIBOR Based Rate is applicable. LIBOR Based Rate - a rate of interest equal to the Adjusted LIBOR Rate plus 250 basis points. LIBOR Rate Loans - collectively, all Loans bearing interest at the LIBOR Based Rate. Lien - any interest in Property securing an obligation owed to, or a claim by, a Person other than the owner of the Property, whether such interest is based on common law, statute or contract and including, without limitation, the security interest, security title or lien arising from a security agreement, mortgage, deed of trust, deed to secure debt, encumbrance, pledge, conditional sale or trust receipt, or a lease, consignment or bailment for security 6 purposes. The term "Lien" shall also include reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictions, leases and other title exceptions and encumbrances affecting Property. For the purpose of the Agreement, Borrower shall be deemed to be the owner of any Property which it has acquired or holds subject to a conditional sale agreement or other arrangement pursuant to which title to the Property has been retained by or vested in some other Person for security purposes. Loan Account - the loan account established on the books of Lender pursuant to Section 3.6 of the Agreement. Loan Documents - the Agreement, the Other Agreements and the Security Documents as each of the same may be amended, modified, renewed, extended, replaced, restated or substituted from time to time. Loans - all loans and advances of any kind made by Lender pursuant to the Agreement, including without limitation the Revolving Credit Loans and the Supplemental Loan. London Business Day - any Business Day on which banks in London, England are open for business. Material Adverse Effect - a material and adverse effect on the (a) financial condition, business, prospects or Property of Borrower, (b) the ability of Borrower to pay or perform its obligations and undertakings hereunder, or (c) the validity or enforceability of the Obligations or Lender's Liens in the Collateral or the priority thereof. Maturity Date - the last day of the Original Term or, if any Renewal Term is in effect, then the last day of such Renewal Term. Maximum Revolving Credit Amount - $50,000,000. Money Borrowed - means (i) Indebtedness arising from the lending of money by any Person to Borrower; (ii) Indebtedness, whether or not in any such case arising from the lending by any Person of money to Borrower, (A) which is represented by notes payable or drafts accepted that evidence extensions of credit, (B) which constitutes obligations evidenced by bonds, debentures, notes or similar instruments, or (C) upon which interest charges are customarily paid (other than accounts payable) or that was issued or assumed as full or partial payment for Property; (iii) Indebtedness that constitutes a Capitalized Lease Obligation; (iv) reimbursement obligations with respect to letters of credit or guaranties of letters of credit and (v) Indebtedness of Borrower under any guaranty of obligations that would constitute Indebtedness for Money Borrowed under clauses (i) through (iii) hereof, if owed directly by Borrower. Mortgage - that certain mortgage as described in Section 5.3 of the Agreement, as the 7 same may be amended, modified, renewed, extended, replaced, restated or substituted from time to time, to be executed by Borrower in favor of Lender, to be in form and substance acceptable to Lender, and by which Borrower shall grant and convey to Lender, as security for the Supplemental Loan, a Lien upon the Real Property. Multiemployer Plan - has the meaning set forth in Section 4001(a)(3) of ERISA. Net Worth - at any date means a sum equal to: (i) the net book value (after deducting related depreciation, obsolescence, amortization, valuation, and other proper reserves) at which the assets of a Person would be shown on a balance sheet at such date in accordance with GAAP, minus (ii) the amount at which such Person's liabilities (other than capital stock and surplus and Subordinated Debt) and including as liabilities all reserves for contingencies and other potential liabilities, all as would be shown on such balance sheet in accordance with GAAP. Notes - collectively, the Revolving Credit Note and the Supplemental Loan Note. Obligations - all Loans and all other advances, debts, liabilities, obligations, covenants and duties, together with all interest, fees and other charges thereon, owing, arising, due or payable from Borrower to Lender of any kind or nature, present or future, whether or not evidenced by any note, guaranty or other instrument, whether arising under the Agreement or any of the other Loan Documents or otherwise whether direct or indirect (including those acquired by assignment), absolute or contingent, primary or secondary, due or to become due, now existing or hereafter arising and however acquired. The term includes without limitation, all interest, charges, fees, expenses, attorneys' fees, and any other sums chargeable to Borrower, under any of the Loan Documents. Original Term - as defined in Section 4.1 of the Agreement. Other Agreements - any and all agreements and instruments (other than the Agreement and the Security Documents), heretofore, now or hereafter executed by Borrower, any guarantor, or any other third party and delivered to Lender in respect of the transactions contemplated by the Agreement, as each of the same may be amended, modified, renewed, extended, replaced, restated or substituted from time to time. Overadvance - the amount, if any, by which the outstanding principal amount of Revolving Credit Loans exceeds the Borrowing Base. Participating Lender - each Person who shall be granted the right by Lender to participate in any of the Loans described in the Agreement and who shall have entered into a participation agreement in form and substance satisfactory to Lender. 8 Permitted Liens - any Lien of a kind specified in subsection 8.2.5 of the Agreement. Permitted Purchase Money Indebtedness - Purchase Money Indebtedness of Borrower incurred after the date hereof which is secured by a Purchase Money Lien. Person - an individual, partnership, corporation, limited liability company, joint stock company, land trust, business trust, or unincorporated organization, or a government or agency or political subdivision thereof. Plan - an employee benefit plan now or hereafter maintained for employees of Borrower that is covered by Title IV of ERISA. Projections - Borrower's forecasted Consolidated and Consolidating (if applicable) (a) balance sheets, (b) profit and loss statements, and (c) cash flow statements, all prepared on a consistent basis with Borrower's historical financial statements, together with appropriate supporting details and a statement of underlying assumptions. Property - any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible. Purchase Money Indebtedness - means and includes (i) Indebtedness (other than the Obligations) for the payment of all or any part of the purchase price of any fixed assets, (ii) any Indebtedness (other than the Obligations) incurred at the time of or within 10 days prior to or after the acquisition of any fixed assets for the purchase price thereof, and (iii) any renewals, extensions or refinancings thereof, but not any increases in the principal amounts thereof outstanding at the time. Purchase Money Lien - a Lien upon fixed assets which secures Purchase Money Indebtedness, but only if such Lien shall at all times be confined solely to the fixed assets, the purchase price of which was financed through the incurrence of the Purchase Money Indebtedness secured by such Lien. Real Property - the real estate (with buildings, improvements, rents and profits) described on Exhibit A-2 to this Agreement. Regulation D - Regulation D of the Board of Governors of the Federal Reserve System, comprising Part 204 of Title 12, Code of Federal Regulations, as amended, and any successor thereto. Rentals - as defined in subsection 8.2.13 of the Agreement. Renewal Terms - as defined in Section 4.1 of the Agreement. 9 Reportable Event - any of the events set forth in Section 4043(b) of ERISA. Reserve - for any day, that reserve (expressed as a decimal) which is in effect (whether or not actually incurred) with respect to Bank on such day, as prescribed by the Board of Governors of the Federal Reserve System (or any successor or any other banking authority to which Bank is subject including any board or governmental or administrative agency of the United States or any other jurisdiction to which Bank is subject), for determining the maximum reserve requirement (including without limitation any basic, supplemental, marginal or emergency reserves) for Eurocurrency liabilities as defined in Regulation D. Reserve Percentage - for Bank on any day, that percentage (expressed as a decimal) which is in effect on such day, prescribed by the Board of Governors of the Federal Reserve System (or any successor or any other banking authority to which Lender is subject, including any board or governmental or administrative agency of the United States or any other jurisdiction to which Bank is subject) for determining the maximum reserve requirement (including without limitation any basic, supplemental, marginal or emergency reserves) for (i) deposits of United States Dollars or (ii) Eurocurrency liabilities as defined in Regulation D, in each case used to fund a LIBOR Rate Loan subject to an Adjusted LIBOR Rate. The Adjusted LIBOR Rate shall be adjusted automatically on and as of the effective day of any change in the Reserve Percentage. Restricted Investment - any investment made in cash or by delivery of Property to any Person, whether by acquisition of stock, Indebtedness or other obligation or Security, or by loan, advance or capital contribution, or otherwise, or in any Property except the following: (i) investments in one or more Subsidiaries of Borrower to the extent existing on the Closing Date; (ii) Property to be used in the ordinary course of business; (iii) Current assets arising from the sale of goods and services in the ordinary course of business of Borrower; (iv) investments in direct obligations of the United States of America, or any agency thereof or obligations guaranteed by the United States of America, provided that such obligations mature within one year from the date of acquisition thereof; (v) investments in certificates of deposit maturing within one year from the date of acquisition issued by a bank or trust company organized under the laws of the United States or any state thereof having capital surplus and undivided profits aggregating at least $100,000,000; 10 (vi) investments in commercial paper given the highest rating by a national credit rating agency and maturing not more than 270 days from the date of creation thereof; and (vii) mutual funds that invest in any of the foregoing. Revolving Credit Loan - a Loan made by Lender as provided in Section 1.1 of the Agreement. Revolving Credit Facility - the credit facility established by for the making of Revolving Credit Loans pursuant to Section 1.1.1 hereof. Revolving Credit Note - the secured promissory note to be executed by Borrower on the Closing Date in favor of Lender to evidence Borrower's obligation to repay the Revolving Credit Loans, which shall be in the form of Exhibit A-3 to the Agreement. Schedule of Accounts - as defined in subsection 6.4.1 of the Agreement. Security - shall have the same meaning as in Section 2(1) of the Securities Act of 1933, as amended. Security Documents - the Mortgage, and all other instruments and agreements now or at any time hereafter securing the whole or any part of the Obligations, as each of the same may be amended, modified, renewed, extended, replaced, restated or substituted from time to time. Solvent - as to any Person, such Person (i) owns Property whose fair saleable value is greater than the amount required to pay all of such Person's Indebtedness (including contingent debts), (ii) is able to pay all of its Indebtedness as such Indebtedness matures and (iii) has capital sufficient to carry on its business and transactions and all business and transactions in which it is about to engage. Subordinated Debt - Unsecured indebtedness of Borrower that is subordinated to the Obligations in a manner, under terms and subject to a written agreement satisfactory to Lender. Subsidiary - any corporation of which a Person owns, directly or indirectly through one or more intermediaries, more than 50% of the Voting Stock at the time of determination. Supplemental Loan - the Loan described in subsection 1.2 of the Agreement. Supplemental Loan Note - the secured promissory note to be executed by Borrower in favor of Lender as a pre-condition to Lender's making the Supplemental Loan available to Borrower to evidence Borrower's obligation to pay the Supplemental Loan, which shall 11 be in the form of Exhibit A-4 to the Agreement. Total Credit Facility - $50,000,000. Voting Stock - Securities of any class or classes of a corporation the holders of which are ordinarily, in the absence of contingencies, entitled to elect a majority of the corporate directors (or Persons performing similar functions). Other Terms. All other terms contained in the Agreement shall have, when the context so indicates, the meanings provided for by the Code to the extent the same are used or defined therein. Certain Matters of Construction. The terms "herein", "hereof" and "hereunder" and other words of similar import refer to the Agreement as a whole and not to any particular section, paragraph or subdivision. Any pronoun used shall be deemed to cover all genders. The section titles, table of contents and list of exhibits appear as a matter of convenience only and shall not affect the interpretation of the Agreement. All references to statutes and related regulations shall include any amendments of same and any successor statutes and regulations. All references to any of the Loan Documents shall include any and all modifications thereto and any and all extensions or renewals thereof. 12 LIST OF EXHIBITS Exhibit A-1 Borrowing Base Certificate Exhibit A-2 Real Property Exhibit A-3 Revolving Credit Note Exhibit A-4 Supplemental Loan Note Exhibit 6.1.1 Borrower's and each Subsidiary's Business Locations Exhibit 7.1.1 Jurisdictions in which Borrower and each Subsidiary is Authorized to do Business Exhibit 7.1.4 Capital Structure of Borrower Exhibit 7.1.5 Corporate Names Exhibit 7.1.12 Existing Sureties Exhibit 7.1.13 Tax Identification Numbers of Subsidiaries Exhibit 7.1.15 Patents, Trademarks, Copyrights and Licenses Exhibit 7.1.16 Contracts Restricting Borrower's Right to Incur Debts Exhibit 7.1.17 Compliance with Laws Exhibit 7.1.19 Litigation Exhibit 7.1.21 Pension Plans Exhibit 7.1.23 Labor Contracts Exhibit 8.1.3 Compliance Certificate Exhibit 8.2.5 Permitted Liens 13 EX-21.1 6 EXHIBIT 21.1 EXHIBIT 21.1 SUBSIDIARIES OF ELECTRONICS BOUTIQUE HOLDINGS CORP. 1. The Electronics Boutique, Inc., a Pennsylvania corporation 2. Electronics Boutique Canada Inc., an Ontario corporation 3. E.B. International, Inc., a Pennsylvania corporation 4. Electronics Boutique Korea, Inc., a South Korea corporation 5. Electronics Boutique Australia Pty Ltd, an Australia corporation EX-27.1 7 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ELECTRONICS BOUTIQUE GROUP CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR JAN-31-1998 FEB-02-1997 JAN-31-1998 20,639,610 0 8,057,727 0 52,973,314 84,508,298 72,501,361 32,535,305 143,170,193 101,040,159 0 0 0 2,290 29,178,016 143,170,193 449,179,603 449,179,603 338,614,309 85,490,857 0 0 1,378,919 23,695,518 846,280 22,849,238 0 0 0 22,849,238 0 0 TOTAL SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.
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