Registration of Securities Issued in a Business-Combination Transaction — Form S-4 Filing Table of Contents
Document/ExhibitDescriptionPagesSize 1: S-4 Registration of Securities Issued in a HTML 2.26M Business-Combination Transaction
8: EX-3.10 Bylaws 12 56K
9: EX-3.11 Amended and Restated Certificate of Incorporation 17 70K
10: EX-3.12 Bylaws 17 73K
11: EX-3.13 Articles of Incorporation 8 38K
12: EX-3.14 Bylaws 21 92K
13: EX-3.15 Articles of Incorporation 3 22K
14: EX-3.16 Bylaws 10 43K
15: EX-3.17 Certificate of Formation 2 18K
16: EX-3.18 Certificate of Amendment of the Certificate of 2 18K
Formation
17: EX-3.19 Limited Liability Company Agreement 14 56K
18: EX-3.20 Certificate of Formation 2 18K
19: EX-3.21 Certificate of Amendment of the Certificate of 2 18K
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20: EX-3.22 Limited Liability Company Agreement 14 55K
21: EX-3.23 Certificate of Incorporation 8 41K
22: EX-3.24 Certificate of Amendment of the Certificate of 2 19K
Incorporation
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24: EX-3.26 Articles of Incorporation 3 22K
25: EX-3.27 Bylaws 9 42K
26: EX-3.28 Certificate of Incorporation 3 20K
27: EX-3.29 Bylaws 21 57K
28: EX-3.30 Certificate of Formation 2 18K
29: EX-3.31 Certificate of Amendment to the Certificate of 2 19K
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30: EX-3.32 Limited Liability Company Agreement 10 41K
31: EX-3.33 Certificate of Limited Partnership 5 24K
32: EX-3.34 Limited Partnership Agreement 12 47K
33: EX-3.35 Certificate of Limited Partnership 5 24K
34: EX-3.36 Limited Partnership Agreement 12 48K
35: EX-3.37 Certificate of Incorporation 4 22K
36: EX-3.38 Certificate of Merger 3 20K
37: EX-3.39 Bylaws 20 83K
2: EX-3.4 Amended and Restated Articles of Incoporation 3 21K
3: EX-3.5 Amended and Restated Bylaws 17 98K
4: EX-3.6 Certificate of Limited of Partnership 3 24K
5: EX-3.7 Limited Partnership Agreement 11 48K
6: EX-3.8 Certificate of Incorporation 5 24K
7: EX-3.9 Certificate of Amendment of Certificate of 2 19K
Incorporation
38: EX-5.1 Opinion of Bryan Cave LLP HTML 29K
39: EX-5.2 Opinion of Oppenheimer Wolff & Donnelly LLP HTML 32K
40: EX-21.1 List of Subsidiaries 2 21K
41: EX-23.1 Consent of Bdo Seidman LLP HTML 18K
42: EX-23.2 Consent of Kpmg LLP HTML 20K
43: EX-25.1 Statement of Eligibility on Form T-1 HTML 48K
44: EX-99.1 Form of Letter of Transmittal HTML 85K
45: EX-99.2 Form of Letter to Brokers, Dealers HTML 25K
46: EX-99.3 Form of Letter to Clients HTML 28K
47: EX-99.4 Form of Notice of Guaranteed Delivery HTML 30K
S-4 — Registration of Securities Issued in a Business-Combination Transaction Document Table of Contents
Approximate date of commencement of proposed sale to
public: As soon as practicable after the Registration
Statement becomes effective.
If the securities being registered on this form are being
offered in connection with the formation of a holding company
and there is compliance with General Instruction G, check the
following
box: o
If this form is filed to register additional securities for an
offering pursuant to Rule 462(b) 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. o
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. o
CALCULATION OF REGISTRATION FEE
Proposed Maximum
Proposed Maximum
Title of Each Class of
Amount
Offering Price
Aggregate
Amount of
Securities to be Registered
to be Registered
per Unit(1)
Offering Price(1)
Registration Fee
Senior Floating Rate Notes due 2011
$300,000,000
100.000%
$300,000,000
$32,100.00
Guarantees of the Senior Floating Rate Notes due 2011
(2)
(2)
(2)
(2)
8% Senior Notes due 2012
$650,000,000
98.688%
$641,472,000
$68,637.51
Guarantees of the 8% Senior Notes due 2012
(2)
(2)
(2)
(2)
(1)
Estimated solely for purposes of calculation of the registration
fee pursuant to Rule 457(f) under the Securities Act of
1933, as amended.
(2)
Pursuant to Rule 457(n) under the Securities Act of 1933,
as amended, no separate registration fee is payable.
The Registrants hereby amend this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrants 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 of 1933, as amended, or until the
Registration Statement shall become effective on such date as
the Securities and Exchange Commission, acting pursuant to said
Section 8(a), may determine.
The address and telephone number for each of the additional
registrants is 625 Westport Parkway, Grapevine, Texas76051, (817) 424-2000. The primary standard industrial
classification code number for each of the additional
registrants is 5734.
The
information in this prospectus is not complete and may be
changed. We may not sell these securities until the registration
statement filed with the Securities Exchange Commission is
effective. This prospectus is not an offer to sell securities
and is not soliciting an offer to buy securities in any state
where the offer of sale is not
permitted.
SUBJECT TO COMPLETION,
DATED ,
2006
GameStop Corp.
GameStop, Inc.
OFFER TO EXCHANGE
all outstanding
Senior Floating Rate Notes due 2011
($300,000,000 principal amount outstanding)
for
Senior Floating Rate Notes due 2011
Which Have Been Registered Under the Securities Act of
1933
and all outstanding
8% Senior Notes due 2012
($650,000,000 principal amount outstanding)
for
8% Senior Notes due 2012
Which Have Been Registered Under the Securities Act of
1933
The exchange offer expires at 5:00 p.m., New York City
time,
on ,
2006, unless extended.
The Exchange Offer
We are offering, upon the terms and subject to the conditions
set forth in this prospectus and the accompanying letter of
transmittal, to exchange (1) up to $300,000,000 aggregate
principal amount of our senior floating rate notes due 2011, or
the new floating rate notes, for a like amount of our
outstanding, unregistered senior floating rate notes due 2011,
or the old floating rate notes, and (2) up to $650,000,000
aggregate principal amount of our 8% senior notes due 2012,
or the new 8% notes, for a like amount of our outstanding,
unregistered 8% senior notes due 2012, or the old
8% notes. We refer to the new floating rate notes and the
new 8% notes being offered in the exchange offer as the
exchange notes. We refer to the old floating rate notes and the
old 8% notes that can be exchanged for the exchange notes
as the old notes. We refer to the old notes and the exchange
notes as the notes, where the context so requires.
•
We will exchange all old notes that are validly tendered and not
withdrawn prior to the expiration of the exchange offer.
•
You may withdraw tenders of old notes at any time prior to the
expiration of the exchange offer.
•
We believe that the exchange of old notes for exchange notes
will not be a taxable transaction for United States federal
income tax purposes.
•
We will not receive any proceeds from the exchange offer.
The Exchange Notes
•
The form and terms of the exchange notes will be identical in
all material respects to the form and terms of the old notes,
except that the exchange notes will be registered under the
Securities Act, the transfer restrictions and registration
rights applicable to the old notes will not apply to the
exchange notes, and the exchange notes will not contain any
provisions relating to liquidated damages in connection with the
old notes under circumstances related to the timing of the
exchange offer.
•
We are offering the exchange notes in order to satisfy certain
of our obligations under the registration rights agreement
entered into in connection with the placement of the old notes.
Investing in the exchange notes involves risks. For a
discussion of certain factors that you should consider in
connection with the exchange offer and an investment in the
exchange notes, see “Risk Factors” beginning on
page 10.
Neither the Securities and Exchange Commission, nor any state
securities commission has approved or disapproved of these
securities or determined that this prospectus is accurate or
complete. Any representation to the contrary is a criminal
offense.
You should rely only on the information contained in this
document or to which we have referred you. We have not
authorized anyone to provide you with information that is
different. You should also be aware that information in this
prospectus may change after this date.
Each broker-dealer that receives exchange notes for its own
account pursuant to the exchange offer must acknowledge that it
shall deliver a prospectus in connection with any resale of such
exchange notes. The letter of transmittal states that by so
acknowledging and by delivering a prospectus, a broker-dealer
shall not be deemed to admit that it is an
“underwriter” within the meaning of the Securities Act
of 1933, as amended. This prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer
in connection with resales of exchange notes received in
exchange for old notes where such old notes were acquired by
such broker-dealer as a result of market-making activities or
other trading activities. We have agreed that, for a period of
90 days after consummation of the exchange offer, we shall
make this prospectus available to any broker-dealer for use in
connection with any such resale. See “Plan of
Distribution.”
When the old notes were originally issued on September 28,2005 and the proceeds from the sale of the old notes were placed
in escrow, GameStop was named GSC Holdings Corp., or GSC. GSC
was formed in contemplation of the mergers described herein
combining the businesses of what was then named
GameStop Corp. and Electronics Boutique Holdings Corp. and
their respective subsidiaries, which we refer to in this
prospectus as the “mergers.” On the date GSC and
GameStop, Inc. issued the old notes, each of the direct and
indirect domestic wholly-owned subsidiaries of what was then
named GameStop Corp. (other than the co-issuer GameStop, Inc.)
guaranteed the old notes on a senior unsecured basis with
unconditional guarantees. On October 7, 2005, the proceeds
from the sale of the old notes were released from escrow in
anticipation of the consummation of the mergers. The mergers
were consummated on October 8, 2005 and, concurrently,
Electronics Boutique Holdings Corp. and its direct and indirect
domestic wholly-owned subsidiaries guaranteed the old notes on a
senior unsecured basis with unconditional guarantees. As a
result of the mergers, both what was then named GameStop Corp.
and Electronics Boutique Holdings Corp. became direct
wholly-owned subsidiaries of their holding company parent, GSC.
Subsequently, GameStop Corp. was renamed GameStop Holdings Corp.
and GSC was renamed GameStop Corp.
Unless the context otherwise requires: the term “Historical
GameStop” refers to GameStop Holdings Corp.; the
terms “EB” and “Electronics Boutique” refer
to Electronics Boutique Holdings Corp.; the terms
“GameStop,”“we,”“us,”“our,”“Company” and other similar terms
refer to GameStop Corp. and its subsidiaries, which include,
among others, Historical GameStop, GameStop, Inc. and EB; the
term “guarantors” refers to the direct and indirect
domestic subsidiaries of GameStop (other than GameStop, Inc.)
that have provided unconditional guarantees of the old notes and
will be providing unconditional guarantees of the exchange
notes; and the term “Issuers” refers to GameStop and
GameStop, Inc. References in this prospectus to “fiscal
2008,”“fiscal 2007,”“fiscal 2006,”“fiscal 2005,”“fiscal 2004,”“fiscal
2003” and “fiscal 2002” refer to the fiscal years
ending January 31, 2009, February 2, 2008 and
February 3, 2007 and the fiscal years ended
January 28, 2006, January 29, 2005, January 31,2004 and February 1, 2003, respectively.
AVAILABLE INFORMATION
GameStop is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended, and in accordance
therewith files annual, quarterly and special reports, proxy
statements and other information with the Securities and
Exchange Commission, or SEC, on a regular basis. Prior to the
mergers combining their businesses, Historical GameStop and EB
were also subject to the informational requirements of the
Securities Exchange Act of 1934, as amended, and in accordance
therewith filed annual, quarterly and special reports, proxy
statements and other information with the SEC on a regular
basis. You may read and copy this information or obtain copies
of this information by mail from the Public Reference Section of
the SEC, Room 1024, 100 F Street, N.E.,
Washington, D.C. 20549, at prescribed rates. Further
information on the operation of the SEC’s Pubic Reference
Room in Washington, D.C. can be obtained by calling the SEC
at 1-800-SEC-0330.
The SEC also maintains an Internet worldwide website that
contains reports, proxy statements and other information about
issuers, like GameStop, who file electronically with the SEC.
The address of that site is http://www.sec.gov. In
addition, GameStop makes available free of charge on its website
(http://www.gamestop.com), under “Investor
Relations — SEC Filings,” its annual reports on
Form 10-K,
quarterly reports on
Form 10-Q, current
reports on
Form 8-K, and
amendments to those reports as soon as reasonably practicable
after they are filed with or furnished to the SEC. GameStop also
makes available on its website the annual reports on
Form 10-K,
quarterly reports on
Form 10-Q, current
reports on
Form 8-K, and
amendments to those reports that were filed by Historical
GameStop and EB when, prior to the mergers combining their
businesses, they were reporting companies. The information
included on such website is deemed not to be part of this
prospectus.
This prospectus “incorporates by reference” important
business and financial information about GameStop from documents
that are not included in or delivered with this document. This
means that we can disclose important information to you by
referring you to those documents. The information incorporated by
reference is an important part of this prospectus and
information that GameStop subsequently files with the SEC will
automatically update and supercede the information in this
prospectus and in the filings of GameStop, Historical GameStop
and EB with the SEC. We incorporate by reference in this
prospectus the documents listed below, which GameStop,
Historical GameStop and EB have already filed with the SEC, and
any future filings GameStop makes with the SEC under
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act
until the offering of the exchange notes contemplated by this
prospectus is terminated:
•
Registration Statement on
Form S-4, filed by
GameStop with the SEC on May 23, 2005;
•
Amendment No. 1 to the Registration Statement on
Form S-4, filed by
GameStop with the SEC on July 8, 2005;
•
Amendment No. 2 to the Registration Statement on
Form S-4, filed by
GameStop with the SEC on September 2, 2005;
•
GameStop’s Annual Report on
Form 10-K for the
fiscal year ended January 28, 2006, filed with the SEC on
April 3, 2006;
•
GameStop’s Current Report on
Form 8-K, filed
with the SEC on April 13, 2006;
EB’s Current Report on
Form 8-K, filed
with the SEC on March 15, 2005;
•
EB’s Current Report on
Form 8-K, filed
with the SEC on March 22, 2005;
•
EB’s Current Report on
Form 8-K, filed
with the SEC on April 18, 2005;
•
EB’s Current Report on
Form 8-K, filed
with the SEC on May 27, 2005;
•
EB’s Current Report on
Form 8-K, filed
with the SEC on June 9, 2005;
•
EB’s Current Report on
Form 8-K, filed
with the SEC on June 15, 2005;
•
EB’s Current Report on
Form 8-K, filed
with the SEC on August 30, 2005;
•
EB’s Current Report on
Form 8-K, filed
with the SEC on September 6, 2005;
•
EB’s Current Report on
Form 8-K, filed
with the SEC on October 7, 2005; and
•
EB’s Current Report on
Form 8-K, filed
with the SEC on October 11, 2005.
Any statement or information included in any such filing made
prior to the date of this prospectus shall be deemed to be
modified or superceded to the extent a statement or information
included in this prospectus modifies or supercedes such
information. Any such statement or information so modified or
superceded shall not be deemed, except as so modified or
superceded, to constitute part of this prospectus.
This prospectus contains summaries of terms of certain
agreements that we believe to be accurate in all material
respects. However, we refer you to the actual agreements for
complete information relating to those
agreements. All summaries are qualified in their entirety by
this reference. You can obtain copies of documents incorporated
by reference in this document by requesting them in writing at
GameStop Corp., 625 Westport Parkway, Grapevine, Texas76051, Attention: Investor Relations, or by telephone at
(817) 424-2800.
You will not be charged for any of these documents that you
request. In order to ensure timely delivery of the documents,
any request should be made at least five business days before
the expiration date of the exchange offer.
INDUSTRY AND MARKET DATA
This prospectus includes information regarding our industry and
markets. Where reasonably possible, this information is derived
from third-party sources that we believe are reliable and in
other cases is based on estimates made by our management based
on their industry and market knowledge. However, market share
data is subject to change and cannot always be verified with
complete certainty due to limits on the availability and
reliability of raw data, the voluntary nature of the data
gathering process and other limitations and uncertainties
inherent in any statistical survey of market shares. In
addition, consumption patterns and consumer preferences can and
do change. As a result, you should be aware that market share,
ranking and other similar data set forth herein, and estimates
and beliefs based on such data, may not be reliable.
FORWARD-LOOKING STATEMENTS
All statements other than statements of historical facts
included in this prospectus, including statements regarding our
future financial position, economic performance and results of
operations, as well as our business strategy, budgets, projected
costs and plans and objectives of management for future
operations, and the information referred to under “Risk
Factors” beginning on page 10 of this prospectus and
as further outlined elsewhere in this prospectus and the reports
incorporated by reference in this prospectus, are
forward-looking statements. These forward-looking statements
involve a number of risks and uncertainties. A number of factors
could cause our actual results, performance, achievements or
industry results to be materially different from any future
results, performance or achievements expressed or implied by
these forward-looking statements. These factors include, but are
not limited to:
•
our reliance on suppliers and vendors for sufficient quantities
of their products and for new product releases;
•
economic conditions affecting the electronic game industry;
•
the competitive environment in the electronic game industry;
•
our ability to open and operate new stores;
•
our ability to attract and retain qualified personnel;
•
the impact and costs of litigation and regulatory compliance;
•
the risks involved in our international operations;
•
our ability to successfully integrate the operations of
Historical GameStop and EB and manage the combined operations of
the Company;
•
the cost savings and other synergies from the mergers may not be
fully realized or may take longer to realize than
expected; and
•
other factors described in our Annual Report on
Form 10-K, filed
with the SEC on April 3, 2006, including those set forth
under the caption “Item 1A. Risk Factors.”
In some cases, forward-looking statements can be identified by
the use of terms such as “anticipates,”“believes,”“continues,”“could,”“estimates,”“expects,”“intends,”“may,”“plans,”“potential,”“predicts,”“will,”“should,”“seeks,”“pro forma” or similar expressions.
These statements are only predictions based on
current expectations and assumptions and involve known and
unknown risks, uncertainties and other factors that may cause
our or our industry’s actual results, levels of activity,
performance or achievements to be materially different from any
future results, levels of activity, performance or achievements
expressed or implied by such forward-looking statements. You
should not place undue reliance on these forward-looking
statements.
Although we believe that the expectations reflected in our
forward-looking statements are reasonable, we cannot guarantee
future results, levels of activity, performance or achievements.
We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new
information, future events or otherwise after the date of this
prospectus. In light of these risks and uncertainties, the
forward-looking events and circumstances contained in this
prospectus may not occur, causing actual results to differ
materially from those anticipated or implied by our
forward-looking statements.
All forward-looking statements attributable to us are expressly
qualified in their entirety by these cautionary statements.
This summary highlights selected information in this
prospectus and may not contain all of the information that is
important to you. To better understand this offering, you should
carefully read this entire prospectus, including the “Risk
Factors” section beginning on page 10 and the
financial statements and the notes to those statements, which
are included elsewhere in this prospectus.
Our Company
GameStop is the world’s largest retailer of video game
products and PC entertainment software. We sell new and used
video game hardware, video game software and accessories, as
well as PC entertainment software, and related accessories and
other merchandise. As of January 28, 2006, we operated
4,490 stores in the United States, Australia, Canada and Europe,
primarily under the names GameStop and EB Games. We also operate
electronic commerce websites under the names gamestop.com and
ebgames.com and publish Game Informer, the largest
circulation multi-platform video game magazine in the United
States, with approximately 1.9 million subscribers.
GameStop is a holding company that was created to facilitate the
combination of Historical GameStop and EB. On April 17,2005, Historical GameStop and EB entered into a merger agreement
pursuant to which, effective October 8, 2005, separate
subsidiaries of GameStop were merged with and into Historical
GameStop and EB, respectively, and Historical GameStop and EB
became wholly-owned subsidiaries of GameStop. Our Class A
common stock and our Class B common stock are traded on the
New York Stock Exchange under the symbols GME and GME.B,
respectively.
In the mergers, Historical GameStop’s stockholders received
one share of GameStop’s Class A common stock for each
share of Historical GameStop’s Class A common stock
owned and one share of GameStop’s Class B common stock
for each share of Historical GameStop’s Class B common
stock owned. EB stockholders received $38.15 in cash and
..78795 of a share of GameStop’s Class A common stock
for each EB share owned. In aggregate, 20.2 million shares
of GameStop’s Class A common stock were issued to
EB stockholders and approximately $993.3 million in
cash was paid in consideration for all outstanding common stock
of EB and all outstanding stock options of EB.
Of our 4,490 stores, 3,624 stores are located in the U.S. and
866 stores are located in Australia, Canada and Europe. Our
stores, which average approximately 1,500 square feet,
carry a balanced mix of new and used video game hardware, video
game software and accessories, which we refer to as video game
products, and PC entertainment software. Our used video game
products provide a unique value proposition to our customers,
and our purchasing of used video game products provides our
customers with an opportunity to trade in their used video game
products for store credits and apply those credits towards other
merchandise, which, in turn, increases sales.
Industry Background
According to NPD Group, Inc., or NPD, a market research firm,
the electronic game industry was an approximately
$11.5 billion market in the United States in 2005.
New Video Game Products. The Entertainment Software
Association (formerly the Interactive Digital Software
Association), or ESA, estimates that 50% of all Americans, or
approximately 145 million people, play video or computer
games on a regular basis. We expect the following trends to
result in increased sales of video game products:
•
Hardware Platform Technology Evolution. Video game
hardware has evolved significantly from the early products
launched in the 1980s. Technological developments in both chip
processing speed and data storage have provided significant
improvements in advanced graphics and audio quality, which allow
software developers to create more advanced games, encourage
existing players to upgrade their hardware platforms and attract
new video game players to purchase an initial system. As general
computer technology advances, we expect video game technology to
make similar advances.
Next-Generation Systems Provide Multiple Capabilities Beyond
Gaming. Many next-generation hardware platforms, including
Sony PlayStation 2 and Microsoft Xbox and Xbox 360, utilize a
DVD software format and have the potential to serve as
multi-purpose entertainment centers by doubling as a player for
DVD movies and compact discs. In addition, Sony
PlayStation 2, Nintendo DS and Microsoft Xbox and Xbox 360
manufacture accessories which provide internet connectivity.
•
Backward Compatibility. Sony PlayStation 2, Nintendo
DS and, to some extent, Microsoft Xbox 360 are backward
compatible, meaning that titles produced for the earlier version
of the hardware platform may be used on the new hardware
platform.
•
Introduction of Next-Generation Hardware Platforms Drives
Software Demand. Sales of video game software generally
increase as next-generation platforms mature and gain wider
acceptance.
•
Broadening Demographic Appeal. While the typical
electronic game enthusiast is male between the ages of 14 and
35, the electronic game industry is broadening its appeal.
Used Video Game Market. As the installed base of video
game hardware platforms has increased and new hardware platforms
are introduced, a growing used video game market has evolved in
the United States.
PC Entertainment Software. PC entertainment software is
generally sold in the form of CD-ROMs and played on multimedia
PCs featuring fast processors, expanded memories, and enhanced
graphics and audio capabilities.
Business Strategy
Our goal is to enhance our position as the world’s largest
retailer of new and used video game products and PC
entertainment software by focusing on the following strategies:
Continue to Execute Our Proven Growth Strategies. We
intend to continue to execute our proven growth strategies,
including:
•
Continuing the practices of Historical GameStop and EB of
opening new strip center stores in our target markets and new
mall stores in selected mall locations.
•
Increasing our comparable store sales and operating earnings by
capitalizing on industry growth, increasing sales of used video
game products and our Game Informer magazine and
increasing awareness of the GameStop brand.
Targeting a Broad Audience of Game Players. We have
created a store environment targeting a broad audience including
the electronic game enthusiast, the casual gamer and the
seasonal gift giver.
Enhancing our Image as a Destination Location. Our stores
serve as destination locations for game players due to our broad
selection of products, knowledgeable sales associates,
game-oriented environment and unique pricing proposition.
Offering the Largest Selection of Used Video Game
Products. We are the largest retailer of used video games in
the world and carry the broadest selection of used video game
products for both current and previous generation platforms.
Building the GameStop Brand. We currently operate most of
Historical GameStop’s stores under the GameStop name.
Within the next 12 to 24 months, we intend to rebrand all
of the EB stores to the GameStop brand. Building the GameStop
brand has enabled us to leverage brand awareness and to capture
advertising and marketing efficiencies.
Providing a
First-to-Market
Distribution Network. We employ a variety of rapid-response
distribution methods in our efforts to be the
first-to-market for new
video game products and PC entertainment software. We strive to
deliver popular new releases to selected stores within hours of
release and to all of our stores by the next morning. This
highly efficient distribution network is essential, as a
significant portion of a new title’s sales will be
generated in the first few days and weeks following its release.
Investing in our Information Systems and Distribution
Capabilities. We employ sophisticated and fully-integrated
inventory management, store-level point of sale and financial
systems and
state-of-the-art
distribution facilities.
Growth Strategy
New Store Expansion. We intend to continue to open new
stores in our targeted markets. Historical GameStop opened 338
new stores in fiscal 2004 and 221 new stores in fiscal 2005,
prior to the consummation of the mergers on October 8,2005. EB opened 415 stores in fiscal 2005, prior to the
consummation of the mergers. Between the consummation of the
mergers and the end of fiscal 2005, we opened 156 stores. We
plan to open approximately 400 new stores in fiscal 2006.
Increase Comparable Store Sales. We plan to increase our
comparable store sales by capitalizing on the growth in the
video game industry, expanding our sales of used video game
products and increasing awareness of the GameStop name.
•
Capitalize on Growth in Demand. Our sales of new video
game software and used video game products grew by approximately
20% and 27%, respectively, in fiscal 2004 and, due primarily to
the mergers, by an additional 60% and 58%, respectively, in
fiscal 2005.
•
Increase Sales of Used Video Game Products. We will
continue to expand the selection and availability of used video
game products in our U.S. and international stores. Our strategy
consists of increasing consumer awareness of the benefits of
trading in and buying used video game products at our stores
through increased marketing activities.
•
Increase GameStop Brand Awareness. We intend to increase
customer awareness of how the adoption of the best practices of
Historical GameStop and EB will benefit our customers. In
connection with our brand-building efforts, in each of the last
three fiscal years, we increased the amount of media advertising
in targeted markets. In fiscal 2006, we plan to continue to
increase media advertising, to expand our GameStop loyalty card
program, to aggressively promote trade-ins of used video game
products in our stores and to leverage our web sites at
www.gamestop.com and www.ebgames.com.
The Transactions
In order to finance the cash consideration that was paid to EB
stockholders in connection with the mergers, to pay related
fees, expenses and transaction costs, to fund our ongoing
working capital needs and for general corporate purposes, the
Issuers and the guarantors entered into a new
$400.0 million asset-based senior secured revolving credit
facility, or the Senior Credit Facility, and the Issuers issued
the old notes that are the subject of the exchange offer
provided for in this prospectus. For more information regarding
the Senior Credit Facility, see “Description of Other
Indebtedness.” The financing transactions, along with the
mergers, are referred to in this prospectus collectively as the
“Transactions.”
Our Holding Company Structure
GameStop is a holding company that operates through its domestic
and foreign subsidiaries. On a pro forma basis after giving
effect to the Transactions, approximately $3,597.3 million,
or 81.9%, of our net sales were generated by our domestic
subsidiaries (the guarantors and GameStop, Inc.) in fiscal 2005,
and as of January 28, 2006, approximately
$1,256.0 million, or 77.4%, of our total assets (excluding
goodwill of $1,392.4 million) were held by those
subsidiaries.
GameStop Corp. is a corporation organized under the laws of the
State of Delaware with principal executive offices located at
625 Westport Parkway, Grapevine, Texas76051. Our telephone
number at our principal executive offices is
(817) 424-2000. Our worldwide web address is
www.gamestop.com. The information on our website is not
part of this prospectus.
Summary of the Exchange Offer
The Exchange Offer
We are offering to exchange (1) up to $300.0 million
aggregate principal amount of our new floating rate notes, which
have been registered under the Securities Act, for a like amount
of our old floating rate notes, and (2) up to
$650.0 million aggregate principal amount of our new
8% notes, which have been registered under the Securities
Act, for a like amount of our old 8% notes. The old
floating rate notes and old 8% notes were issued on
September 28, 2005 in a private offering. To exchange your
old notes, you must properly tender them by following the
procedures under “The Exchange Offer” and we must
accept them.
Expiration Date
The exchange offer expires at 5:00 p.m., New York City
time,
on ,
2006, unless we extend it. In that case, the term
“expiration date” will mean the latest date and time
to which the exchange offer is extended. We will issue exchange
notes upon the expiration date or promptly thereafter.
Withdrawal Rights
You may withdraw the tender of your old notes at any time before
5:00 p.m., New York City time, on the expiration date. If
we decide for any reason not to accept any old notes for
exchange, we will return your old notes without expense to you
promptly after the expiration or termination of the exchange
offer. In the case of old notes tendered by book entry transfer
into the exchange agent’s account at The Depository Trust
Company, or DTC, any withdrawn or unaccepted old notes will be
credited to the tendering holder’s account at DTC. See
“The Exchange Offer — Withdrawal of Tender”
for further information.
Conditions to the Exchange Offer
The exchange offer is subject to customary conditions, some of
which we may waive in our sole discretion. The exchange offer is
not conditioned upon any minimum principal amount of old notes
being tendered for exchange. See “The Exchange
Offer — Conditions” for further information.
Procedures for Tendering Old Notes
If you are a holder of old notes who wishes to accept the
exchange offer for exchange notes:
• you must complete, sign and date the letter of
transmittal accompanying this prospectus and mail, fax or
otherwise deliver it, together with your old notes, to the
exchange agent on or before the expiration date at the address
set forth under “The Exchange Offer — Exchange
Agent;” or
• arrange for DTC to transmit certain required
information to the exchange agent in connection with a
book-entry transfer.
Do not send letters of transmittal and certificates representing
old notes to us.
By tendering your old notes in this manner, you will be
representing to us, among other things, that:
• the exchange notes you acquire pursuant to the
exchange offer are being acquired in the ordinary course of your
business;
• you are not participating, do not intend to
participate, and have no arrangement or understanding with any
person to participate, in the distribution of the exchange notes
issued to you in the exchange offer; and
• you are not an “affiliate” of either
Issuer.
Any broker-dealer that acquires exchange notes for its own
account in exchange for old notes must represent to us that the
old notes to be exchanged for the exchange notes were acquired
by it as a result of market-making or other trading activities
and acknowledge that it will deliver a prospectus meeting the
requirements of the Securities Act in connection with any resale
of exchange notes received by it pursuant to the exchange offer.
See “— Resales” below for further
information.
Special Procedures for Beneficial Owners
If you are a beneficial owner whose old notes are registered in
the name of a broker, dealer, commercial bank, trust company or
other nominee and wish to tender your old notes in the exchange
offer, please contact the registered owner as soon as possible
and instruct it to tender on your behalf. If you wish to tender
on your own behalf, you must, prior to completing and executing
the letter of transmittal and delivering your old notes, either
arrange to have your old notes registered in your name or obtain
a properly completed bond power from the registered holder. The
transfer of registered ownership may take considerable time.
Guaranteed Delivery Procedures
If you wish to tender your old notes and the old notes are not
immediately available, time will not permit your required
documents to reach the exchange agent by the expiration date, or
the procedure for book-entry transfer cannot be completed by the
expiration date, you may tender your old notes according to the
guaranteed delivery procedures set forth in “The Exchange
Offer — Guaranteed Delivery Procedures.”
Consequences of Not Exchanging Old Notes
If you do not tender your old notes or we reject your tender,
your old notes will continue to be subject to the restrictions
on transfer set forth in the legend on the certificate for your
old notes. In addition, you will not be entitled to any further
registration rights or exchange rights, except under limited
circumstances where we may be required to file and cause to
become effective a shelf registration statement which could
cover your resales of your old notes. However, your old notes
will remain outstanding and entitled to the benefits of the
indenture governing the notes. See “The Exchange
Offer — Consequences of Failure to Exchange” for
further information.
Resales
We believe that you can offer for resale, resell or otherwise
transfer the exchange notes without complying with further
registration and
prospectus delivery requirements of the Securities Act if you
make the representations described above under
“— Procedures for Tendering Old Notes.”
We base our belief on interpretations by the SEC staff in no
action letters issued to other issuers in exchange offers like
the one contemplated by this prospectus. We cannot guarantee
that the SEC would make a similar decision about this exchange
offer.
If our belief is wrong, or if you cannot truthfully make the
representations described above under
“— Procedures for Tendering Old Notes,” and
you transfer any exchange notes issued to you in the exchange
offer without meeting the registration and prospectus delivery
requirements of the Securities Act, or without an exemption from
such requirements, you could incur liabilities under the
Securities Act. We are not indemnifying you from any such
liability and will not protect you against any loss incurred as
a result of any such liability under the Securities Act.
This prospectus, as it may be amended or supplemented from time
to time, may be used by broker-dealers in connection with
resales of exchange notes that they received in exchange for old
notes that they acquired for their own account as a result of
market-making activities or other trading activities. We have
agreed that, for a period of 90 days after the consummation
of the exchange offer, we will make this prospectus, as amended
or supplemented, available to any broker-dealer for use in
connection with any such resale.
Federal Tax Consequences
Your exchange of old notes for exchange notes pursuant to the
exchange offer should not result in any gain or loss to you for
United States federal income tax purposes. For more information,
see “Certain United States Federal Income Tax
Consequences.”
Use of Proceeds
We will receive no proceeds from the exchange offer. We will pay
all of our expenses related to the exchange offer.
Exchange Agent
Citibank, N.A.
Shelf Registration Statement
In certain limited circumstances, we will be required to file
under the Securities Act, and cause to become effective, a shelf
registration statement to cover resales of the old notes or the
exchange notes, as the case may be, by the holders thereof. See
“The Exchange Offer — Registration Rights;
Liquidated Damages.”
The form and terms of the exchange notes will be identical in
all material respects to the form and terms of the old notes,
except that the exchange notes will be registered under the
Securities Act, the transfer restrictions and registration
rights applicable to the old notes will not apply to the
exchange notes, and the exchange notes will not contain any
provisions relating to liquidated damages in connection with the
old notes under circumstances related to the timing of the
exchange offer. The exchange notes represent the same debt as
the old notes. Both the exchange notes and the old notes are
governed by the same indenture. Some of the terms and conditions
described below are subject to important limitations and
exceptions. The “Description of the Exchange Notes”
section of this prospectus contains a more detailed description
of the terms and conditions of the exchange notes.
Issuers
GameStop Corp. and GameStop, Inc. GameStop, Inc., a Minnesota
corporation, is an indirect wholly-owned subsidiary of GameStop
Corp. and is a co-obligor of the notes.
Notes Offered
$300,000,000 aggregate principal amount of Senior Floating Rate
Notes due 2011. $650,000,000 aggregate principal amount of
8% Senior Notes due 2012.
Each of GameStop’s direct and indirect domestic
wholly-owned subsidiaries (other than GameStop, Inc.) will
guarantee the exchange notes on a senior unsecured basis with
unconditional guarantees on the issue date of the exchange
notes. From and after the issue date of the exchange notes, each
domestic wholly-owned subsidiary acquired or formed by GameStop
will be required to guarantee the notes on the same basis.
Interest Payment Dates
Interest on the new floating rate notes will be payable in cash
on January 1, April 1, July 1 and October 1
of each year. Interest on the new 8% notes will be payable
in cash on April 1 and October 1 of each year. The
exchange notes will bear interest from the most recent date of
payment of interest on the old notes surrendered and accepted
for exchange or, if no interest has been paid on the old notes,
from the date the old notes surrendered and accepted for
exchange were issued. Accordingly, the most recent payment of
interest on the old floating rate notes was made on the first
business day following April 1, 2006 and the next payment
of interest on the old floating rate notes, or if the exchange
offer is earlier consummated, the new floating rate notes, will
be due on the first business day following July 1, 2006.
The most recent payment of interest on the old 8% notes was
made on the first business day following April 1, 2006 and
the next payment of interest on the old 8% notes, or if the
exchange offer is earlier consummated, the new 8% notes,
will be due on the first business day following October 1,2006.
Ranking
The exchange notes will be the Issuers’ senior unsecured
obligations and will:
• rank equally in right of payment to all of the
Issuers’ existing and future unsecured senior indebtedness;
• rank senior in right of payment to all of the
Issuers’ existing and future senior subordinated
indebtedness and subordinated indebtedness; and
• be effectively subordinated in right of payment to
the Issuers’ secured indebtedness (including the Senior
Credit Facility) to the extent of the value of the assets
securing such indebtedness, and all obligations of each of
GameStop’s existing and future subsidiaries.
Similarly, the guarantees of the exchange notes will be senior
unsecured obligations of the guarantors and will:
• rank equally in right of payment to all of the
applicable guarantor’s existing and future senior
indebtedness;
• rank senior in right of payment to all of the
applicable guarantor’s existing and future senior
subordinated indebtedness and subordinated indebtedness; and
• be effectively subordinated in right of payment to
all of the applicable guarantor’s existing and future
secured debt (including the applicable guarantor’s
guarantee under the Senior Credit Facility), to the extent of
the value of the assets securing such debt, and to all
liabilities and preferred stock of any subsidiary of a guarantor
if that subsidiary is not a guarantor.
As of January 28, 2006, we had approximately
$984.2 million of indebtedness, gross of the original issue
discount on the old 8% notes of $8.2 million, of which
approximately $9.5 million was secured, approximately
$0.6 million was indebtedness of non-guarantor subsidiaries
and structurally senior to the exchange notes and approximately
$24.3 million was subordinated to the exchange notes and
the guarantees of the exchange notes.
The exchange notes will also be structurally subordinated to all
indebtedness and other obligations, including trade payables, of
GameStop’s non-guarantor subsidiaries. See
“Capitalization” for further information.
Optional Redemption
We may redeem the new floating rate notes, in whole or in part,
at any time on or after October 1, 2007 and we may redeem
the new 8% notes, in whole or in part, at any time on or
after October 1, 2009 at the redemption prices set forth
under “Description of the Exchange Notes —
Optional Redemption.”
We may redeem up to 100% of the aggregate principal amount of
the new floating rate notes at any time on or prior to
October 1, 2007 and up to 35% of the aggregate principal
amount of the new 8% notes at any time on or prior to
October 1, 2008, in each case with the proceeds of certain
equity offerings plus accrued and unpaid interest, if any, to
the date of redemption. See “Description of the Exchange
Notes — Optional Redemption” for further
information.
Change of Control Offer
Upon the occurrence of a change of control, you will have the
right, as holders of the exchange notes, to require us to
repurchase some or all of your exchange notes at 101% of their
principal amount,
plus accrued and unpaid interest, if any, to the repurchase
date. See “Description of the Exchange Notes —
Repurchase at the Option of Holders Upon a Change of
Control” for further information.
Certain Covenants
The indenture governing the notes contains covenants limiting,
among other things, the Issuers’ ability and the ability of
GameStop’s restricted subsidiaries to:
• incur additional debt;
• pay dividends on or repurchase capital stock;
• make certain investments;
• enter into certain types of transactions with
affiliates;
• limit dividends or other payments by restricted
subsidiaries;
• engage in sale and leaseback transactions;
• use assets as security in other
transactions; and
• sell certain assets or merge with or into other
companies.
These covenants are subject to important exceptions and
qualifications, as described under the heading “Description
of the Exchange Notes.”
If at any time the notes receive an Investment Grade Rating (as
defined under “Description of the Exchange
Notes — Certain Definitions”), then for so long
as such rating is maintained and no default or event of default
shall have occurred and be continuing, certain of the covenants
will cease to apply as described under “Description of the
Exchange Notes — Certain Covenants —
Suspension of Applicability of Certain Covenants in Certain
Circumstances.”
Use of Proceeds
We will not receive any cash proceeds from the exchange offer.
The proceeds from the sale of the old notes were used to fund a
portion of the cash consideration payable in the mergers to
purchase shares of EB common stock and to pay certain fees and
related expenses. See “Use of Proceeds” for further
information.
Risk Factors
You should refer to “Risk Factors” beginning on page
10 for an explanation of certain risks before deciding to
participate in the exchange offer.
You should carefully consider each of the following risks and
all of the other information included or incorporated by
reference in this prospectus before deciding to participate in
the exchange offer described in this prospectus. Some of the
following risks relate principally to your participation or
failure to participate in the exchange offer and ownership of
the notes. Other risks relate principally to our business in
general and the industry in which we operate. Our business,
financial condition or results of operations could be materially
adversely affected due to any of these risks.
Risks Relating to the Exchange Offer
There are significant consequences if you fail to exchange
your old notes.
We did not register the old notes under the Securities Act or
any state securities laws, nor do we intend to do so after the
exchange offer. As a result, the old notes may only be
transferred in limited circumstances under the securities laws.
If you do not tender your old notes or the Issuers reject your
tender, your old notes will continue to be subject to the
restrictions on transfer set forth in the legend on the
certificate for your old notes. In addition, you will not be
entitled to any further registration rights or exchange rights,
except under limited circumstances where the Issuers may be
required to file and cause to become effective a shelf
registration statement which could cover your resales of your
old notes. However, your old notes will remain outstanding and
entitled to the benefits of the indenture governing the notes.
If you continue to hold old notes after the exchange offer, you
may be unable to sell your old notes. Old notes that are not
tendered or are tendered but not accepted will, following the
exchange offer, continue to be subject to existing transfer
restrictions.
You cannot be sure that an active trading market for the
exchange notes will develop.
While the old notes are presently eligible for trading in the
PORTAL®
Market, there is no existing market for the exchange notes. We
do not intend to apply for a listing of the exchange notes on
any securities exchange. We do not know if an active public
market for the exchange notes will develop or, if developed,
will continue. If an active public market does not develop or is
not maintained, the market price and liquidity of the exchange
notes may be adversely affected. We cannot make any assurances
regarding the liquidity of the market for the exchange notes,
the ability of holders to sell their exchange notes or the price
at which holders may sell their exchange notes. In addition, the
liquidity and the market price of the exchange notes may be
adversely affected by changes in the overall market for
securities similar to the exchange notes, by changes in our
financial performance or prospects and by changes in conditions
in our industry.
You must follow the appropriate procedures to tender your
old notes or they will not be exchanged.
The exchange notes will be issued in exchange for the old notes
only after timely receipt by the exchange agent of the old notes
or a book-entry confirmation related thereto, a properly
completed and executed letter of transmittal or an agent’s
message and all other required documentation. If you want to
tender your old notes in exchange for exchange notes, you should
allow sufficient time to ensure timely delivery. Neither we nor
the exchange agent are under any duty to give you notification
of defects or irregularities with respect to tenders of old
notes for exchange. Old notes that are not tendered or are
tendered but not accepted will, following the exchange offer,
continue to be subject to the existing transfer restrictions. In
addition, if you tender the old notes in the exchange offer to
participate in a distribution of the exchange notes, you will be
required to comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale
transaction. For additional information, please refer to the
sections entitled “The Exchange Offer” and “Plan
of Distribution” elsewhere in this prospectus.
The failure to successfully integrate Historical
GameStop’s and EB’s businesses and operations in the
expected timeframe may adversely affect our future
results.
Prior to the mergers, Historical GameStop and EB operated
independently. We will face significant challenges in continuing
to consolidate Historical GameStop and EB functions and
integrating their organizations, procedures and operations in a
timely and efficient manner. The integration of Historical
GameStop and EB has been and will be costly, complex and time
consuming, and our management will have to devote substantial
resources and efforts to it.
The integration process and other disruptions resulting from the
mergers could prevent us from achieving the anticipated benefits
of the mergers and result in the disruption of our ongoing
business or inconsistencies in standards, controls, procedures
and policies that adversely affect our ability to maintain
relationships with customers, suppliers, employees and others
with whom we have business dealings.
We may fail to realize the anticipated synergies, cost
savings and other benefits expected from the mergers.
The future success of GameStop will depend, in part, on our
ability to realize the anticipated growth opportunities and cost
savings from combining the businesses of Historical GameStop and
EB. We estimate that cost savings and operating synergies
resulting from the mergers will be approximately $70 to
$80 million annually beginning in fiscal 2006. Such cost
savings and operating synergies are expected to be realized by
capitalizing on consolidation and integration of certain
functions as well as through the adoption of best practices from
both Historical GameStop and EB. However, to realize the
anticipated benefits from the mergers, we must successfully
combine the businesses of Historical GameStop and EB in a manner
that permits those cost savings synergies to be realized. In
addition, we must achieve these savings without adversely
affecting our revenues. If we are not able to successfully
achieve these objectives, the anticipated benefits of the
mergers may not be realized fully or at all or may take longer
to realize than expected.
We depend upon our key personnel and they would be
difficult to replace.
Our success depends upon our ability to attract, motivate and
retain key management for our stores and skilled merchandising,
marketing and administrative personnel at our headquarters. We
depend upon the continued services of our key executive
officers. They include R. Richard Fontaine, our Chairman of the
Board and Chief Executive Officer, Daniel A. DeMatteo, our Vice
Chairman and Chief Operating Officer, Steven R. Morgan, our
President, and David W. Carlson, our Executive Vice President
and Chief Financial Officer. The loss of services of any of our
key personnel could have a negative impact on our business.
We depend upon the timely delivery of products.
We depend on major hardware manufacturers, primarily Sony
Computer Entertainment of America, or Sony, Nintendo of America,
Inc., or Nintendo, and Microsoft Corp., or Microsoft, to deliver
new and existing video game platforms on a timely basis and in
anticipated quantities. In addition, we depend on software
publishers to introduce new and updated software titles. Any
material delay in the introduction or delivery of hardware
platforms or software titles could result in reduced sales in
one or more fiscal quarters.
We depend upon third parties to develop products and
software.
Our business depends upon the continued development of new and
enhanced video game platforms, PC hardware, and video game and
PC entertainment software. Our business could suffer due to the
failure of manufacturers to develop new or enhanced video game
platforms, 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 video game systems or PC hardware.
Our ability to obtain favorable terms from our suppliers
may impact our financial results.
Our financial results depend significantly upon the business
terms we can obtain from our suppliers, including competitive
prices, unsold product return policies, advertising and market
development allowances, freight charges and payment terms. We
purchase substantially all of our products directly from
manufacturers, software publishers and approximately five
distributors. Our largest vendors are Sony, Microsoft and
Electronic Arts, Inc., or Electronic Arts, which accounted for
18%, 13% and 11%, respectively, of our new product purchases in
fiscal 2005. If our suppliers do not provide us with favorable
business terms, we may not be able to offer products to our
customers at competitive prices.
If our vendors fail to provide marketing and merchandising
support at historical levels, our sales and earnings could be
negatively impacted.
The manufacturers of video game hardware and software and PC
entertainment software have typically provided retailers with
significant marketing and merchandising support for their
products. As part of this support, we receive cooperative
advertising and market development payments from these vendors.
These cooperative advertising and market development payments
enable us to actively promote and merchandise the products we
sell and drive sales at our stores and on our website. We cannot
assure you that vendors will continue to provide this support at
historical levels. If they fail to do so, our sales and earnings
could be negatively impacted.
The electronic game industry is cyclical, which could
cause significant fluctuation in our earnings.
The electronic game industry has been cyclical in nature in
response to the introduction and maturation of new technology.
Following the introduction of new video game platforms, sales of
these platforms and related software and accessories generally
increase due to initial demand, while sales of older platforms
and related products generally decrease as customers migrate
toward the new platforms. New video game platforms have
historically been introduced approximately every five years. If
video game platform manufacturers fail to develop new hardware
platforms, our sales of video game products could decline.
Pressure from our competitors may force us to reduce our
prices or increase spending, which could decrease our
profitability.
The electronic game industry is intensely competitive and
subject to rapid changes in consumer preferences and frequent
new product introductions. We compete with: mass merchants and
regional chains, including Wal-Mart Stores, Inc., or Wal-Mart,
and Target Corporation, or Target; computer product and consumer
electronics stores, including Best Buy Co., Inc., or Best Buy,
and Circuit City Stores, Inc., or Circuit City; other video game
and PC software specialty stores located in malls and other
locations; toy retail chains, including Toys “R” Us,
Inc., or Toys “R” Us; mail-order businesses; catalogs;
direct sales by software publishers; and online retailers. In
addition, video games are available for rental from many video
stores, some of whom, like Movie Gallery Inc. (Hollywood Video),
or Movie Gallery, and Blockbuster, Inc., or Blockbuster, have
increased the availability of video game products for sale.
Video game products may also be distributed through other
methods which may emerge in the future. We also compete with
sellers of used video game products. Some of our competitors in
the electronic game industry have longer operating histories and
may have greater financial resources than we do. Additionally,
we compete with other forms of entertainment activities,
including movies, television, theater, sporting events and
family entertainment centers. If we lose customers to our
competitors, or if we reduce our prices or increase our spending
to maintain our customers, we may be less profitable.
International events could delay or prevent the delivery
of products to our suppliers.
Our suppliers rely on foreign sources, primarily in Asia, to
manufacture a portion of the products we purchase from them. As
a result, any event causing a disruption of imports, including
the imposition of import
restrictions or trade restrictions in the form of tariffs or
quotas, could increase the cost and reduce the supply of
products available to us, which could lower our sales and
profitability.
Our international operations expose us to numerous
risks.
We have international retail operations in Australia, Canada and
Europe. Because release schedules for hardware and software
introduction in these countries often differ from release
schedules in the United States, the timing of increases and
decreases in foreign sales may differ from the timing of
increases or decreases in domestic sales. We are also subject to
a number of other factors that may affect our current or future
international operations. These include:
•
economic downturns;
•
currency exchange rate fluctuations;
•
international incidents;
•
government instability; and
•
an increasing number of competitors entering our current and
potential markets.
Possible changes in our global tax rate.
As a result of our operations in many foreign countries, our
global tax rate is derived from a combination of applicable tax
rates in the various jurisdictions in which we operate.
Depending upon the sources of our income, any agreements we may
have with taxing authorities in various jurisdictions and the
tax filing positions we take in various jurisdictions, our
overall tax rate may be higher than other companies or higher
than our tax rates have been in the past. We base our estimate
of an annual effective tax rate at any given point in time on a
calculated mix of the tax rates applicable to our company and to
estimates of the amount of income to be derived in any given
jurisdiction. A change in the mix of our business from year to
year and from country to country, changes in rules related to
accounting for income taxes, changes in tax laws in any of the
multiple jurisdictions in which we operate or adverse outcomes
from the tax audits that regularly are in process in any
jurisdiction in which we operate could result in an unfavorable
change in our overall tax rate, which could have a material
effect on our business and results of our operations.
If we are unable to renew or enter into new leases on
favorable terms, our revenue growth may decline.
All of our retail stores are located in leased premises. If the
cost of leasing existing stores increases, we cannot assure you
that we will be able to maintain our existing store locations as
leases expire. In addition, we may not be able to enter into new
leases on favorable terms or at all, or we may not be able to
locate suitable alternative sites or additional sites for new
store expansion in a timely manner. Our revenues and earnings
may decline if we fail to maintain existing store locations,
enter into new leases, locate alternative sites or find
additional sites for new store expansion.
The ability to download video games and play video games
on the Internet could lower our sales.
While it is currently only possible to download current release
video game software onto existing video game platforms over the
Internet on a limited basis, at some point in the future this
technology may become more prevalent. A limited selection of PC
entertainment software and older generation video games may
currently be purchased for download over the Internet, and as
technology advances, a broader selection of games may become
available for purchase and download or playing on the Internet.
If advances in technology continue to expand our customers’
ability to access software through these and other sources, our
customers may no longer choose to purchase video games or PC
entertainment software in our stores. As a result, our sales and
earnings could decline.
If we fail to keep pace with changing industry technology,
we will be at a competitive disadvantage.
The interactive entertainment industry is characterized by
swiftly changing technology, evolving industry standards,
frequent new and enhanced product introductions and product
obsolescence. These characteristics require us to respond
quickly to technological changes and to understand their impact
on our customers’ preferences. If we fail to keep pace with
these changes, our business may suffer.
An adverse trend in sales during the holiday selling
season could impact our financial results.
Our business, like that of many retailers, is seasonal, with the
major portion of our sales and operating profit realized during
the fourth fiscal quarter, which includes the holiday selling
season. During fiscal 2005, on a pro forma basis, we generated
approximately 38% of our sales and approximately 75% of our
operating earnings during the fourth quarter. Any adverse trend
in sales during the holiday selling season could lower our
results of operations for the fourth quarter and the entire year.
Our results of operations may fluctuate from quarter to
quarter, which could affect our business, financial condition
and results of operations.
Our results of operations may fluctuate from quarter to quarter
depending upon several factors, some of which are beyond our
control. These factors include:
•
the timing of new product releases;
•
the timing of new store openings; and
•
shifts in the timing of certain promotions.
These and other factors could affect our business, financial
condition and results of operations, and this makes the
prediction of our financial results on a quarterly basis
difficult. Also, it is possible that our quarterly financial
results may be below the expectations of public market analysts.
Our failure to effectively manage new store openings could
lower our sales and profitability.
Our growth strategy is largely dependent upon opening new stores
and operating them profitably. We opened 377 stores in fiscal
2005 and expect to open approximately 400 new stores in fiscal
2006. EB opened 415 stores in fiscal 2005 prior to the
consummation of the mergers. Our ability to open new stores and
operate them profitably depends upon a number of factors, some
of which may be beyond our control. These factors include:
•
the ability to identify new store locations, negotiate suitable
leases and build out the stores in a timely and cost efficient
manner;
•
the ability to hire and train skilled associates;
•
the ability to integrate new stores into our existing
operations; and
•
the ability to increase sales at new store locations.
Our growth will also depend on our ability to process increased
merchandise volume resulting from new store openings through our
inventory management systems and distribution facilities in a
timely manner. If we fail to manage new store openings in a
timely and cost efficient manner, our growth may decrease.
If our management information systems fail to perform or
are inadequate, our ability to manage our business could be
disrupted.
We rely on computerized inventory and management systems to
coordinate and manage the activities in our distribution
centers, as well as to communicate distribution information to
the off-site third-party operated distribution centers with
which we work. The third-party distribution centers pick up
products from our suppliers, repackage the products for each of
our stores and ship those products to our stores by package
carriers. We use inventory replenishment systems to track sales
and inventory. Our ability to rapidly process incoming shipments
of new release titles and deliver them to all of our stores,
either that day or by the next morning, enables us to meet peak
demand and replenish stores at least twice a week, to keep our
stores in stock at optimum levels and to move inventory
efficiently. If our inventory or management information systems
fail to adequately perform these functions, our business could
be adversely affected. In addition, if operations in any of our
distribution centers were to shut down for a prolonged period of
time or if these centers were unable to accommodate the
continued store growth in a particular region, our business
could suffer.
We may engage in acquisitions which could negatively
impact our business if we fail to successfully complete and
integrate them.
To enhance our efforts to grow and compete, we may engage in
acquisitions. Our plans to pursue future acquisitions are
subject to our ability to negotiate favorable terms for these
acquisitions. Accordingly, we cannot assure you that future
acquisitions will be completed. In addition, to facilitate
future acquisitions, we may take actions that could dilute the
equity interests of our stockholders, increase our debt or cause
us to assume contingent liabilities, all of which may have a
detrimental effect on the price of our common stock. Finally, if
any acquisitions are not successfully integrated with our
business, our ongoing operations could be adversely affected.
Risks Relating to Our Indebtedness and the Notes
To service our indebtedness, we will require a significant
amount of cash, the availability of which depends on many
factors beyond our control.
Our ability to make scheduled payments or to refinance our debt
obligations depends on our financial and operating performance,
which is subject to prevailing economic and competitive
conditions and to certain financial, business and other factors
beyond our control. These factors include:
•
our reliance on suppliers and vendors for sufficient quantities
of their products and new product releases and our ability to
obtain favorable terms from these suppliers and vendors;
•
economic conditions affecting the electronic game industry as a
whole;
•
the highly competitive environment in the electronic game
industry and the resulting pressure from our competitors
potentially forcing us to reduce our prices or increase spending;
•
our ability to open and operate new stores;
•
our ability to attract and retain qualified personnel; and
•
our dependence upon software publishers to develop popular game
and entertainment titles for video game systems and PCs.
If our financial condition or operating results deteriorate, our
relations with our creditors, including holders of the notes,
the lenders under our Senior Credit Facility and our suppliers,
may be materially and adversely impacted.
As a result of the Transactions, we have substantial debt
that could adversely impact cash availability for growth and
operations and may increase our vulnerability to general adverse
economic and industry conditions.
We incurred significant additional debt as a result of the
Transactions. As of January 28, 2006, we had approximately
$984.2 million of indebtedness, gross of the original issue
discount on the old 8% notes of $8.2 million. Our debt
service obligations with respect to this increased indebtedness
could have an adverse impact on our earnings and cash flows for
as long as the indebtedness is outstanding.
Our increased indebtedness could have important consequences to
you, including the following:
•
our ability to obtain additional financing for working capital,
capital expenditures, acquisitions or general corporate purposes
may be impaired;
•
we must use a substantial portion of our cash flow from
operations to make debt service payments on the notes and our
Senior Credit Facility, which will reduce the funds available to
us for other purposes such as potential acquisitions and capital
expenditures;
•
we may have a higher level of indebtedness than some of our
competitors, which may put us at a competitive disadvantage and
reduce our flexibility in planning for, or responding to,
changing conditions in our industry, including increased
competition; and
•
we are more vulnerable to general economic downturns and adverse
developments in our business.
If our cash flows and capital resources are insufficient to fund
our debt service obligations, we may be forced to reduce or
delay capital expenditures, sell assets, seek additional capital
or restructure or refinance our indebtedness, including the
notes. These alternative measures may not be successful and may
not permit us to meet our scheduled debt service obligations. In
the absence of such operating results and resources, we could
face substantial liquidity problems and might be required to
dispose of material assets or operations to meet our debt
service and other obligations. Our Senior Credit Facility and
the indenture governing the notes restrict our ability to
dispose of assets and use the proceeds from such dispositions.
We may not be able to consummate those dispositions, dispose of
our assets at prices that we believe are fair or use the
proceeds from asset sales to make payments on the notes and
these proceeds may not be adequate to meet any debt service
obligations then due.
Because of our incurrence of floating rate debt resulting
from financing arrangements entered into in connection with the
mergers, we may be adversely affected by interest rate
changes.
Our financial position is affected, in part, by fluctuations in
interest rates. Significant portions of our outstanding debt are
held at floating interest rates, including the old floating rate
notes and, following the exchange offer, the new floating rate
notes, and our Senior Credit Facility. In addition, under the
terms of the indenture for the notes, if we do not complete an
offer to exchange the old notes for the exchange notes by
June 23, 2006, the interest rate on the notes will increase
by 25 basis points for the first 90 days from
June 23, 2006 and will increase by an additional
25 basis points at the beginning of each subsequent
90-day period
thereafter (up to a maximum of 100 basis points). Increased
interest rates may adversely affect our earnings and cash flow
by increasing the amount of interest expense that we are
obligated to pay on our floating rate debt.
Interest rates are highly sensitive to many factors, including
governmental monetary policies, domestic and international
economic and political conditions and other factors beyond our
control. A significant increase in interest rates could have a
material adverse effect on our financial position and results of
operations.
Your right to receive payments on the notes will be
effectively junior to our secured indebtedness to the extent of
the value of the assets securing such indebtedness.
The old notes are, and the exchange notes will be, unsecured. As
such, the old notes are, and the exchange notes will be,
effectively ranked junior to our secured indebtedness, including
our Senior Credit Facility. As a result, upon any distribution
to our creditors in a bankruptcy, liquidation or reorganization
or similar proceeding relating to us or our property, the
holders of our secured indebtedness and related guarantee
obligations, including under our Senior Credit Facility, will be
entitled to be paid in full to the extent of the value of the
assets securing such indebtedness before any payment may be made
with respect to the notes.
As of January 28, 2006, the old notes and the related
guarantees were effectively subordinated to approximately
$9.5 million of secured indebtedness and approximately
$397.7 million would have been available for future
borrowing as additional senior secured indebtedness under our
Senior Credit Facility, subject to a borrowing base.
Claims of holders of the notes will be structurally junior
to claims of creditors of all of our existing and future
non-guarantor subsidiaries.
The old notes are, and the exchange notes will be, only
guaranteed by our direct and indirect domestic wholly-owned
subsidiaries (other than GameStop, Inc.). Our non-guarantor
subsidiaries are separate and distinct legal entities and have
no obligation, contingent or otherwise, to pay any amounts due
pursuant to the notes, or to make any funds available therefor,
whether by dividends, loans, distributions or other payments.
Any right we or the guarantors have to receive any assets of any
of our non-guarantor subsidiaries upon the liquidation or
reorganization of those non-guarantor subsidiaries, and the
consequent rights of holders of notes to realize proceeds from
the sale of any of those non-guarantor subsidiaries’
assets, will be structurally junior to the claims of those
non-guarantor subsidiaries’ creditors, including trade
creditors and holders of debt of those subsidiaries. As of
January 28, 2006, such non-guarantor subsidiaries had total
liabilities of approximately $143.9 million, including
indebtedness of $0.6 million.
Our operations are substantially restricted by the
indenture governing the notes and the terms of our Senior Credit
Facility.
The indenture for the notes imposes, and the terms of any future
debt may impose, significant operating and financial
restrictions on us. These restrictions, among other things,
limit the Issuers’ ability and the ability of
GameStop’s restricted subsidiaries to:
•
incur, assume or permit to exist additional indebtedness or
guaranty obligations;
•
incur liens or agree to negative pledges in other agreements;
•
engage in sale and leaseback transactions;
•
make loans and investments;
•
declare dividends, make payments or redeem or repurchase capital
stock;
•
engage in mergers, acquisitions and other business combinations;
•
prepay, redeem or purchase certain indebtedness, including the
notes;
•
amend or otherwise alter the terms of our organizational
documents and our indebtedness, including the notes;
We cannot assure you that these covenants will not adversely
affect our ability to finance our future operations or capital
needs or to pursue available business opportunities.
The Senior Credit Facility contains various restrictive
covenants prohibiting us, in certain circumstances, from, among
other things, prepaying, redeeming or purchasing certain
indebtedness.
Most of the covenants in the indenture will be suspended
during any future period that we have an investment grade rating
from both rating agencies, and during any such period you will
not have the benefit of those covenants.
Most of the covenants in the indenture, as well as our
obligation to offer to repurchase notes following certain asset
sales, will be suspended if the notes obtain an investment grade
rating from Moody’s Investors Service, Inc. and
Standard & Poor’s Ratings Services and we are not
in default under the indenture. If such a suspension occurs, the
protections afforded to you by the covenants that have been
suspended will not be restored until the investment grade rating
assigned by either of the ratings agencies to the notes
subsequently declines. See “Description of the Exchange
Notes — Certain Covenants — Suspension of
Applicability of Certain Covenants in Certain
Circumstances.”
Despite current anticipated indebtedness levels and
restrictive covenants, we may incur additional indebtedness in
the future.
Despite our current level of indebtedness, we may be able to
incur substantial additional indebtedness in the future,
including additional secured indebtedness. Although the terms of
the indenture governing the notes and our Senior Credit Facility
restrict the Issuers and GameStop’s restricted subsidiaries
from incurring additional indebtedness, these restrictions are
subject to important exceptions and qualifications. If we incur
additional indebtedness, the risks that we now face as a result
of our leverage could intensify.
We may not be able to repurchase the notes upon a change
of control.
Upon a change of control, we must offer to repurchase all the
outstanding notes at 101% of the principal amount thereof, plus
accrued and unpaid interest to the date of repurchase. We may
not be able to repurchase the notes upon a change of control
because we may not have sufficient funds. Further, we may be
contractually restricted under the terms of our Senior Credit
Facility or our future indebtedness from repurchasing all the
notes tendered by holders upon a change of control and we may
not be able to obtain necessary consents under our Senior Credit
Facility or our future indebtedness to repurchase all of the
notes. In addition, this change of control provision may not
necessarily protect holders of the notes if we engage in a
highly leveraged transaction or certain other transactions
involving us or our subsidiaries.
Federal and state fraudulent transfer laws permit a court
to void or subordinate the notes and related guarantees, and if
that occurs, you may not receive any payments on the
notes.
Under federal and state fraudulent transfer and conveyance
statutes, a court could void the obligations under the notes and
the related guarantees, further subordinate the notes and the
guarantees, require the holders of the notes to repay payments
made to them on account of the notes or take other action
detrimental to you, if, among other things, at the time the
indebtedness under the notes was incurred or the guarantees were
given, either of the Issuers or a guarantor, as applicable:
•
issued the notes or a guarantee with actual intent to hinder,
delay or defraud present or future creditors; or
received less than reasonably equivalent value or fair
consideration in return for issuing either the notes or a
guarantee, and, one of the following is also true:
•
either of the Issuers or any guarantor was insolvent, or
rendered insolvent, by reason of the issuance of the notes
and/or guarantees;
•
the issuance of the notes and/or the guarantees left either of
the Issuers or any guarantor with an unreasonably small amount
of capital to carry on the business; or
•
either of the Issuers or any guarantor intended to incur, or
believed it would incur, debts that we or it would be unable to
pay as they become due and matured.
While the measures of insolvency for fraudulent transfer
purposes vary depending on the law to be applied, generally, an
entity would be considered insolvent if, at the time it incurred
indebtedness:
•
the sum of its debts was greater than the fair value of all its
assets;
•
the present fair saleable value of its assets is less than the
amount required to pay the probable liability on its existing
debts and liabilities as they become due; or
•
it cannot pay its debts as they become due.
In the event of a finding that a fraudulent conveyance occurred,
you may not receive any repayment on the notes. Further, the
avoidance of the notes and the guarantees could result in an
event of default with respect to our other debt and that of our
subsidiaries, which could result in acceleration of such debt.
We cannot be certain as to the standards a court would use to
determine whether or not either of the Issuers or a guarantor
was solvent at the relevant time, or, regardless of the standard
that a court uses, that the issuance of the notes and the
guarantees would not be avoided as a fraudulent transfer, or be
further subordinated to either of the Issuers’ or any
guarantor’s other debt and that you may not be required to
return payments made to you on account of the notes and the
guarantees.
The Issuers will not receive any proceeds from the exchange
offer. Because the exchange notes have substantially identical
terms as the old notes, the issuance of the exchange notes will
not result in any increase in the Issuers’ indebtedness.
Any old notes that are properly tendered and exchanged pursuant
to the exchange offer will be retired and cancelled. The
exchange offer is intended to satisfy the Issuers’
obligations under the registration rights agreement they entered
into in connection with the private offering of the old notes.
The proceeds of the offering of the old notes were approximately
$941.5 million, net of the original issue discount of
$8.5 million. These proceeds were used to fund a portion of
the cash consideration payable in the mergers to purchase shares
of EB common stock and to pay certain fees and related expenses.
The following table sets forth our consolidated cash and cash
equivalents and total capitalization as of January 28, 2006.
You should read the following table in conjunction with
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and the audited
consolidated financial statements and the related accompanying
notes included elsewhere in this prospectus.
The following unaudited pro forma condensed consolidated
statement of operations for the fiscal year ended
January 28, 2006 gives effect to the Transactions as if
they occurred on January 30, 2005. GameStop’s fiscal
year is, and those of Historical GameStop and EB were, composed
of the 52 or 53 weeks ending on the Saturday closest to
January 31. Following the mergers, the financial statements of
Historical GameStop became the financial statements of GameStop.
Reclassifications have been made to the historical financial
statements of GameStop and EB to conform to the presentation
used in the unaudited pro forma financial information.
In the mergers, Historical GameStop’s stockholders received
one share of GameStop’s Class A common stock for each
share of Historical GameStop’s Class A common stock
owned and one share of GameStop’s Class B common stock
for each share of Historical GameStop’s Class B common
stock owned. Approximately 22.2 million shares of
GameStop’s Class A common stock were issued in
exchange for all outstanding Class A common stock of
Historical GameStop based on the one-for-one exchange ratio and
approximately 29.9 million shares of GameStop’s
Class B common stock were issued in exchange for all
outstanding Class B common stock of Historical GameStop
based on the one-for-one exchange ratio. EB stockholders
received $38.15 in cash and .78795 of a share of GameStop’s
Class A common stock for each EB share owned. In aggregate,
20.2 million shares of GameStop’s Class A common
stock were issued to EB stockholders at a value of approximately
$437.1 million (based on the closing price of $21.61 of
Historical GameStop’s Class A common stock on
April 15, 2005, the last trading day before the date the
then proposed mergers were announced). In addition,
approximately $993.3 million in cash was paid in
consideration for (i) all outstanding common stock of EB
and (ii) all outstanding stock options of EB. Including
transaction costs of approximately $13.6 million incurred
by Historical GameStop, the total consideration paid was
approximately $1.4 billion.
The mergers and related transactions were treated as a purchase
business combination for accounting purposes. The purchase price
has been allocated based on the estimated fair values of
EB’s assets acquired and liabilities assumed on
October 8, 2005, the date the mergers were consummated. The
purchase price allocation is preliminary and a final
determination of required purchase accounting adjustments will
be made upon completion of our integration plans. In determining
the preliminary purchase price allocation, our management
considered, among other factors, our intention to use the
acquired assets. The total weighted average amortization period
for the intangible assets, excluding goodwill, is approximately
four years. These intangible assets are being amortized based
upon the pattern in which the economic benefits of the
intangible assets are being utilized. None of the goodwill is
deductible for income tax purposes.
We estimate that cost savings and operating synergies resulting
from the mergers will be approximately $70 to $80 million
annually beginning in fiscal 2006. Such cost savings and
operating synergies are expected to be realized by capitalizing
on consolidation and integration of certain functions as well as
through the adoption of best practices from both Historical
GameStop and EB. The accompanying unaudited pro forma condensed
consolidated statement of operations does not include any cost
saving synergies which may be achievable or the impact of
non-recurring expenses and costs which are directly related to
the mergers.
The unaudited pro forma financial information shown under this
heading is presented for informational purposes only, is not
necessarily indicative of the results of operations that would
actually have occurred had the Transactions been consummated at
the beginning of the periods presented, nor is it necessarily
indicative of future operating results. We have not finalized
integration plans, and accordingly, this pro forma information
does not include all costs related to the mergers. The unaudited
pro forma financial information under this heading and the
accompanying notes should be read together with the consolidated
financial statements and related notes included elsewhere in
this prospectus.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
(In thousands, except per share data)
(a) Certain reclassifications have been made to the
historical presentation of GameStop and EB to conform to the
presentation used in the unaudited pro forma condensed
consolidated statement of operations. The historical
presentation of EB includes the results of operations for the
36 weeks ended October 8, 2005, the date of the
mergers.
(b) To give effect to the intangible asset amortization and
depreciation on the property and equipment adjustment based on
the preliminary allocation of the purchase price over estimated
useful lives.
(c) To give effect to the exclusion of certain expenses of
$16,500 and financing costs of $7,518, which are directly
attributable to the mergers and are believed to be of a one-time
or short-term nature.
(d) To give effect to the interest expense incurred related
to the receipt of $941,472 resulting from issuance of $650,000
in old 8% notes at an interest rate of 8.0% and $300,000 in
old floating rate notes at an interest rate of LIBOR plus
3.875%. The old 8% notes were issued at a discount of
$8,528 and interest expense includes the amortization of this
discount over seven years.
(e) To give effect to the amortization of deferred
financing fees relating to the Senior Credit Facility, the old
floating rate notes and the old 8% notes over five, six and
seven years to match the terms, respectively.
(f) Represents the aggregate pro forma effective income tax
effect of Notes (b), (c), (d) and (e) above.
(g) The pro forma earnings per share have been adjusted to
reflect the issuance of 20,229 shares of GameStop
Class A common stock to EB common stockholders as if they
were issued on January 30, 2005.
(h) The holders of Historical GameStop Class A and
Class B common stock generally had identical rights, except
that the holders of Historical GameStop Class A common
stock were entitled to one vote per share and the holders of
Historical GameStop Class B common stock were entitled to
ten votes per share on all matters to be voted on by
stockholders. Earnings per common share amounts represent per
share amounts for both classes of common stock.
(i) The holders of GameStop Class A and Class B
common stock generally have identical rights, except that the
holders of GameStop Class A common stock are entitled to
one vote per share and the holders of GameStop Class B
common stock are entitled to ten votes per share on all matters
to be voted on by stockholders. Earnings per common share
amounts represent per share amounts for both classes of common
stock.
The following selected financial data should be read in
conjunction with “Management’s Discussion and Analysis
of Financial Condition and Results of Operations,”
GameStop’s audited historical consolidated financial
statements as of January 28, 2006 and January 29, 2005
and for the fiscal years ended January 28, 2006,
January 29, 2005 and January 31, 2004, each included
elsewhere in this prospectus. The selected financial data as of
January 31, 2004, February 1, 2003 and
February 2, 2002 and for the fiscal years ended
February 1, 2003 and February 2, 2002 was derived from
GameStop’s audited historical consolidated financial
statements not included elsewhere in this prospectus.
The mergers have been treated as a purchase business combination
for accounting purposes, with Historical GameStop designated as
the acquirer. Therefore, the historical financial statements of
Historical GameStop became the historical financial statements
of GameStop. The accompanying historical consolidated financial
statements as of and for the fiscal year ended January 28,2006 of GameStop include the results of operations of EB from
October 9, 2005 forward. Therefore, GameStop’s
operating results for the fiscal year ended January 28,2006 include 16 weeks of EB’s results and
52 weeks of Historical GameStop’s results.
Historical GameStop’s fiscal year was composed of 52 or
53 weeks ending on the Saturday closest to January 31.
Fiscal 2005, fiscal 2004, fiscal 2003, fiscal 2002 and fiscal
2001 each consisted of 52 weeks. Following the mergers,
GameStop adopted the same method of designating its fiscal years
as that previously employed by Historical GameStop.
In thousands, except per share data and statistical data
Other Financial Data:
Net earnings excluding the after-tax effect of goodwill
amortization(3)
$
100,784
$
60,926
$
63,467
$
52,404
$
15,373
Net earnings per share excluding the after-tax effect of
goodwill amortization — diluted(3)
$
1.61
$
1.05
$
1.06
$
0.87
$
0.39
Store Operating Data:
Stores open at the end of period
4,490
1,826
1,514
1,231
1,038
Comparable store sales increase (decrease)(4)
(1.4
)%
1.7
%
0.8
%
11.4
%
32.0
%
Inventory turnover
5.0
5.4
4.9
4.9
5.2
Balance Sheet Data:
Working capital
$
233,591
$
111,093
$
188,378
$
174,482
$
31,107
Total assets(2)
3,015,119
915,983
902,189
806,237
608,674
Total debt
975,990
36,520
—
—
399,623
Total liabilities(2)
1,900,406
372,972
308,156
257,562
612,659
Stockholders’ equity (deficit)
1,114,713
543,011
594,033
548,675
(3,985
)
(1)
Includes the results of operations of EB from October 9,2005, the day after completion of the mergers, through
January 28, 2006. The addition of EB’s results affects
the comparability of amounts from fiscal periods before fiscal
2005.
(2)
In 2004, we revised our method of accounting for rent expense to
conform to GAAP, as clarified by the Chief Accountant of the SEC
in a February 2005 letter to the American Institute of Certified
Public Accountants. A non-cash, after-tax adjustment of $3,312
was made in the fourth quarter of fiscal 2004 to correct the
method of accounting for rent expense (and related deferred rent
liability) to include the impact of escalating rents for periods
in which we are reasonably assured of exercising lease options
and to include any “rent holiday” period (a period
during which the Company is not obligated to pay rent) the lease
allows while the store is being constructed. We also corrected
our calculation of depreciation expense for leasehold
improvements for those leases which do not include an option
period. The impact of these corrections on periods prior to
fiscal 2004 was not material and the adjustment does not affect
historical or future cash flows or the timing of payments under
related leases. See Note 1 of “Notes to Consolidated
Financial Statements” of the Company for additional
information concerning lease accounting.
(3)
Net earnings excluding the after-tax effect of goodwill
amortization is presented here to provide additional information
about our operations. These items should be considered in
addition to, but not as a substitute for or superior to,
operating earnings, net earnings, cash flow and other measures
of financial performance prepared in accordance with GAAP.
(4)
Stores are included in our comparable store sales base beginning
in the 13th month of operation.
The following table sets forth our unaudited historical ratios
of earnings to fixed charges for the periods indicated below. We
have calculated the ratio of earnings to fixed charges by
dividing earnings by fixed charges. For this purpose, earnings
include earnings before income tax expense plus fixed charges.
Fixed charges include interest and amortization of the issue
discount on the old 8% notes.
The following discussion should be read in conjunction with
the information contained in our consolidated financial
statements, including the notes thereto, which appear elsewhere
in this prospectus. Statements regarding future economic
performance, management’s plans and objectives, and any
statement concerning assumptions related to the foregoing
contained in this section constitute forward-looking statements.
Certain factors, which may cause actual results to vary from
these forward-looking statements, accompany such statements or
appear elsewhere in this prospectus, including the factors
disclosed under “Forward-Looking Statements,”“Risk Factors,” and “Unaudited Pro Forma
Financial Information.”
General
We are the world’s largest retailer of video game products
and PC entertainment software. We sell new and used video game
hardware, video game software and accessories, as well as PC
entertainment software and related accessories and other
merchandise. As of January 28, 2006, we operated 4,490
stores, in the United States, Australia, Canada and Europe,
primarily under the names GameStop and EB Games. We also operate
electronic commerce web sites under the names gamestop.com and
ebgames.com and publish Game Informer, the
industry’s largest circulation multi-platform video game
magazine in the United States.
Our fiscal year is composed of 52 or 53 weeks ending on the
Saturday closest to January 31. Fiscal 2005, fiscal 2004 and
fiscal 2003 each consisted of 52 weeks.
The mergers have been treated as a purchase business combination
for accounting purposes, with Historical GameStop designated as
the acquirer. Therefore, the historical financial statements of
Historical GameStop became the historical financial statements
of GameStop. The consolidated financial statements and notes
thereto included elsewhere in this prospectus include the
results of operations of EB from October 9, 2005 forward.
Therefore, the Company’s operating results for fiscal 2005
include 16 weeks of EB’s results and 52 weeks of
Historical GameStop’s results. Management expects sales,
sales mix, cost of sales, gross profit, selling general and
administrative expenses, depreciation and amortization and
interest expense in fiscal 2006 to be significantly impacted by
including the operations of EB for a full year, as opposed to
16 weeks in fiscal 2005, which included the holiday selling
season. Growth in each of these statement of operations line
items will come from each of the Company’s business
segments.
Growth in the video game industry is driven by the introduction
of new technology. In October 2000, Sony introduced PlayStation
2 and, in November 2001, Microsoft introduced Xbox and Nintendo
introduced GameCube. Nintendo introduced the Game Boy Advance SP
in March 2003 and the DS in November 2004. Sony introduced the
PlayStation Portable, or the Sony PSP, in March 2005 and
Microsoft introduced the Xbox 360 in November 2005. As is
typical following the introduction of new video game platforms,
sales of new video game hardware generally increase as a
percentage of sales in the first full year following
introduction. As video game platforms mature, the sales mix
attributable to complementary video game software and
accessories, which generate higher gross margins, generally
increases in the second and third years. The net effect is
generally a decline in gross margins in the first full year
following new platform releases and an increase in gross margins
in the second and third years. Unit sales of maturing video game
platforms are typically also driven by manufacturer-funded
retail price decreases, further driving sales of related
software and accessories. We expect that the installed base of
the hardware platforms listed above and sales of related
software and accessories will increase in the future. Sony is
expected to launch the PlayStation 3 and Nintendo is expected to
launch the Revolution in late 2006. We expect that our gross
margin in fiscal 2006 will be impacted by the anticipated
launches of these new products.
The Company believes that the following are its most significant
accounting policies which are important in determining the
reporting of transactions and events:
Use of Estimates. The preparation of financial statements
in conformity with GAAP requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities, the 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. In
preparing these financial statements, management has made its
best estimates and judgments of certain amounts included in the
financial statements, giving due consideration to materiality.
Changes in the estimates and assumptions used by management
could have significant impact on the Company’s financial
results. Actual results could differ from those estimates.
Revenue Recognition. Revenue from the sales of the
Company’s products is recognized at the time of sale. The
sales of used video game products are recorded at the retail
price charged to the customer. Sales returns (which are not
significant) are recognized at the time returns are made.
Subscription and advertising revenues are recorded upon release
of magazines for sale to consumers and are stated net of sales
discounts. Magazine subscription revenue is recognized on a
straight-line basis over the subscription period. Revenue from
the sales of product replacement plans is recognized on a
straight-line basis over the coverage period.
Merchandise Inventories. Our merchandise inventories are
carried at the lower of cost or market using the average cost
method. Used video game products traded in by customers are
recorded as inventory at the amount of the store credit given to
the customer. In valuing inventory, management is required to
make assumptions regarding the necessity of reserves required to
value potentially obsolete or over-valued items at the lower of
cost or market. Management considers quantities on hand, recent
sales, potential price protections and returns to vendors, among
other factors, when making these assumptions.
Property and Equipment. Property and equipment are
carried at cost less accumulated depreciation and amortization.
Depreciation on furniture, fixtures and equipment is computed
using the straight-line method over estimated useful lives
(ranging from two to eight years). Maintenance and repairs are
expensed as incurred, while betterments and major remodeling
costs are capitalized. Leasehold improvements are capitalized
and amortized over the shorter of their estimated useful lives
or the terms of the respective leases, including renewal options
in which the exercise of the option is reasonably assured
(generally ranging from three to ten years). Costs incurred in
purchasing management information systems are capitalized and
included in property and equipment. These costs are amortized
over their estimated useful lives from the date the systems
become operational. The Company periodically reviews its
property and equipment whenever events or changes in
circumstances indicate that their carrying amounts may not be
recoverable or their depreciation or amortization periods should
be accelerated. The Company assesses recoverability based on
several factors, including management’s intention with
respect to its stores and those stores’ projected
undiscounted cash flows. An impairment loss is recognized for
the amount by which the carrying amount of the assets exceeds
the present value of their projected cash flows. As a result of
the mergers and an analysis of assets to be abandoned, the
Company impaired assets totaling $9.0 million. Write-downs
incurred by the Company through January 28, 2006 which were
not related to the mergers have not been material.
Merger-Related Costs. In connection with the mergers,
management incurred merger-related costs and commenced
integration activities which have resulted in, or will result
in, involuntary employment terminations, lease terminations,
disposals of property and equipment and other costs and
expenses. Approximately $65.7 million of these costs and
expenses were charged to acquisition costs, representing a
portion of the recorded goodwill, and approximately
$21.1 million were charged to costs and expenses in the
accompanying consolidated statement of operations. The liability
for involuntary termination benefits covers severance amounts,
payroll taxes and benefit costs for approximately 680 employees,
primarily in general and administrative functions in EB’s
Pennsylvania corporate office and distribution center and Nevada
call center, which are expected to be closed in the first half
of fiscal 2006. Termination of these employees began in October
2005 and is expected to be completed by July 2006. Certain
senior executives with EB received payments in the amount of
$4.0 million in accordance with employment contracts. The
Pennsylvania
corporate office and distribution center are owned facilities
which are currently being marketed for sale and are classified
in the accompanying consolidated balance sheet as “Assets
held for sale.” Sale of these facilities is expected to
occur in fiscal 2006.
The liability for lease terminations is associated with stores
and the Nevada call center to be closed and will be paid over
the remaining lease terms through 2015 if the Company is
unsuccessful in negotiating lease terminations or sublease
agreements. The Company began closing these stores in fiscal
2005 and intends to close the remainder of these stores in the
next 12 to 24 months. The disposals of property and
equipment are related to assets of Historical GameStop which are
either impaired or have been, or will be, either abandoned or
disposed of due to the mergers. Certain costs associated with
the disposition of these assets remain as an accrual until the
assets are disposed of and the costs are paid, which is expected
to occur in the next few months.
Merger-related costs include professional fees, financing costs
and other costs associated with the mergers and include certain
ongoing costs associated with integrating the operations of
Historical GameStop and EB, including relocation costs. The
Company is working to finalize integration plans which may
result in additional involuntary employment terminations, lease
and other contractual terminations and employee relocations. The
Company will finalize integration plans and related liabilities
in fiscal 2006 and management anticipates completion of all
integration activities in fiscal 2006. Finalization of
integration plans may result in additional liabilities which
will increase goodwill. Note 2 of “Notes to
Consolidated Financial Statements” of the Company provides
additional information on the merger costs and related
liabilities.
Goodwill. Goodwill, aggregating $340.0 million was
recorded in the acquisition of Funco, Inc., or Funco, in 2000
and through the application of “push-down” accounting
in accordance with SAB 54 in connection with the
acquisition of Babbage’s Etc. LLC, or Babbage’s, in
1999 by a subsidiary of Barnes & Noble, Inc., or
Barnes & Noble. Goodwill in the amount of
$2.9 million was recorded in connection with the
acquisition of Gamesworld Group Limited in 2003. Goodwill in the
amount of $1,071.5 million was recorded in connection with
the mergers. Goodwill represents the excess purchase price over
tangible net assets and identifiable intangible assets acquired.
The Company evaluates goodwill for impairment on at least an
annual basis. In accordance with the requirements of Statement
of Financial Accounting Standards No. 142, Goodwill and
Other Intangible Assets (“SFAS 142”), the
Company completed annual impairment tests of the goodwill
attributable to its reporting unit as of the first day of the
fourth quarter of fiscal 2003 and fiscal 2004 and concluded that
none of its goodwill was impaired. Through January 29,2005, the Company determined that it had one reporting unit
based upon the similar economic characteristics of its
operations. Fair value of this reporting unit was estimated
using market capitalization methodologies. Subsequent to the
mergers, the Company determined that it has four reporting
units, the United States, Australia, Canada and Europe, based
upon the similar economic characteristics of operations in those
regions. The Company employed the services of an independent
valuation specialist to assist in the allocation of goodwill
resulting from the mergers to the four reporting units as of
October 8, 2005, the date of the mergers. The Company also
completed its annual impairment test of goodwill as of the first
day of the fourth quarter of fiscal 2005 and concluded that none
of its goodwill was impaired. Note 7 of “Notes to
Consolidated Financial Statements” of the Company provides
additional information concerning goodwill.
Intangible Assets. Intangible assets consist of
non-compete agreements,
point-of-sale software
and amounts attributed to favorable leasehold interests acquired
in the mergers and are included in other non-current assets in
the consolidated balance sheet. The total weighted-average
amortization period for the intangible assets, excluding
goodwill, is approximately four years. The intangible assets are
being amortized based upon the pattern in which the economic
benefits of the intangible assets are being utilized, with no
expected residual value. The deferred financing fees associated
with the Company’s revolving credit facility and the senior
notes and senior floating rate notes issued in connection with
the financing of the mergers are separately shown in the
consolidated balance sheet. The deferred financing fees are
being amortized over five, six and seven years to match the
terms of the revolving credit facility, the senior floating rate
notes and the senior notes, respectively.
Cash Consideration Received from Vendors. The Company and
its vendors participate in cooperative advertising programs and
other vendor marketing programs in which the vendors provide the
Company with cash consideration in exchange for marketing and
advertising the vendors’ products. Our accounting for
cooperative advertising arrangements and other vendor marketing
programs, in accordance with FASB Emerging Issues Task Force
Issue 02-16 or
“EITF 02-16,”
results in a portion of the consideration received from our
vendors reducing the product costs in inventory. The
consideration serving as a reduction in inventory is recognized
in cost of sales as inventory is sold. The amount of vendor
allowances recorded as a reduction of inventory is determined by
calculating the ratio of vendor allowances in excess of
specific, incremental and identifiable advertising and
promotional costs to merchandise purchases. The Company then
applies this ratio to the value of inventory in determining the
amount of vendor reimbursements recorded as a reduction to
inventory reflected on the balance sheet. Because of the
variability in the timing of our advertising and marketing
programs throughout the year, the Company uses significant
estimates in determining the amount of vendor allowances
recorded as a reduction of inventory in interim periods,
including estimates of full year vendor allowances, specific,
incremental and identifiable advertising and promotional costs,
merchandise purchases and value of inventory. Estimates of full
year vendor allowances and the value of inventory are dependent
upon estimates of full year merchandise purchases. Determining
the amount of vendor allowances recorded as a reduction of
inventory at the end of the fiscal year no longer requires the
use of estimates as all vendor allowances, specific, incremental
and identifiable advertising and promotional costs, merchandise
purchases and value of inventory are known.
Although management considers its advertising and marketing
programs to be effective, we do not believe that we would be
able to incur the same level of advertising expenditures if the
vendors decreased or discontinued their allowances. In addition,
management believes that the Company’s revenues would be
adversely affected if its vendors decreased or discontinued
their allowances, but management is unable to quantify the
impact.
Lease Accounting. As previously disclosed, for fiscal
2004, the Company, similar to many other retailers, revised its
method of accounting for rent expense (and related deferred rent
liability) and leasehold improvements funded by landlord
incentives for allowances under operating leases (tenant
improvement allowances) to conform to GAAP, as clarified by the
Chief Accountant of the SEC in a February 2005 letter to the
American Institute of Certified Public Accountants. For all
stores opened since the beginning of fiscal 2002, the Company
had calculated straight-line rent expense using the initial
lease term, but was generally depreciating leasehold
improvements over the shorter of their estimated useful lives or
the initial lease term plus the option periods. The Company
corrected its calculation of straight-line rent expense to
include the impact of escalating rents for periods in which it
is reasonably assured of exercising lease options and to include
in the lease term any rent holiday. The Company also corrected
its calculation of depreciation expense for leasehold
improvements for those leases which do not include an option
period. Because the effects of the correction were not material
to any previous years, a non-cash, after-tax adjustment of
$3.3 million was made in the fourth quarter of fiscal 2004
to correct the method of accounting for rent expense (and
related deferred rent liability). Of the $3.3 million
after-tax adjustment, $1.8 million pertained to the
accounting for rent holidays, $1.4 million pertained to the
calculation of straight-line rent expense to include the impact
of escalating rents for periods in which the Company is
reasonably assured of exercising lease options and
$0.1 million pertained to the calculation of depreciation
expense for leasehold improvements for the small portion of
leases which do not include an option period. The aggregate
effect of these corrections relating to prior years was
$1.9 million ($0.9 million for fiscal 2003 and
$1.0 million for years prior to fiscal 2003). The
correction does not affect historical or future cash flows or
the timing of payments under related leases.
Income Taxes. The Company accounts for income taxes in
accordance with the provisions of Statement of Financial
Accounting Standards No. 109 Accounting for Income Taxes
(“SFAS 109”). SFAS 109 utilizes an asset
and liability approach, and deferred taxes are determined based
on the estimated future tax effect of differences between the
financial reporting and tax bases of assets and liabilities
using enacted tax rates. As a result of our operations in many
foreign countries, our global tax rate is derived from a
combination of applicable tax rates in the various jurisdictions
in which we operate. We base our estimate of an annual effective
tax rate at any given point in time on a calculated mix of the
tax rates applicable to our company and
to estimates of the amount of income to be derived in any given
jurisdiction. We file our tax returns based on our understanding
of the appropriate tax rules and regulations. However,
complexities in the tax rules and our operations, as well as
positions taken publicly by the taxing authorities, may lead us
to conclude that accruals for uncertain tax positions are
required. We generally maintain accruals for uncertain tax
positions until examination of the tax year is completed by the
taxing authority, available review periods expire or additional
facts and circumstances cause us to change our assessment of the
appropriate accrual amount. The Financial Accounting Standards
Board has been evaluating the accounting for uncertain tax
positions and is likely to issue guidance during 2006 for all
companies to follow. We believe our current processes are
consistent with accounting principles generally accepted in the
United States.
Results of Operations
The following table sets forth certain income statement items as
a percentage of sales for the periods indicated:
The Company includes purchasing, receiving and distribution
costs in selling, general and administrative expenses, rather
than cost of goods sold, in the statement of operations. For
fiscal 2005, fiscal 2004 and fiscal 2003, these purchasing,
receiving and distribution costs amounted to $20.6 million,
$9.2 million and $9.5 million, respectively. The
Company includes processing fees associated with purchases made
by check and credit cards in cost of sales, rather than selling,
general and administrative expenses, in the statement of
operations. For fiscal 2005, fiscal 2004 and fiscal 2003, these
processing fees amounted to $20.9 million,
$12.0 million and $10.7 million, respectively. As a
result of these classifications, our gross margins are not
comparable to those retailers that include purchasing, receiving
and distribution costs in cost of sales and include processing
fees associated with purchases made by check and credit cards in
selling, general and administrative expenses. The net effect of
the Company’s classifications is that its cost of sales as
a percentage of sales is higher than, and its selling, general
and administrative expenses as a percentage of sales are lower
than, they would have been had the Company’s treatment
conformed with those retailers that include purchasing,
receiving and distribution costs in cost of sales and include
processing fees associated with purchases made by check and
credit cards in selling, general and administrative expenses, by
0.0%, 0.2% and 0.1% for fiscal 2005, fiscal 2004 and fiscal
2003, respectively.
Following the completion of the mergers, the Company now
operates its business in the following segments: United States,
Australia, Canada and Europe. Segment results for the United
States include retail operations in 50 states, the District
of Columbia, Guam and Puerto Rico, electronic commerce web sites
under the names gamestop.com and ebgames.com and Game
Informer magazine. Segment results for Canada include retail
operations in Canada and segment results for Australia include
retail operations in Australia and New Zealand. Segment results
for Europe include retail operations in 11 European countries.
Prior to the mergers, Historical GameStop had operations in
Ireland and the United Kingdom which were not material. The
mergers significantly increased our operations in foreign
currencies, including the Euro, Australian dollar, New Zealand
dollar, Canadian dollar, British pound, Swiss franc, Danish
kroner, Swedish krona and Norwegian kroner.
Sales by operating segment in U.S. dollars were as follows
(in millions):
The Canada and Australia segments have a longer history of
operations than the Europe segment and their older store base
generates more operating earnings than Europe. As stores in
Europe mature, the Company expects operating profit to increase.
Because fiscal 2005 segment results for international operations
consist primarily of the results for the 16 weeks of
EB’s operations owned by the Company, management does not
believe that further discussion of the segment results will be
meaningful.
Fiscal 2005 Compared to Fiscal 2004
Sales increased by $1,249.0 million, or 67.7%, from
$1,842.8 million in fiscal 2004 to $3,091.8 million in
fiscal 2005. The increase in sales was primarily attributable to
approximately $996.8 million in sales from EB for the
16 weeks of its operations owned by the Company,
approximately $216.0 million in non-comparable sales
resulting from the 574 net new GameStop stores opened since
January 31, 2004 and approximately $29.6 million due
to an increase in comparable Historical GameStop store sales of
1.7%. This comparable store sales increase was expected due to
the launch of the Sony PSP in March 2005 and the launch of
Microsoft Xbox 360 hardware in November 2005. On a pro forma
basis, comparable store sales decreased 1.4% in fiscal 2005.
Stores are included in our comparable store sales base beginning
in the thirteenth month of operation.
The mergers and the release of the Sony PSP and the Microsoft
Xbox 360 led to an increase in new video game hardware sales of
$294.0 million, or 140.5%, from fiscal 2004 to fiscal 2005.
New hardware sales increased as a percentage of sales from 11.4%
in fiscal 2004 to 16.3% in fiscal 2005 due primarily to the
Sony PSP and Microsoft Xbox 360 launches. The mergers led
to an increase in new video game software sales of
$468.2 million, or 60.3%, from fiscal 2004 to fiscal 2005.
New software sales as a percentage of total sales decreased from
42.1% in fiscal 2004 to 40.3% in fiscal 2005, due to the
increase in new hardware sales as a percentage of total sales.
Used video game product sales also grew due to an increase in
store count, efforts to increase the supply of used inventory
available for sale and the mergers, with an increase in sales of
$296.2 million, or 57.9%, from fiscal 2004. Sales of other
product categories, including PC entertainment and other
software and accessories, magazines and character-related
merchandise, grew 55.2%, or $190.6 million, from fiscal
2004 to fiscal 2005, due to the mergers.
Cost of sales increased by $886.3 million, or 66.5%, from
$1,333.5 million in fiscal 2004 to $2,219.8 million in
fiscal 2005 as a result of the changes in gross profit discussed
below.
Gross profit increased by $362.7 million, or 71.2%, from
$509.3 million in fiscal 2004 to $872.0 million in
fiscal 2005. Gross profit as a percentage of sales increased
from 27.6% in fiscal 2004 to 28.2% in fiscal 2005. This increase
was primarily the result of increases in vendor allowances
received in excess of advertising expenses, which are recorded
as a reduction in cost of sales. In fiscal 2005, vendor
allowances received in excess of advertising expenses were
$74.7 million compared to $29.9 million in fiscal
2004. This increase was due to the ownership of EB during the
fourth fiscal quarter, during which much of the year’s
advertising allowances are generated, and due to the launch of
the Xbox 360, which generated additional advertising allowances.
Gross profit as a percentage of sales on new hardware, new
software and other products increased due to the increase in
vendor allowances received as discussed above. The gross profit
on new hardware increased from 4.1% of sales in fiscal 2004 to
6.1% in fiscal 2005. Because new hardware platforms typically
have lower margins than established hardware platforms, as
expected, the launch of the Sony PSP and the Microsoft Xbox 360
had an offsetting effect on new hardware gross profit as a
percentage of sales. Gross profit as a percentage of sales on
new software increased from 19.6% in fiscal 2004 to 21.4% in
fiscal 2005 due to the increase in vendor allowances received,
as discussed above. Gross profit as a percentage of sales on
other products increased from 34.0% in fiscal 2004 to 35.8% in
fiscal 2005. Gross profit as a percentage of sales on used video
game products increased from 45.3% in fiscal 2004 to 47.4% in
fiscal 2005 due to increased efforts to monitor margin rates
and, following the mergers, the application of GameStop’s
merchandising algorithms to EB’s used video game category.
The Company expects gross profit as a percentage of sales in
fiscal 2006 to be impacted by the anticipated launch in late
2006 of two new hardware platforms in the United States and the
March 2006 launch of Microsoft’s Xbox 360 hardware platform
in Australia.
Selling, general and administrative expenses increased by
$225.9 million, or 60.5%, from $373.4 million in
fiscal 2004 to $599.3 million in fiscal 2005. Approximately
$165.9 million of this increase was attributable to the
mergers and the remainder was due to increases in the number of
stores in operation, and the related increases in store,
distribution, and corporate office operating expenses. Selling,
general and administrative expenses as a percentage of sales
decreased from 20.2% in fiscal 2004 to 19.4% in fiscal 2005. The
decrease in selling, general and administrative expenses as a
percentage of sales was primarily due to combining the full year
results of Historical GameStop’s operations with the
16 weeks of EB’s operations, including the fourth
quarter of the fiscal year. The fourth quarter of the fiscal
year typically experiences high leveraging of selling, general
and administrative expenses due to the holiday selling season.
Foreign currency transaction gains and (losses) are included in
selling, general and administrative expenses and amounted to
$2.6 million in fiscal 2005, compared to an immaterial
amount of loss in fiscal 2004.
Depreciation and amortization expense increased from
$36.8 million in fiscal 2004 to $66.4 million in
fiscal 2005. This increase of $29.6 million was due
primarily to depreciation of EB’s assets of
$22.4 million after the mergers, with the remaining
increase due to capital expenditures for 296 new GameStop stores
and management information systems and the commencement in the
third quarter of fiscal 2005 of full operations in the
Company’s new distribution facility. Depreciation and
amortization expense will increase from fiscal 2005 to fiscal
2006 due to the mergers, continued capital expenditures for new
stores and management information systems and due to a full year
of depreciation on the Company’s new distribution facility.
The Company’s results of operations for fiscal 2005 include
expenses believed to be of a one-time or short-term nature
associated with the mergers, which included $13.6 million
included in operating earnings and $7.5 million included in
interest expenses. The $13.6 million included
$9.0 million in one-time charges associated with assets of
the Company considered to be impaired because they were
redundant as a result of the mergers. The $7.5 million of
merger-related interest expense resulted primarily from a
commitment fee of $7.1 million for bridge financing as a
contingency in the event that we were unable to issue the senior
notes and senior floating rate notes prior to the consummation
of the mergers.
Interest income resulting from the investment of excess cash
balances increased from $1.9 million in fiscal 2004 to
$5.1 million in fiscal 2005 due to an increase in the
average yield on the investments, interest of $0.8 million
earned on the investment of the $941.5 million in proceeds
of the offering of the senior notes and
the senior floating rate notes from the issuance date on
September 28, 2005 until the date of the mergers on
October 8, 2005 and interest income earned by EB after the
mergers on its invested assets. Interest expense increased from
$2.2 million in fiscal 2004 to $30.4 million in fiscal
2005 primarily due to the interest incurred on the
$650 million senior notes payable and the $300 million
senior floating rate notes payable and the interest incurred on
the note payable to Barnes & Noble in connection with
the repurchase of Historical GameStop’s Class B common
stock in fiscal 2004. Interest expense on the Company’s
debt is expected to be approximately $80.0 million in
fiscal 2006.
Income tax expense increased by $21.1 million, from
$38.0 million in fiscal 2004 to $59.1 million in
fiscal 2005. The Company’s effective tax rate decreased
from 38.4% in fiscal 2004 to 37.0% in fiscal 2005 due to
expenses related to the mergers and corporate restructuring. See
Note 12 of “Notes to Consolidated Financial
Statements” of the Company for additional information
regarding income taxes.
The factors described above led to an increase in operating
earnings of $93.6 million, from $99.1 million in
fiscal 2004 to $192.7 million in fiscal 2005 and an
increase in net earnings of $39.9 million, or 65.5%, from
$60.9 million in fiscal 2004 to $100.8 million in
fiscal 2005.
Fiscal 2004 Compared to Fiscal 2003
Sales increased by $264.0 million, or 16.7%, from
$1,578.8 million in fiscal 2003 to $1,842.8 million in
fiscal 2004. The increase in sales was attributable to the
$139.0 million in sales resulting from 338 new stores
opened since January 31, 2004 and the $94.2 million in
additional sales from having a full year of sales in fiscal 2004
from stores that opened in fiscal 2003, compared to a partial
year in 2003. Comparable store sales increased a modest 1.7% as
increases in video game software sales driven by strong new game
releases were offset by declining hardware price points and
hardware shortages caused by insufficient quantities
manufactured by hardware vendors. Stores are included in our
comparable store sales base beginning in the thirteenth month of
operation.
The strong new game releases in fiscal 2004 led to an increase
in new video game software sales of $128.8 million, or
19.9%, from fiscal 2003 and an increase in new software sales as
a percentage of total sales from 41.0% in fiscal 2003 to 42.1%
in fiscal 2004. The declining price points and hardware
shortages described above curtailed the expected growth in new
hardware, resulting in a modest 5.6%, or $11.1 million,
increase in sales and a decline in hardware sales as a
percentage of total sales from 12.6% in fiscal 2003 to 11.4% in
fiscal 2004. Used video game products continued to show strong
growth, with an increase in sales of $108.5 million, or
26.9%, from fiscal 2003 to fiscal 2004 and an increase as a
percentage of total sales from 25.5% in fiscal 2003 to 27.8% in
fiscal 2004. This growth was due to our store growth in strip
centers and the availability of used products for sale caused by
trade-ins of used video game products in response to the strong
new game releases. Sales of other product categories, including
PC entertainment and other software and accessories, magazines
and character-related merchandise, grew only 4.7%, or
$15.6 million, from fiscal 2003 to fiscal 2004, as was
expected due to a lack of strong new PC accessories and trading
cards.
Cost of sales increased by $187.6 million, or 16.4%, from
$1,145.9 million in fiscal 2003 to $1,333.5 million in
fiscal 2004 as a result of the changes in gross profit discussed
below.
Gross profit increased by $76.4 million, or 17.6%, from
$432.9 million in fiscal 2003 to $509.3 million in
fiscal 2004. Gross profit as a percentage of sales increased
from 27.4% in fiscal 2003 to 27.6% in fiscal 2004. This increase
was primarily the result of the shift in sales mix from lower
margin new video game hardware to higher margin new video game
software and used video game products, as discussed above. Gross
profit as a percentage of sales on new hardware declined from
5.3% in fiscal 2003 to 4.1% in fiscal 2004 due to the expedited
freight costs incurred in shipping hardware, which was in short
supply, into our stores. The expected continued downward
pressure in margin rates on new release titles caused a decline
in gross profit as a percentage of sales on new software from
19.9% in fiscal 2003 to 19.6% in fiscal 2004. Gross profit as a
percentage of sales on used video game products increased from
44.5% in fiscal 2003 to 45.3% in fiscal 2004
due to increased efforts to monitor margin rates. Gross profit
as a percentage of sales on other products remained comparable
from fiscal 2003 to fiscal 2004.
Selling, general and administrative expenses increased by
$74.2 million, or 24.8%, from $299.2 million in fiscal
2003 to $373.4 million in fiscal 2004. These increases were
primarily attributable to the increase in the number of stores
in operation, and the related increases in store, distribution,
and corporate office operating expenses, the $2.8 million
provision for the proposed California labor litigation
settlement, the $2.8 million charge attributable to the
professional fees related to the spin-off of our Class B
common shares previously owned by Barnes & Noble and
$5.1 million attributable to correcting our method of
accounting for rent expense. Selling, general and administrative
expenses as a percentage of sales increased from 19.0% in fiscal
2003 to 20.2% in fiscal 2004. The increase in selling, general
and administrative expenses as a percentage of sales was
primarily due to the costs associated with the continued rollout
of new stores and the effect these stores have on leveraging of
selling, general and administrative expenses and investments in
our international infrastructure (a combined impact of 0.6% of
sales), the provision for the proposed California labor
litigation settlement (0.2% of sales), the charge attributable
to the professional fees related to the spin-off of our
Class B common shares (0.2% of sales) and correcting our
method of accounting for rent expense (0.3% of sales).
Depreciation and amortization expense increased from
$29.4 million in fiscal 2003 to $36.8 million in
fiscal 2004. This increase of $7.4 million was due to the
capital expenditures for new stores and management information
systems during the fiscal year.
Interest income resulting from the investment of excess cash
balances increased from $1.5 million in fiscal 2003 to
$1.9 million in fiscal 2004 due to an increase in the level
of investments and the average yield on the investments.
Interest expense increased by $1.5 million, from
$0.7 million in fiscal 2003 to $2.2 million in fiscal
2004. This increase in interest expense was due to the interest
incurred on the note payable to Barnes & Noble in
connection with the repurchase of the Company’s
Class B common stock.
Income tax expense decreased by $3.7 million, from
$41.7 million in fiscal 2003 to $38.0 million in
fiscal 2004. The Company’s effective tax rate decreased
from 39.7% in fiscal 2003 to 38.4% in fiscal 2004 due to
corporate restructuring. See Note 12 of “Notes to
Consolidated Financial Statements” of the Company for
additional information regarding income taxes.
The factors described above led to a decrease in operating
earnings of $5.3 million, from $104.4 million in
fiscal 2003 to $99.1 million in fiscal 2004 and a decrease
in net earnings of $2.6 million, or 4.0%, from
$63.5 million in fiscal 2003 to $60.9 million in
fiscal 2004.
Liquidity and Capital Resources
During fiscal 2005, cash provided by operations was
$291.4 million, compared to cash provided by operations of
$146.0 million in fiscal 2004 and cash provided by
operations of $71.3 million in fiscal 2003. The increase in
cash provided by operations of $145.4 million from fiscal
2004 to fiscal 2005 resulted from an increase in net income of
$39.9 million, primarily due to EB’s results of
operations since the mergers; an increase in depreciation and
amortization of $29.7 million due primarily to the mergers;
an increase in the growth in accounts payable, net of growth in
merchandise inventories, of $26.8 million caused by growth
of the Company and efforts to manage working capital; an
increase in the growth of accrued liabilities of
$29.9 million due primarily to increases in liabilities for
customer reservations caused by the growth of the Company; and a
net decrease in prepaid expenses of $19.5 million due
primarily to the timing of rent payments at the end of fiscal
2004.
The increase in cash provided by operations of
$74.7 million from fiscal 2003 to fiscal 2004 resulted
primarily from an excess of the growth of accounts payable over
the growth in merchandise inventories of $7.3 million
during fiscal 2004 compared to a deficit in the growth of
accounts payable compared to the growth in merchandise
inventories of $32.7 million during fiscal 2003. The
Company invested in merchandise inventories during fiscal 2003
to prepare for the growth of the Company and store openings in
fiscal 2004, with
an increase in merchandise inventories of $72.7 million
during fiscal 2003 compared to an increase in accounts payable
and accrued liabilities of $40.0 million during fiscal
2003. In addition, the increase in cash provided by operations
from fiscal 2003 to fiscal 2004 was also due to an increase in
depreciation and amortization of $7.5 million, due
primarily to growth in store count and investments in
information systems and a net change in prepaid taxes of
$21.8 million due to timing of tax payments made in fiscal
2003 for fiscal 2004.
Cash used in investing activities was $996.8 million and
$98.4 million during fiscal 2005 and fiscal 2004,
respectively. During fiscal 2005, $886.1 million of cash
was used to acquire EB. Our capital expenditures in fiscal 2005
included approximately $9.7 million to complete the
build-out of our new corporate headquarters and distribution
center facility in Grapevine, Texas. The remaining
$101.0 million in capital expenditures was used to open 377
new stores, remodel existing stores and invest in information
and distribution systems in support of the integration of the
operations of EB and Historical GameStop. During fiscal 2004,
our capital expenditures included approximately
$27.7 million to acquire and begin the build-out of our new
corporate headquarters and distribution center facility. The
remaining $70.6 million in capital expenditures was used to
open 338 new stores, remodel existing stores and invest in
information systems.
Our future capital requirements will depend on the number of new
stores we open and the timing of those openings within a given
fiscal year. We opened 377 stores in fiscal 2005 and expect to
open approximately 400 stores in fiscal 2006. Within the
next 12 to 24 months, we intend to rebrand all of the EB
stores to the GameStop brand. Projected capital expenditures for
fiscal 2006 are approximately $110.0 million, to be used
primarily to fund new store openings, rebrand EB stores and
invest in distribution and information systems in support of the
integration of the operations of EB and Historical GameStop.
In October 2005, in connection with the mergers, the Company
entered into the
five-year,
$400.0 million Senior Credit Facility. The Senior Credit
Facility has a $50.0 million letter of credit sub-limit and
is secured by the assets of the Company. The Senior Credit
Facility places certain restrictions on the Company and the
borrower subsidiaries, including limitations on asset sales,
additional liens, and the incurrence of additional indebtedness.
For more information regarding the Senior Credit Facility, see
“Description of Other Indebtedness.”
As of January 28, 2006, there were no borrowings
outstanding under the Senior Credit Facility and letters of
credit outstanding totaled $2.3 million.
On May 31, 2005, a subsidiary of EB completed the
acquisition of Jump Ordenadores S.L.U., or Jump, a
privately-held retailer based in Valencia, Spain. As of
January 28, 2006, Jump had other third-party debt of
approximately $0.6 million.
As of January 28, 2006, the Company was in compliance with
all covenants associated with its credit facilities.
On September 28, 2005, the Issuers completed the offering
of the old notes. At such time, the gross proceeds of the
offering of the old notes were placed in escrow pending approval
of the mergers by Historical GameStop’s and EB’s
stockholders, which approval was a condition to the consummation
of the mergers.
The old notes were sold pursuant to a purchase agreement, dated
September 21, 2005, by and among the Issuers, the
subsidiary guarantors listed on Schedule I-A thereto, and
Citigroup Global Markets Inc., for themselves and as
representatives of the several initial purchasers listed on
Schedule II thereto. A copy of the purchase agreement was
filed as Exhibit 1.1 to Historical GameStop’s Current
Report on
Form 8-K, dated
September 27, 2005.
The old notes were issued under an indenture, dated
September 28, 2005, by and among the Issuers, the
subsidiary guarantors party thereto, and Citibank, N.A., as
trustee. A copy of the indenture was filed as Exhibit 4.2
to Historical GameStop’s Current Report on
Form 8-K, dated
September 30, 2005. For more information regarding the
indenture and the terms of the old notes and the exchange notes,
see “Description of the Exchange Notes.”
In connection with the closing of the offering of the old notes,
the Issuers also entered into a registration rights agreement,
dated September 28, 2005, by and among the Issuers, the
subsidiary guarantors listed on Schedule I-A thereto, and
Citigroup Global Markets Inc., for themselves and as
representatives of the several initial purchasers listed on
Schedule II thereto. A copy of the registration rights
agreement was filed as Exhibit 4.3 to Historical
GameStop’s Current Report on
Form 8-K, dated
September 30, 2005. For more information regarding the
registration rights agreement and the Company’s obligations
thereunder regarding the notes, see “The Exchange
Offer.”
At the scheduled meetings of Historical GameStop’s and
Electronics Boutique’s stockholders held on October 6,2005, the proposal for the business combination was approved. On
October 7, 2005, the proceeds of the offering of old notes
placed in escrow, minus certain fees and expenses of the initial
purchasers and others, were released to the Company. Such net
proceeds of the offering were used to pay the cash portion of
the merger consideration paid to the stockholders of EB in
connection with the mergers.
Concurrently with the consummation of the mergers on
October 8, 2005, EB and its direct and indirect domestic
wholly-owned subsidiaries, or the EB Guarantors, became
subsidiaries of the Company and entered into: (1) a first
supplemental indenture, dated October 8, 2005, by and among
the Issuers, the EB Guarantors, and Citibank, N.A., as trustee,
pursuant to which the EB Guarantors assumed all the obligations
of a subsidiary guarantor under the notes and the indenture; and
(2) a joinder agreement, dated October 8, 2005,
pursuant to which the EB Guarantors assumed all the obligations
of a subsidiary guarantor under the purchase agreement and the
registration rights agreement.
On May 25, 2005, a subsidiary of EB closed on a
10-year,
$9.5 million mortgage agreement collateralized by a new
315,000 square foot distribution facility located in
Sadsbury Township, Pennsylvania. Interest is fixed at a rate of
5.4% per annum. As of January 28, 2006, the
outstanding principal balance under the mortgage was
approximately $9.3 million.
In March 2003, the Board of Directors of Historical GameStop
authorized a common stock repurchase program for the purchase of
up to $50.0 million of Historical GameStop’s
Class A common shares. Historical GameStop had the right to
repurchase shares from time to time in the open market or
through privately negotiated transactions, depending on
prevailing market conditions and other factors. During fiscal
2004, Historical GameStop repurchased 959,000 shares at an
average share price of $15.64. During fiscal 2003, Historical
GameStop repurchased 2,304,000 shares at an average share
price of $15.19. From the inception of this repurchase program
through January 29, 2005, Historical GameStop repurchased
3,263,000 shares at an average share price of $15.32,
totaling $50.0 million, and, as of January 29, 2005,
had no amount remaining available for purchases under this
repurchase program. The repurchased shares were held in treasury
until the consummation of the mergers, at which time the shares
were retired and all outstanding shares of Historical GameStop
were exchanged for shares of common stock of the Company.
In October 2004, the board of directors of Historical GameStop
authorized a repurchase of Historical GameStop Class B
common stock held by Barnes & Noble. Historical
GameStop repurchased 6,107,000 shares of Class B
common stock at a price equal to $18.26 per share for
aggregate consideration of $111.5 million. Historical
GameStop paid $37.5 million in cash and issued a promissory
note in the principal amount of $74.0 million. Scheduled
principal payments of $37.5 million and $12.2 million
were made in January 2005 and October 2005, respectively. The
note also requires payments of $12.2 million each due in
October 2006 and October 2007. The note is unsecured and bears
interest at 5.5% per annum, payable when principal
installments are due. The repurchased shares were immediately
retired.
Based on our current operating plans, we believe that available
cash balances, cash generated from our operating activities and
funds available under the Senior Credit Facility will be
sufficient to fund our operations, required interest payments on
the notes and our note payable to Barnes & Noble, store
expansion and remodeling activities and corporate capital
expenditure programs for at least the next 12 months.
The following table sets forth our contractual obligations (in
millions) as of January 28, 2006:
Payments Due by Period
Less Than
More Than
Contractual Obligations
Total
1 Year
1-3 Years
3-5 Years
5 Years
In millions
Long-Term Debt(1)
$
1,479.4
$
91.4
$
168.8
$
156.3
$
1,062.9
Operating Leases
$
1,017.4
$
197.1
$
339.3
$
206.5
$
274.5
Purchase Obligations(2)
$
420.9
$
420.9
$
—
$
—
$
—
Involuntary Employment Termination Costs(3)
$
10.2
$
10.2
$
—
$
—
$
—
Total
$
2,927.9
$
719.6
$
508.1
$
362.8
$
1,337.4
(1)
The long-term debt consists of $650.0 million (principal
value), which bears interest at 8.0%, $300.0 million of
floating rate notes which currently bear interest at 8.865%,
$24.3 million which bears interest at 5.5% and
$9.3 million which bears interest at 5.4%. Amounts include
contractual interest payments (using the interest rate as of
January 28, 2006 for the floating rate notes).
(2)
Purchase obligations represent outstanding purchase orders for
merchandise from vendors. These purchase orders are generally
cancelable until shipment of the products.
(3)
Involuntary employment termination costs include known amounts
committed to approximately 680 employees, primarily in general
and administrative functions in EB’s Pennsylvania corporate
office and distribution center and Nevada call center, which are
expected to be closed in the first half of fiscal 2006.
Termination of these employees began in October 2005 and is
expected to be completed by July 2006.
In addition to minimum rentals, the operating leases generally
require the Company to pay all insurance, taxes and other
maintenance costs and may provide for percentage rentals.
Percentage rentals are based on sales performance in excess of
specified minimums at various stores. Leases with step rent
provisions, escalation clauses or other lease concessions are
accounted for on a straight-line basis over the lease term,
including renewal options for those leases in which it is
reasonably assured that the Company will exercise the renewal
option. The Company does not have leases with capital
improvement funding.
The Company intends to sell the 315,000 square foot
distribution facility located in Sadsbury Township, Pennsylvania
in fiscal 2006. Under the terms of the mortgage agreement on
this facility, we could be liable for an early-termination
payment of approximately $0.8 million when we sell the
facility and retire the mortgage. This early-termination payment
is recorded in accrued liabilities in the consolidated balance
sheet as of January 28, 2006 as the Company intends to
retire the mortgage if the building is sold in fiscal 2006 and
expects to be liable for the early-termination penalty.
The Company has entered into employment agreements with R.
Richard Fontaine, Daniel A. DeMatteo Steven R. Morgan and David
W. Carlson. The terms of the employment agreements for
Mr. Fontaine and Mr. DeMatteo commenced on
April 11, 2005 and continue for a period of three years
thereafter, with automatic annual renewals thereafter unless
either party gives notice of non-renewal at least six months
prior to automatic renewal. The term of the employment agreement
for Mr. Morgan commenced on December 9, 2005 and
continues through February 12, 2008, with automatic annual
renewals thereafter unless either party gives notice of
non-renewal at least six months prior to automatic renewal. The
term of the employment agreement for Mr. Carlson commenced
on April 3, 2006 and continues for a period of two years
thereafter, with automatic annual renewals thereafter unless
either party gives notice of non-renewal at least six months
prior to automatic renewal. Mr. Fontaine’s minimum
annual salary during the term of his employment under the
employment agreement shall be no less than $650,000.
Mr. DeMatteo’s minimum annual salary during the term
of his employment under the employment agreement shall be no
less than $535,000. The Board of Directors of the Company has
set Mr. Fontaine’s and Mr. DeMatteo’s
salaries for fiscal 2006 at $1,000,000
and $800,000, respectively. Mr. Morgan’s minimum
annual salary during the term of his employment under the
employment agreement shall be no less than $450,000.
Mr. Carlson’s minimum annual salary during the term of
his employment under the employment agreement shall be no less
than $350,000.
As of January 28, 2006, we had standby letters of credit
outstanding in the amount of $2.3 million and had no other
commercial commitments such as guarantees or standby repurchase
obligations outstanding.
Off-Balance Sheet Arrangements
The Company remains contingently liable for the BC Sports
Collectibles store leases assigned to Sports Collectibles
Acquisition Corporation, or SCAC. SCAC is owned by the family of
James J. Kim, Chairman of EB at the time and currently one of
the Company’s directors. If SCAC were to default on these
lease obligations, the Company would be liable to the landlords
for up to $5.4 million in minimum rent and landlord charges
as of January 28, 2006. Mr. Kim has entered into an
indemnification agreement with EB with respect to these leases,
therefore no accrual was recorded for this contingent obligation.
Impact of Inflation
We do not believe that inflation has had a material effect on
our net sales or results of operations.
Recent Accounting Pronouncements
In December 2004, the FASB issued Statement of Financial
Accounting Standard No. 123 (Revised 2004), Share-Based
Payment, (“SFAS 123(R)”). This Statement
requires companies to expense the estimated fair value of stock
options and similar equity instruments issued to employees.
Currently, companies are required to calculate the estimated
fair value of these share-based payments and can elect to either
include the estimated cost in earnings or disclose the pro forma
effect in the footnotes to their financial statements. We have
chosen to disclose the pro forma effect. The fair value concepts
were not changed significantly in SFAS 123(R), however, in
adopting this Standard, companies must choose among alternative
valuation models and amortization assumptions. The valuation
model and amortization assumption we have used continue to be
available and we intend to continue to use them.
SFAS 123(R) will be effective for the Company beginning in
fiscal 2006. Transition options allow companies to choose
whether to adopt prospectively, restate results to the beginning
of the year, or to restate prior periods with the amounts on a
basis consistent with pro forma amounts that have been included
in their footnotes. We have concluded that we will adopt on the
modified prospective basis. For the pro forma effect on fiscal
2005, fiscal 2004 and fiscal 2003, using our existing valuation
and amortization assumptions, see Note 1 of “Notes to
Consolidated Financial Statements” of the Company included
elsewhere in this prospectus. We expect that the implementation
of SFAS 123(R) will reduce net income by approximately
$10.6 million, $8.5 million and $5.3 million in
fiscal 2006, fiscal 2007 and fiscal 2008, respectively, based on
the terms and conditions of non-vested stock options outstanding
as of January 28, 2006.
In May 2005, the FASB issued Statement of Financial Accounting
Standard No. 154, Accounting Changes and Error
Corrections, (“SFAS 154”). This Statement
defines the accounting for and reporting of a change in
accounting principle. SFAS 154 will be effective for the
Company beginning in fiscal 2006. The implementation of
SFAS 154 is not expected to have an impact on the
Company’s financial condition or results of operations.
In October 2005, the FASB issued Statement of Financial
Accounting Standards Staff Position
No. 13-1,
Accounting for Rental Costs Incurred During a Construction
Period, (“SFAS SP
13-1”). This
Statement requires that rental costs associated with ground or
building operating leases that are incurred during a
construction period shall be recognized as rental expense. The
rental costs shall be included in income from continuing
operations. SFAS SP
13-1 will be effective
for the Company beginning in fiscal 2006. However, the Company
previously corrected its calculation of straight-line rent
expense to include in the lease term any period during which the
Company is not obligated to pay rent while the store is being
constructed. The implementation of SFAS SP
13-1 is not expected to
have an impact on the Company’s financial condition or
results of operations.
GameStop is the world’s largest retailer of video game
products and PC entertainment software. We sell new and used
video game hardware, video game software and accessories, as
well as PC entertainment software, and related accessories and
other merchandise. As of January 28, 2006, we operated
4,490 stores in the United States, Australia, Canada and Europe,
primarily under the names GameStop and EB Games. We also operate
electronic commerce websites under the names gamestop.com and
ebgames.com and publish Game Informer, the largest
circulation multi-platform video game magazine in the United
States, with approximately 1.9 million subscribers.
GameStop is a holding company that was created to facilitate the
combination of Historical GameStop and EB. On April 17,2005, Historical GameStop and EB entered into a merger agreement
pursuant to which, effective October 8, 2005, separate
subsidiaries of GameStop were merged with and into Historical
GameStop and EB, respectively, and Historical GameStop and EB
became wholly-owned subsidiaries of GameStop. Our Class A
common stock and our Class B common stock are traded on the
New York Stock Exchange under the symbols GME and GME.B,
respectively.
Historical GameStop’s subsidiary Babbage’s began
operations in November 1996. In October 1999, Babbage’s was
acquired by, and became a wholly-owned subsidiary of,
Barnes & Noble. In June 2000, Barnes & Noble
acquired Funco and thereafter, Babbage’s became a
wholly-owned subsidiary of Funco. In December 2000, Funco
changed its name to GameStop, Inc. On February 12, 2002,
Historical GameStop completed an initial public offering of its
Class A common stock and was a majority-owned subsidiary of
Barnes & Noble until November 12, 2004, when
Barnes & Noble distributed its holdings of outstanding
Historical GameStop Class B common stock to its
stockholders.
EB was incorporated under the laws of the State of Delaware in
March 1998 as a holding company for EB’s operating
activities and completed its initial public offering in July of
that same year. EB’s predecessor was incorporated in the
Commonwealth of Pennsylvania in 1977.
In the mergers, Historical GameStop’s stockholders received
one share of GameStop’s Class A common stock for each
share of Historical GameStop’s Class A common stock
owned and one share of GameStop’s Class B common stock
for each share of Historical GameStop’s Class B common
stock owned. EB stockholders received $38.15 in cash and .78795
of a share of GameStop’s Class A common stock for each
EB share owned. In aggregate, 20.2 million shares of
GameStop’s Class A common stock were issued to EB
stockholders and approximately $993.3 million in cash was
paid in consideration for all outstanding common stock of EB and
all outstanding stock options of EB.
Of our 4,490 stores, 3,624 stores are located in the U.S. and
866 stores are located in Australia, Canada and Europe. Our
stores, which average approximately 1,500 square feet,
carry a balanced mix of new and used video game hardware, video
game software and accessories, which we refer to as video game
products, and PC entertainment software. Our used video game
products provide a unique value proposition to our customers,
and our purchasing of used video game products provides our
customers with an opportunity to trade in their used video game
products for store credits and apply those credits towards other
merchandise, which, in turn, increases sales.
Our corporate office and one of our distribution facilities are
housed in a 480,000 square foot headquarters and
distribution center in Grapevine, Texas. We purchased this
facility in March 2004 and improved and equipped it prior to
relocating headquarters and distribution center operations to
this facility in fiscal 2005. We also have a distribution
facility in Louisville, Kentucky. In connection with the
mergers, we have commenced efforts to integrate the operations
of Historical GameStop and EB, and are in the process of
discontinuing operations in EB’s distribution facility and
corporate office in Pennsylvania and in EB’s call center in
Nevada.
According to NPD, a market research firm, the electronic game
industry was an approximately $11.5 billion market in the
United States in 2005. Of this $11.5 billion market,
approximately $10.5 billion was attributable to video game
products, excluding sales of used video game products, and
approximately $1.0 billion was attributable to PC
entertainment software. According to International Development
Group, a market research firm, retail sales of video game
hardware and software and PC entertainment software totaled
approximately $9.6 billion in Europe in 2005.
New Video Game Products. ESA estimates that 50% of all
Americans, or approximately 145 million people, play video
or computer games on a regular basis. We expect the following
trends to result in increased sales of video game products:
•
Hardware Platform Technology Evolution. Video game
hardware has evolved significantly from the early products
launched in the 1980s. The processing speed of video game
hardware has increased from 8-bit speeds in the 1980s to 128-bit
speeds in next-generation systems such as Sony
PlayStation 2, launched in 2000, and Nintendo GameCube and
Microsoft Xbox, which both launched in November 2001. In
addition, portable handheld video game devices have evolved from
the 8-bit Nintendo Game Boy to the 128-bit Nintendo DS, which
was introduced in November 2004, and the Sony PSP, which was
introduced in March 2005. Microsoft released the Xbox 360 in
November 2005 and Sony and Nintendo are each expected to release
their respective new consoles in late 2006. Technological
developments in both chip processing speed and data storage have
provided significant improvements in advanced graphics and audio
quality, which allow software developers to create more advanced
games, encourage existing players to upgrade their hardware
platforms and attract new video game players to purchase an
initial system. As general computer technology advances, we
expect video game technology to make similar advances.
•
Next-Generation Systems Provide Multiple Capabilities Beyond
Gaming. Many next-generation hardware platforms, including
Sony PlayStation 2 and Microsoft Xbox and Xbox 360, utilize a
DVD software format and have the potential to serve as
multi-purpose entertainment centers by doubling as a player for
DVD movies and compact discs. In addition, Sony
PlayStation 2, Nintendo DS and Microsoft Xbox and Xbox 360
manufacture accessories which provide internet connectivity.
•
Backward Compatibility. Sony PlayStation 2, Nintendo
DS and, to some extent, Microsoft Xbox 360 are backward
compatible, meaning that titles produced for the earlier version
of the hardware platform may be used on the new hardware
platform. We believe that backward compatibility may result in
more stable industry growth because the decrease in consumer
demand for products associated with existing hardware platforms
that typically precedes the release of next-generation hardware
platforms may be diminished.
•
Introduction of Next-Generation Hardware Platforms Drives
Software Demand. Sales of video game software generally
increase as next-generation platforms mature and gain wider
acceptance. Historically, when a new platform is released, a
limited number of compatible game titles are immediately
available, but the selection grows rapidly as manufacturers and
third-party publishers develop and release game titles for that
new platform. For example, when the Sony PSP was released in
March 2005, approximately 20 game titles were available for
sale. Currently, there are over 200 titles for the Sony PSP
platform available for sale.
•
Broadening Demographic Appeal. While the typical
electronic game enthusiast is male between the ages of 14 and
35, the electronic game industry is broadening its appeal. More
females are playing electronic video games, in part due to the
development of video game products that appeal to them.
According to ESA, approximately 43% of all electronic game
players are female. More adults are also playing video games as
a portion of the population that played video games in their
childhood continues to play and advance to the next-generation
video game products. In addition, the availability of used video
game products for sale has enabled a lower-economic demographic,
that may not have been able
to afford the considerably more expensive new video game
products, to participate in the video game industry.
Used Video Game Market. As the installed base of video
game hardware platforms has increased and new hardware platforms
are introduced, a growing used video game market has evolved in
the United States. Based on reports published by NPD, we believe
that, as of December 2005, the installed base of video game
hardware systems in the United States, based on original sales,
totaled over 200 million units, including approximately
600,000 Microsoft Xbox 360 units, 3.6 million Sony PSP
units, 33 million Sony PlayStation 2 units,
14 million Microsoft Xbox units, 11 million Nintendo
GameCube units, 32 million Nintendo DS, Game Boy Advance SP
and Game Boy Advance units, 29 million Sony PlayStation
units and over 80 million units of older hardware platforms
such as Sega Dreamcast, Nintendo 64, Nintendo Game Boy and Game
Boy Color, Sega Genesis and Super Nintendo systems. Hardware
manufacturers and third-party software publishers have produced
a wide variety of software titles for each of these hardware
platforms. Based on internal company estimates, we believe that
the installed base of video game software units in the
United States exceeds 800 million units.
PC Entertainment Software. PC entertainment software is
generally sold in the form of CD-ROMs and played on multimedia
PCs featuring fast processors, expanded memories, and enhanced
graphics and audio capabilities.
Business Strategy
Our goal is to enhance our position as the world’s largest
retailer of new and used video game products and PC
entertainment software by focusing on the following strategies:
Continue to Execute Our Proven Growth Strategies. We
intend to continue to execute our proven growth strategies,
including:
•
Continuing the practices of Historical GameStop and EB of
opening new strip center stores in our target markets and new
mall stores in selected mall locations.
•
Increasing our comparable store sales and operating earnings by
capitalizing on industry growth, increasing sales of used video
game products and our Game Informer magazine and
increasing awareness of the GameStop brand.
Targeting a Broad Audience of Game Players. We have
created a store environment targeting a broad audience including
the electronic game enthusiast, the casual gamer and the
seasonal gift giver. Our stores focus on the electronic game
enthusiast who demands the latest merchandise featuring the
“hottest” technology immediately on the day of release
and the value-oriented customer who wants a wide selection of
value-priced used video game products. Our stores offer the
opportunity to trade in used video game products in exchange for
store credits applicable to future purchases, which, in turn,
drives more sales.
Enhancing our Image as a Destination Location. Our stores
serve as destination locations for game players due to our broad
selection of products, knowledgeable sales associates,
game-oriented environment and unique pricing proposition. We
offer all major video game platforms, provide a broad assortment
of video game products and offer a larger and more current
selection of merchandise than other retailers. We provide a high
level of customer service by hiring game enthusiasts and
providing them with ongoing sales training, as well as training
in the latest technical and functional elements of our products
and services. Our stores are equipped with several video game
sampling areas, which provide our customers the opportunity to
play games before purchase, as well as equipment to play video
game clips.
Offering the Largest Selection of Used Video Game
Products. We are the largest retailer of used video games in
the world and carry the broadest selection of used video game
products for both current and previous generation platforms. We
are one of the only retailers that provide video game software
for previous generation platforms, giving us a unique advantage
in the video game retail industry. The opportunity to trade in
and purchase used video game products offers our customers a
unique value proposition unavailable at mass merchants, toy
stores and consumer electronics retailers. We obtain most of our
used video game products
from trade-ins made in our stores by our customers. Used video
game products generate significantly higher gross margins than
new video game products.
Building the GameStop Brand. We currently operate most of
Historical GameStop’s stores under the GameStop name.
Within the next 12 to 24 months, we intend to rebrand all
of the EB stores to the GameStop brand. Building the GameStop
brand has enabled us to leverage brand awareness and to capture
advertising and marketing efficiencies. Our branding strategy is
further supported by the GameStop loyalty card and our web site.
The GameStop loyalty card, which is obtained as a bonus with a
paid subscription to our Game Informer magazine, offers
customers discounts on selected merchandise in our stores. Our
web site allows our customers to buy games on-line and to learn
about the latest video game products and PC entertainment
software and their availability in our stores.
Providing a
First-to-Market
Distribution Network. We employ a variety of rapid-response
distribution methods in our efforts to be the
first-to-market for new
video game products and PC entertainment software. We strive to
deliver popular new releases to selected stores within hours of
release and to all of our stores by the next morning. This
highly efficient distribution network is essential, as a
significant portion of a new title’s sales will be
generated in the first few days and weeks following its release.
As the world’s largest retailer of video game products and
PC entertainment software, with a proven capability to
distribute new releases to our customers quickly, we believe
that we regularly receive a disproportionately large allocation
of popular new video game products and PC entertainment
software. On a daily basis, we actively monitor sales trends,
customer reservations and store manager feedback to ensure a
high in-stock position for each store. To assure our customers
immediate access to new releases, we offer our customers the
opportunity to pre-order products in our stores or through our
web site prior to their release.
Investing in our Information Systems and Distribution
Capabilities. We employ sophisticated and fully-integrated
inventory management, store-level point of sale and financial
systems and
state-of-the-art
distribution facilities. These systems enable us to maximize the
efficiency of the flow of over 5,000 SKUs, improve store
efficiency, optimize store in-stock positions and carry a broad
selection of inventory. Our proprietary inventory management
system enables us to maximize sales of new release titles and
avoid markdowns as titles mature and utilizes electronic
point-of-sale equipment
that provides corporate headquarters with daily information
regarding store-level sales and available inventory levels to
automatically generate replenishment shipments to each store at
least twice a week. In addition, our highly-customized inventory
management system allows us to actively manage the pricing and
product availability of our used video game products across our
store base and to reallocate our inventory as necessary. Our
systems enable each store to carry a merchandise assortment
uniquely tailored to its own sales mix and customer needs. Our
ability to react quickly to consumer purchasing trends has
resulted in a target mix of inventory, reduced shipping and
handling costs for overstocks and reduced our need to discount
products.
Growth Strategy
New Store Expansion. We intend to continue to open new
stores in our targeted markets. Historical GameStop opened 338
new stores in fiscal 2004 and 221 new stores in fiscal 2005,
prior to the consummation of the mergers on October 8,2005. EB opened 415 stores in fiscal 2005, prior to the
consummation of the mergers. Between the consummation of the
mergers and the end of fiscal 2005, we opened 156 stores. We
plan to open approximately 400 new stores in fiscal 2006. Our
primary growth vehicles will be the expansion of our strip
center store base in the United States and the expansion of our
international store base. Our strategy within the U.S. is
to open strip center stores in targeted major metropolitan
markets and in regional shopping centers in tertiary markets.
Our international strategy is to continue our expansion in
Europe and to continue to open stores in advantageous markets
and locations in Canada and Australia. We analyze each market
relative to target population and other demographic indices,
real estate availability, competitive factors and past operating
history, if available. In some cases, these new stores may
adversely impact sales at existing stores.
Increase Comparable Store Sales. We plan to increase our
comparable store sales by capitalizing on the growth in the
video game industry, expanding our sales of used video game
products and increasing awareness of the GameStop name.
•
Capitalize on Growth in Demand. Our sales of new video
game software and used video game products grew by approximately
20% and 27%, respectively, in fiscal 2004 and, due primarily to
the mergers, by an additional 60% and 58%, respectively, in
fiscal 2005. In fiscal 2004, our comparable store sales
increased 1.7%, driven in large measure by the success of Sony
PlayStation 2, Microsoft Xbox, Nintendo GameCube and
Nintendo DS, which was launched in November 2004. During fiscal
2004, we capitalized on the growth in demand for video game
software and accessories that followed the increases in the
installed hardware base of these four video game platforms.
Comparable store sales on a pro forma basis for Historical
GameStop and EB decreased 1.4% in fiscal 2005, due to soft
demand leading up to the launch of the Microsoft Xbox 360 in
November 2005. Despite limited supplies of the Microsoft Xbox
360, we capitalized on the demand for video game software and
accessories that followed that launch and the launch in March
2005 of the Sony PSP. Over the next few years, we expect to
continue to capitalize on the increasing installed base for
these platforms and the expected release in late 2006 of the
Sony PlayStation 3 and the Nintendo Revolution and the related
growth in video game software and accessories sales.
•
Increase Sales of Used Video Game Products. We will
continue to expand the selection and availability of used video
game products in our U.S. and international stores. Our strategy
consists of increasing consumer awareness of the benefits of
trading in and buying used video game products at our stores
through increased marketing activities. We expect the continued
growth of new platform technology to drive trade-ins of previous
generation products, as well as next generation platforms,
thereby expanding the supply of used video game products.
•
Increase GameStop Brand Awareness. We intend to increase
customer awareness of how the adoption of the best practices of
Historical GameStop and EB will benefit our customers. In
connection with our brand-building efforts, in each of the last
three fiscal years, we increased the amount of media advertising
in targeted markets. In fiscal 2006, we plan to continue to
increase media advertising, to expand our GameStop loyalty card
program, to aggressively promote trade-ins of used video game
products in our stores and to leverage our web sites at
www.gamestop.com and www.ebgames.com.
Merchandise
Substantially all of our revenues are derived from the sale of
tangible products. Our product offerings consist of new and used
video game products, PC entertainment software, and related
products, such as action figures, trading cards and strategy
guides. Our in-store inventory generally consists of a
constantly changing selection of over 5,000 SKUs. We have buying
groups in the U.S., Canada, Australia and Europe that negotiate
terms, discounts and cooperative advertising allowances for the
stores in their respective geographic areas. We use customer
requests and feedback, advance orders, industry magazines and
product reviews to determine which new releases are expected to
be hits. Advance orders are tracked at individual stores to
distribute titles and capture demand effectively. This
merchandise management is essential because a significant
portion of a game’s sales are usually generated in the
first days and weeks following its release.
Video Game Software. We purchase new video game software
directly from the leading manufacturers, including Sony,
Nintendo and Microsoft, as well as over 40 third-party game
publishers, such as Electronic Arts and Activision, Inc. We are
one of the largest customers in the United States of video game
titles sold by these publishers. We generally carry over 1,000
SKUs of new video game software at any given time across a
variety of genres, including Sports, Action, Strategy,
Adventure/ Role Playing and Simulation.
Used Video Game Products. We are the largest retailer of
used video games in the world. We provide our customers with an
opportunity to trade in their used video game products in our
stores in exchange for store credits which can be applied
towards the purchase of other products, primarily new
merchandise. We have the largest selection (over 4,000
SKUs) of used video game titles which have an average price of
$13, as
compared to $34 for new video game titles, and which generate
significantly higher gross margins than new video game products.
Our trade-in program provides our customers with a unique value
proposition which is unavailable at mass merchants, toy stores
and consumer electronics retailers. This program provides us
with an inventory of used video game products which we resell to
our more value-oriented customers. In addition, our
highly-customized inventory management system allows us to
actively manage the pricing and product availability of our used
video game products across our store base and to reallocate our
inventory as necessary. Our trade-in program also allows us to
be one of the only suppliers of previous generation platforms
and related video games. We also operate refurbishment centers
in the U.S and Canada, where defective video game products can
be tested, repaired, relabeled, repackaged and redistributed
back to our stores.
Video Game Hardware. We offer the video game platforms of
all major manufacturers, including Sony PlayStation 2 and
Sony PSP, Microsoft Xbox and Xbox 360, Nintendo DS, GameCube and
Game Boy Advance SP. We also offer extended service agreements
on video game hardware and software. In support of our strategy
to be the destination location for electronic game players, we
aggressively promote the sale of video game platforms. Video
game hardware sales are generally driven by the introduction of
new platform technology and the reduction in price points as
platforms mature. Due to our strong relationships with the
manufacturers of these platforms, we often receive
disproportionately large allocations of new release hardware
products, which is an important component of our strategy to be
the destination of choice for electronic game players. We
believe that selling video game hardware increases store traffic
and promotes customer loyalty, leading to increased sales of
video game software and accessories, which have higher gross
margins than video game hardware.
PC Entertainment and Other Software. We purchase PC
entertainment software from over 45 publishers, including
Electronic Arts, Microsoft and Vivendi Universal. We offer PC
entertainment software across a variety of genres, including
Sports, Action, Strategy, Adventure/ Role Playing and Simulation.
Accessories and Other Products. Video game accessories
consist primarily of controllers, memory cards and other
add-ons. PC entertainment accessories consist primarily of
joysticks and mice. We also carry strategy guides and magazines,
as well as character-related merchandise, including action
figures and trading cards. We carry over 200 SKUs of accessories
and other products. In general, this category has higher margins
than new video game and PC entertainment products.
Store Operations
As of January 28, 2006, we operated 4,490 stores, primarily
under the names GameStop or EB Games. Each of our stores
typically carries over 5,000 SKUs. We design our stores to
provide an electronic gaming atmosphere with an engaging and
visually-captivating layout. Our stores are equipped with
several video game sampling areas, which provide our customers
the opportunity to play games before purchase, as well as
equipment to play video game clips. We use store configuration,
in-store signage and product demonstrations to produce marketing
opportunities both for our vendors and for us.
Our stores, which average approximately 1,500 square feet,
carry a balanced mix of new and used video game products and PC
entertainment software. Our stores are generally located in both
high traffic “power strip centers,” local neighborhood
strip centers and high-traffic shopping malls, primarily in
major metropolitan areas. These locations provide easy access
and high frequency of visits and, in the case of strip center
stores, visibility. We target strip centers that are
conveniently located, have a mass merchant or supermarket anchor
tenant and have a high volume of customers.
Site Selection and Locations
Site Selection. In the U.S., we have a dedicated staff of
real estate personnel experienced in selecting store locations.
International locations are selected by the management in each
region or country. Site selections for new stores are made after
an extensive review of demographic data and other information
relating to market potential, competitor access and visibility,
compatible nearby tenants, accessible parking, location
visibility, lease terms and the location of our other stores.
Most of our stores are located in highly visible locations
within malls and strip centers.
Locations. The table below sets forth the number of our
stores located in each state, the District of Columbia, Guam,
Puerto Rico, Australia, Austria, Canada, Denmark, Finland,
Germany, Ireland, Italy, New Zealand, Norway, Spain,
Sweden, Switzerland and the United Kingdom as of
January 28, 2006:
We publish Game Informer, a monthly video game magazine
featuring reviews of new title releases, tips and secrets about
existing games and news regarding current developments in the
electronic game industry. The magazine is sold through
subscription and through displays in the Historical GameStop
stores. We intend to begin selling Game Informer in EB
stores in early fiscal 2006. For its February 2006 issue, the
magazine had approximately 1.9 million paid subscriptions.
According to Advertising Age magazine, Game Informer is
the 38th largest consumer publication in the
U.S. Game Informer revenues are also generated
through the sale of advertising space. In addition, we offer the
GameStop loyalty card as a bonus with each paid subscription,
providing our subscribers with a discount on selected
merchandise.
E-Commerce
We operate electronic commerce web sites at
www.gamestop.com and www.ebgames.com that allow
our customers to buy video game products and other merchandise
on-line. The sites also offer customers
information and content about available games, release dates for
upcoming games, and access to store information, such as
location and product availability. In 2003, we entered into an
arrangement with Amazon.com, Inc. under which gamestop.com is
the exclusive specialty video game retailer listed on
Amazon.com. In 2005, we entered into an arrangement with
Barnes & Noble under which gamestop.com is the
exclusive specialty video game retailer listed on bn.com,
Barnes & Noble’s
e-commerce site.
Advertising
Our U.S. stores are primarily located in high traffic, high
visibility areas of regional shopping malls and strip centers.
Given the high foot traffic drawn past the stores themselves, we
use in-store marketing efforts such as window displays and
“coming soon” signs to attract customers, as well as
to promote used video game products and subscriptions to our
Game Informer magazine. Inside the stores, we feature
selected products through the use of vendor displays,
“coming soon” or preview videos, signs, catalogs,
point-of-purchase
materials and end-cap displays. These advertising efforts are
designed to increase the initial sales of new titles upon their
release. We receive cooperative advertising and market
development funds from manufacturers, distributors, software
publishers and accessory suppliers to promote their respective
products. Generally, vendors agree to purchase advertising space
in one of our advertising vehicles. Once we run the advertising,
the vendor pays to us an agreed amount.
As part of our brand-building efforts and targeted growth
strategies, in the last three years, we expanded our advertising
and promotional activities in certain targeted markets at
certain key times of the year. In addition, we expanded our use
of radio advertising in certain markets to promote store
openings. We plan to continue these efforts in fiscal 2006.
Information Management
Our operating strategy involves providing a broad merchandise
selection to our customers as quickly and as cost-effectively as
possible. We use our inventory management systems to maximize
the efficiency of the flow of products to our stores, enhance
store efficiency and optimize store in-stock and overall
investment in inventory.
Distribution. We operate a 380,000 square foot
distribution center in Grapevine, Texas, a 200,000 square
foot distribution center in Louisville, Kentucky and a
315,000 square foot distribution center in Sadsbury
Township, Pennsylvania. Our efforts to integrate the
distribution operations of both Historical GameStop and EB will
result in the use of the center in Louisville, Kentucky to
support our
first-to-market
distribution efforts, while our Grapevine, Texas facility will
support efforts to replenish stores. In early fiscal 2006, we
intend to discontinue use of EB’s distribution center in
Sadsbury Township, Pennsylvania and move the distribution center
operations from that facility to the facilities in Texas and
Kentucky. In order to enhance our
first-to-market
distribution network, we also utilize the services of several
off-site, third-party operated distribution centers that pick up
products from our suppliers, repackage the products for each of
our stores and ship those products to our stores by package
carriers. Our ability to rapidly process incoming shipments of
new release titles at the Louisville and third-party facilities
and deliver those shipments to all of our stores, either that
day or by the next morning, enables us to meet peak demand and
replenish stores at least twice a week.
The state-of-the-art
facilities in Grapevine, Texas and Louisville, Kentucky are
designed to effectively control and minimize inventory levels.
Technologically-advanced conveyor systems and flow-through racks
control costs and improve speed of fulfillment in both
facilities. The technology used in the distribution centers
allow for high-volume receiving, distributions to stores and
returns to vendors. Inventory is shipped to each store at least
twice a week, or daily, if necessary, in order to keep stores in
supply of products.
We also operate distribution centers in Canada, Australia, and
in various locations in Europe.
Management Information Systems. Our integration efforts
in the first half of fiscal 2006 will focus on the conversion of
the point-of-sale
system used in the Historical GameStop stores to the
point-of-sale
technology developed by EB and used in the EB stores and the
conversion of the
point-of-sale
technology in
the EB stores to report results to the proprietary inventory
management system used by Historical GameStop. Our proprietary
inventory management system and
point-of-sale
technology show daily sales and in-store stock by title by
store. Systems in place now and after integration use this data
to automatically generate replenishment shipments to each store
from our distribution centers, enabling each store to carry a
merchandise assortment uniquely tailored to its own sales mix
and rate of sale. Our call lists and reservation system also
provide our buying staff with information to determine order
size and inventory management for store-by-store inventory
allocation. We constantly review and edit our merchandise
categories with the objective of ensuring that inventory is
up-to-date and meets
customer needs.
To support our U.S. operations, we use a large-scale,
Intel-based computing environment with a
state-of-the-art
storage area network and a wired and wireless corporate network
installed at our U.S. headquarters, and, a secure, virtual
private network to access and provide services to computing
assets located in our stores, distribution centers and satellite
offices and to our mobile workforce. This strategy has proven to
minimize initial outlay of capital while allowing for
flexibility and growth as operations expand. To support our
international operations, we use a mid-range, scalable computing
environment and a
state-of-the-art
storage area network. Computing assets and our mobile workforce
around the globe access this environment via a secure, virtual
private network. Regional communication links exist to each of
our distribution centers and offices in international locations
with connectivity to our U.S. data centers as required by
our international, distributed applications.
Our in-store
point-of-sale system
enables us to efficiently manage in-store transactions. This
proprietary
point-of-sale system
has been enhanced to facilitate trade-in transactions, including
automatic look-up of
trade-in prices and printing of machine-readable bar codes to
facilitate in-store restocking of used video games. In addition,
our central database of all used video game products allows us
to actively manage the pricing and product availability of our
used video game products across our store base and re-allocate
our used video game products as necessary.
Field Management and Staff
The U.S. store operations of both Historical GameStop and
EB have been integrated and are now managed by a
centrally-located senior vice president of stores, four vice
presidents of stores and 28 regional store operations directors.
The regions are further divided into districts, each with a
district manager covering an average of 14 stores. In total,
there are approximately 250 districts. Our stores in Europe are
managed by two vice presidents and managing directors in each
country. Our stores in Australia and Canada are managed by two
vice presidents. Each store employs, on average, one manager,
one assistant manager and between two and ten sales associates,
many of whom are part-time employees. We have cultivated a work
environment that attracts employees who are actively interested
in electronic games. We seek to hire and retain employees who
know and enjoy working with our products so that they are better
able to assist customers. To encourage them to sell the full
range of our products and to maximize our profitability, we
provide our employees with targeted incentive programs to drive
overall sales and sales of higher margin products. We also
provide our U.S. employees with the opportunity to take
home and try new video games, which enables them to better
discuss those games with our customers. In addition, employees
are casually dressed to encourage customer access and increase
the “game-oriented” focus of the stores. We also
employ regional loss prevention managers who assist the stores
in implementing security to prevent theft of our products.
Our stores communicate with our corporate offices via daily
e-mail. This
e-mail allows for
better tracking of trends in upcoming titles, competitor
strategies and in-stock inventory positions. In addition, this
communication allows title selection in each store to be
continuously updated and tailored to reflect the tastes and
buying patterns of the store’s local market. These
communications also give field management access to relevant
inventory levels and loss prevention information. We also
sponsor an annual store managers’ conference in the U.S.,
Canada, Europe and Australia, which we invite all video game
software publishers to attend, and operate an intense
educational training program to provide our employees with
information about the video game products that will be released
by those publishers in the holiday season.
Our store personnel provide value-added services to each
customer, such as maintaining lists of regular customers,
notifying each customer by phone when new titles are available,
and reserving new releases for customers with a down payment to
ensure product availability. In addition, our store personnel
readily provide product reviews to ensure customers are making
informed purchasing decisions and offer help-line numbers to
increase a customer’s enjoyment of the product upon
purchase.
Vendors
We purchase substantially all of our new products for
U.S. stores from approximately 70 manufacturers and
software publishers and approximately five distributors.
Purchases from the top ten vendors accounted for approximately
75% of our new product purchases in fiscal 2005. Only Sony,
Microsoft and Electronic Arts (which accounted for 18%, 13% and
11%, respectively) individually accounted for more than 10% of
our new product purchases during fiscal 2005. We have
established price protections and return privileges with our
primary vendors in order to reduce the risk of inventory
obsolescence. In addition, we have no purchase contracts with
trade vendors and conduct business on an order-by-order basis, a
practice that is typical throughout the industry. We believe
that maintaining and strengthening our long-term relationships
with our vendors is essential to our operations and continued
expansion. We believe that we have very good relationships with
our vendors.
Competition
The electronic game industry is intensely competitive and
subject to rapid changes in consumer preferences and frequent
new product introductions. We compete with mass merchants and
regional chains, including Wal-Mart and Target; computer product
and consumer electronics stores, including Best Buy and Circuit
City; other video game and PC software specialty stores located
in malls and other locations; toy retail chains, including Toys
“R” Us; mail-order businesses; catalogs; direct sales
by software publishers; and online retailers. In addition, video
games are available for rental from many video stores, some of
whom, like Movie Gallery and Blockbuster, have increased the
availability of video game products for sale. Video game
products may also be distributed through other methods which may
emerge in the future. We also compete with sellers of used video
game products. Additionally, we compete with other forms of
entertainment activities, including movies, television, theater,
sporting events and family entertainment centers.
Competitors in Europe include Game Group PLC, which operates in
the United Kingdom, Ireland and Scandinavia, and its subsidiary
CentroMail, which operates in Spain, and Media Market.
Competitors in Canada include Wal-Mart, Best Buy and its
subsidiary Future Shop. In Australia, competitors include
K-Mart, Target, Myer
Department Stores, Big W discount department stores and Dick
Smith electronics stores.
Operating Segments
Following the completion of the mergers, we now operate our
business in the following segments: United States, Canada,
Australia and Europe. We identified these segments based on a
combination of geographic areas and management responsibility.
Each of the segments consists primarily of retail operations
with all stores engaged in the sale of new and used video game
systems and software and personal computer entertainment
software and related accessories. These products are
substantially the same regardless of geographic location, with
the only differences in merchandise carried being timing of
release dates of new products. Stores in all segments are
similar in size at approximately 1,500 square feet each.
Segment results for the United States include retail operations
in 50 states, the District of Columbia, Guam and Puerto
Rico, electronic commerce web sites under the names gamestop.com
and ebgames.com and Game Informer magazine. Segment
results for Canada include retail operations in stores
throughout Canada and segment results for Australia include
retail operations in Australia and New Zealand. Segment results
for Europe include retail operations in 11 European countries.
Prior to the mergers, Historical GameStop had operations in
Ireland and the United Kingdom which were not material to our
business.
Our U.S. segment is supported by distribution centers in
Texas, Kentucky and Pennsylvania, and further supported through
the use of third-party distribution centers for new release
titles. The distribution center operations in Pennsylvania will
be phased out in the first half of fiscal 2006. We distribute
merchandise to our Canadian segment from a distribution center
in Ontario. We have a distribution center near Brisbane,
Australia which supports our Australian operations and a small
distribution facility in New Zealand which supports the stores
in New Zealand. European segment operations are supported by
five regionally-located distribution centers.
Our international segments purchase products from many of the
same vendors as the U.S., including Sony and Electronic Arts.
Products from certain other vendors such as Microsoft and
Nintendo are obtained through distributors operating in the
various countries in which we operate.
Seasonality
Our business, like that of many retailers, is seasonal, with the
major portion of our sales and operating profit realized during
the fourth fiscal quarter, which includes the holiday selling
season. During fiscal 2005, on a pro forma basis, we generated
approximately 38% of our sales and approximately 75% of our
operating earnings during the fourth quarter. Any adverse trend
in sales during the holiday selling season could lower our
results of operations for the fourth quarter and the entire year.
The board of directors has eleven members, consisting of seven
members who were directors of Historical GameStop, James J. Kim
(who was Chairman of the Board of EB), Stanley (Mickey)
Steinberg (who was a director of EB), and two new independent
directors added subsequent to the mergers. The board of
directors is classified into three classes, one whose term
expires in one year, one whose term expires in two years, and
one whose term expires in three years. The following table sets
forth the names and ages of the directors of GameStop, the
positions they currently hold with GameStop, and the year their
term expires:
R. Richard Fontainehas been our Chairman of the
Board and Chief Executive Officer since Historical
GameStop’s initial public offering in February 2002.
Mr. Fontaine is also a member of the Executive Committee.
Mr. Fontaine has served as the Chief Executive Officer our
predecessor companies since November 1996. He has been an
executive officer or director in the video game industry since
1988.
Daniel A. DeMatteohas been our Vice Chairman and Chief
Operating Officer since March 2005. Prior to March 2005,
Mr. DeMatteo served as President and Chief Operating
Officer of GameStop or our predecessor companies since November
1996. He has served on our board since 2002 and has been an
executive officer in the video game industry since 1988.
Jerome L. Davisis a director and a member of the
Compensation Committee. Mr. Davis has served as a director
since October 2005. Mr. Davis has served as Global Vice
President, Service Excellence for Electronic Data Systems, a
business and technology services company, since July 2003. From
May 2001 to July 2003, he served in various capacities at
Electronic Data Systems, including Chief Client Executive
Officer and President, Americas for Business Process Management.
Prior to joining Electronic Data Systems, Mr. Davis served
as President and Executive Officer of the Commercial Solutions
Division of Maytag Corporation, a home and commercial appliance
company, from October 1999 until May 2001. Mr. Davis served
as Senior Vice President and Officer of Sales for Maytag
Appliances Division from March 1998 to September 1999. From
March 1992 to February 1998 Mr. Davis was Vice President of
National Accounts and Area Vice President for Frito Lay.
Mr. Davis has also held senior executive positions in Sales
and Marketing with Procter & Gamble from 1977 to 1992.
Mr. Davis is currently a director and Chair of the Finance
Committee and a member of the Compensation and Nominating and
Corporate Governance Committees of Apogee Enterprises, Inc.,
where he has been a director since 2004.
James J. Kimis a director. Mr. Kim has served as a
director since the mergers in October 2005. Prior to the
mergers, Mr. Kim served as EB’s Chairman and as a
director from March 1998. Mr. Kim founded The
Electronics Boutique, Inc., the predecessor to EB, in 1977 and
served as its Chairman from its inception. Mr. Kim also
serves as the Chairman of Amkor Technology, Inc., a
semiconductor assembly, test, packaging and technology firm.
Leonard Riggiois a director and Chairman of the
Executive Committee. Mr. Riggio was the Chairman of the
Board of Historical GameStop or its predecessor companies from
November 1996 until Historical GameStop’s initial public
offering in February 2002. He has served as an executive officer
or director in the video game industry since 1987.
Mr. Riggio has been Chairman of the Board and a principal
stockholder of Barnes & Noble since its inception in
1986 and served as Chief Executive Officer from its inception in
1986 until February 2002. Since 1965, Mr. Riggio has been
Chairman of the Board, Chief Executive Officer and the principal
stockholder of Barnes & Noble College Booksellers,
Inc., one of the largest operators of college bookstores in the
country. Since 1985, Mr. Riggio has been Chairman of the
Board and a principal beneficial owner of MBS Textbook Exchange,
Inc., one of the nation’s largest wholesalers of college
textbooks.
Michael N. Rosenis our Secretary and a director.
Mr. Rosen has served in the same capacities for us or our
predecessor companies since October 1999. Mr. Rosen is also
a member of the Executive Committee. Mr. Rosen has been a
partner at Bryan Cave LLP, counsel to us, since their July 2002
combination with Robinson Silverman. Prior to that,
Mr. Rosen was Chairman of Robinson Silverman.
Mr. Rosen is also a director of Barnes & Noble.
Stephanie M. Shernis a director and Chair of the Audit
Committee. Mrs. Shern formed Shern Associates LLC in
February 2002 to provide business advisory and board services,
primarily to publicly-held companies. From May 2001 until
February 2002, Mrs. Shern served as Senior Vice President
and Global Managing Director of Retail and Consumer Products for
Kurt Salmon Associates. From 1995 until April 2001,
Mrs. Shern was the Vice Chair and Global Director of Retail
and Consumer Products for Ernst & Young LLP and a
member of Ernst & Young’s Management Committee.
Mrs. Shern is currently a director and Chair of the Audit
Committee of The Scotts/ Miracle Gro Company, a director and
Chair of the Audit Committee and member of the Governance
Committee of Nextel Communications, Inc., a director and member
of the Audit Committee of Royal Ahold, and a director and Chair
of the Audit Committee of the Vitamin Shoppe, Inc.
Stanley (Mickey) Steinberg is a director.
Mr. Steinberg has served as a director since the mergers in
October 2005. Mr. Steinberg served as a director of EB from
September 1998. Mr. Steinberg currently serves as a Senior
Advisor to the mergers and acquisitions firm of Navigant Capital
Advisors, LLC. From August 1994 to June 1998, Mr. Steinberg
served as Chairman of Sony Retail Entertainment. From 1989 to
1994, Mr. Steinberg served as Executive Vice President and
Chief Operating Officer of Walt Disney Imagineering.
Mr. Steinberg serves on the Board of Directors of Reckson
Associates Realty Corp. and of two privately held
companies — AMC, Inc., the owner and manager of the
AmericasMart Atlanta trade show center, and ECI Group, an
apartment developer, construction and management company.
Gerald R. Szczepanskiis a director and Chair of the
Compensation Committee and a member of the Audit Committee and
the Nominating and Corporate Governance Committee.
Mr. Szczepanski is currently retired. Mr. Szczepanski
was the co-founder, and, from 1994 to 2005, the Chairman and
Chief Executive Officer of Gadzooks, Inc., a publicly traded,
specialty retailer of casual clothing and accessories for
teenagers. On February 3, 2004, Gadzooks, Inc. filed a
voluntary petition under Chapter 11 of the United States
Bankruptcy Code in the United States Bankruptcy Court for the
Northern District of Texas, Dallas Division (Case
No. 04-31486-11).
Edward A. Volkweinis a director and a member of the
Audit Committee, the Compensation Committee and the Nominating
and Corporate Governance Committee. Mr. Volkwein is
President and Chief Operating Officer of Hydro-Photon, Inc., a
water purification technology company. Prior to joining
Hydro-Photon, Mr. Volkwein had a broad marketing career
beginning in brand management for General Foods and
Chesebrough-Ponds, Inc. He served as Senior Vice President
Global Advertising and Promotion for Philips Consumer
Electronics and as Senior Vice President Marketing for Sega of
America, where he was instrumental in developing Sega into a
major video game brand. Mr. Volkwein has also held senior
executive positions with Funk & Wagnalls and Prince
Manufacturing.
Lawrence S. Zilavyis a director. Mr. Zilavy has
served as a director since October 2005. Mr. Zilavy retired
as Executive Vice President, Corporate Finance and Strategic
Planning for Barnes & Noble in November 2004 and had
served in that position since May 2003. Mr. Zilavy was
Chief Financial Officer of Barnes & Noble from June
2002 through April 2003. Prior to that, he was Executive Vice
President of IBJ Whitehall Bank and Trust Company, where he
worked since 1992. Mr. Zilavy is currently a director and
member of the Audit Committee of The Hain Celestial Group, Inc.,
a publicly traded natural and organic food and personal care
products company, a director of Community Resource Exchange (a
non-profit organization) and a trustee of St. Francis College in
New York City.
Committees of the GameStop Board of Directors
The board of directors of GameStop has the following four
committees: (i) Audit Committee, (ii) Compensation
Committee, (iii) Nominating and Corporate Governance
Committee, and (iv) Executive Committee. Each of the Audit,
Compensation, and Nominating and Corporate Governance Committees
complies with the independence requirements of the New York
Stock Exchange. The table below reflects the membership for each
committee:
Senior Vice President and Chief Accounting Officer
Information with respect to executive officers of the Company
who are also directors is set forth above.
Steven R. Morgan has been our President since December
2005. Mr. Morgan joined GameStop upon completion of the
mergers in October 2005 in his position as EB’s President
of Stores — North America and President of Electronics
Boutique Canada Inc. He had served in that capacity from April
2002. From June 2001 to April 2002, Mr. Morgan served as
EB’s Senior Vice President of Stores and Canadian
Operations. Mr. Morgan joined EB in January 2001 as Senior
Vice President of Stores. Prior to January 2001, Mr. Morgan
held various positions within the Federated and May Department
Stores organization.
David W. Carlsonhas been Executive Vice President and
Chief Financial Officer of GameStop or our predecessor companies
since November 1996. From 1989 to November 1996,
Mr. Carlson held various positions with Barnes &
Noble, including Director of Finance, Director of Accounting and
Manager of Financial Reporting. Prior to 1989, Mr. Carlson
held various positions with the public accounting firm of KPMG
Peat Marwick.
Ronald Freeman has been our Executive Vice President of
Distribution since January 2004. From March 2000 to January
2004, Mr. Freeman was our Vice President of Distribution
and Logistics. Mr. Freeman was Vice President of
Distribution/Configuration for CompUSA from July 1997 until
March 2000. Mr. Freeman was Vice President of Distribution
and Logistics of Babbage’s, a predecessor company of ours,
from November 1996 until July 1997.
Robert A. Lloydhas been our Senior Vice President and
Chief Accounting Officer since October 2005. Prior to that,
Mr. Lloyd was the Vice President — Finance of
GameStop or its predecessor companies from October 2000 and was
the Controller of GameStop’s predecessor companies from
December 1996 to October 2000. From 1988 to December 1996,
Mr. Lloyd held various financial management positions as
Controller or Chief Financial Officer, primarily in the
telecommunications industry. Prior to May 1988, Mr. Lloyd
held various positions with the public accounting firm of
Ernst & Young. Mr. Lloyd is a Certified Public
Accountant.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Agreements With Barnes & Noble
In connection with the consummation of Historical
GameStop’s initial public offering in February 2002,
Historical GameStop entered into various agreements with
Barnes & Noble relating to its relationship with
Barnes & Noble following the completion of Historical
GameStop’s initial public offering.
Separation Agreement. Historical GameStop entered into a
“separation agreement” with Barnes & Noble,
which governs our respective rights and duties with respect to
Historical GameStop’s initial public offering and the
distribution by Barnes & Noble to its stockholders of
Barnes & Noble’s shares of GameStop common stock,
which is referred to herein as the spin-off, completed
November 12, 2004. The separation agreement contains
covenants designed to protect the intended tax-free nature of
the spin-off.
Under the separation agreement, Historical GameStop agreed not
to take certain actions without the approval of
Barnes & Noble or the satisfaction of certain
procedures. These actions include:
•
until two years after the spin-off, entering into or permitting
any transaction or series of transactions which would result in
a person or persons acquiring or having the right to acquire
shares of Historical GameStop’s capital stock that would
comprise 50% or more of either the value of all outstanding
shares of the capital stock or the total combined voting power
of the outstanding voting stock; and
•
until two years after the spin-off, liquidating, disposing of,
or otherwise discontinuing the conduct of any portion of
Historical GameStop’s active trade or business.
Historical GameStop generally agreed to indemnify
Barnes & Noble and its affiliates against any and all
tax-related losses incurred by Barnes & Noble in
connection with any proposed tax assessment or tax controversy
with respect to the spin-off to the extent caused by any breach
by Historical GameStop of any of its representations, warranties
or covenants made in the separation agreement.
Insurance Agreement. Historical GameStop entered into an
“insurance agreement” with Barnes & Noble,
pursuant to which we participated in Barnes &
Noble’s worker’s compensation, property and general
liability and directors’ and officers’ liability
insurance programs. We reimbursed Barnes & Noble for
our pro rata share of the cost of providing these insurance
programs. In fiscal 2005, Barnes & Noble charged us
approximately $1,726,000 for our insurance program.
The insurance agreement terminated in part on May 1, 2005
and in full on June 1, 2005, at which point Historical
GameStop procured its own insurance. Although we have now
secured our own insurance coverage, costs will likely continue
to be incurred by Barnes & Noble on insurance claims
which were incurred under its programs prior to June 2005 and
any such costs applicable to insurance claims against us will be
allocated to GameStop.
Operating Agreement. Historical GameStop entered into an
“operating agreement” with Barnes & Noble,
pursuant to which we operate the existing video game departments
in ten Barnes & Noble stores. We pay Barnes &
Noble a licensing fee equal to 7.0% of the aggregate gross sales
of each such department. In fiscal 2005, Barnes & Noble
charged us approximately $857,000 in connection with our
operation of such departments in Barnes & Noble stores.
The operating agreement will remain in force unless terminated:
•
by mutual agreement of us and Barnes & Noble;
•
automatically, in the event that we no longer operate any
department within Barnes & Noble’s stores;
•
by us or Barnes & Noble, with respect to any
department, upon not less than 30 days prior notice;
•
by Barnes & Noble because of an uncured default by us;
•
automatically, with respect to any department, if the applicable
store lease in which we operate that department expires or is
terminated prior to its expiration date; or
automatically, in the event of the bankruptcy or a change in
control of either us or Barnes & Noble.
Tax Disaffiliation Agreement. Historical GameStop entered
into a “tax disaffiliation agreement” with
Barnes & Noble which governs the allocation of federal,
state, local and foreign tax liabilities and contains agreements
with respect to other tax matters arising prior to and after the
date of Historical GameStop’s initial public offering. The
tax disaffiliation agreement became effective at the time of the
initial public offering and, among other things, sets forth the
procedures for amending returns filed prior to the date of our
initial public offering, tax audits and contests and record
retention. In general, we are responsible for filing and paying
our separate taxes for periods after the initial public offering
and Barnes & Noble is responsible for filing and paying
its separate taxes for periods after the initial public
offering. In general, with respect to consolidated or combined
returns that include Barnes & Noble and Historical
GameStop prior to the initial public offering, Barnes &
Noble is responsible for filing and paying the related tax
liabilities and will retain any related tax refunds.
Under the tax disaffiliation agreement, without the prior
written consent of Barnes & Noble, we may not amend any
tax return for a period in which we were a member of
Barnes & Noble’s consolidated tax group.
Barnes & Noble has the sole right to represent the
interests of its consolidated tax group, including us, in any
tax audits, litigation or appeals that involve, directly or
indirectly, periods prior to the time that we ceased to be a
member of their consolidated tax group (the date of the
offering), unless we are solely liable for the taxes at issue
and any redetermination of taxes would not result in any
additional tax liability or detriment to any member of
Barnes & Noble’s consolidated tax group. In
addition, we and Barnes & Noble have agreed to provide
each other with the cooperation and information reasonably
requested by the other in connection with the preparation or
filing of any amendment to any tax return, the determination and
payment of any amounts owed relating to periods prior to the
date of the offering and in the conduct of any tax audits,
litigation or appeals.
GameStop and Barnes & Noble have agreed to indemnify
each other for tax or other liabilities resulting from the
failure to pay any taxes required to be paid under the tax
disaffiliation agreement, tax or other liabilities resulting
from negligence in supplying inaccurate or incomplete
information or the failure to cooperate with the preparation of
any tax return or the conduct of any tax audits, litigation or
appeals. The tax disaffiliation agreement requires us to retain
records, documents and other information necessary for the audit
of tax returns relating to periods prior to the date we ceased
to be a member of Barnes & Noble’s consolidated
tax group and to provide reasonable access to Barnes &
Noble with respect to such records, documents and information.
Other Transactions and Relationships
We paid the legal fees and expenses of one of our directors,
Leonard Riggio, in connection with the mergers, including
Mr. Riggio’s legal fees and expenses incurred in
connection with the preparation and filing of
Mr. Riggio’s notification and report form under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended
(including the filing fee). Those legal fees and expenses were
approximately $150,000.
In July 2003, the Company purchased an airplane from a company
controlled by a member of the board of directors. The purchase
price was $9.5 million and was negotiated through an
independent third party following an independent appraisal.
In October 2004, Historical GameStop’s board of directors
authorized a repurchase of Historical GameStop’s
Class B common stock held by Barnes & Noble.
Historical GameStop repurchased 6,107,000 shares of
Historical GameStop Class B common stock at a price equal
to $18.26 per share for aggregate consideration of
$111.5 million. The repurchase price per share was
determined by using a discount of 3.5% on the last reported
trade of Historical GameStop’s Class A common stock on
the New York Stock Exchange prior to the time of the
transaction. Historical GameStop paid $37.5 million in cash
and issued a promissory note in the principal amount of
$74.0 million, which is payable in installments over three
years and bearing interest at 5.5% per annum, payable when
principal installments are due. The Company made principal
payments of $37.5 million and $12.2 million on the
promissory note as scheduled in January 2005 and October 2005,
respectively. Interest expense on the promissory note for fiscal
2005 totaled $1.8 million.
In May 2005, we entered into an arrangement with
Barnes & Noble under which gamestop.com is the
exclusive videogame retailer listed on bn.com, Barnes &
Noble’s e-commerce
website. Under the terms of this agreement, the Company pays a
fee to Barnes & Noble for sales of video game or PC
entertainment products sold through bn.com. For fiscal 2005, the
fee to Barnes & Noble totaled $255,000.
On November 2, 2002, EB sold its BC Sports Collectibles
business to SCAC for $2.2 million in cash and the
assumption of lease related liabilities in excess of
$13.0 million. The purchaser, SCAC, is owned by the family
of James J. Kim, Chairman of EB at the time and currently one
the Company’s directors. The transaction was negotiated and
approved by a committee of EB’s board of directors
comprised solely of independent directors with the assistance of
an investment banking firm engaged to solicit offers for the BC
Sports Collectibles business. As EB remains contingently liable
for these leases, Mr. Kim has agreed to indemnify EB
against any liabilities associated with these leases.
Michael N. Rosen, our Secretary and one of our directors, is a
partner of Bryan Cave LLP, which is counsel to us.
In October 2004, Historical GameStop’s board of directors
authorized a repurchase of Historical GameStop’s
Class B common stock held by Barnes & Noble.
Historical GameStop repurchased 6,107,000 shares of
Historical GameStop Class B common stock at a price equal
to $18.26 per share for aggregate consideration of
$111.5 million. The repurchase price per share was
determined by using a discount of 3.5% on the last reported
trade of Historical GameStop’s Class A common stock on
the New York Stock Exchange prior to the time of the
transaction. Historical GameStop paid $37.5 million in cash
and issued a promissory note in the principal amount of
$74.0 million, which is payable in installments over three
years and bearing interest at 5.5% per annum, payable when
principal installments are due. The Company made principal
payments of $37.5 million and $12.2 million on the
promissory note as scheduled in January 2005 and October 2005,
respectively. Interest expense on the promissory note for fiscal
2005 totaled $1.8 million.
Pre-Merger Debt of EB
On May 25, 2005, EB closed on a
10-year,
$9.5 million mortgage agreement collateralized by EB’s
new 315,000 square foot distribution facility located in
Sadsbury Township, Pennsylvania. Interest is fixed at a rate of
5.4% per annum.
On May 31, 2005, EB completed the acquisition of Jump, a
privately-held retailer based in Valencia, Spain. As of
January 28, 2006, Jump had third-party debt of
approximately $0.6 million.
Senior Credit Facility
General
In conjunction with the closing of the mergers, we entered into
the Senior Credit Facility with affiliates of the initial
purchasers of the notes pursuant to financing commitments
received from them. The Senior Credit Facility has a five-year
term and is available for refinancing of indebtedness, to pay
transaction costs in connection with the mergers and for other
general corporate purposes, including letters of credit, working
capital, capital expenditures, permitted dividends, permitted
share repurchases and permitted acquisitions. The Senior Credit
Facility is guaranteed by all of our wholly-owned
U.S. subsidiaries and secured by all our assets and those
of the guarantors. Borrowings under the Senior Credit Facility
are limited to the lesser of $400.0 million or the
borrowing base. The borrowing base is the lesser of (i) the
cost of eligible inventory multiplied by the inventory advance
rate (currently approximately 70%) or (ii) 90% of the net
appraised inventory liquidation value, plus, in each case, 85%
of eligible credit card receivables less reserves. As of
January 28, 2006, there were no borrowings outstanding
under the Senior Credit Facility and letters of credit
outstanding totaled $2.3 million.
Interest Rate and Fees
Interest on the Senior Credit Facility is variable and, at our
option, is calculated by applying a margin of (1) 0.0% to
0.25% above the higher of the prime rate of the administrative
agent or the federal funds effective rate plus 0.50% or
(2) 1.25% to 1.75% above LIBOR. The applicable margin is
determined quarterly as a function of our consolidated leverage
ratio.
In addition, we are required to pay a commitment fee, ranging
from 0.375% to 0.50%, for any unused amounts under the Senior
Credit Facility.
Prepayments
We are required to prepay amounts outstanding under the Senior
Credit Facility (i) if, and to the extent that, total
credit extensions exceed the lesser of the then amounts
available under the facility cap of $400.0 million or the
borrowing base or (ii) as may be required by our lenders
under the Senior Credit Facility after the occurrence and during
the continuance of an event of default.
We may voluntarily prepay the Senior Credit Facility in whole or
in part at any time without penalty, subject to customary
“breakage” costs with respect to LIBOR loans. Such
optional prepayments are required to be in the minimum amounts
set out in the Senior Credit Facility. In addition, the
unutilized portion of any commitment under the Senior Credit
Facility may be irrevocably cancelled by us in whole or in part.
Collateral and Guarantees
Indebtedness under the Senior Credit Facility is guaranteed by
our current and future domestic wholly-owned subsidiaries. The
facility is secured by a first priority perfected security
interest in all of our and the guarantors’ present and
future assets, both real and personal, including, without
limitation, (i) inventory, (ii) accounts receivable
(including credit card receivables), (iii) general
intangibles (including trade names, trademarks and other
intellectual property), (iv) furniture, fixtures and
equipment, (v) bank and investment accounts,
(vi) investment property (including a pledge of subsidiary
stock), (vii) owned real estate, and (viii) claims and
causes of action relating to the foregoing.
Restrictive Covenants and Other Matters
The Senior Credit Facility requires that under certain
circumstances we comply with a fixed charge coverage ratio test.
In addition, the Senior Credit Facility includes negative
covenants, subject to certain exceptions, that restrict or limit
our ability and the ability of our subsidiaries to, among other
things:
•
incur, assume or permit to exist additional indebtedness or
guaranty obligations;
•
incur liens or agree to negative pledges in other agreements;
•
make loans and investments;
•
declare dividends, make payments or redeem or repurchase capital
stock;
•
engage in mergers, acquisitions and other business combinations;
•
prepay, redeem or purchase certain indebtedness;
•
amend or otherwise alter the terms of our organizational
documents or other specified agreements to the extent any such
amendment or alteration is adverse to the lenders under the
Senior Credit Facility;
•
sell assets;
•
transact with affiliates; and
•
alter the business we conduct.
The Senior Credit Facility contains customary representations
and warranties, affirmative covenants and events of default,
including payment defaults, breach of representations and
warranties, covenant defaults, cross-defaults to certain
indebtedness and other material agreements, certain events of
bankruptcy, material judgments, actual or asserted failure of
any guarantee or security document supporting the Senior Credit
Facility to be in full force and effect and change of control.
If such an event of default occurs, the lenders under the Senior
Credit Facility will be entitled to take various actions,
including an increase in interest rate, the acceleration of
amounts due under the facility and all actions permitted to be
taken by a secured creditor.
We sold the old notes on September 28, 2005 to the initial
purchasers of the old notes with further distribution permitted
only to (i) qualified institutional buyers under
Rule 144A under the Securities Act and (ii) persons in
offshore transactions in reliance on Regulation S under the
Securities Act. In connection with the sale of the old notes,
the Issuers, the guarantors and the initial purchasers entered
into a registration rights agreement which requires us to use
our reasonable best efforts to file with the SEC the
registration statement of which this prospectus is a part with
respect to a registered offer to exchange the old notes for
exchange notes, to use our reasonable best efforts to cause such
registration statement to become effective under the Securities
Act within 210 days of the date the old notes were issued,
and to use our commercially reasonable efforts to cause the
exchange offer to be completed within 270 days of the date
the old notes were issued. The form and terms of the exchange
notes will be identical in all material respects to the form and
terms of the old notes, except that the exchange notes will be
registered under the Securities Act, the transfer restrictions
and registration rights applicable to the old notes will not
apply to the exchange notes, and the exchange notes will not
contain any provisions relating to liquidated damages in
connection with the old notes under circumstances related to the
timing of the exchange offer. We will keep the exchange offer
open for not less than 20 business days (or longer if required
by applicable law) after the date notice of the exchange offer
is mailed to the holders of the old notes. A copy of the
registration rights agreement has been filed as an exhibit to
the registration statement of which this prospectus is a part.
Registration Rights; Liquidated Damages
Pursuant to the registration rights agreement, we will be
required, as promptly as practicable, to use our reasonable best
efforts to file a shelf registration statement with the SEC
relating to the offer and sale of old notes or exchange notes,
as applicable, and to use our commercially reasonable efforts to
have it become and remain effective within 120 days of the
obligation arising to file such shelf registration statement, if:
•
due to any change in law or applicable interpretation thereof by
the SEC’s staff, we determine upon advice of outside
counsel that we are not permitted to effect the exchange offer
contemplated by this prospectus;
•
for any other reason the exchange offer is not consummated
within 270 days of the date the old notes were issued;
•
any initial purchaser of the old notes so requests with respect
to old notes that are not eligible to be exchanged for exchange
notes in the exchange offer and that are held by such initial
purchaser following consummation of the exchange offer;
•
any holder of old notes (other than an initial purchaser) is not
eligible to participate in the exchange offer; or
•
any initial purchaser does not receive freely tradable exchange
notes in exchange for old notes constituting any portion of an
unsold allotment.
With respect to exchange notes received by any initial purchaser
in exchange for old notes constituting any portion of an unsold
allotment, we may, if permitted by current interpretations by
the SEC’s staff, file a post-effective amendment to the
registration statement of which this prospectus forms a part
containing the information required by Item 507 or
Item 508 of
Regulation S-K, as
applicable.
We will use our reasonable best efforts to keep the shelf
registration statement continuously effective, supplemented and
amended as required by the Securities Act, in order to permit
the prospectus forming part thereof to be usable by holders for
a period from the date the shelf registration statement is
declared effective by the SEC to the earliest of (i) the
second anniversary of the date on which the old notes were
issued or (ii) the date upon which all of the old notes or
the exchange notes, as applicable, covered by the shelf
registration statement have been sold pursuant to the shelf
registration statement.
We will be required to pay liquidated damages in respect of the
notes to holders of the notes if:
•
neither the exchange offer is completed within 270 days of
the date the old notes were issued nor, if required, the shelf
registration statement is declared effective within
120 days after the obligation arises to file such shelf
registration statement; or
•
notwithstanding that we have consummated or will consummate the
exchange offer, if we are required to file a shelf registration
statement and such shelf registration statement is not declared
effective on or prior to the 120th day following the date
the obligation arises to file such shelf registration statement.
Liquidated damages shall accrue on the notes at a rate of
0.25% per annum of the principal amount of such notes for
the first 90 days from the date the obligation to pay such
liquidated damages arose, and increasing by an additional
0.25% per annum at the beginning of each subsequent
90-day period
thereafter; provided, however, that liquidated damages in the
aggregate may not exceed 1.0% per annum of the principal
amount of such notes.
Resale of Exchange Notes
Based on interpretations by the SEC’s staff in no action
letters issued to other issuers in exchange offers like the one
contemplated by this prospectus, we believe that, except as
described below, the exchange notes issued pursuant to the
exchange offer in exchange for old notes may be offered for
resale, resold or otherwise transferred by any holder of the
exchange notes (other than any holder which is a broker-dealer
or an “affiliate” of the Issuers within the meaning of
Rule 405 under the Securities Act) without compliance with
the registration and prospectus delivery provisions of the
Securities Act, provided that you can make the following
representations to us:
•
the exchange notes you acquire pursuant to the exchange offer
are being acquired in the ordinary course of your business;
•
you are not participating, do not intend to participate, and
have no arrangement or understanding with any person to
participate, in the distribution of the exchange notes issued to
you in the exchange offer; and
•
you are not an “affiliate” of either Issuer.
Although we have based our belief on interpretations by the
SEC’s staff, we have not asked the SEC to consider this
particular exchange offer in the context of a no action letter.
Therefore, you cannot be sure that the SEC will treat this
exchange offer in the same way it has treated other exchange
offers in the past. If you cannot truthfully make the
representations described above, you must comply with the
registration and prospectus delivery requirements of the
Securities Act in connection with any resale of the exchange
notes issued to you in the exchange offer, unless an exemption
from such registration and prospectus delivery requirements is
available to you. If you resell any exchange notes issued to you
in the exchange offer without meeting the registration and
prospectus delivery requirements of the Securities Act, or
without an exemption from such requirements, you could incur
liabilities under the Securities Act. We are not indemnifying
you for any such liability and will not protect you against any
loss incurred as a result of any such liability under the
Securities Act.
Any broker-dealer that acquires exchange notes for its own
account in exchange for old notes must represent to us that the
old notes to be exchanged for the exchange notes were acquired
by it as a result of market-making or other trading activities
and acknowledge that it will deliver a prospectus meeting the
requirements of the Securities Act in connection with any resale
of exchange notes received by it pursuant to the exchange offer.
Any such broker-dealer is referred to as a participating
broker-dealer. However, by so acknowledging and by delivering a
prospectus, the participating broker-dealer will not be deemed
to admit that it is an “underwriter” (as such term is
defined in the Securities Act). If a broker-dealer acquired old
notes as a result of market-making or other trading activities,
it may use this prospectus, as it may be amended or supplemented
from time to time, in connection with resales of exchange notes
that it received in exchange for old notes pursuant to the
exchange offer. We have agreed that, for a period of
90 days after the consummation
of the exchange offer, we will make this prospectus, as amended
or supplemented, available to any broker-dealer for use in
connection with any such resale.
Terms of the Exchange Offer
Upon the terms and subject to the conditions set forth in this
prospectus and in the accompanying letter of transmittal, we
will accept for exchange any and all old notes properly tendered
and not withdrawn prior to 5:00 p.m., New York City time,
on the expiration date of the exchange offer. We will issue
$1,000 principal amount of exchange notes in exchange for each
$1,000 principal amount of outstanding old notes surrendered
pursuant to the exchange offer. Old notes may be tendered only
in integral multiples of $1,000.
The form and terms of the exchange notes will be identical in
all material respects to the form and terms of the old notes,
except that the exchange notes will be registered under the
Securities Act, the transfer restrictions and registration
rights applicable to the old notes will not apply to the
exchange notes, and the exchange notes will not contain any
provisions relating to liquidated damages in connection with the
old notes under circumstances related to the timing of the
exchange offer. The exchange notes will evidence the same debt
as the old notes. The exchange notes will be issued under and
entitled to the benefits of the indenture, which also authorized
the issuance of the old notes, such that both series will be
treated as a single class of debt securities under the indenture.
As of the date of this prospectus, $300.0 million aggregate
principal amount of the old floating rate notes and
$650.0 million aggregate principal amount of the old
8% notes are outstanding. This prospectus, together with
the accompanying letter of transmittal, is being sent to all
registered holders of old notes. There will be no fixed record
date for determining registered holders of old notes entitled to
participate in the exchange offer. The exchange offer is not
conditioned upon any minimum principal amount of old notes being
tendered for exchange. However, the obligation to accept old
notes for exchange pursuant to the exchange offer is subject to
certain conditions, as described under
“— Conditions.”
We intend to conduct the exchange offer in accordance with the
provisions of the registration rights agreement and the
applicable requirements of the Exchange Act, and the rules and
regulations of the SEC thereunder. Old notes which are not
tendered for exchange in the exchange offer will remain
outstanding and continue to accrue interest and will be entitled
to the rights and benefits such holders have under the indenture
and the registration rights agreement.
We will be deemed to have accepted for exchange properly
tendered old notes when, as and if we have given oral or written
notice thereof to the exchange agent and complied with the
provisions of the indenture. The exchange agent will act as
agent for the tendering holders for the purposes of receiving
the exchange notes for us.
If you tender old notes in the exchange offer you will not be
required to pay brokerage commissions or fees or, subject to the
instructions in the letter of transmittal, transfer taxes with
respect to the exchange of old notes pursuant to the exchange
offer. We will pay all charges and expenses, other than certain
applicable taxes described below, in connection with the
exchange offer. See “— Fees and Expenses.”
Expiration Date; Extensions; Amendments
The term “expiration date” shall mean 5:00 p.m.,
New York City time
on ,
2006, unless we, in our sole discretion, extend the exchange
offer, in which case the term “expiration date” shall
mean the latest date to which the exchange offer is extended.
In order to extend the exchange offer, we will notify the
exchange agent of any extension by oral or written notice and
will mail to the holders an announcement thereof, prior to
9:00 a.m., New York City time, on the next business day
after the previously scheduled expiration date.
We reserve the right, in our sole discretion:
•
to delay accepting any old notes, to extend the exchange offer
or to terminate the exchange offer and not permit acceptance of
old notes not previously accepted, if any of the conditions set
forth below
under “— Conditions” have not been
satisfied, by giving oral or written notice of the delay,
extension or termination to the exchange agent; or
•
to amend the terms of the exchange offer in any manner which, in
our good faith judgment, is advantageous to the holders of the
old notes, whether before or after any tender of the exchange
notes.
Any delay in acceptance, extension, termination or amendment
will be followed as promptly as practicable by oral or written
notice thereof to the holders. If the exchange offer is amended
in a manner determined by us to constitute a material change, we
will promptly notify holders of the amendment by means of a
prospectus supplement that will be distributed to the registered
holders, if required by law, and we will extend the exchange
offer for a period of five to ten business days, depending upon
the significance of the amendment and the manner of disclosure
to the registered holders, if the exchange offer would otherwise
expire during such five to ten business day period.
Without limiting the manner in which we may choose to make a
public announcement of any delay, extension, termination or
amendment of the exchange offer, we will have no obligation to
publish, advertise, or otherwise communicate any such public
announcement, other than by making a timely release to the
Dow Jones news service.
Interest on the Exchange Notes
Interest on the new floating rate notes will be payable in cash
on January 1, April 1, July 1 and October 1
of each year. Interest on the new 8% notes will be payable
in cash on April 1 and October 1 of each year. The
exchange notes will bear interest from the most recent date of
payment of interest on the old notes surrendered and accepted
for exchange or, if no interest has been paid on the old notes,
from the date the old notes surrendered and accepted for
exchange were issued. Accordingly, the most recent payment of
interest on the old floating rate notes was made on the first
business day following April 1, 2006 and the next payment
of interest on the old floating rate notes, or if the exchange
offer is earlier consummated, the new floating rate notes, will
be due on the first business day following July 1, 2006.
The most recent payment of interest on the old 8% notes was
made on the first business day following April 1, 2006 and
the next payment of interest on the old 8% notes, or if the
exchange offer is earlier consummated, the new 8% notes,
will be due on the first business day following October 1,2006.
Conditions
We will not be required to accept for exchange, or exchange any
exchange notes for, any old notes, and may terminate the
exchange offer before the acceptance of any old notes for
exchange, if:
•
any action or proceeding is instituted or threatened in any
court or by or before any governmental agency with respect to
the exchange offer which, in our sole judgment, might materially
impair our ability to proceed with the exchange offer;
•
any law, statute, rule or regulation is proposed, adopted or
enacted, or any existing law, statute, rule or regulation is
interpreted by the staff of the SEC, which, in our sole
judgment, might materially impair our ability to proceed with
the exchange offer; or
•
any governmental approval has not been obtained, which approval
we shall, in our sole discretion, deem necessary for the
consummation of the exchange offer as contemplated hereby.
If we determine in our sole discretion that any of these
conditions are not satisfied, we may:
•
refuse to accept any old notes and return all tendered old notes
to the tendering holders;
•
extend the exchange offer and retain all old notes tendered
prior to the expiration of the exchange offer, subject, however,
to the rights of holders who tendered such old notes to withdraw
their tendered old notes; or
•
waive such unsatisfied conditions with respect to the exchange
offer and accept all properly tendered old notes which have not
been withdrawn.
The foregoing conditions are for our sole benefit and may be
asserted by us regardless of the circumstances giving rise to
any such condition or may be waived by us in whole or in part at
any time and from time to time in our sole discretion. The
failure by us at any time to exercise any of our rights shall
not be deemed a waiver of any such right, and each such right
will be deemed an ongoing right which may be asserted at any
time and from time to time.
Procedures for Tendering
Only a holder of old notes may tender such old notes in the
exchange offer. To tender in the exchange offer, you must
complete, sign and date the letter of transmittal, have the
signatures thereon guaranteed if required by the letter of
transmittal, and mail, fax or otherwise deliver the letter of
transmittal, together with the old notes and any other required
documents, to the exchange agent prior to 5:00 p.m., New
York City time, on the expiration date. In addition, either:
•
old notes must be received by the exchange agent along with the
letter of transmittal;
•
a timely confirmation of book-entry transfer of such old notes,
if such procedure is available, into the exchange agent’s
account at DTC pursuant to the procedure for book-entry transfer
described below must be received by the exchange agent prior to
the expiration date; or
•
you must comply with the guaranteed delivery procedures
described below.
To be tendered effectively, the old notes, letter of transmittal
and other required documents must be received by the exchange
agent at the address set forth below under
“— Exchange Agent”.
The tender by a holder which is not withdrawn prior to the
expiration date will constitute an agreement between such holder
and us in accordance with the terms and subject to the
conditions set forth herein and in the letter of transmittal.
The method of delivery of old notes, the letter of
transmittal and all other required documents to the exchange
agent is at the election and risk of the holders. If such
delivery is by mail, it is recommended that registered mail,
properly insured, with return receipt requested, be used. In all
cases, sufficient time should be allowed to assure delivery to
the exchange agent before the expiration date. No letter of
transmittal or old notes should be sent to us. Holders may
request their respective brokers, dealers, commercial banks,
trust companies or nominees to effect the above transactions for
and on behalf of such holders.
Any beneficial owner whose old notes are registered in the name
of a broker, dealer, commercial bank, trust company or other
nominee and who wishes to tender such old notes should contact
the registered holder promptly and instruct such holder to
tender on such beneficial owner’s behalf. If such
beneficial owner wishes to tender on its own behalf, such owner
must, prior to completing and executing the letter of
transmittal and delivering its old notes, either make
appropriate arrangements to register ownership of the old notes
in its name or obtain a properly completed bond power from the
registered holder. The transfer of registered ownership may take
considerable time and may not be able to be completed prior to
the expiration date.
Signatures on a letter of transmittal or a notice of withdrawal,
as the case may be, must be guaranteed by an eligible
institution unless the old notes tendered pursuant thereto are
tendered:
•
by a holder who has not completed the box entitled “Special
Issuance Instructions” or “Special Delivery
Instructions” on the letter of transmittal; or
•
for the account of an eligible institution.
“Eligible institutions” include:
•
a member firm of a registered national securities exchange or of
the National Association of Securities Dealers, Inc.;
•
a commercial bank or trust company having an office or
correspondent in the United States; or
an “eligible guarantor institution” within the meaning
of Rule 17Ad-15 under the Exchange Act which is a member of
one of the recognized signature guarantee programs identified in
the letter of transmittal.
If the letter of transmittal is signed by a person other than
the holder of any old notes listed therein, the old notes must
be endorsed or accompanied by a properly completed bond power,
in satisfactory form as determined by us in our sole discretion,
signed by the holder as the holder’s name appears on the
old notes with the signature thereon guaranteed by an eligible
institution.
If the letter of transmittal or any old notes or bond powers are
signed by trustees, executors, administrators, guardians,
attorneys-in-fact,
officers of corporations or others acting in a fiduciary or
representative capacity, these persons should so indicate when
signing, and unless waived by us, evidence satisfactory to us of
their authority to so act must be submitted with the letter of
transmittal.
All questions as to the validity, form, eligibility (including
time of receipt), acceptance of tendered old notes and
withdrawal of tendered old notes will be determined by us in our
sole discretion, which determination will be final and binding.
We reserve the absolute right to reject any and all old notes
not properly tendered or any old notes our acceptance of which
would, in the opinion of counsel for us, be unlawful. We also
reserve the right to waive any defects, irregularities or
conditions of tender as to particular old notes. Our
interpretation of the terms and conditions of the exchange offer
(including the instructions in the letter of transmittal) will
be final and binding on all parties. Unless waived, any defects
or irregularities in connection with tenders of old notes must
be cured within such time as we shall determine. Although we
intend to notify holders of defects or irregularities with
respect to tenders of old notes, neither we, the exchange agent
nor any other person will incur any liability for failure to
give such notification. Tenders of old notes will not be deemed
to have been made until the defects or irregularities have been
cured or waived. Any old notes received by the exchange agent
that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned by
the exchange agent to the tendering holders, unless otherwise
provided in the letter of transmittal, as soon as practicable
following the expiration date.
While we have no present plan to acquire any old notes that are
not tendered in the exchange offer, we reserve the right in our
sole discretion to:
•
purchase or make offers for any old notes that remain
outstanding subsequent to the expiration date;
•
as set forth above under “— Conditions,” to
terminate the exchange offer;
•
redeem the old notes as a whole or in part at any time and from
time to time, as set forth under “Description of the
Exchange Notes — Optional Redemption;” or
•
to the extent permitted by applicable law, purchase old notes in
the open market, in privately negotiated transactions or
otherwise.
The terms of any such purchases or offers could differ from the
terms of the exchange offer.
In all cases, issuance of exchange notes for old notes that are
accepted for exchange pursuant to the exchange offer will be
made only after timely receipt by the exchange agent of
certificates for such old notes or a timely book-entry
confirmation of such old notes into the exchange agent’s
account at DTC, a properly completed and duly executed letter of
transmittal and all other required documents. If any tendered
old notes are not accepted for exchange for any reason set forth
in the terms and conditions of the exchange offer, or if old
notes are submitted for a greater principal amount than the
holder desires to exchange, the unaccepted or non exchanged old
notes will be returned without expense to the tendering holder
thereof (or, in the case of old notes tendered by book-entry
transfer into the exchange agent’s account at DTC pursuant
to the book-entry transfer procedures described below, the non
exchanged old notes will be credited to an account maintained
with DTC) as promptly as practicable after the expiration or
termination of the exchange offer.
The exchange agent will make a request to establish an account
with respect to the old notes at DTC for purposes of the
exchange offer after the date of this prospectus, and any
financial institution that is a participant in DTC’s system
may make book-entry delivery of old notes by causing DTC to
transfer such old notes into the exchange agent’s account
at DTC in accordance with DTC’s procedures for transfer.
For holders whose old notes are being delivered by book-entry
transfer, delivery of an Agent’s Message by DTC will
satisfy the terms of the exchange offer in lieu of execution and
delivery of a letter of transmittal by the participant(s)
identified in the Agent’s Message. An “Agent’s
Message” is a message transmitted by DTC to the exchange
agent stating that DTC has received an express acknowledgement
from the participant in DTC tendering the old notes, that the
participant has received and agrees to execute and be bound by
the terms of the letter of transmittal, and that the Issuers may
enforce the letter of transmittal against the participant. If
delivery of the old notes is to be made by book-entry transfer
to the account maintained by the exchange agent at DTC, the
letter of transmittal need not be manually executed; provided,
however, that tenders of old notes must be effected in
accordance with the procedures mandated by DTC’s Automated
Tender Offer Program.
Guaranteed Delivery Procedures
If you wish to tender your old notes and your old notes are not
immediately available, or you cannot deliver your old notes, the
letter of transmittal or any other required documents to the
exchange agent prior to the expiration date, you may effect a
tender if:
•
the tender is made through an eligible institution;
•
prior to the expiration date, the exchange agent receives from
an eligible institution a properly completed and duly signed
letter of transmittal and notice of guaranteed delivery,
substantially in the form provided by us (by facsimile
transmission, mail or hand delivery) setting forth your name and
address, the registered number(s) of the old notes and the
principal amount of old notes tendered, stating that the tender
is being made by guaranteed delivery and guaranteeing that,
within three New York Stock Exchange trading days after the
expiration date, the letter of transmittal together with the old
notes or a book-entry confirmation, as the case may be, and any
other documents required by the letter of transmittal will be
deposited by the eligible institution with the exchange agent;
and
•
a properly completed and signed letter of transmittal, as well
as all tendered old notes in proper form for transfer or a
book-entry confirmation, and all other documents required by the
letter of transmittal, are received by the exchange agent within
five New York Stock Exchange trading days after the expiration
date. Upon request of the exchange agent, a notice of guaranteed
delivery will be sent to holders who wish to tender their old
notes according to the guaranteed delivery procedures set forth
above.
Withdrawal of Tender
Except as otherwise provided herein, you may withdraw tenders of
old notes at any time prior to 5:00 p.m., New York City
time, on the expiration date.
To withdraw a tender of old notes in the exchange offer, a
written or facsimile transmission notice of withdrawal must be
received by the exchange agent at its address set forth herein
prior to 5:00 p.m., New York City time, on the expiration
date. Any such notice of withdrawal must:
•
specify the name of the person having deposited the old notes to
be withdrawn, which we refer to herein as the
“depositor;”
•
identify the old notes to be withdrawn (including the principal
amount of the old notes and, in the case certificates
representing the old notes have been tendered, registered number
or numbers and or, in the case of old notes transferred by
book-entry transfer, the name and number of the account at DTC
to be credited);
be signed by the holder in the same manner as the original
signature on the letter of transmittal by which the old notes
were tendered (including any required signature guarantees) or
be accompanied by documents of transfer sufficient to have
Citibank, N.A., the trustee with respect to the old notes,
register the transfer of such old notes into the name of the
person withdrawing the tender; and
•
specify the name in which any such old notes are to be
registered, if different from that of the depositor.
All questions as to the validity, form and eligibility
(including time of receipt) of such notices will be determined
by us, and our determination will be final and binding on all
parties. Any old notes so withdrawn will be deemed not to have
been validly tendered for purposes of the exchange offer and no
exchange notes will be issued with respect thereto unless the
old notes so withdrawn are validly re-tendered. Any old notes
which have been tendered but which are not accepted for payment
will be returned to the holder thereof without cost to the
holder (or, in the case of old notes tendered by book-entry
transfer into the exchange agent’s account at DTC pursuant
to the book-entry transfer procedures described above, such old
notes will be credited to an account maintained with DTC) as
soon as practicable after withdrawal, rejection of tender or
termination of the exchange offer. Properly withdrawn old notes
may be retendered by following one of the procedures described
above under “— Procedures for Tendering” and
“— Book-Entry Transfer” at any time prior to
the expiration date.
Exchange Agent
Citibank, N.A. has been appointed as exchange agent of the
exchange offer. Questions and requests for assistance, requests
for additional copies of this prospectus or of the letter of
transmittal and requests for notices of guaranteed delivery
should be directed to the exchange agent as follows:
The expenses of soliciting tenders will be paid by us. The
principal solicitation is being made by mail; however,
additional solicitation may be made by telephone, facsimile, or
in person by officers and regular employees of the Issuers and
their affiliates.
We have not retained any dealer-manager in connection with the
exchange offer and will not make any payments to brokers,
dealers or others soliciting acceptances of the exchange offer.
We will, however, pay the exchange agent reasonable and
customary fees for its services and will reimburse it for its
reasonable
out-of-pocket expenses
in connection therewith. We may also pay brokerage houses and
other custodians, nominees and fiduciaries the reasonable
out-of-pocket expenses
incurred by them in forwarding copies of the prospectus and
related documents to the beneficial owners of the old notes and
in handling or forwarding tenders for exchange. In addition, we
expect to incur other expenses in connection with the exchange
offer, including reimbursement of the fees and expenses of the
trustee of the notes, accounting and legal fees, and printing
costs.
We will pay all transfer taxes, if any, applicable to the
exchange of old notes pursuant to the exchange offer. If,
however, exchange notes or old notes for principal amounts not
tendered or accepted for exchange are to be delivered to, or are
to be issued in the name of, any person other than the holder of
the old notes tendered, or if tendered old notes are registered
in the name of any person other than the person signing the
letter of transmittal, or if a transfer tax is imposed for any
reason other than the exchange of old notes pursuant to the
exchange offer, then the amount of any transfer taxes (whether
imposed on the holder or any other persons) will be payable by
the tendering holder. If satisfactory evidence of payment of
such taxes or
exemption from such payment is not submitted with the letter of
transmittal, the amount of such transfer taxes will be billed
directly to such tendering holder.
Consequences of Failure to Exchange
Holders of old notes who do not exchange their old notes for
exchange notes pursuant to the exchange offer will continue to
be subject to the restrictions on transfer of such old notes as
set forth in the legend on the old notes and in the indenture as
a result of the issuance of the old notes pursuant to exemptions
from, or in transactions not subject to, the registration
requirements of the Securities Act and applicable state
securities law. Accordingly, the old notes may be resold only
•
to us (upon redemption thereof or otherwise),
•
pursuant to an effective registration statement under the
Securities Act,
•
so long as the old notes are eligible for resale pursuant to
Rule 144A, to a qualified institutional buyer within the
meaning of Rule 144A under the Securities Act in a
transaction meeting the requirements of Rule 144A, or
•
pursuant to another available exemption from the registration
requirements of the Securities Act, in each case in accordance
with any applicable securities laws of any state of the United
States.
We may in the future seek to acquire untendered old notes in
open market or privately negotiated transactions, through
subsequent exchange offers or otherwise. Currently, we have no
present plans to acquire any old notes that are not tendered in
the exchange offer or to file a registration statement to permit
resales of any untendered old notes. However, generally, if any
initial purchaser so requests with respect to old notes not
eligible to be exchanged for exchange notes in the exchange
offer and held by it following consummation of the exchange
offer or if any holder of old notes is not eligible to
participate in the exchange offer or, in the case of any holder
of old notes that participates in the exchange offer, does not
receive freely tradable exchange notes in exchange for old
notes, we are obligated to file a registration statement on the
appropriate form under the Securities Act relating to the old
notes held by such persons.
Accounting Treatment
The exchange notes will be recorded at the same carrying value
as the old notes as reflected in our accounting records on the
date of the exchange. Accordingly, no gain or loss for
accounting purposes will be recognized by us. The expenses of
the exchange offer will be amortized over the term of the
exchange notes.
Other
Participation in the exchange offer is voluntary, and you should
carefully consider whether or not to accept. You are urged to
consult your legal, financial and tax advisors in making your
own decision on what action to take.
The Issuers issued the old notes, and will issue the exchange
notes, under an indenture (the “Indenture”),
dated as of September 28, 2005, by and among the Issuers,
the Subsidiary Guarantors and Citibank, N.A., as Trustee (the
“Trustee”), as supplemented by the supplemental
indenture (the “Supplemental Indenture”), dated
as of October 8, 2005, by and among the Issuers, the EB
Guarantors (as defined in the Supplemental Indenture) and the
Trustee. The form and terms of the exchange notes will be
identical in all material respects to the form and terms of the
old notes, except that the exchange notes will be registered
under the Securities Act, the transfer restrictions and
registration rights applicable to the old notes will not apply
to the exchange notes, and the exchange notes will not contain
any provisions relating to liquidated damages in connection with
the old notes under circumstances related to the timing of the
exchange offer.
Definitions of certain terms are set forth under
“— Certain Definitions” and throughout this
description. For purposes of this section, references to the
“Issuers,”“we,”“us” and
“our” include only GameStop Corp. and GameStop, Inc.
and not their Subsidiaries, references to the
“Company” include only GameStop Corp. and not its
Subsidiaries, and references to the “Co-Issuer”
include only GameStop, Inc. and not its Subsidiaries.
The following description is a summary of the material
provisions of the Indenture. It does not include all of the
information included in the Indenture and may not include all of
the information that you would consider important. We urge you
to read the Indenture because it, and not this description,
defines your rights as a holder of the Notes. A copy of the
Indenture is available upon request to the Issuers at the
address indicated under “Available Information.” This
summary is qualified by reference to the Trust Indenture Act of
1939, as amended (the “TIA”), and to all of the
provisions of the Indenture, including the definitions of terms
therein and those terms made a part of the Indenture by
reference to the TIA.
Principal, Maturity and Interest
The Issuers will issue $950.0 million in aggregate
principal amount of exchange notes in this offering, including
$300,000,000 in aggregate principal amount of new floating rate
notes, which will mature on October 1, 2011, and
$650,000,000 in aggregate principal amount of new 8% notes,
which will mature on October 1, 2012.
Interest on the Senior Floating Rate Notes will accrue at a rate
equal to the Applicable Rate from the Issue Date or, if interest
has already been paid, from the date interest was last paid. The
Applicable Rate will be reset quarterly. The Applicable Rate for
the current quarterly period is 8.405%. The Issuers will pay
interest on the Senior Floating Rate Notes quarterly, in
arrears, every January 1, April 1, July 1 and
October 1, to holders of record on the immediately
preceding December 15, March 15, June 15 and
September 15, and at maturity. The most recent payment of
interest on the Senior Floating Rate Notes was made on the first
Business Day following April 1, 2006 and the next payment
of interest on the Senior Floating Rate Notes will be due on the
first Business Day following July 1, 2006. Interest on the
Senior Floating Rate Notes will be computed on the basis of a
360-day year comprised
of twelve 30-day months.
Interest on the Senior Notes will accrue at the rate of
8% per year from the Issue Date or, if interest has already
been paid, from the date interest was last paid. The Issuers
will pay interest on the Senior Notes semi-annually, in arrears,
every April 1 and October 1 to holders of record on
the immediately preceding March 15 and September 15, and at
maturity. The most recent payment of interest on the Senior
Notes was made on the first Business Day following April 1,2006 and the next payment of interest on the Senior Notes will
be due on the first Business Day following October 1, 2006.
Interest on the Senior Notes will be computed on the basis of a
360-day year comprised
of twelve 30-day months.
Subject to compliance with the covenant described under
“— Certain Covenants — Limitation on
Debt,” we can issue an unlimited amount of additional Notes
(“Additional Notes”) in the future as part of
either series or as an additional series. Any Additional Notes
that we issue in the future will be identical in all respects to
the Notes, except that any Additional Notes issued in the future
may have different issuance prices
and will have different issuance dates. The Notes and any
Additional Notes that we issue in the future will be treated as
a single class for all purposes of the Indenture, including
waivers, amendments and redemptions.
The old notes are, and the exchange notes will be, issued in
fully registered form only, without coupons, in denominations of
$1,000 and integral multiples thereof.
Transfer and Exchange
Initially, the Trustee will act as paying agent and registrar
for the Notes. The Notes may be presented for transfer or
exchange at the offices of the registrar, which initially will
be the Trustee’s corporate trust office. The Issuers may
change any paying agent and registrar without notice to holders
of the Notes. The Issuers will pay principal (and premium, if
any) on the Notes at the Trustee’s corporate office in New
York, New York. Interest may be paid at the Trustee’s
corporate trust office, by check mailed to the registered
address of the holders of the Notes or, at the Issuers’
option, by wire transfer if instructions therefor are furnished
by a holder of the Notes. Any old notes that remain outstanding
after the completion of the exchange offer, together with the
exchange notes, will be treated as a single class of securities
under the Indenture.
The interest rate on the Notes will increase in circumstances
described under “The Exchange Offer —
Registration Rights; Liquidated Damages.” Any interest
payable as a result of any such increase in the interest rate is
referred to as “Additional Interest.”
Guarantees
The Subsidiary Guarantors will jointly and severally guarantee,
on an unsecured senior basis, our obligations under the exchange
notes. The obligations of each Subsidiary Guarantor under its
Subsidiary Guarantee of the exchange notes will be limited as
necessary to prevent that Subsidiary Guarantee from constituting
a fraudulent conveyance under applicable law. See “Risk
Factors — Federal and state fraudulent transfer laws
permit a court to void or subordinate the notes and related
guarantees, and if that occurs, you may not receive any payments
on the notes.”
Each Subsidiary Guarantor that makes a payment under its
Subsidiary Guarantee will be entitled, upon payment in full of
all guarantied Obligations under the Indenture, to a
contribution from each other Subsidiary Guarantor in an amount
equal to such other Subsidiary Guarantor’s pro rata portion
of such payment, based on the respective net assets of all the
Subsidiary Guarantors at the time of such payment.
If a Subsidiary Guarantee was rendered voidable, it could be
subordinated by a court to all other Debt (including Guarantees
and other contingent liabilities) of the applicable Subsidiary
Guarantor, and, depending on the amount of such Debt, a
Subsidiary Guarantor’s liability on its Subsidiary
Guarantee could be reduced to zero. See “Risk
Factors — Federal and state fraudulent transfer laws
permit a court to void or subordinate the notes and related
guarantees, and if that occurs, you may not receive any payments
on the notes.”
The Subsidiary Guarantee of a Subsidiary Guarantor will be
released:
•
upon the sale or other disposition of all the assets or Capital
Stock of the Subsidiary Guarantor, in each case in a transaction
in compliance with the covenant described under
“— Certain Covenants — Limitation on
Asset Sales”;
•
upon the sale or other disposition (including by way or
consolidation or merger) of the Subsidiary Guarantor in
compliance with the covenant described under
“— Merger, Consolidation and Sale of
Property”; and
•
upon the designation of the Subsidiary Guarantor as an
Unrestricted Subsidiary in accordance with the covenant
described under “— Certain Covenants —
Designation of Restricted and Unrestricted Subsidiaries.”
The Debt of the Issuers evidenced by the new floating rate notes
will rank pari passu in right of payment with the Debt of
the Issuers evidenced by the new 8% notes. The exchange
notes will rank senior in right of payment to all Subordinated
Obligations of the Issuers and will rank pari passu in
right of payment with all other existing or future
unsubordinated Debt of the Issuers.
Each Subsidiary Guarantee of the exchange notes will rank senior
in right of payment to all Subordinated Obligations of the
Subsidiary Guarantor giving such Subsidiary Guarantee and will
rank pari passu in right of payment with all other
existing or future unsubordinated Debt of such Subsidiary
Guarantor.
The exchange notes and the Subsidiary Guarantees of the exchange
notes will be effectively subordinated to all secured Debt of
the Issuers and the Subsidiary Guarantors, respectively, to the
extent of the assets securing such Debt and structurally
subordinated to the Debt of any non-Subsidiary Guarantor.
Optional Redemption
Senior Floating Rate Notes. At any time on or prior to
October 1, 2007, the Issuers may on any one or more
occasions redeem up to 100% of the aggregate principal amount of
Senior Floating Rate Notes issued under the Indenture at a
redemption price equal to 104% of the principal amount thereof
plus accrued and unpaid interest, if any, to the redemption
date, plus Additional Interest, if any, with the net cash
proceeds of one or more Equity Offerings; provided that:
(1) to the extent that less than 100% of the aggregate
principal amount of Senior Floating Rate Notes is redeemed
pursuant to this provision, at least 65% of the aggregate
principal amount of Senior Floating Rate Notes originally issued
under the Indenture (excluding Senior Floating Rate Notes held
by the Issuers and their Subsidiaries) shall remain outstanding
immediately after the occurrence of such redemption; and
(2) the redemption occurs within 120 days of the date
of the closing of such Equity Offering.
Except pursuant to the preceding paragraph and as described
below, the Senior Floating Rate Notes will not be redeemable at
the Issuers’ option prior to October 1, 2007.
On or after October 1, 2007, the Issuers may redeem all or
a part of the Senior Floating Rate Notes upon not less than 30
nor more than 60 days’ notice, at the redemption
prices (expressed as percentages of principal amount) set forth
below plus accrued and unpaid interest and Additional Interest,
if any, on the Senior Floating Rate Notes redeemed, to the
applicable redemption date, if redeemed during the twelve-month
period beginning on October 1 of the years indicated below,
subject to the rights of holders of the Senior Floating Rate
Notes on the relevant record date to receive interest on the
relevant interest payment date:
Year
Percentage
2007
102.000
%
2008
101.000
%
2009 and thereafter
100.000
%
Unless the Issuers default in the payment of the redemption
price, interest will cease to accrue on the Senior Floating Rate
Notes or portions thereof called for redemption on the
applicable redemption date.
Senior Notes. At any time on or prior to October 1,2008, the Issuers may on any one or more occasions redeem up to
35% of the aggregate principal amount of Senior Notes issued
under the Indenture at a redemption price of 108% of the
principal amount, plus accrued and unpaid interest and
Additional Interest, if any, to the redemption date, with the
net cash proceeds of one or more Equity Offerings; provided
that:
(1) at least 65% of the aggregate principal amount of
Senior Notes originally issued under the Indenture (excluding
Senior Notes held by the Issuers and their Subsidiaries) remains
outstanding immediately after the occurrence of such
redemption; and
(2) the redemption occurs within 120 days of the date
of the closing of such Equity Offering.
Except pursuant to the preceding paragraph, the Senior Notes
will not be redeemable at the Issuers’ option prior to
October 1, 2009.
On or after October 1, 2009, the Issuers may redeem all or
a part of the Senior Notes upon not less than 30 nor more than
60 days’ notice, at the redemption prices (expressed
as percentages of principal amount) set forth below plus accrued
and unpaid interest and Additional Interest, if any, on the
Senior Notes redeemed, to the applicable redemption date, if
redeemed during the twelve-month period beginning on
October 1 of the years indicated below, subject to the
rights of holders of the Senior Notes on the relevant record
date to receive interest on the relevant interest payment date:
Year
Percentage
2009
104.000
%
2010
102.000
%
2011 and thereafter
100.000
%
Unless the Issuers default in the payment of the redemption
price, interest will cease to accrue on the Senior Notes or
portions thereof called for redemption on the applicable
redemption date.
At any time on or prior to October 1, 2007, with respect to
the Senior Floating Rate Notes, or October 1, 2009, with
respect to the Senior Notes, the Senior Floating Rate Notes or
the Senior Notes, as the case may be, may be redeemed, in whole
or in part at the option of the Issuers, upon not less than 30
nor more than 60 days’ prior notice mailed by
first-class mail to each holder’s registered address, at a
redemption price equal to 100% of the principal amount of such
Notes to be redeemed plus the Applicable Premium then in effect,
plus accrued and unpaid interest and Additional Interest, if
any, to the date of the redemption (the “Make-Whole
Redemption Date”), except that installments of
interest which are due and payable on dates falling on or prior
to the applicable redemption date will be payable to the persons
who were the holders of record at the close of business on the
relevant record dates.
“Applicable Premium”means, with respect to the
Senior Floating Rate Notes at any Make-Whole
Redemption Date, the greater of:
(1) 1.00% of the principal amount of such Senior Floating
Rate Notes; and
(2) the excess of
(A) the present value at such time of (i) the
redemption price of such Senior Floating Rate Notes at
October 1, 2007 set forth above plus (ii) all accrued
and unpaid interest required to be paid on such Senior Floating
Rate Notes from the date of redemption through October 1,2007, assuming that LIBOR (as determined in accordance with the
definition of Applicable Rate) in effect on the date of the
redemption notice would be LIBOR in effect through
October 1, 2007 computed using a discount rate equal to
LIBOR as of such redemption date plus 0.75% per annum, over
(B) the principal amount of such Senior Floating Rate Notes.
“Applicable Premium”means, with respect to the
Senior Notes at any Make-Whole Redemption Date, the greater
of:
(1) 1.00% of the principal amount of such Senior
Notes; and
(2) the excess of
(A) the present value at such time of (i) the
redemption price of such Senior Notes at October 1, 2009
set forth above plus (ii) all accrued and unpaid interest
required to be paid on such Senior Notes from the date of
redemption through October 1, 2009 computed using a
discount rate equal to the Treasury Rate plus 0.75% per
annum, over
(B) the principal amount of such Senior Notes.
“Treasury Rate”means the yield to maturity at
the time of computation of U.S. Treasury securities with a
constant maturity (as compiled and published in the most recent
Federal Reserve Release H.15
(519) which has become publicly available at least two
Business Days prior to the Make-Whole Redemption Date (or,
if such Statistical Release is no longer published, any publicly
available source or similar market data)) closest to the period
from the Make-Whole Redemption Date to October 1,2009; provided, however, that if the period from the
Make-Whole Redemption Date to October 1, 2009 is not
equal to the constant maturity of a U.S. Treasury security
for which a weekly average yield is given, the Treasury Rate
shall be obtained by linear interpolation (calculated to the
nearest one-twelfth of one year) from the weekly average yields
of U.S. Treasury securities for which such yields are
given, except that, if the period from the Make-Whole
Redemption Date to October 1, 2009 is less than one
year, the weekly average yield on actually traded
U.S. Treasury securities adjusted to a constant maturity of
one year shall be used.
Unless the Issuers default in the payment of the redemption
price, interest will cease to accrue on the Senior Floating Rate
Notes or the Senior Notes, as the case may be, or portions
thereof called for redemption on the applicable Make-Whole
Redemption Date.
The Issuers may acquire Senior Floating Rate Notes and Senior
Notes by means other than redemption, whether by tender offer,
open market purchases, negotiated transactions or otherwise, in
accordance with applicable securities laws, so long as such
acquisitions do not otherwise violate the terms of the Indenture.
Selection and Notice
If fewer than all the Notes of either series issued under the
Indenture are to be redeemed at any time and such Notes are not
listed on any national securities exchange, the Trustee, in its
sole discretion, will select Notes of such series for redemption
on a pro rata basis, by lot or by such method as the
Trustee shall deem fair and appropriate. If such Notes are
listed on any national securities exchange, the Trustee will
select such Notes for redemption in compliance with the
requirements of such exchange. No Notes of $1,000 or less shall
be redeemed in part. Notices of redemption shall be mailed by
first class mail at least 30 but not more than 60 days
before the redemption date to each holder of Notes to be
redeemed at its registered address. Notices of redemption may
not be conditional. If any Note is to be redeemed in part only,
the notice of redemption that relates to such Note shall state
the portion of the principal amount thereof to be redeemed. A
new Note in principal amount equal to the unredeemed portion
thereof will be issued in the name of the holder thereof upon
cancellation of the original Note. Notes called for redemption
become due on the date fixed for redemption. On and after the
redemption date, interest will cease to accrue on Notes or
portions of them called for redemption.
Sinking Fund
There will be no mandatory redemption or sinking fund payments
for the Notes.
Repurchase at the Option of Holders Upon a Change of
Control
Upon the occurrence of a Change of Control, each holder of Notes
will have the right to require the Issuers to repurchase all or
any part (equal to $1,000 or an integral multiple thereof) of
such holder’s Notes pursuant to the offer described below
(the “Change of Control Offer”) at an offer
price in cash equal to 101% of the aggregate principal amount
thereof plus accrued and unpaid interest, if any, thereon to the
date of purchase (the “Change of Control
Payment”) on a date that is not more than 90 days
after the occurrence of such Change of Control (the
“Change of Control Payment Date”); provided,
however, that, notwithstanding the occurrence of a Change of
Control, the Issuers shall not be obligated to purchase the
Notes pursuant to a Change of Control Offer in the event that it
has mailed the notice to exercise its rights to redeem all of
the Notes under “— Optional Redemption” at
any time prior to the occurrence of a Change of Control Offer.
Within 30 days following any Change of Control, the Issuers
will mail, or at the Issuers’ request the Trustee will
mail, a notice to each holder offering to repurchase the Notes
held by such holder pursuant to the procedures specified in such
notice. The Issuers will comply with the requirements of
Rule 14e-1 under
the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), and any other securities laws
and regulations thereunder to the extent such laws and
regulations are applicable in connection with the repurchase of
the Notes as a result of a Change of Control. To the extent that
the provisions of any securities
laws or regulations conflict with provisions of this covenant,
the Issuers will comply with the applicable securities laws and
regulations and will not be deemed to have breached its
obligations under this covenant by virtue of such compliance.
On the Change of Control Payment Date, the Issuers will, to the
extent lawful,
•
accept for payment all Notes or portions thereof validly
tendered and not withdrawn pursuant to the Change of Control
Offer,
•
deposit with the applicable paying agent (or, if an Issuer or
any of the Restricted Subsidiaries is acting as the paying
agent, segregate and hold in trust) an amount equal to the
aggregate Change of Control Payments in respect of all Notes or
portions thereof so tendered, and
•
deliver or cause to be delivered to the Trustee the Notes so
accepted with an Officer’s Certificate stating the
aggregate principal amount of Notes or portions thereof being
purchased by the Issuers.
The applicable paying agent will promptly mail or deliver to
each holder of Notes so tendered the Change of Control Payment
for such Notes, and the Trustee will promptly authenticate and
mail (or cause to be transferred by book entry) to each holder a
Note equal in principal amount to any unpurchased portion of the
Notes surrendered, if any; provided that each such Note
will be in a principal amount of $1,000 or an integral multiple
thereof.
A failure by the Issuers to comply with the provisions of the
two preceding paragraphs will constitute an Event of Default
under the Indenture. Except as described above with respect to a
Change of Control, the Indenture will not contain provisions
that permit the holders of the Notes to require that the Issuers
purchase or redeem the Notes in the event of a takeover,
recapitalization or similar transaction.
The Senior Credit Facility contains, and future Debt of the
Issuers may contain, prohibitions or restrictions on events that
would constitute a Change of Control. Moreover, the exercise by
holders of the Notes of their right to require the Issuers to
repurchase their Notes could cause a default under the Senior
Credit Facility and future Debt, even if the Change of Control
itself does not result in a default under such facilities, due
to the financial effect of any such repurchases on the Issuers.
Finally, our ability to pay cash to holders of the Notes upon a
repurchase may be limited by the Issuers’ financial
resources at the time of the repurchase. Therefore, we cannot
assure you that sufficient funds will be available when
necessary to make any required repurchases. Our failure to
purchase Notes in connection with a Change of Control would
result in a default under the Indenture. Such a default would,
in turn, constitute a default under the Senior Credit Facility.
Our obligation to make an offer to repurchase the Notes as a
result of a Change of Control may be waived or modified at any
time prior to the occurrence of such Change of Control with the
written consent of the holders of majority in aggregate
principal amount of the outstanding Notes. See
“— Amendments and Waivers.”
The Issuers will not be required to make a Change of Control
Offer upon a Change of Control if a third party makes the Change
of Control Offer at the same or higher purchase price, at the
same times and otherwise in compliance with the requirements
applicable to a Change of Control Offer otherwise required to be
made by the Issuers and purchases all Notes validly tendered and
not withdrawn under such Change of Control Offer.
Certain Covenants
Suspension of Applicability of Certain Covenants in
Certain Circumstances
During any period of time that (i) the Notes have
Investment Grade Ratings from both Rating Agencies and
(ii) no Default or Event of Default has occurred and is
continuing under the Indenture (the occurrence of the events
described in the foregoing clauses (i) and (ii) being
collectively referred to as a “Covenant
Suspension Event”), the Company and its Restricted
Subsidiaries will not be subject to the following provisions of
the Indenture:
(1) “Limitation on Debt;”
(2) “Limitation on Restricted Payments;”
(3) “Limitation on Asset Sales;”
(4) “Limitation on Payment Restrictions Affecting
Restricted Subsidiaries;”
(5) “Limitation on Transactions with Affiliates;”
(6) “Designation of Restricted and Unrestricted
Subsidiaries;”
(7) clause (d) of the first paragraph of “Merger,
Consolidation and Sale of Property;” and
(8) clauses (1) and (4) of “Limitation on
Sale and Leaseback Transactions”
(collectively, the “Specified Covenants”). Upon
the occurrence of a Covenant Suspension Event, the amount of
Excess Proceeds from Asset Sale Proceeds shall be set at zero.
If, after a Covenant Suspension Event, either of the Rating
Agencies withdraws its rating or downgrades the ratings assigned
to the Notes below the required Investment Grade Ratings such
that both Rating Agencies at such time shall not have assigned
to the Notes an Investment Grade Rating or a Default or Event of
Default occurs and is continuing, then the Company and the
Restricted Subsidiaries will thereafter again be subject to the
Specified Covenants and compliance with the Specified Covenants
with respect to Restricted Payments made after the time of such
withdrawal, downgrade, Default or Event of Default will be
calculated in accordance with the terms of
“— Limitation on Restricted Payments” below
as though such covenant had been in effect during the entire
period of time from the Issue Date; provided, however,
that there will not be deemed to have occurred a Default or
Event of Default with respect to the Specified Covenants during
the time that the Company and its Restricted Subsidiaries were
not subject to the Specified Covenants (or upon termination of
the suspension period or after that time based solely on events
that occurred during the suspension period).
Limitation on Debt. The Company shall not, and shall not
permit any Restricted Subsidiary to, directly or indirectly,
Incur any Debt (including Acquired Debt), except that the
Company, the Co-Issuer or a Subsidiary Guarantor may Incur Debt
(including Acquired Debt) if after giving effect to the
Incurrence of such Debt and the application of the proceeds
thereof, (A) the Consolidated Interest Coverage Ratio would
be greater than 2.00 to 1.00 and (B) no Default or Event of
Default would occur as a consequence of such Incurrence or be
continuing following such Incurrence.
The foregoing restrictions shall not apply to (each of the
following, “Permitted Debt”):
(a) (i) Debt of the Company or the Co-Issuer evidenced
by the Notes and (ii) Debt of the Subsidiary Guarantors
evidenced by the Subsidiary Guarantees relating to the Notes;
(b) Debt of the Company, the Co-Issuer or a Subsidiary
Guarantor under Credit Facilities (including the Senior Credit
Facility), provided that, after giving effect to any such
Incurrence, the aggregate principal amount of all Debt Incurred
pursuant to this clause (b) and then outstanding shall not
exceed the greater of (i) $400 million, which amount
shall be permanently reduced by the amount of Net Available Cash
used to Repay Debt under any such Credit Facilities, pursuant to
the covenant described under “— Limitation on
Asset Sales,” and (ii) the Borrowing Base;
(c) Debt of the Company or a Restricted Subsidiary in
respect of Capital Lease Obligations and Purchase Money Debt,
provided that:
(i) the aggregate principal amount of such Debt does not
exceed the Fair Market Value (on the date of the Incurrence
thereof) of the Property acquired, constructed or
leased, and
(ii) the aggregate principal amount of all Debt Incurred
and then outstanding pursuant to this clause (c) (together
with all Permitted Refinancing Debt Incurred and then
outstanding in respect of Debt previously Incurred pursuant to
this clause (c)) does not exceed $50 million;
(d) Debt of the Company owing to and held by any Wholly
Owned Restricted Subsidiary and Debt of a Restricted Subsidiary
owing to and held by the Company or any Wholly Owned Restricted
Subsidiary; provided, however, that any subsequent issue or
transfer of Capital Stock or other event that results in any
such Wholly Owned Restricted Subsidiary ceasing to be a Wholly
Owned Restricted Subsidiary or any subsequent transfer of any
such Debt (except to the Company or a Wholly Owned Restricted
Subsidiary) shall be deemed, in each case, to constitute the
Incurrence of such Debt by the issuer thereof; provided,
further, however, that if the Company, the Co-Issuer or any
Subsidiary Guarantor is the obligor on such Debt and the payee
is not the Company, the Co-Issuer or a Subsidiary Guarantor,
such Debt must be expressly subordinated to the prior payment in
full in cash of all Obligations then due with respect to the
Notes, in the case of the Company or the Co-Issuer, or the
Subsidiary Guarantee, in the case of a Subsidiary Guarantor;
(e) Debt under Interest Rate Agreements entered into by the
Company or a Restricted Subsidiary for the purpose of limiting
interest rate risk in the ordinary course of the financial
management of the Company or such Restricted Subsidiary and not
for speculative purposes; provided that the obligations under
such agreements are directly related to payment obligations on
Debt otherwise permitted by the terms of this covenant;
(f) Debt under Currency Exchange Protection Agreements
entered into by the Company or a Restricted Subsidiary for the
purpose of limiting currency exchange rate risks directly
related to transactions entered into by the Company or such
Restricted Subsidiary in the ordinary course of business and not
for speculative purposes;
(g) Debt of a Restricted Subsidiary outstanding on the date
on which such Restricted Subsidiary was acquired by the Company
or otherwise became a Restricted Subsidiary (other than Debt
Incurred as consideration in, or to provide all or any portion
of the funds or credit support utilized to consummate, the
transaction or series of transactions pursuant to which such
Restricted Subsidiary became a Subsidiary of the Company or was
otherwise acquired by the Company); provided that at the time
such Restricted Subsidiary was acquired by the Company or
otherwise became a Restricted Subsidiary and after giving effect
to the Incurrence of such Debt, the Company would have been able
to Incur $1.00 of additional Debt pursuant to the first
paragraph of this covenant;
(h) Debt of the Company or a Restricted Subsidiary
outstanding on the Issue Date;
(i) Debt arising from agreements of the Company or a
Restricted Subsidiary providing for indemnification, adjustment
of purchase price or similar obligations, in each case, Incurred
or assumed in connection with the disposition of any business,
assets or Capital Stock of the Company or any Restricted
Subsidiary; provided, that (A) the maximum aggregate
liability in respect of all such Debt shall at no time exceed
the gross proceeds including non-cash proceeds (the Fair Market
Value of such non-cash proceeds being measured at the time
received and without giving effect to any subsequent changes in
value) actually received by the Company and its Subsidiaries in
connection with such disposition and (B) such Debt is not
reflected on the balance sheet of the Company or any Restricted
Subsidiary (contingent obligations referred to in a footnote to
financial statements and not otherwise reflected on the balance
sheet will not be deemed to be reflected on such balance sheet
for purposes of this clause (i));
(j) the Incurrence by the Company or any of its Restricted
Subsidiaries of Debt in respect of workers’ compensation
claims, payment obligations in connection with health or other
types of social security benefits, unemployment or other
insurance or self-insurance obligations, reclamation, statutory
obligations, bankers’ acceptances, performance, surety or
similar bonds and letters of credit or completion or performance
guarantees, or other similar obligations in the ordinary course
of business or consistent with past practice;
(k) the Incurrence by the Company or any of its Restricted
Subsidiaries of Debt arising from the honoring by a bank or
other financial institution of a check, draft or similar
instrument inadvertently drawn against insufficient funds;
(l) Debt of the Company or any Subsidiary Guarantor (not
including Debt under clause (h) above) in an aggregate
principal amount outstanding at any one time not to exceed
$100 million;
(m) the Guarantee by the Company, the Co-Issuer or any
Subsidiary Guarantor of Debt of the Company or any Restricted
Subsidiary, so long as in each case such Debt was Incurred
pursuant to another provision of this covenant and is otherwise
permitted under the Indenture;
(n) the Incurrence of Debt by Foreign Restricted
Subsidiaries in an aggregate principal amount outstanding at any
one time not to exceed $50.0 million;
(o) the Guarantee by any Restricted Subsidiary that is not
the Co-Issuer or a Subsidiary Guarantor of Debt of the Company
or any Restricted Subsidiary, so long as in each case such Debt
was Incurred pursuant to another provision of this covenant and
the requirements of the covenant described under
“— Guarantees by Restricted Subsidiaries”
are met; and
(p) Permitted Refinancing Debt Incurred in respect of Debt
Incurred pursuant to the first paragraph of this covenant and
clauses (a), (g) and (h) above.
Notwithstanding anything to the contrary contained in this
covenant,
(a) the Company shall not, and shall not permit any
Restricted Subsidiary to, Incur any Debt that is subordinated by
its terms to any other Debt of the Company or any Restricted
Subsidiary unless such Debt is subordinated by its terms to the
Notes to at least the same extent and for so long as it is
subordinated to such other Debt;
(b) the Company or the Co-Issuer shall not, and shall not
permit any Subsidiary Guarantor of the Notes to, Incur any Debt
pursuant to this covenant if the proceeds thereof are used,
directly or indirectly, to Refinance any Subordinated
Obligations unless such Debt shall be subordinated to the Notes
or any Subsidiary Guarantee of the Notes by such Subsidiary
Guarantor to at least the same extent as such Subordinated
Obligations;
(c) the Company shall not permit any Restricted Subsidiary
that is not the Co-Issuer or a Subsidiary Guarantor to Incur any
Debt pursuant to this covenant if the proceeds thereof are used,
directly or indirectly, to Refinance any Debt of the Company,
the Co-Issuer or any Subsidiary Guarantor; and
(d) accrual of interest, fees, expenses, charges, premiums
and additional or contingent interest on Permitted Debt,
accretion or amortization of original issue discount and the
payment of interest or dividends in the form of additional Debt
will not be deemed to be an Incurrence of Debt for purposes of
this covenant.
For purposes of determining compliance with this covenant, in
the event that an item of Debt meets the criteria for Permitted
Debt under more than one of the categories described in
clauses (a) through (p) of the second paragraph of
this covenant or is entitled to be Incurred pursuant to the
first paragraph of this covenant, the Company shall, in its sole
discretion, classify (or later reclassify, in whole or in part,
in its sole discretion) such item of Debt in any manner that
complies with this covenant, provided that all
outstanding Debt under the Senior Credit Facility at the Issue
Date shall be deemed to have been Incurred pursuant to
clause (b) of the second paragraph of this covenant.
Debt permitted by this covenant need not be permitted solely by
reference to one provision permitting such Debt but may be
permitted in part by one such provision and in part by one or
more other provisions of this covenant permitting such Debt.
For the purposes of determining any particular amount of Debt
under this covenant, Guarantees, Liens, obligations with respect
to letters of credit and other obligations supporting Debt
otherwise included in the determination of a particular amount
will not be included.
For purposes of determining compliance with any
dollar-denominated restriction on the Incurrence of Debt, with
respect to any Debt which is denominated in a foreign currency,
the dollar-equivalent principal amount of such Debt Incurred
pursuant thereto shall be calculated based on the relevant
currency exchange rate in effect on the date that such Debt was
Incurred, and any such foreign denominated Debt may be
Refinanced or subsequently Refinanced in an amount equal to the
dollar-equivalent principal amount of such Debt on the date of
such Refinancing whether or not such amount is greater or less
than the dollar equivalent principal amount of the Debt on the
date of initial Incurrence.
Limitation on Restricted Payments. The Company shall not
make, and shall not permit any Restricted Subsidiary to make,
directly or indirectly, any Restricted Payment if at the time
of, and after giving effect to, such proposed Restricted Payment,
(a) a Default or Event of Default shall have occurred and
be continuing,
(b) the Company could not Incur at least $1.00 of
additional Debt pursuant to the first paragraph of the covenant
described under “— Limitation on
Debt,” or
(c) the aggregate amount of such Restricted Payment and all
other Restricted Payments declared or made since the Issue Date
(the amount of any Restricted Payment, if made other than in
cash, to be based upon Fair Market Value at the time of such
Restricted Payment) would exceed an amount equal to the sum
(without duplication) of:
(i) 50% of the aggregate amount of Consolidated Net Income
accrued during the period (treated as one accounting period)
from the Issue Date to the end of the most recent fiscal quarter
for which financial statements are available (or if the
aggregate amount of Consolidated Net Income for such period
shall be a deficit, minus 100% of such deficit), plus
(ii) 100% of Capital Stock Sale Proceeds, plus
(iii) the sum of:
(A) the aggregate net cash proceeds received by the Company
or any Restricted Subsidiary from the issuance or sale after the
Issue Date of convertible or exchangeable Debt or Disqualified
Stock that has been converted into or exchanged for Capital
Stock (other than Disqualified Stock) of the Company, and
(B) the aggregate amount by which Debt (other than
Subordinated Obligations) of the Company or any Restricted
Subsidiary is reduced on the Company’s consolidated balance
sheet on or after the Issue Date upon the conversion or exchange
of any Debt issued or sold on or prior to the Issue Date that is
convertible or exchangeable for Capital Stock (other than
Disqualified Stock) of the Company,
excluding, in the case of clause (A) or (B):
(x) any such Debt or Disqualified Stock issued or sold to
the Company or a Subsidiary of the Company or an employee stock
ownership plan or trust established by the Company or any such
Subsidiary for the benefit of their employees, and
(y) the aggregate amount of any cash or other Property
distributed by the Company or any Restricted Subsidiary upon any
such conversion or exchange,
plus
(iv) an amount equal to the sum of:
(A) the net reduction in Investments in any Person other
than the Company or a Restricted Subsidiary resulting from
dividends, repayments of loans or advances or other
transfers of Property, in each case to the Company or any
Restricted Subsidiary from such Person, and
(B) the portion (proportionate to the Company’s equity
interest in such Unrestricted Subsidiary) of the Fair Market
Value of an Unrestricted Subsidiary at the time such
Unrestricted Subsidiary is designated a Restricted Subsidiary;
provided, however, that the foregoing sum shall not
exceed, in the case of any Person, the amount of Investments
previously made (and treated as a Restricted Payment for
purposes of clause (c) above) by the Company or any
Restricted Subsidiary in such Person.
Notwithstanding the foregoing limitation, the Company or any
Restricted Subsidiary may:
(a) so long as no Default or Event of Default shall have
occurred and be continuing (or result therefrom), pay dividends
or distributions on its Capital Stock within 60 days of the
declaration thereof if, on the declaration date, such dividends
or distributions could have been paid in compliance with the
Indenture; provided, however, that such dividends or
distributions shall be included in the calculation of the amount
of Restricted Payments made by the Company or any Restricted
Subsidiary;
(b) purchase, repurchase, redeem, legally defease, acquire
or retire for value any (i) Capital Stock of the Company,
any Restricted Subsidiary or any joint venture, or
(ii) Subordinated Obligations, in exchange for, or out of
the proceeds of the substantially concurrent sale of, Capital
Stock of the Company (other than Disqualified Stock and other
than Capital Stock issued or sold to a Subsidiary of the Company
or an employee stock ownership plan or trust established by the
Company or any such Subsidiary for the benefit of their
employees); provided, however, that
(1) such purchase, repurchase, redemption, legal
defeasance, acquisition or retirement shall be excluded from the
calculation of the amount of Restricted Payments made by the
Company or any Restricted Subsidiary, and
(2) the Capital Stock Sale Proceeds from such exchange or
sale shall be excluded from (and shall not have been included
in) the calculation of the amount of Capital Stock Sale Proceeds
for the purposes of clause (c)(ii) of the first paragraph
of this covenant;
(c) purchase, repurchase, redeem, legally defease, acquire
or retire for value any Subordinated Obligations in exchange
for, or out of the proceeds of the substantially concurrent sale
of, Permitted Refinancing Debt; provided, however, that such
purchase, repurchase, redemption, legal defeasance, acquisition
or retirement shall be excluded from the calculation of the
amount of Restricted Payments made by the Company or any
Restricted Subsidiary;
(d) purchase, repurchase, redeem, legally defease, acquire
or retire for value any Subordinated Obligations from Net
Available Cash to the extent permitted by the covenant described
under “— Limitation on Asset Sales”;
provided, however, that such purchase, repurchase, redemption,
legal defeasance, acquisition or retirement for value shall be
excluded from the calculation of the amount of Restricted
Payments made by the Company or any Restricted Subsidiary;
(e) purchase or redeem any Subordinated Obligations or
Disqualified Stock, to the extent required by the terms of such
Debt or such Disqualified Stock, as applicable, following a
Change of Control; provided, however, that the Company has made
a Change of Control Offer and has purchased all Notes tendered
in connection with that Change of Control Offer; provided
further, however, that such purchase or redemption shall be
included in the calculation of the amount of Restricted Payments
made by the Company or any Restricted Subsidiary;
(f) make Restricted Payments in an amount not to exceed
$50 million in the aggregate; provided, however, that such
Restricted Payments shall be excluded from the calculation of
the amount of Restricted Payments pursuant to clause (c) of
the first paragraph of this covenant;
(g) repurchase, redeem, acquire or retire for value any
Disqualified Stock of the Company or any Restricted Subsidiary
made by exchange for, or out of the proceeds of the
substantially concurrent sale of,
Disqualified Stock of the Company or any Restricted Subsidiary
that is permitted to be Incurred pursuant to the covenant
described under “— Limitation on Debt”;
provided, however, that such repurchase, redemption or other
acquisition or retirement for value will be excluded from the
calculation of the amount of Restricted Payments made by the
Company or any Restricted Subsidiary;
(h) purchase, repurchase, redeem, acquire or retire for
value any Capital Stock of the Company upon the exercise of
warrants, options or similar rights if such Capital Stock
constitutes all or a portion of the exercise price or are
surrendered in connection with satisfying any federal or state
income tax obligation, including, without limitation, upon a
cashless exercise of such warrants, options or other rights;
provided, however, that such purchase, repurchase, redemption,
acquisition or retirement shall be included in the calculation
of the amount of Restricted Payments made by the Company or any
Restricted Subsidiary; and
(i) make cash payments in lieu of the issuance of
fractional shares in connection with stock splits, reverse-stock
splits or the exercise of warrants, options or other securities
convertible into or exchangeable for Capital Stock of the
Company; provided, however, that such payments shall be included
in the calculation of the amount of Restricted Payments made by
the Company or any Restricted Subsidiary.
Limitation on Liens. The Company will not, and will not
permit any of its Restricted Subsidiaries to, Incur or suffer to
exist any Lien (other than any Permitted Lien) on Property owned
on the Issue Date or thereafter acquired to secure Debt without
making, or causing such Restricted Subsidiary to make, effective
provision for securing the Notes (and, if the Company so
determines, any other Debt of the Company which is not
subordinate to the Notes or the applicable Subsidiary Guarantee)
equally and ratably with such Debt as to such Property so long
as such Debt is so secured.
“Permitted Liens”means:
(a) Liens in respect of Debt existing at the Issue Date
(other than Liens securing the Senior Credit Facility);
(b) Liens on Property existing at the time of acquisition
thereof;
(c) Liens to secure Debt permitted to be Incurred under
clause (c) of the second paragraph of the covenant
described under “— Certain Covenants —
Limitation on Debt”; provided that any such Lien may not
extend to any Property of the Company or any Restricted
Subsidiary, other than the Property acquired, constructed or
leased with the proceeds of such Debt and any improvements or
accessions to such Property;
(d) Liens on Property of a Person existing at the time
(i) such Person is merged into or consolidated with the
Company or any Restricted Subsidiary or (ii) such Person
becomes a Restricted Subsidiary;
(e) Liens arising solely by virtue of any statutory or
common law provision relating to banker’s liens, rights of
setoff or similar rights;
(f) Liens for taxes or assessments or other governmental
charges or levies (including, without limitation, Liens in favor
of customs and revenue authorities to secure payment of customs
duties in connection with the importation of goods in the
ordinary course of business), Liens imposed by law, such as
mechanics’ and material men’s Liens, for sums not due
or sums being contested in good faith and with respect to which
adequate reserves are being maintained, to the extent required
by GAAP, and Liens securing reimbursement obligations with
respect to trade letters of credit, bankers’ acceptances
and sight drafts Incurred in the ordinary course of business
which encumber documents and other Property relating to such
trade letters of credit, bankers’ acceptances and sight
drafts;
(g) Liens to secure obligations under workers’
compensation laws or similar legislation, including Liens with
respect to judgments which are not currently dischargeable;
(h) Liens created by or resulting from any litigation or
other proceeding being contested by the Company or a Restricted
Subsidiary, including Liens arising out of judgment or awards
against the
Company or any Restricted Subsidiary with respect to which the
Company or such Restricted Subsidiary is prosecuting an appeal
or proceedings for review or for which the time to make an
appeal has not yet expired; or final unappealable judgment Liens
which are satisfied within 15 days of the date of judgment;
or Liens Incurred by the Company or any Restricted Subsidiary
for the purpose of obtaining a stay or discharge in the course
of any litigation or other proceeding to which the Company or
such Restricted Subsidiary is a party;
(i) Liens to secure obligations under the Senior Credit
Facility in an amount not to exceed the amount of obligations
permitted to be Incurred pursuant to clause (b) of the
second paragraph of “— Limitation on Debt”
and for purposes of this clause (i) deeming all of the Debt
at any time outstanding under the Senior Credit Facility or any
other Credit Facility to have been Incurred under such
clause (b);
(j) Liens or deposits to secure the performance of
statutory or regulatory obligations, or surety, appeal,
indemnity or performance bonds, warranty and contractual
requirements or other obligations of a like nature incurred in
the ordinary course of business;
(k) easements, rights of way, zoning and similar
restrictions, reservations, restrictions or encumbrances in
respect of real property (or leases or subleases of real
property) or title defects that were not incurred in connection
with Indebtedness and that do not in the aggregate materially
adversely affect the value of said properties (as such
properties are used by the Company or its Subsidiaries) or
materially impair their use in the operation of the business of
the Company and its Subsidiaries;
(l) licenses of patents, trademarks and other intellectual
property rights granted in the ordinary course of business;
(m) Liens arising out of conditional sale, retention,
consignment or similar arrangements, Incurred in the ordinary
course of business, for the sale of goods;
(n) Liens on Property of any Foreign Restricted Subsidiary;
(o) Liens existing on the Issue Date not otherwise
described in clauses (a) through (n) above;
(p) Liens not otherwise described in clauses (a)
through (o) above on the Property of any Restricted
Subsidiary that is not the Co-Issuer or a Subsidiary Guarantor
to secure any Debt permitted to be Incurred by such Restricted
Subsidiary pursuant to the covenant described under
“— Limitation on Debt;”
(q) so long as the Company is subject to all of the
Specified Covenants, Liens not otherwise permitted by
clauses (a) through (p) securing Debt or other
obligations permitted under the Indenture at any time
outstanding not to exceed 5% of the Consolidated Net Tangible
Assets of the Company, determined based on the consolidated
balance sheet of the Company as of the end of the most recent
fiscal quarter for which financial statements have been filed or
furnished; and
(r) Liens to secure any extension, renewal or refinancing
(or successive extensions, renewals or refinancings), in whole
or in part, of any Debt secured by Liens referred to in the
foregoing clauses (a) to (k) so long as such Liens do
not extend to any other Property and the Debt so secured is not
increased.
Limitation on Sale and Leaseback Transactions. The
Company will not, and will not permit any Restricted
Subsidiary, to enter into any Sale and Leaseback Transaction
unless
(1) the Company or such Restricted Subsidiary would be
entitled to Incur Debt in an amount equal to the Attributable
Value relating to such Sale and Leaseback Transaction in
accordance with the “— Limitation on Debt”
covenant above;
(2) the Company or such Restricted Subsidiary would be
entitled to Incur a Lien to secure Debt in an amount equal to
the Attributable Value of the Sale and Leaseback Transaction in
accordance with the
“— Limitation on Liens” covenant above,
without equally and ratably securing the Notes or the applicable
Subsidiary Guarantee; and
(3) the transfer of assets in such Sale and Leaseback
Transaction is permitted by, and the Company applies the
proceeds of such transaction in accordance with, the
“— Limitation on Assets Sales” covenant
below.
Limitation on Asset Sales. The Company shall not, and
shall not permit any Restricted Subsidiary to, directly or
indirectly, consummate any Asset Sale unless:
(a) the Company or such Restricted Subsidiary receives
consideration at the time of such Asset Sale at least equal to
the Fair Market Value of the Property subject to such Asset Sale;
(b) at least 75% of the consideration paid to the Company
or such Restricted Subsidiary in connection with such Asset Sale
is in the form of (i) cash or cash equivalents,
(ii) notes or obligations that are converted into cash (to
the extent of the cash received) or equity securities listed on
a national securities exchange (as such term is defined in the
Exchange Act) or quoted on the Nasdaq National Market and
converted into cash (to the extent of cash received), in each
case within 90 days of such Asset Sale, (iii) the
assumption by the purchaser of liabilities of the Company or any
Restricted Subsidiary (other than liabilities that are by their
terms subordinated to the Notes or the applicable Subsidiary
Guarantee) as a result of which the Company and the Restricted
Subsidiaries are no longer obligated with respect to such
liabilities or (iv) Additional Assets; and
(c) the Company delivers an Officer’s Certificate to
the Trustee certifying that such Asset Sale complies with the
foregoing clauses (a) and (b).
The Net Available Cash (or any portion thereof) from Asset Sales
may be applied by the Company or a Restricted Subsidiary, to the
extent the Company or such Restricted Subsidiary elects (or is
required by the terms of any Debt):
(a) to permanently Repay (and to correspondingly reduce
commitments with respect thereto in the case of revolving
borrowings) (i) Bank Obligations, or (ii) Debt of any
Restricted Subsidiary that is not the Co-Issuer or a Subsidiary
Guarantor;
(b) to reinvest in Additional Assets (including by means of
an Investment in Additional Assets by a Restricted Subsidiary
with Net Available Cash received by the Company or another
Restricted Subsidiary);
(c) to the extent the Net Available Cash is from Asset
Sales of Property of a Foreign Restricted Subsidiary, to Repay
Debt of any Foreign Restricted Subsidiary; or
(d) a combination of the repayments and reinvestments
permitted by the foregoing clauses (a), (b) and (c).
Any Net Available Cash from Asset Sales in excess of
$75 million in the aggregate not applied in accordance with
the preceding paragraph within 365 days from the date of
the receipt of such Net Available Cash shall constitute
“Excess Proceeds.”
When the aggregate amount of Excess Proceeds exceeds
$25 million, the Company will be required to make an offer
to purchase (the “Asset Sale Offer”) the Notes,
which offer shall be in the amount of the Allocable Excess
Proceeds (as defined below) (rounded to the nearest $1,000), on
a pro rata basis according to principal amount (of a
minimum $1,000 or any integral multiple thereof), at a purchase
price equal to 100% of the principal amount thereof, plus
accrued and unpaid interest and Additional Interest, if any, to
the purchase date (subject to the right of holders of record on
the relevant record date to receive interest due on the relevant
interest payment date), in accordance with the procedures
(including prorating in the event of over subscription) set
forth in the Indenture. To the extent that any portion of the
amount of Excess Proceeds remains after compliance with the
preceding sentence and provided that all holders of the
Notes have been given the opportunity to tender their Notes for
purchase in accordance with the Indenture, the Company or
such Restricted Subsidiary may use such remaining amount for any
purpose not restricted by the Indenture and the amount of Excess
Proceeds will be reset to zero.
The term “Allocable Excess Proceeds”shall mean
the product of:
(a) the Excess Proceeds and
(b) a fraction,
(1) the numerator of which is the aggregate principal
amount of the Notes outstanding on the date of the Asset Sale
Offer, and
(2) the denominator of which is the sum of the aggregate
principal amount of the Notes outstanding on the date of the
Asset Sale Offer and the aggregate principal amount of other
Debt of the Company outstanding on the date of the Asset Sale
Offer that is pari passu in right of payment with the
Notes and subject to terms and conditions in respect of Asset
Sales similar in all material respects to this covenant and
requiring the Company to make an offer to purchase such Debt at
substantially the same time as the Asset Sale Offer.
Within five Business Days after the Company is obligated to make
an Asset Sale Offer as described in the preceding paragraph, the
Company shall send a written notice, by first-class mail, to the
holders of the Notes, accompanied by such information regarding
the Company and its Subsidiaries as the Company in good faith
believes will enable such holders to make an informed decision
with respect to such Asset Sale Offer. Such notice shall state,
among other things, the purchase price and the purchase date,
which shall be, subject to any contrary requirements of
applicable law, a business day no earlier than 30 days nor
later than 60 days from the date such notice is mailed.
The Company will comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any
other securities laws or regulations in connection with any
repurchase of Notes pursuant to this covenant. To the extent
that the provisions of any securities laws or regulations
conflict with provisions of this covenant, the Company will
comply with the applicable securities laws and regulations and
will not be deemed to have breached its obligations under this
covenant by virtue thereof.
Limitation on Payment Restrictions Affecting Restricted
Subsidiaries. The Company shall not, and shall not permit
any Restricted Subsidiary to, directly or indirectly, create or
otherwise cause or suffer to exist any consensual restriction on
the right of any Restricted Subsidiary to:
(a) pay dividends, in cash or otherwise, or make any other
distributions on or in respect of its Capital Stock, or pay any
Debt or other obligation owed, to the Company or any other
Restricted Subsidiary;
(b) make any loans or advances to the Company or any other
Restricted Subsidiary; or
(c) transfer any of its Property to the Company or any
other Restricted Subsidiary.
The foregoing limitations will not apply:
(1) with respect to clauses (a), (b) and (c), to:
(A) restrictions in effect on the Issue Date, including,
without limitation, restrictions pursuant to the old notes and
the Indenture (including any exchange notes and Subsidiary
Guarantees of the Notes) and restrictions pursuant to Credit
Facilities (including, for such purposes, restrictions in effect
under the Senior Credit Facility);
(B) restrictions relating to Debt or Capital Stock of a
Restricted Subsidiary and existing at the time it became a
Restricted Subsidiary if such restriction was not created in
connection with or in anticipation of the transaction or series
of transactions pursuant to which such Restricted Subsidiary
became a Restricted Subsidiary or was acquired by the Company,
and any amendments, restatements, renewals or other
modifications of these instruments, provided that the
encumbrances or restrictions contained in any such amendments,
restatements, renewals or other modifications, taken
as a whole, are not materially more restrictive than the
encumbrances or restrictions contained in documents in effect on
the date of acquisition;
(C) restrictions existing under or by reason of applicable
law, rule, regulation or order;
(D) restrictions that result from the Refinancing of Debt
Incurred pursuant to clause (A) or (B) above;
provided such restrictions are no less favorable to the
holders of the Notes than those under the agreement evidencing
the Debt so Refinanced;
(E) any other agreement governing Debt entered into after
the Issue Date that contains encumbrances and restrictions that
are not materially more restrictive with respect to any
Restricted Subsidiary than those in effect on the Issue Date
with respect to that Restricted Subsidiary pursuant to
agreements in effect on the Issue Date;
(F) any restrictions applicable only to Foreign Restricted
Subsidiaries; or
(G) Liens securing obligations otherwise permitted to be
Incurred under the provisions of the covenants described under
“— Limitation on Liens” or
“— Limitation on Sale and Leaseback
Transactions” that limit the right of the debtor to dispose
of the assets subject to such Liens; and
(2) with respect to clause (c) only, to restrictions:
(A) relating to Debt that is permitted to be Incurred and
secured without also securing the Notes or any Subsidiary
Guarantee pursuant to the covenants described under
“— Limitation on Debt” and
“— Limitation on Liens” only to the extent
that such restrictions limit the right of the debtor to dispose
of the Property securing such Debt;
(B) encumbering Property at the time such Property was
acquired by the Company or any Restricted Subsidiary, so long as
such restriction relates solely to the Property so acquired and
was not created in connection with or in anticipation of such
acquisition;
(C) resulting from customary restrictions contained in
asset sale, stock purchase, merger or other similar agreements
limiting the transfer of such Property pending the closing of
such sale;
(D) resulting from restrictions relating to the common
stock of Unrestricted Subsidiaries;
(E) resulting from encumbrances or restrictions existing
under or by reason of provisions with respect to the disposition
or distribution of assets or property in joint venture
agreements and other similar agreements entered into in the
ordinary course of business;
(F) resulting from encumbrances or restrictions existing
under or by reason of restrictions on cash or other deposits or
net worth imposed by customers under contracts entered into in
the ordinary course of business;
(G) resulting from restrictions on cash, Temporary Cash
Investments or other deposits or net worth imposed by customers
or lessors under contracts or leases entered into in the
ordinary course of business;
(H) resulting from customary provisions restricting
subletting or assignment of leases or customary provisions in
other agreements that restrict assignment of such agreements or
rights thereunder; or
(I) imposed under any Purchase Money Debt or Capital Lease
Obligation in the ordinary course of business with respect only
to the Property the subject thereof.
Limitation on Transactions with Affiliates. The Company
shall not, and shall not permit any Restricted Subsidiary to,
directly or indirectly, conduct any business or enter into or
suffer to exist any transaction or series of related
transactions (including the purchase, sale, transfer,
assignment, lease, conveyance or
exchange of any Property or the rendering of any service) with,
or for the benefit of, any Affiliate of the Company (an
“Affiliate Transaction”), unless:
(a) the terms of such Affiliate Transaction are not less
favorable to the Company or such Restricted Subsidiary, as the
case may be, than those that could be obtained in a comparable
arm’s-length transaction with a Person that is not an
Affiliate of the Company;
(b) if such Affiliate Transaction involves aggregate
payments or value in excess of $10 million, the Board of
Directors (including at least a majority of the disinterested
members of the Board of Directors) approves such Affiliate
Transaction and, in its good faith judgment, believes that such
Affiliate Transaction complies with clause (a) of this
paragraph as evidenced by a Board Resolution promptly delivered
to the Trustee; and
(c) if such Affiliate Transaction involves aggregate
payments or value in excess of $25 million, the Company
obtains a written opinion from an Independent Financial Advisor
to the effect that the consideration to be paid or received in
connection with such Affiliate Transaction is fair, from a
financial point of view, to the Company and its Restricted
Subsidiaries, taken as a whole.
Notwithstanding the foregoing limitation, the Company or any
Restricted Subsidiary may enter into or suffer to exist the
following Affiliate Transactions:
(a) any transaction or series of transactions between the
Company and one or more Restricted Subsidiaries or between two
or more Restricted Subsidiaries in the ordinary course of
business;
(b) any Restricted Payment permitted to be made pursuant to
the covenant described under “— Limitation on
Restricted Payments” or any Permitted Investment;
(c) the payment of compensation (including awards or grants
in cash, securities or other payments) for the personal services
of officers and directors of the Company or any of the
Restricted Subsidiaries entered into by the Company or any
Restricted Subsidiary in the ordinary course of business or, if
not entered into in the ordinary course of business, that the
Board of Directors in good faith shall have approved the terms
thereof and deemed the services theretofore or thereafter to be
performed for such compensation to be fair consideration
therefor;
(d) payments made by the Company or any Restricted
Subsidiary in the ordinary course of business pursuant to
employment agreements, collective bargaining agreements,
employee benefit plans, officer or director indemnification
agreements or arrangements for employees, officers or directors,
including health and life insurance plans, deferred compensation
plans, directors’ and officers’ indemnification
agreements and retirement or savings plans, stock option, stock
ownership and similar plans and the entering into of such
agreements and plans by the Company or any Restricted Subsidiary
in the ordinary course of business;
(e) transactions with a Person (other than an Unrestricted
Subsidiary of the Company) that is an Affiliate of the Company
solely because the Company owns, directly or through a
Restricted Subsidiary, Capital Stock of, or controls, such
Person;
(f) loans or advances to employees or consultants in the
ordinary course of business or consistent with past practice not
to exceed $5 million in the aggregate at any one time
outstanding;
(g) transactions with Unrestricted Subsidiaries, customers,
clients, suppliers, joint venture partners or purchasers or
sellers of goods or services, or lessors or lessees of property,
in each case in the ordinary course of business and otherwise in
compliance with the terms of the Indenture which are, in the
aggregate (taking into account all the costs and benefits
associated with such transactions), materially no less favorable
to the Company or its Restricted Subsidiaries than those that
would have been obtained in a comparable transaction by the
Company or such Restricted Subsidiary with an unrelated Person,
in the reasonable determination of the Board of Directors of the
Company or senior management thereof, or are on terms at least
as favorable as might reasonably have been obtained at such time
from an unaffiliated party;
(h) the issuance or sale of any Capital Stock (other than
Disqualified Capital Stock) of the Company;
(i) any agreement or arrangement as in effect on the Issue
Date or any amendment to any such agreement or arrangement (so
long as such amendment is not disadvantageous to the holders of
the Notes in any material respect) or any transaction
contemplated thereby;
(j) the granting and performance of registration rights for
shares of Capital Stock of the Company if approved by the Board
of Directors; and
(k) any action required to be taken in connection with the
mergers described elsewhere in this prospectus.
Designation of Restricted and Unrestricted Subsidiaries.
As of the Issue Date, there were no material Unrestricted
Subsidiaries. After the Issue Date, the Company may designate
any Subsidiary of the Company (other than a Subsidiary of the
Company which owns Capital Stock of a Restricted Subsidiary) as
an “Unrestricted Subsidiary” under the Indenture (a
“Designation”) only if:
(1) no Default or Event of Default shall have occurred and
be continuing at the time of or after giving effect to such
Designation;
(2) the Company would be permitted under the Indenture to
make an Investment at the time of Designation (assuming the
effectiveness of such Designation) in an amount (the
“Designation Amount”) equal to the sum of
(A) the Fair Market Value of the Capital Stock of such
Subsidiary owned by the Company and/or any of the Restricted
Subsidiaries on such date and (B) the aggregate amount of
Indebtedness of such Subsidiary owed to the Company and the
Restricted Subsidiaries on such date; and
(3) the Company would be permitted to incur $1.00 of
additional Debt under the first paragraph of the covenant
described under “— Limitation on Debt” at
the time of Designation (assuming the effectiveness of such
Designation).
In the event of any such Designation, the Company shall be
deemed to have made an Investment constituting a Restricted
Payment in the Designation Amount pursuant to the covenant
described under “— Limitation on Restricted
Payments” for all purposes of the Indenture.
The Indenture will further provide that the Company shall not,
and shall not cause or permit any Restricted Subsidiary to, at
any time:
(x) provide direct or indirect credit support for or a
guarantee of any Debt of any Unrestricted Subsidiary (including
any undertaking agreement or instrument evidencing such Debt);
(y) be directly or indirectly liable for any Debt of any
Unrestricted Subsidiary; or
(z) be directly or indirectly liable for any Debt which
provides that the holder thereof may (upon notice, lapse of time
or both) declare a default thereon or cause the payment thereof
to be accelerated or payable prior to its final scheduled
maturity upon the occurrence of a default with respect to any
Indebtedness of any Unrestricted Subsidiary (including any right
to take enforcement action against such Unrestricted
Subsidiary), except, in the case of clause (x) or (y),
to the extent permitted under the covenant described under
“— Limitation on Restricted Payments.”
The Indenture will further provide that the Company may revoke
any Designation of a Subsidiary as an Unrestricted Subsidiary
(“Revocation”), whereupon such Subsidiary shall
then constitute a Restricted Subsidiary, if:
(1) no Default or Event of Default shall have occurred and
be continuing at the time and after giving effect to such
Revocation; and
(2) all Liens and Indebtedness of such Unrestricted
Subsidiaries outstanding immediately following such Revocation
would, if incurred at such time, have been permitted to be
incurred for all purposes of the Indenture.
All Designations and Revocations must be evidenced by an
Officer’s Certificate of the Company delivered to the
Trustee certifying compliance with the foregoing provisions.
Guarantees by Domestic Restricted Subsidiaries. The
Company will not permit any Domestic Restricted Subsidiary that
is not then a Subsidiary Guarantor of the Notes, directly or
indirectly, to Guarantee or secure the payment of any other Debt
of the Company or any of its Restricted Subsidiaries unless such
Domestic Restricted Subsidiary simultaneously executes and
delivers a supplemental indenture to the Indenture providing for
a full and unconditional Guarantee of the payment of the Notes
by such Domestic Restricted Subsidiary; provided that
this paragraph shall not be applicable to:
(i) any Subsidiary Guarantee of any Domestic Restricted
Subsidiary that existed at the time such Person became a
Domestic Restricted Subsidiary and was not Incurred in
connection with, or in contemplation of, such Person becoming a
Domestic Restricted Subsidiary;
(ii) any Guarantee arising under or in connection with
performance bonds, indemnity bonds, surety bonds and letters of
credit or bankers’ acceptances; or
(iii) Permitted Liens.
If the Guaranteed Debt is subordinated in right of payment to
the Notes or any such Subsidiary Guarantee of the Notes, as
applicable, pursuant to a written agreement to that effect, the
Guarantee of such guaranteed Debt must be subordinated in right
of payment to such Subsidiary Guarantee of the Notes to at least
the extent that the Guaranteed Debt is subordinated to the Notes.
Any Subsidiary Guarantee shall provide by its terms that it will
be released upon:
(a) the sale of the Capital Stock of the applicable
Subsidiary Guarantor in accordance with the terms of the
Indenture such that it is no longer a Subsidiary of the Company,
(b) the sale of all or substantially all of the assets of
such Subsidiary Guarantor in accordance with the terms of the
Indenture,
(c) the release of the Subsidiary Guarantor of liability on
the Subsidiary Guarantee, the issuance of which caused such
Restricted Subsidiary to be required to become a Subsidiary
Guarantor, or
(d) the applicable Subsidiary Guarantor’s becoming an
Unrestricted Subsidiary in accordance with the terms of the
Indenture,
so long as in the case of clause (a), (b), (c) or (d),
any Subsidiary Guarantee or security of payment by such
Subsidiary Guarantor of Debt of the Company or any of its other
Restricted Subsidiaries (other than the Notes or any Subsidiary
Guarantee) is fully and unconditionally released prior thereto
or simultaneously therewith.
Merger, Consolidation and Sale of Property
The Company shall not merge or consolidate with or into any
other Person or sell, transfer, assign, lease, convey or
otherwise dispose of (or permit any Restricted Subsidiary to
sell, transfer, assign, lease, convey or otherwise dispose of)
all or substantially all of the Company’s Property
(determined on a consolidated basis for the Company and its
Restricted Subsidiaries) in any one transaction or series of
transactions unless:
(a) the Company shall be the Surviving Person in such
merger or consolidation, or the Surviving Person (if other than
the Company) formed by such merger or consolidation or to which
such sale, transfer, assignment, lease, conveyance or other
disposition is made shall be an entity organized and existing
under the laws of the United States of America, any State
thereof or the District of Columbia;
(b) the Surviving Person (if other than the Company)
expressly assumes, by supplemental indenture in form
satisfactory to the Trustee, executed and delivered to the
Trustee by such Surviving Person, the due and punctual payment
of the principal of, and premium, if any, and interest on, all
the Notes, and the due and punctual performance and observance
of all the covenants and conditions of the Indenture to be
performed by the Company;
(c) immediately before and after giving effect to such
transaction or series of transactions on a pro forma basis (and
treating, for purposes of this clause (c) and
clauses (d) and (e) below, any Debt that becomes an
obligation of the Surviving Person or any Restricted Subsidiary
as a result of such transaction or series of transactions as
having been Incurred by the Surviving Person or such Restricted
Subsidiary at the time of such transaction or series of
transactions), no Default or Event of Default shall have
occurred and be continuing;
(d) immediately after giving effect to such transaction or
series of transactions on a pro forma basis, the Company or the
Surviving Person, as the case may be, would be able to Incur at
least $1.00 of additional Debt under the first paragraph of the
covenant described under “— Certain
Covenants — Limitation on Debt;” and
(e) the Company shall deliver, or cause to be delivered, to
the Trustee, in form and substance reasonably satisfactory to
the Trustee, an Officer’s Certificate and an Opinion of
Counsel, each stating that such transaction and the supplemental
indenture, if any, with respect thereto comply with this
covenant and that all conditions precedent herein provided for
relating to such transaction have been satisfied.
The Company shall not permit the Co-Issuer or any Subsidiary
Guarantor to merge or consolidate with or into any other Person
(other than a merger of a Wholly Owned Restricted Subsidiary
into the Company, the Co-Issuer or such Subsidiary Guarantor) or
sell, transfer, assign, lease, convey or otherwise dispose of
all or substantially all its Property in any one transaction or
series of transactions unless:
(a) the Co-Issuer or such Subsidiary Guarantor will be the
Surviving Person or the Surviving Person (if not the Co-Issuer
or such Subsidiary Guarantor) formed by such merger or
consolidation or to which such sale, transfer, assignment,
lease, conveyance or other disposition is made shall be an
entity organized and existing under the laws of the United
States of America, any State thereof or the District of Columbia;
(b) the Surviving Person (if other than the Co-Issuer or
such Subsidiary Guarantor) becomes a Subsidiary Guarantor of
Notes by executing a supplemental indenture to the Indenture
providing a Subsidiary Guarantee;
(c) immediately before and after giving effect to such
transaction or series of transactions on a pro forma basis (and
treating, for purposes of this clause (c) and
clause (d) below, any Debt that becomes an obligation of
the Surviving Person, the Company or any Restricted Subsidiary
as a result of such transaction or series of transactions as
having been Incurred by the Surviving Person, the Company or
such Restricted Subsidiary at the time of such transaction or
series of transactions), no Default or Event of Default shall
have occurred and be continuing; and
(d) the Company shall deliver, or cause to be delivered, to
the Trustee, in form and substance reasonably satisfactory to
the Trustee, an Officer’s Certificate and an Opinion of
Counsel, each stating that such transaction and such Subsidiary
Guarantee, if any, with respect thereto comply with this
covenant and that all conditions precedent herein provided for
relating to such transaction have been satisfied.
The foregoing provisions (other than clause (c)) shall not
apply to (i) a consolidation or merger of any Subsidiary
Guarantor with and into the Company or any other Subsidiary
Guarantor, so long as the Company (in the case of any
transaction involving the Company) or a Subsidiary Guarantor
survives such consolidation or merger, (ii) any
transactions which do not constitute Asset Sales if the
applicable Subsidiary Guarantors are otherwise being released
from their Subsidiary Guarantees in accordance with the
Indenture, or (iii) any transactions which constitute Asset
Sales if the Company has complied with the covenant described
under “— Certain Covenants — Limitation
on Asset Sales.”
The Surviving Person shall succeed to, and be substituted for,
and may exercise every right and power of the Company under the
Indenture (or such Subsidiary Guarantor, as the case may be) but
the predecessor Company in the case of:
(a) a sale, transfer, assignment, conveyance or other
disposition (unless such sale, transfer, assignment, conveyance
or other disposition is of all the assets of the Company as an
entirety or virtually as an entirety); or
(b) a lease;
shall not be released from any of the obligations or covenants
under the Indenture, including with respect to the payment of
the Notes.
SEC Reports
So long as the Notes are outstanding, whether or not the Company
is then subject to Section 13(a) or 15(d) of the Exchange
Act, the Company will electronically file with the Commission,
the annual reports, quarterly reports and other periodic reports
that the Company would be required to file with the Commission
pursuant to Section 13(a) or 15(d) if the Company were so
subject, and such documents will be filed with the Commission on
or prior to the respective dates (the “Required Filing
Dates”) by which the Company would be required so to
file such documents if the Company were so subject, unless, in
any case, if such filings are not then permitted by the
Commission.
If such filings with the Commission are not then permitted by
the Commission, or such filings are not generally available on
the Internet free of charge, the Company will, within
15 days of each Required Filing Date, transmit by mail to
holders of the Notes, as their names and addresses appear in the
Note register, without cost to such holders, and file with the
Trustee copies of the annual reports, quarterly reports and
other periodic reports that the Company would be required to
file with the Commission pursuant to Section 13(a) or 15(d)
of the Exchange Act if the Company were subject to such
Section 13(a) or 15(d), and promptly upon written request,
supply copies of such documents to any prospective holder or
beneficial owner at the Company’s cost.
In addition, the Company has agreed that, for so long as any
Notes remain outstanding and constitute “restricted
securities” under Rule 144, it will furnish to the
holders and to securities analysts and prospective investors,
upon their request, the information required to be delivered
pursuant to Rule 144A(d)(4) under the Act.
Events of Default
Each of the following constitute an “Event of
Default” with respect to the Notes of each series:
(1) failure to make the payment of any interest or
Additional Interest, if any, on the Notes of such series when
the same becomes due and payable, and such failure continues for
a period of 30 days;
(2) failure to make the payment of any principal of, or
premium, if any, on, any of the Notes of such series when the
same becomes due and payable at its Stated Maturity, upon
acceleration, redemption, optional redemption, required
repurchase or otherwise (including a Special Mandatory
Redemption);
(3) failure to comply with the covenant described under
“— Merger, Consolidation and Sale of
Property;”
(4) failure to make a Change of Control Offer pursuant to
the covenant described under “— Repurchase at the
Option of the Holders Upon a Change of Control;”
(5) failure to make an Asset Sale Offer pursuant to the
covenant described under “— Limitation on Asset
Sales;”
(6) failure to comply with any other covenant or agreement
in the Notes of such series or in the Indenture (other than a
failure that is the subject of the foregoing clauses (1),
(2), (3), (4) or (5)) and such failure continues for
60 days after written notice is given to the Company as
provided below;
(7) the occurrence of a default under any mortgage,
indenture or instrument under which there may be issued or by
which there may be secured or evidenced any Debt by the Company
or any of its Restricted Subsidiaries (or any Debt Guaranteed by
the Company or any of its Restricted Subsidiaries if the Company
or a Restricted Subsidiary does not perform its payment
obligations under such Guarantee within any grace period
provided for in the documentation governing such Guarantee),
whether such Debt or Guarantee existed on the Issue Date or was
or is thereafter created, which default (a) constitutes a
Payment Default or (b) results in the acceleration of such
Debt prior to its Stated Maturity, and in each case, the
principal amount of any such Debt, together with the principal
amount of any other such Debt under which there has been a
Payment Default or that has been so accelerated, aggregates
$50 million or more;
(8) one or more judgments or orders that exceed
$50 million in the aggregate (net of amounts covered by
insurance or bonded) for the payment of money have been entered
by a court or courts of competent jurisdiction against the
Issuers or any Restricted Subsidiary and such judgment or
judgments have not been satisfied, stayed, annulled or rescinded
within 30 days of being entered;
(9) the Company or any Significant Subsidiary pursuant to
or within the meaning of any Bankruptcy Law:
(A) commences a voluntary insolvency proceeding;
(B) consents to the entry of an order for relief against it
in an involuntary insolvency proceeding;
(C) consents to the appointment of a Custodian of it or for
any substantial part of its Property; or
(D) makes a general assignment for the benefit of its
creditors;
or takes any comparable action under any foreign laws relating
to insolvency; provided, however, that the liquidation of any
Significant Subsidiary into another Restricted Subsidiary or the
Company other than as part of a credit reorganization, shall not
constitute an Event of Default under this clause (9);
(10) a court of competent jurisdiction enters an order or
decree under any Bankruptcy Law that:
(A) is for relief against the Company or any Significant
Subsidiary or for any substantial part of its Property;
(B) appoints a Custodian of the Company or any Significant
Subsidiary or for any substantial part of its Property;
(C) orders the winding up or liquidation of the Company or
any Significant Subsidiary; or
(D) grants any similar relief under any foreign laws;
and in each such case the order or decree remains unstayed and
in effect for 90 days; and
(11) (a) any Subsidiary Guarantee of the Notes by a
Significant Subsidiary ceases to be in full force and effect
(other than in accordance with the terms of such Guarantee) or
(b) any such Significant Subsidiary Guarantor denies or
disaffirms its obligations under its Subsidiary Guarantee.
A Default under clauses (6) and (7) is not an Event of
Default until the Trustee or the holders of not less than 25% in
aggregate principal amount of the Notes of any series then
outstanding notify the Company of the Default and the Company
does not cure such Default within the time specified after
receipt of such notice. Such notice must specify the Default,
demand that it be remedied and state that such notice is a
“Notice of Default.”
In the case of any Event of Default occurring by reason of any
willful action (or inaction) taken (or not taken) by or on
behalf of the Company with the intention of avoiding payment of
the premium that the Company would have had to pay if the
Company then had elected to redeem the Notes pursuant to the
optional redemption provisions of the Indenture, an equivalent
premium will also become and be immediately due and payable to
the extent permitted by law upon the acceleration of the Notes.
If an Event of Default occurs prior to October 1, 2007
(with respect to the Senior Floating Rate Notes) or
October 1, 2009 (with respect to the Senior Notes), by
reason of any willful action (or inaction) taken (or not taken)
by or on behalf of the Company with the intention of avoiding
the prohibition on redemption of the Notes prior to such date,
then an additional premium specified in the Indenture will also
become and be immediately due and payable to the extent
permitted by law upon the acceleration of the Notes.
The Company shall deliver to the Trustee, within 30 days
after the occurrence thereof, written notice in the form of an
Officer’s Certificate of any event that with the giving of
notice or the lapse of time or both would become an Event of
Default, its status and what action the Company is taking or
proposes to take with respect thereto.
If an Event of Default with respect to the Notes of any series
(other than an Event of Default resulting from certain events
involving bankruptcy, insolvency or reorganization with respect
to the Company specified in clause (9) or (10) above)
shall have occurred and be continuing, the Trustee or the
registered holders of not less than 25% in aggregate principal
amount of the Notes of any series then outstanding may declare
to be immediately due and payable the principal amount of all
the Notes of such series then outstanding, plus accrued but
unpaid interest to the date of acceleration. In case an Event of
Default under either clause (9) or (10) with respect
to the Company shall occur, such amount with respect to all the
Notes of any series shall be due and payable immediately without
any declaration or other act on the part of the Trustee or the
holders of the Notes of such series. After any such
acceleration, but before a judgment or decree based on
acceleration is obtained by the Trustee, the registered holders
of a majority in aggregate principal amount of the Notes of any
series then outstanding may, under certain circumstances,
rescind and annul such acceleration if all Events of Default,
other than the nonpayment of accelerated principal, premium or
interest, have been cured or waived as provided in the Indenture.
Subject to the provisions of the Indenture relating to the
duties of the Trustee, in case an Event of Default shall occur
and be continuing, the Trustee will be under no obligation to
exercise any of its rights or powers under the Indenture at the
request or direction of any of the holders of the Notes of any
series, unless such holders shall have offered to the Trustee
reasonable indemnity. Subject to such provisions for the
indemnification of the Trustee, the holders of a majority in
aggregate principal amount of the Notes of any series then
outstanding will have the right to direct the time, method and
place of conducting any proceeding for any remedy available to
the Trustee or exercising any trust or power conferred on the
Trustee with respect to the Notes of such series.
No holder of Notes of any series will have any right to
institute any proceeding with respect to the Indenture, or for
the appointment of a receiver or trustee, or for any remedy
thereunder, unless:
(a) such holder has previously given to the Trustee written
notice of a continuing Event of Default;
(b) the registered holders of at least 25% in aggregate
principal amount of the Notes of such series then outstanding
have made a written request and offered reasonable indemnity to
the Trustee to institute such proceeding as trustee; and
(c) the Trustee shall not have received from the registered
holders of a majority in aggregate principal amount of the Notes
of such series then outstanding a direction inconsistent with
such request and shall have failed to institute such proceeding
within 60 days.
However, such limitations do not apply to a suit instituted by a
holder of any Note for enforcement of payment of the principal
of, and premium, if any, or interest and Additional Interest, if
any, on such Note on or after the respective due dates expressed
in such Note.
Subject to certain exceptions, the Indenture, the Subsidiary
Guarantees and the Notes, may be amended with the consent of the
registered holders of at least a majority in aggregate principal
amount of the Senior Floating Rate Notes or the Senior Notes, as
the case may be, then outstanding (including consents obtained
in connection with a tender offer or exchange offer for the
Senior Floating Rate Notes or the Senior Notes, as the case may
be) and any past default or compliance with any provisions may
also be waived (except a default in the payment of principal,
premium, interest or Additional Interest, if any, and certain
covenants and provisions of the Indenture which cannot be
amended without the consent of each holder of an outstanding
Note) with the consent of the registered holders of at least a
majority in aggregate principal amount of the Senior Floating
Rate Notes or the Senior Notes, as the case may be, then
outstanding. However, without the consent of each holder of an
outstanding Note, no amendment may, among other things:
(1) reduce the amount of Notes of such series whose holders
must consent to an amendment or waiver;
(2) reduce the rate of or extend the time for payment of
interest and Additional Interest, if any, on any Note of such
series;
(3) reduce the principal of or extend the Stated Maturity
of any Note of such series;
(4) make any Note of such series payable in money other
than that stated in the Note;
(5) impair the right of any holder of the Notes of such
series to receive payment of principal of, premium, if any, and
interest and Additional Interest, if any, on such holder’s
Notes on or after the due dates therefor or to institute suit
for the enforcement of any payment on or with respect to such
holder’s Notes;
(6) subordinate the Notes of such series to any other
obligation of the Company, the Co-Issuer or the applicable
Subsidiary Guarantor;
(7) reduce the premium payable upon the redemption of any
Note of such series nor change the time at which any Note of
such series may be redeemed, as described under
“— Optional Redemption” above;
(8) reduce the premium payable upon a Change of Control or,
at any time after a Change of Control has occurred, change the
time at which the Change of Control Offer relating thereto must
be made or at which the Notes of such series must be repurchased
pursuant to such Change of Control Offer;
(9) at any time after the Company is obligated to make an
Asset Sale Offer with the Excess Proceeds from Asset Sales,
change the time at which such Asset Sale Offer must be made or
at which the Notes of such series must be repurchased pursuant
thereto;
(10) make any change in the amendment provisions which
require the consent of each holder or in the waiver
provisions; or
(11) release any Subsidiary from its obligations under its
Subsidiary Guarantee of the Notes of such series or the
Indenture other than pursuant to terms of the Indenture relating
to the release of Subsidiary Guarantors of the Notes of such
series.
Without the consent of any holder of the Notes, the Company and
the Trustee may amend the Indenture to:
(1) cure any ambiguity, omission, defect or inconsistency;
(2) provide for the assumption by a Surviving Person of the
obligations of the Company under the Indenture;
(3) evidence the assumption by a Surviving Person of the
obligations of the Company to the holders of the Notes and
covenants for the protection of the holders of the Notes;
(4) provide for uncertificated Notes in addition to or in
place of certificated Notes (provided that the uncertificated
Notes are issued in registered form for purposes of
Section 163(f) of the Code, or in a manner such that the
uncertificated Notes are described in Section 163(f)(2)(B)
of the Code);
(5) provide for any Guarantee with respect to the Notes or
to release any Subsidiary Guarantee of the Notes as provided or
permitted by the terms of the Indenture;
(6) make any change that does not adversely affect the
rights of any holder of the Notes;
(7) provide for the issuance of Additional Notes in
accordance with the Indenture;
(8) comply with any requirement of the Commission in
connection with the qualification of the Indenture under the TIA
or other applicable trust indenture legislation;
(9) add to the covenants of the Company for the benefit of
the holders of the Notes or to surrender any right or power
conferred in the Indenture upon the Company; and
(10) modify or amend the Indenture to permit the
qualification of indenture supplements thereto.
The consent of the holders of the Notes is not necessary to
approve the particular form of any proposed amendment,
supplement or waiver. It is sufficient if such consent approves
the substance of the proposed amendment, supplement or waiver.
After an amendment becomes effective, the Company is required to
mail to each registered holder of the Notes at such
holder’s address appearing in the Note register a notice
briefly describing such amendment, supplement or waiver.
However, the failure to give such notice to all holders of the
Notes, or any defect therein, will not impair or affect the
validity of the amendment, supplement or waiver.
Defeasance
The Issuers at any time may terminate all their and the
Subsidiary Guarantors’ obligations under the Notes of any
series, the Subsidiary Guarantees and the Indenture
(“legal defeasance”), except for certain
obligations, including those respecting the defeasance trust and
obligations, to register the transfer or exchange of the Notes,
to replace mutilated, destroyed, lost or stolen Notes, and to
maintain a registrar and paying agent in respect of the Notes.
The Issuers at any time may terminate:
(1) their and the Subsidiary Guarantors’ obligations
under the covenants described under “— Repurchase
at the Option of Holders Upon a Change of Control” and
“ — Certain Covenants”;
(2) the operation of clause (7) or (8),
clause (9) or (10) solely with respect to Significant
Subsidiaries and clause (11) described under
“— Events of Default” above; and
(3) the limitations contained in the second paragraph of,
and in clauses (c) and (d) in the first paragraph of,
“— Merger, Consolidation and Sale of
Property” above (collectively, “covenant
defeasance”).
The Issuers may exercise their legal defeasance option
notwithstanding their prior exercise of their covenant
defeasance option.
If the Issuers exercise their legal defeasance option, payment
of the Notes of such series may not be accelerated because of an
Event of Default with respect thereto. If the Issuers exercise
their covenant defeasance option, payment of the Notes of such
series may not be accelerated because of an Event of Default
specified in clause (6) (with respect to the covenants
listed under clause (1) of the first paragraph under
“— Defeasance”), (7), (8), (9) or (10)
(with respect only to Significant Subsidiaries in the case of
clauses (9) and (10) under “— Events of
Default” above) or because of the failure of the Issuers to
comply with clause (c) or (d) under the first
paragraph of “— Merger, Consolidation and Sale of
Property” above. If the Issuers exercise their legal
defeasance option or its covenant defeasance option, each
Subsidiary Guarantor will be released from all its obligations
under its Subsidiary Guarantee of the Notes of such series.
The legal defeasance option or the covenant defeasance option
may be exercised only if:
(a) the Issuers deposit, or causes to be deposited,
irrevocably in trust with the Trustee money or
U.S. Government Obligations, or any combination thereof,
for the payment of principal, premium, if any, and interest and
Additional Interest, if any, on the Notes of such series to
maturity or redemption, as the case may be;
(b) the Issuers deliver to the Trustee a certificate from a
nationally recognized firm of independent certified public
accountants expressing their opinion that the payments of
principal, premium, if any, and interest and Additional
Interest, if any, when due and without reinvestment on the
deposited U.S. Government Obligations plus any deposited
money without investment will provide cash at such times and in
such amounts as will be sufficient to pay principal and interest
when due on all the Notes of such series to maturity or
redemption, as the case may be;
(c) 91 days pass after the deposit is made and during
the 91-day period no
Default described in clause (9) or (10) under
“— Events of Default” occurs and is
continuing at the end of the period with respect to the Issuers
or any other Person making such deposit;
(d) no Default or Event of Default has occurred and is
continuing on the date of such deposit and after giving effect
thereto;
(e) such deposit does not constitute a default under any
other agreement or instrument binding on the Issuers;
(f) in the case of the legal defeasance option, the Issuers
deliver to the Trustee an Opinion of Counsel stating that:
(1) the Issuers have received from the Internal Revenue
Service a private letter ruling, or
(2) since the date of the Indenture there has been a change
in any applicable U.S. federal income tax law,
to the effect, in either case, that, and based thereon, such
Opinion of Counsel shall confirm that, holders of the Notes will
not recognize income, gain or loss for U.S. federal income
tax as a result of such legal defeasance and will be subject to
U.S. federal income tax (including withholding tax) on the
same amounts, in the same manner and at the same times as would
have been the case if such legal defeasance had not occurred;
(g) in the case of the covenant defeasance option, the
Issuers deliver to the Trustee an Opinion of Counsel to the
effect that holders of the Notes will not recognize income, gain
or loss for U.S. federal income tax as a result of such
covenant defeasance and will be subject to U.S. federal
income tax (including withholding tax) on the same amounts, in
the same manner and at the same times as would have been the
case if such covenant defeasance had not occurred; and
(h) the Issuers deliver to the Trustee an Officer’s
Certificate and an Opinion of Counsel, each stating that all
conditions precedent to the defeasance and discharge of the
Notes of such series have been complied with as required by the
Indenture.
Satisfaction and Discharge
The Indenture will be discharged and will cease to be of further
effect, except as to surviving rights of registration of
transfer or exchange of the Notes, as to all Notes of any series
issued hereunder, when:
(a) either:
(i) all Notes of such series that have been previously
authenticated (except lost, stolen or destroyed Notes that have
been replaced or paid and Notes for whose payment money has
previously been deposited in trust or segregated and held in
trust by the Issuers and is thereafter repaid to the Issuers or
discharged from the trust) have been delivered to the Trustee
for cancellation; or
(ii) all Notes of such series that have not been previously
delivered to the Trustee for cancellation (A) have become
due and payable or (B) will become due and payable at their
maturity within one year or (C) are to be called for
redemption within one year under arrangements satisfactory to
the Trustee for the giving of a notice of redemption by the
Trustee, and, in the case of (A), (B) or (C), the Issuers have
irrevocably deposited or caused to be deposited with the Trustee
as trust funds in trust solely for the benefit of holders of the
Notes of such series, cash in U.S. dollars, non-callable
U.S. Government Securities, or a combination thereof, in
such amounts as will be sufficient without consideration of any
reinvestment of interest, to pay and discharge the entire Debt
on the Notes of such series not previously delivered to the
Trustee for cancellation for principal, premium, if any, and
interest and Additional Interest, if any, on the Notes of such
series to the date of deposit, in the case of Notes of such
series that have become due and payable, or to the Stated
Maturity or redemption date, as the case may be;
(b) the Issuers have paid or caused to be paid all other
sums payable by them under the Indenture; and
(c) if required by the Trustee, the Issuers deliver to the
Trustee an Officer’s Certificate and Opinion of Counsel
stating that all conditions precedent under the Indenture
relating to the satisfaction and discharge of the Indenture have
been satisfied.
Governing Law
The Indenture and the old notes are, and the exchange notes will
be, governed by the internal laws of the State of New York
without reference to principles of conflicts of law.
Concerning the Trustee
Citibank, N.A. is the Trustee under the Indenture and has been
appointed by the Issuers as registrar and paying agent with
regard to the Notes. The Indenture contains certain limitations
on the rights of the Trustee, should it become a creditor of the
Issuers, to obtain payment of claims in certain cases, or to
realize on certain Property received in respect of any such
claim as security or otherwise. The Trustee will be permitted to
engage in other transactions; however, if it acquires any
conflicting interest it must eliminate such conflict within
90 days, apply to the Commission for permission to continue
or resign.
The holders of not less than a majority in principal amount of
the then outstanding Notes of any series will have the right to
direct the time, method and place of conducting any proceeding
for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event
of Default shall occur and be continuing, the Trustee will be
required, in the exercise of its power, to use the degree of
care of a prudent person in the conduct of his or her own
affairs. Subject to such provisions, the Trustee will not be
under any obligation to exercise any rights or powers under the
Indenture at the request of any holder of Notes, unless such
holder shall have offered to the Trustee security and indemnity
satisfactory to it against any loss, liability or expense.
No Personal Liability of Directors, Officers, Affiliates,
Employees and Stockholders
No director, officer, employee, incorporator, Affiliate or
holder of Capital Stock of the Issuers will have any liability
for any obligations of the Issuers under the Notes or the
Indenture or for any claim based on, in respect of, or by reason
of, such obligations. Each holder of Notes, by accepting a Note,
waives and releases all such liability. The waiver and release
are part of the consideration for issuance of the Notes. This
waiver may not be effective to waive liabilities under the
federal securities laws and it is the view of the Commission
that such a waiver is against public policy.
Certain Definitions
Set forth below is a summary of certain of the defined terms
used in the Indenture. Reference is made to the Indenture for
the full definition of all such terms as well as any other
capitalized terms used herein for
which no definition is provided. Unless the context otherwise
requires, an accounting term not otherwise defined has the
meaning assigned to it in accordance with GAAP.
“Acquired Debt”means, with respect to any
specified Person, (i) Debt of any other Person existing at
the time such other Person is merged with or into or became a
Subsidiary of such specified Person, including, without
limitation, Debt Incurred in connection with, or in
contemplation of, such other Person merging with or into or
becoming a Subsidiary of such specified Person and
(ii) Debt secured by a Lien encumbering any asset acquired
by such specified Person.
“Additional Assets”means:
(a) any Property (other than cash, securities and Capital
Stock) to be owned by the Company or any Restricted Subsidiary
and used or useful in a Permitted Business;
(b) Capital Stock of a Person that becomes a Restricted
Subsidiary as a result of the acquisition of such Capital Stock
by the Company or another Restricted Subsidiary from any Person
other than the Company or an Affiliate of the Company; or
(c) Capital Stock of a Person that at such time is a
Restricted Subsidiary;
provided, however, that, in the case of clauses (b)
and (c), such Restricted Subsidiary is primarily engaged in a
Permitted Business.
“Affiliate”of any specified Person means:
(a) any other Person directly or indirectly controlling or
controlled by or under direct or indirect common control with
such specified Person, or
(b) any other Person who is a director or officer of:
(1) such specified Person,
(2) any Subsidiary of such specified Person, or
(3) any Person described in clause (a) above.
For the purposes of this definition, “control,” when
used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract
or otherwise; and the terms “controlling” and
“controlled” have meanings correlative to the
foregoing.
“Applicable Rate”means, for each quarterly
period during which any Senior Floating Rate Note is outstanding
subsequent to the initial quarterly period, 387.5 basis
points over the rate determined by the Issuers (notice of such
rate to be sent to the Trustee by the Issuers on the date of
determination thereof) equal to the applicable British
Bankers’ Association LIBOR rate for deposits in
U.S. dollars for a period of three months as reported by
any generally recognized financial information service as of
11:00 a.m. (London time) two Business Days prior to the
first day of such quarterly period; provided that, if no
such LIBOR rate is available to the Issuers, the Applicable Rate
for the relevant quarterly period shall instead be the rate at
which Citigroup Global Markets Inc. or one of its affiliate
banks offers to place deposits in U.S. dollars with
first-class banks in the London interbank market for a period of
three months at approximately 11:00 a.m. (London time) two
Business Days prior to the first day of such quarterly period,
in amounts equal to $1.0 million. Notwithstanding the
foregoing, the Applicable Rate for the initial quarterly period
was 7.845%.
“Asset Sale”means any sale, lease, transfer,
issuance or other disposition (or series of related sales,
leases, transfers, issuances or dispositions) by the Company or
any Restricted Subsidiary, including any disposition by means of
a merger, consolidation or similar transaction (each referred to
for the purposes of this definition as a
“disposition”), of
(a) any shares of Capital Stock of a Restricted Subsidiary
(other than directors’ qualifying shares), or
(b) any other Property of the Company or any Restricted
Subsidiary outside of the ordinary course of business of the
Company or such Restricted Subsidiary,
other than, in the case of clause (a) or (b) above,
(1) any disposition by a Restricted Subsidiary to the
Company or by the Company or a Restricted Subsidiary to a Wholly
Owned Restricted Subsidiary;
(2) any disposition that constitutes a Permitted Investment
or Restricted Payment permitted by the covenant described under
“— Certain Covenants — Limitation on
Restricted Payments;”
(3) any disposition effected in compliance with the first
paragraph of the covenant described under
“— Merger, Consolidation and Sale of
Property;”
(4) any sale or other disposition of damaged, worn-out,
obsolete or no longer useful assets or properties in the
ordinary course of business;
(5) any sale of assets received by the Company or any of
its Restricted Subsidiaries upon the foreclosure on a Lien;
(6) any disposition or series of related dispositions of
Property with an aggregate Fair Market Value and for net
proceeds of less than $10 million; and
(7) the creation of any Permitted Lien.
“Attributable Value”means, as to any
particular lease under which any Person is at the time liable
and at any date as of which the amount thereof is to be
determined, the total net amount of rent required to be paid by
such Person under such lease during the initial term thereof as
determined in accordance with GAAP, discounted from such initial
term date to the date of determination at a rate per annum equal
to the discount rate which would be applicable to a Capital
Lease Obligation with a like term in accordance with GAAP. The
net amount of rent required to be paid under any such lease for
any such period shall be the lesser of: (1) the aggregate
amount of rent payable by the lessee with respect to such period
after excluding amounts required to be paid on account of
insurance, taxes, assessments, utility, operating and labor
costs and similar charges and (2) in the case of any lease
which is terminable by the lessee upon the payment of a penalty,
the net amount calculated pursuant to (1) but adjusted to
also include the amount of such penalty and to exclude any rent
which would otherwise be required to be paid under such lease
subsequent to the first date upon which it may be so terminated.
“Average Life”means, as of any date of
determination, with respect to any Debt or Preferred Stock, the
quotient obtained by dividing:
(a) the sum of the product of (i) the number of years
(rounded to the nearest one-twelfth of one year) from the date
of determination to the dates of each successive scheduled
principal payment of such Debt or redemption or similar payment
with respect to such Preferred Stock multiplied by (ii) the
amount of such payment by
(b) the sum of all such payments.
“Bank Obligations”means, without duplication,
the Obligations of the Company under the Senior Credit Facility
and Hedging Obligations in respect of the Senior Credit Facility.
“Bankruptcy Law”means Title 11, United
States Code, or any similar U.S. federal or state law.
“Board of Directors”means the board of
directors of the Company.
“Borrowing Base”means, as of any date, an
amount equal to:
(a) 80% of the aggregate book value of all accounts
receivable owned by the Company and its Restricted Subsidiaries
as of the end of the most recent fiscal quarter preceding such
date that were not more that 90 days past due; plus
(b) 69% of the aggregate book value of all inventory owned
by the Company and its Restricted Subsidiaries as of the end of
the most recent fiscal quarter preceding such date.
“Business Day”means each day that is not a
Saturday, Sunday or a day on which commercial banks are
authorized or required by law to close in New York City.
“Capital Lease Obligations”means any
obligation under a lease that is required to be capitalized for
financial reporting purposes in accordance with GAAP; and the
amount of Debt represented by such obligation shall be the
capitalized amount of such obligations determined in accordance
with GAAP; and the Stated Maturity thereof shall be the date of
the last payment of rent or any other amount due under such
lease prior to the first date upon which such lease may be
terminated by the lessee without payment of a penalty. For
purposes of “— Certain Covenants —
Limitation on Liens,” a Capital Lease Obligation shall be
deemed secured by a Lien on the Property being leased.
“Capital Stock”means, with respect to any
Person, any shares or other equivalents (however designated) of
any class of corporate stock or partnership interests or any
other participations, rights, warrants, options or other
interests in the nature of an equity interest in such Person,
including Preferred Stock, but excluding any debt security
convertible or exchangeable into such equity interest.
“Capital Stock Sale Proceeds”means the
aggregate cash proceeds received by the Company from the
issuance or sale (other than to a Restricted Subsidiary of the
Company or an employee stock ownership plan or trust established
by the Company or any such Restricted Subsidiary for the benefit
of their employees) by the Company of its Capital Stock (other
than Disqualified Stock), including upon the exercise of
warrants, options or other rights, or warrants, options or other
rights to purchase its Capital Stock (other than Disqualified
Stock) after the Issue Date, net of attorneys’ fees,
accountants’ fees, underwriters’ or placement
agents’ fees, discounts or commissions and brokerage,
consultant and other fees actually Incurred in connection with
such issuance or sale and net of taxes paid or payable as a
result thereof.
“Change of Control”means the occurrence of any
of the following events:
(1) any “person” or “group” (as such
terms are used in Section 13(d) and 14(d) of the Exchange
Act) is or becomes the “beneficial owner” (as defined
in Rules 13d-3 and
13d-5 under the
Exchange Act, except that a Person shall be deemed to have
“beneficial ownership” of all securities that such
Person has the right to acquire, whether such right is
exercisable immediately or only after the passage of time),
directly or indirectly, of 50% or more of the total voting power
of all Voting Stock of the Company;
(2) Continuing Directors shall cease to constitute at least
a majority of the directors constituting the Board of Directors;
(3) the sale, lease, transfer, conveyance or other
disposition (other than by way of merger or consolidation), in
one or a series of related transactions, of all or substantially
all of the assets of the Company and its Restricted Subsidiaries
taken as a whole to any “person” or “group”
(as such terms are used in Sections 13(d) and 14(d) of the
Exchange Act);
(4) the Company consolidates with, or merges with or into,
any Person, or any Person consolidates with, or merges with or
into, the Company, in any such event pursuant to a transaction
in which any of the outstanding Capital Stock of the Company is
converted into or exchanged for cash, securities or other
Property, other than any such transaction where the Capital
Stock of the Company outstanding immediately prior to such
transaction is converted into or exchanged from Capital Stock
(other than Disqualified Stock) of the surviving or transferee
Person representing at least a majority of the voting power of
all Capital Stock of such surviving or transferee Person
immediately after giving effect to such issuance; or
(5) the adoption by the stockholders of the Company of a
plan or proposal for the liquidation or dissolution of the
Company.
Notwithstanding the foregoing, the Mergers and related
transactions contemplated by the Merger Agreement shall be
deemed not to constitute a Change of Control.
“Code”means the Internal Revenue Code of 1986,
as amended.
“Commission”means the U.S. Securities and
Exchange Commission.
“Consolidated Interest Coverage Ratio”means,
as of any date of determination, the ratio of:
(a) the aggregate amount of EBITDA for the most recent four
consecutive fiscal quarters ending prior to such determination
date to
(b) Consolidated Interest Expense for such four fiscal
quarters;
provided, however, that:
(1) if
(A) since the beginning of such period the Company or any
Restricted Subsidiary has Incurred any Debt that remains
outstanding or Repaid any Debt; or
(B) the transaction giving rise to the need to calculate
the Consolidated Interest Coverage Ratio is an Incurrence or
Repayment of Debt;
Consolidated Interest Expense for such period shall be
calculated after giving effect on a pro forma basis to such
Incurrence or Repayment as if such Debt was Incurred or Repaid
on the first day of such period, provided that, in the event of
any such Repayment of Debt, EBITDA for such period shall be
calculated on a pro forma basis as if the Company or such
Restricted Subsidiary had not earned any interest income
actually earned during such period in respect of the funds used
to Repay such Debt, and
(2) if
(A) since the beginning of such period the Company or any
Restricted Subsidiary shall have made any Asset Sale or an
Investment (by merger or otherwise) in any Restricted Subsidiary
(or any Person which becomes a Restricted Subsidiary) or an
acquisition of Property which constitutes all or substantially
all of an operating unit of a business;
(B) the transaction giving rise to the need to calculate
the Consolidated Interest Coverage Ratio is such an Asset Sale,
Investment or acquisition which constitutes all or substantially
all of an operating unit of a business; or
(C) since the beginning of such period any Person (that
subsequently became a Restricted Subsidiary or was merged with
or into the Company or any Restricted Subsidiary since the
beginning of such period) shall have made such an Asset Sale,
Investment or acquisition which constitutes all or substantially
all of an operating unit of a business;
then EBITDA for such period shall be calculated after giving pro
forma effect to such Asset Sale, Investment or acquisition as if
such Asset Sale, Investment or acquisition had occurred on the
first day of such period.
For the purpose of this definition, whenever pro forma effect is
to be given to any sale, purchase or other transaction, or the
amount of income or earnings relating thereto and the amount of
the Consolidated Interest Expense associated with any Debt
Incurred or repaid, repurchased, redeemed, defeased or otherwise
acquired, retired or discharged in connection therewith, the pro
forma calculations in respect thereof (including without
limitation in respect of anticipated cost savings or synergies
relating to any such sale, purchase or other transaction) shall
be as determined in good faith by the chief financial officer of
the Company. If any Debt bears a floating rate of interest and
is being given pro forma effect, the interest expense on such
Debt shall be calculated as if the base interest rate in effect
for such floating rate of interest on the date of determination
had been the applicable base interest rate for the entire period
(taking into account any Interest Rate Agreement applicable to
such Debt if such Interest Rate Agreement has a remaining term
in excess of 12 months). In the event the Capital Stock of
any Restricted Subsidiary is sold during the period, the Company
shall be deemed, for purposes of clause (1) above, to have
Repaid during such period the Debt of such Restricted Subsidiary
to the extent the Company and its continuing Restricted
Subsidiaries are no longer liable for such Debt after such sale.
“Consolidated Interest Expense”means, for any
period, the total interest expense of the Company and its
consolidated Restricted Subsidiaries, plus, to the extent not
included in such total interest expense, and to the extent
Incurred by the Company or its Restricted Subsidiaries,
(a) interest expense attributable to leases constituting
part of a Sale and Leaseback Transaction and to Capital Lease
Obligations;
(b) amortization of debt discount and debt issuance cost,
including commitment fees;
(c) capitalized interest;
(d) non-cash interest expense;
(e) commissions, discounts and other fees and charges owed
with respect to letters of credit and bankers’ acceptance
financing;
(f) net costs associated with Hedging Obligations
(including amortization of fees);
(g) Disqualified Stock Dividends;
(h) Preferred Stock Dividends; and
(i) interest accruing on any Debt of any other Person to
the extent such Debt is Guaranteed by the Company or any
Restricted Subsidiary.
“Consolidated Net Income”means, for any
period, the net income (loss) of the Company and its
consolidated Restricted Subsidiaries; provided, however,
that there shall not be included in such Consolidated Net Income:
(a) any net income (loss) of any Person (other than the
Company) if such Person is not a Restricted Subsidiary, except
that:
(1) subject to the exclusion contained in clause (d)
below, the equity of the Company and its consolidated Restricted
Subsidiaries in the net income of any such Person for such
period shall be included in such Consolidated Net Income up to
the aggregate amount of cash distributed by such Person during
such period to the Company or a Restricted Subsidiary as a
dividend or other distribution (subject, in the case of a
dividend or other distribution to a Restricted Subsidiary, to
the limitations contained in clause (c) below), and
(2) the equity of the Company and its consolidated
Restricted Subsidiaries in a net loss of any such Person other
than an Unrestricted Subsidiary for such period shall be
included in determining such Consolidated Net Income,
(b) any net income (loss) of any Restricted Subsidiary if
such Restricted Subsidiary is subject to restrictions, directly
or indirectly, on the payment of dividends or the making of
distributions, directly or indirectly, to the Company, except
that:
(1) subject to the exclusion contained in clause (d)
below, the equity of the Company and its consolidated Restricted
Subsidiaries in the net income of any such Restricted Subsidiary
for such period shall be included in such Consolidated Net
Income up to the aggregate amount of cash distributed by such
Restricted Subsidiary during such period to the Company or
another Restricted Subsidiary as a dividend or other
distribution (subject, in the case of a dividend or other
distribution to another Restricted Subsidiary, to the limitation
contained in this clause), and
(2) the equity of the Company and its consolidated
Restricted Subsidiaries in a net loss of any such Restricted
Subsidiary for such period shall be included in determining such
Consolidated Net Income;
provided, that for the purpose of calculating
Consolidated Net Income as a component of EBITDA, the exclusion
from Consolidated Net Income set forth in this clause (b)
with respect to a Foreign Restricted Subsidiary shall be
disregarded,
(c) any gain (but not loss) realized upon the sale or other
disposition of any Property of the Company or any of its
consolidated Subsidiaries (including pursuant to any Sale and
Leaseback Transaction) that is not sold or otherwise disposed of
in the ordinary course of business,
(d) any extraordinary gain or loss,
(e) the cumulative effect of a change in accounting
principles and
(f) any non-cash compensation expense realized for grants
of performance shares, stock options or other rights to
officers, directors and employees of the Company or any
Restricted Subsidiary; provided that such shares, options
or other rights can be redeemed at the option of the holder only
for Capital Stock of the Company (other than Disqualified Stock).
Notwithstanding the foregoing, for purposes of the covenant
described under “— Certain Covenants —
Limitation on Restricted Payments” only, there shall be
excluded from Consolidated Net Income any dividends, repayments
of loans or advances or other transfers of Property from
Unrestricted Subsidiaries to the Company or a Restricted
Subsidiary to the extent such dividends, repayments or transfers
increase the amount of Restricted Payments permitted under such
covenant pursuant to clause (c)(iv) thereof.
“Consolidated Net Tangible Assets”of a Person
and its Subsidiaries means the sum of the Tangible Assets of
such Person and its Subsidiaries after deducting all current
liabilities and eliminating inter-company items, all determined
in accordance with GAAP, including appropriate deductions for
any minority interest in Tangible Assets of such Subsidiaries
after deducting all current liabilities of such Subsidiaries as
determined in accordance with GAAP.
“Continuing Director”means, during any period
of two consecutive years after the Issue Date, any Person who:
(i) at the beginning of any two-year period was a member of
the Board of Directors on the Issue Date; or
(ii) was nominated for election or elected to the Board of
Directors with the affirmative vote of at least a majority of
the directors then still in office who were either members of
the Board of Directors at the beginning of such period or whose
nomination for election was previously so approved, including
new members of the Board of Directors designated in or provided
for in an agreement approved by at least a majority of such
members.
“Credit Facilities”means with respect to the
Company or any Restricted Subsidiary, one or more debt or
commercial paper facilities with banks or other lenders,
bondholders or other investors (including the Senior Credit
Facility) or indentures, in each case, providing for revolving
credit loans, term loans, notes, receivables or inventory
financing (including through the sale of receivables or
inventory to such lenders or to special purpose, bankruptcy
remote entities formed to borrow from such lenders against such
receivables or inventory) or trade letters of credit, in each
case together with any Refinancings thereof.
“Currency Exchange Protection Agreement”means,
in respect of a Person, any foreign exchange contract, currency
swap agreement, futures contract, currency option, synthetic cap
or other similar agreement or arrangement designed to protect
such Person against fluctuations in currency exchange rates.
“Custodian”means any receiver, trustee,
assignee, liquidator, custodian or similar official under any
Bankruptcy Law.
“Debt”means, with respect to any Person on any
date of determination (without duplication):
(a) the principal of and premium (if any) in respect of:
(1) debt of such Person for money borrowed, and
(2) debt evidenced by notes, debentures, bonds or other
similar instruments for the payment of which such Person is
responsible or liable;
(b) all Capital Lease Obligations of such Person and the
Attributable Value relating to the Sale and Leaseback
Transactions entered into by such Person;
(c) all obligations of such Person representing the
deferred purchase price of Property, all conditional sale
obligations of such Person and all obligations of such Person
under any title retention agreement (but excluding trade
accounts payable arising in the ordinary course of business);
(d) all obligations of such Person for the reimbursement of
any obligor on any letter of credit, bankers’ acceptance or
similar credit transaction (other than obligations with respect
to letters of credit securing obligations (other than
obligations described in (a) through (c) above)
entered into in the ordinary course of business of such Person
to the extent such letters of credit are not drawn upon or, if
and to the extent drawn upon, such drawing is reimbursed no
later than the third Business Day following receipt by such
Person of a demand for reimbursement following payment on the
letter of credit);
(e) the amount of all obligations of such Person with
respect to the Repayment of any Disqualified Stock or, with
respect to any Subsidiary of such Person, any Preferred Stock
(measured, in each case, at the greater of its voluntary or
involuntary maximum fixed repurchase price or liquidation value
but excluding, in each case, any accrued dividends);
(f) all obligations of the type referred to in
clauses (a) through (e) above of other Persons and all
dividends of other Persons for the payment of which, in either
case, such Person is responsible or liable, directly or
indirectly, as obligor, guarantor or otherwise, including by
means of any Guarantee;
(g) all obligations of the type referred to in
clauses (a) through (f) above of other Persons secured
by any Lien on any Property of such Person (whether or not such
obligation is assumed by such Person), the amount of such
obligation being deemed to be the lesser of the Fair Market
Value of such Property and the amount of the obligation so
secured; and
(h) to the extent not otherwise included in this
definition, Hedging Obligations of such Person.
The amount of Debt of any Person at any date shall be the
outstanding balance, or the accreted value of such Debt in the
case of Debt issued with original issue discount, at such date
of all unconditional obligations as described above and the
maximum liability, upon the occurrence of the contingency giving
rise to the obligation, of any contingent obligations at such
date. The amount of Debt represented by a Hedging Obligation
shall be equal to:
(1) zero if such Hedging Obligation has been Incurred
pursuant to clause (e) or (f) of the second paragraph
of “— Certain Covenants — Limitation on
Debt,” or
(2) the amount of such Hedging Obligation as determined in
accordance with GAAP if not Incurred pursuant to such clauses.
Notwithstanding the foregoing, Debt shall not include
(a) any endorsements for collection or deposits in the
ordinary course of business, (b) any realization of a
Permitted Lien, and (c) Debt that has been defeased or
satisfied in accordance with the terms of the documents
governing such Debt. With respect to any Debt denominated in a
foreign currency, for purposes of determining compliance with
the Incurrence of such Debt under the covenant described under
“— Certain Covenants — Limitation on
Debt,” the amount of such Debt shall be calculated based on
the currency exchange rate in effect at the end of the period
for the most recent audited financial statements.
For purposes of this definition, the maximum fixed repurchase
price of any Disqualified Stock that does not have a fixed
redemption, repayment or repurchase price will be calculated in
accordance with the terms of such Disqualified Stock as if such
Disqualified Stock were purchased on any date on which Debt will
be required to be determined pursuant to the Indenture at its
Fair Market Value if such price is based upon, or measured by,
the fair market value of such Disqualified Stock; provided,
however, that if such Disqualified Stock is not then
permitted in accordance with the terms of such Disqualified
Stock to be redeemed, repaid or repurchased, the redemption,
repayment or repurchase price shall be the book value of such
Disqualified Stock as reflected in the most recent financial
statements of such Person.
“Default”means any event which is, or after
notice or passage of time or both would be, an Event of Default.
“Disqualified Stock”means, with respect to any
Person, any Capital Stock that by its terms (or by the terms of
any security into which it is convertible or for which it is
exchangeable, in either case at the option of the holder
thereof) or otherwise:
(a) matures or is mandatorily redeemable pursuant to a
sinking fund obligation or otherwise;
(b) is or may become redeemable or repurchasable at the
option of the holder thereof, in whole or in part; or
(c) is convertible or exchangeable at the option of the
holder thereof for Debt or Disqualified Stock;
on or prior to, in the case of clause (a), (b) or (c),
the first anniversary of the Stated Maturity of the Senior Notes.
“Disqualified Stock Dividends”means all
dividends with respect to Disqualified Stock of the Company held
by Persons other than a Wholly Owned Restricted Subsidiary. The
amount of any such dividend shall be equal to the quotient of
such dividend divided by the difference between one and the
maximum statutory federal income tax rate (expressed as a
decimal number between 1 and 0) then applicable to the Company.
“Domestic Restricted Subsidiary”means any
Restricted Subsidiary that is not a Foreign Restricted
Subsidiary.
“EBITDA”means, for any period, an amount equal
to, for the Company and its consolidated Restricted Subsidiaries:
(a) the sum of Consolidated Net Income for such period,
plus the following to the extent reducing Consolidated Net
Income for such period:
(1) the provision for taxes based on income or profits or
utilized in computing net loss;
(2) Consolidated Interest Expense;
(3) depreciation;
(4) amortization of intangibles; and
(5) any other non-cash items (other than any such non-cash
item to the extent that it represents an accrual of or reserve
for cash expenditures in any future period); minus
(b) all non-cash items increasing Consolidated Net Income
for such period (other than any such non-cash item to the extent
that it will result in the receipt of cash payments in any
future period).
Notwithstanding the foregoing clause (a), the provision for
taxes and the depreciation, amortization and non-cash items of a
Restricted Subsidiary shall be added to Consolidated Net Income
to compute EBITDA only to the extent (and in the same
proportion) that the net income of such Restricted Subsidiary
was included in calculating Consolidated Net Income.
“Equity Offering”means an offering of Capital
Stock of the Company in a public offering registered under the
Securities Act.
“Event of Default”has the meaning set forth
under “— Events of Default.”
“Exchange Act”means the Securities Exchange
Act of 1934, as amended.
“Fair Market Value”means, with respect to any
Property, the price that could be negotiated in an
arm’s-length free market transaction between a willing
seller and a willing buyer, neither of whom is under undue
pressure or compulsion to complete the transaction. Fair Market
Value shall be determined, if such Property has a Fair Market
Value in excess of $10 million, by a majority of the Board
of Directors and evidenced by a Board Resolution, dated within
45 days of the relevant transaction, delivered to the
Trustee.
“Foreign Restricted Subsidiary”means a
Restricted Subsidiary incorporated or otherwise organized or
existing under the laws of a jurisdiction other than the United
States of America, any state thereof or any territory or
possession of the United States of America.
“GAAP”means generally accepted accounting
principles in the United States of America, which were in effect
on the Issue Date.
“Guarantee”means any obligation, contingent or
otherwise, of any Person guaranteeing any Debt of any other
Person and any obligation, direct or indirect, contingent or
otherwise, of such Person:
(a) to purchase or pay (or advance or supply funds for the
purchase or payment of) such Debt of such other Person, or
(b) entered into for the primary purpose of assuring in any
other manner the obligee against loss in respect thereof (in
whole or in part);
provided, however, that the term “Guarantee”
shall not include:
(1) endorsements for collection or deposit in the ordinary
course of business, or
(2) a contractual commitment by one Person to invest in
another Person for so long as such Investment is reasonably
expected to constitute a Permitted Investment under
clause (a) or (b) of the definition of
“Permitted Investment.”
The term “Guarantee”used as a verb has a
corresponding meaning. The term “Guarantor”shall mean any Person Guaranteeing any obligation.
“Hedging Obligation”of any Person means any
obligation of such Person pursuant to any Interest Rate
Agreement, Currency Exchange Protection Agreement or any other
similar agreement or arrangement.
“Incur”means, with respect to any Debt or
other obligation of any Person, to create, issue, incur (by
merger, conversion, exchange or otherwise), extend, assume,
Guarantee or become liable in respect of such Debt or other
obligation or the recording, as required pursuant to GAAP or
otherwise, of any such Debt or obligation on the balance sheet
of such Person (and “Incurrence”and
“Incurred”shall have meanings correlative to
the foregoing); provided, however, that a change in GAAP
that results in an obligation of such Person that exists at such
time, and is not theretofore classified as Debt, becoming Debt
shall not be deemed an Incurrence of such Debt; provided
further, however, that any Debt or other obligations of a
Person existing at the time such Person becomes a Restricted
Subsidiary (whether by merger, consolidation, acquisition or
otherwise) shall be deemed to be Incurred by such Restricted
Subsidiary at the time it becomes a Restricted Subsidiary; and
provided further, however, that solely for purposes of
determining compliance with the covenant described under
“— Certain Covenants — Limitation on
Debt,” amortization of debt discount shall not be deemed to
be the Incurrence of Debt; provided that in the case of
Debt sold at a discount, the amount of such Debt Incurred shall
at all times be the aggregate principal amount at Stated
Maturity.
“Independent Financial Advisor”means an
investment banking firm of national standing or any third party
appraiser of national standing, provided that such firm
or appraiser is not an Affiliate of the Company.
“Interest Rate Agreement”means, for any
Person, any interest rate swap agreement, interest rate cap
agreement, interest rate collar agreement, interest rate option
agreement, interest rate future agreement or other similar
agreement designed to protect against fluctuations in interest
rates.
“Investment”by any Person means any direct or
indirect loan (other than advances and extensions of credit and
receivables in the ordinary course of business that are recorded
as accounts receivable on the balance sheet of such Person),
advance or other extension of credit or capital contribution (by
means of transfers of cash or other Property to others or
payments for Property or services for the account or use of
others, or otherwise) to, or Incurrence of a Guarantee of any
obligation of, or purchase or acquisition of Capital Stock,
bonds, notes, debentures or other securities or evidence of Debt
issued by, any other Person. For purposes of the covenants
described under “— Certain Covenants —
Limitation on Restricted Payments” and
“— Designation of Restricted and Unrestricted
Subsidiaries” and the definitions of “Restricted
Payment”
and “Unrestricted Subsidiary,”the term
“Investment”shall include the portion
(proportionate to the Company’s equity interest in such
Subsidiary) of the Fair Market Value of the net assets of any
Subsidiary of the Company at the time that such Subsidiary is
designated an Unrestricted Subsidiary; provided, however,
that upon a redesignation of such Subsidiary as a Restricted
Subsidiary, the Company shall be deemed to continue to have a
permanent “Investment” in an Unrestricted Subsidiary
(proportionate to the Company’s equity interest in such
Unrestricted Subsidiary) of an amount (if positive) equal to:
(a) the Company’s “Investment” in such
Subsidiary at the time of such redesignation; less
(b) the portion (proportionate to the Company’s equity
interest in such Subsidiary) of the Fair Market Value of the net
assets of such Subsidiary at the time of such redesignation.
In determining the amount of any Investment made by transfer of
any Property other than cash, such Property shall be valued at
its Fair Market Value at the time of such Investment.
“Investment Grade Rating”means a rating of
both Baa3 or higher (or the equivalent) by Moody’s and
BBB — or higher (or the equivalent) by S&P.
“Issue Date”means the date on which the old
notes were initially issued.
“Lien”means, with respect to any Property of
any Person, any mortgage or deed of trust, pledge,
hypothecation, assignment, deposit arrangement, security
interest, lien, charge, easement (other than any easement not
materially impairing usefulness or marketability), encumbrance,
preference, priority or other security agreement or preferential
arrangement of any kind or nature whatsoever on or with respect
to such Property (including any Capital Lease Obligation,
conditional sale or other title retention agreement having
substantially the same economic effect as any of the foregoing
or any Sale and Leaseback Transaction).
“Merger Agreement”means the Agreement and Plan
of Merger, dated as of April 17, 2005, by and among
GameStop Corp., GameStop, Inc., GSC Holdings Corp., Eagle
Subsidiary LLC, Cowboy Subsidiary LLC and Electronics Boutique
Holdings Corp.
“Moody’s”means Moody’s Investors
Service, Inc. or any successor to the rating agency business
thereof.
“Net Available Cash”from any Asset Sale means
cash payments received therefrom (including any cash payments
received by way of deferred payment of principal pursuant to a
note or installment receivable or otherwise, but only as and
when received, but excluding the portion of any such deferred
payment constituting interest and any other consideration
received in the form of assumption by the acquiring Person of
Debt or other obligations relating to the Property that is the
subject of such Asset Sale or received in any other non-cash
form), in each case net of:
(a) all legal, title, accounting and recording tax
expenses, transfer taxes, commissions and other fees and
expenses Incurred (including, without limitation, brokerage
commissions and accounting, legal and investment banking
expenses, fees and sales commissions), and all
U.S. federal, state, provincial, foreign and local taxes
required to be accrued as a liability under GAAP, as a
consequence of such Asset Sale;
(b) all payments made on or in respect of any Debt that is
secured by any Property subject to such Asset Sale, in
accordance with the terms of any Lien upon such Property, or
which must by its terms, or in order to obtain a necessary
consent to such Asset Sale, or by applicable law, be repaid out
of the proceeds from such Asset Sale;
(c) all distributions and other payments required to be
made to minority interest holders in Subsidiaries or joint
ventures as a result of such Asset Sale;
(d) the deduction of appropriate amounts provided by the
seller as a reserve, in accordance with GAAP, against any
liabilities associated with the Property disposed of in such
Asset Sale and retained by the Company or any Restricted
Subsidiary after such Asset Sale, including, without limitation,
pension and other post-employment benefit liabilities,
liabilities related to environmental matters and liabilities
under any indemnification obligations associated with such Asset
Sale; and
(e) payments of unassumed liabilities (not constituting
Debt) relating to the Property sold at the time of, or within
30 days after, the date of such sale.
“Notes”means, collectively, the Senior
Floating Rate Notes and the Senior Notes issued under the
Indenture and offered pursuant to this prospectus and any
Additional Notes issued under the Indenture and subsequently
offered.
“Obligations”means any principal, interest,
penalties, fees, indemnifications, reimbursements, damages and
other liabilities payable under the documentation governing any
Debt and in all cases whether direct or indirect, absolute or
contingent, now outstanding or hereafter created, assumed or
Incurred and including, without limitation, interest accruing
subsequent to the filing of a petition in bankruptcy or the
commencement of any insolvency, reorganization or similar
proceedings at the rate provided in the relevant documentation,
whether or not an allowed claim, and any obligation to redeem or
defease any of the foregoing.
“Officer”means the Chief Executive Officer,
the Chief Operating Officer, the President, the Chief Financial
Officer, the Chief Legal Officer, the Treasurer or the Secretary
of either Issuer or any officer of either Issuer performing
similar functions.
“Officer’s Certificate”means a
certificate signed by an Officer.
“Opinion of Counsel”means a written opinion
from legal counsel who is reasonably acceptable to the Trustee.
The counsel may be an employee of or counsel to the Company or
the Trustee.
“Payment Default”means, with respect to any
Debt, a failure to pay the principal of such Debt at its Stated
Maturity after giving effect to any applicable grace period
provided in the instrument(s) governing such Debt.
“Permitted Business”means the businesses of
the type conducted by the Company and its Subsidiaries upon
consummation of the Mergers and businesses reasonably related or
complementary thereto.
“Permitted Investment”means any Investment by
the Company or a Restricted Subsidiary in:
(a) the Company or any Restricted Subsidiary (including any
non-wholly owned Restricted Subsidiary) or any Person that will,
upon the making of such Investment, become a Restricted
Subsidiary; provided that the primary business of such
Restricted Subsidiary is a Permitted Business;
(b) any Person if as a result of such Investment such
Person is merged or consolidated with or into, or transfers or
conveys all or substantially all its Property to, the Company or
a Restricted Subsidiary; provided that the primary business of
such Restricted Subsidiary is a Permitted Business;
(c) cash and Temporary Cash Investments;
(d) receivables owing to the Company or a Restricted
Subsidiary, if created or acquired in the ordinary course of
business and payable or dischargeable in accordance with
customary trade terms;
(e) payroll, travel, commission and similar advances to
cover matters that are expected at the time of such advances
ultimately to be treated as expenses for accounting purposes and
that are made in the ordinary course of business;
(f) stock, obligations or other securities received in
settlement or good faith compromises of debts created in the
ordinary course of business and owing to the Company or a
Restricted Subsidiary or in satisfaction of judgments;
(g) any Person to the extent such Investment represents the
non-cash portion of the consideration received in connection
with an Asset Sale consummated in compliance with the covenant
described under “— Certain Covenants —
Limitation on Asset Sales”;
(h) prepaid expenses, negotiable instruments held for
collection, lease, utility, workers’ compensation,
performance and other similar deposits provided to third parties
in the ordinary course of business;
(i) any assets or Capital Stock of any Person made out of
the net cash proceeds of the substantially concurrent sale of
Capital Stock of the Company (other than Disqualified Stock);
(j) Interest Rate Agreements and Currency Exchange
Protection Agreements, in each case to the extent such
obligations Incurred thereunder may be Incurred pursuant to the
second paragraph of “— Certain
Covenants — Limitation on Debt”;
(k) in securities of any trade creditor or customer
received in settlement of obligations or pursuant to any plan of
reorganization or similar arrangement upon the bankruptcy or
insolvency of such trade creditor or customer;
(l) acquired as a result of a foreclosure by the Company or
such Restricted Subsidiary with respect to any secured
Investment or other transfer of title with respect to any
secured Investment in default;
(m) consisting of purchases and acquisitions of inventory,
supplies, materials and equipment in the ordinary course of
business and otherwise in accordance with the Indenture;
(n) existence on the Issue Date; and
(o) other Investments made for Fair Market Value that do
not exceed $25 million in the aggregate outstanding at any
one time.
“Permitted Refinancing Debt”means any Debt
that Refinances any other Debt, including any successive
Refinancings, so long as:
(a) such Debt is in an aggregate principal amount (or if
Incurred with original issue discount, an aggregate issue price)
not in excess of the sum of:
(1) the aggregate principal amount (or if Incurred with
original issue discount, the aggregate accreted value) then
outstanding of the Debt being Refinanced; and
(2) an amount necessary to pay any fees and expenses,
including premiums and defeasance costs, related to such
Refinancing;
(b) the Average Life of such Debt is equal to or greater
than the Average Life of the Debt being Refinanced;
(c) the Stated Maturity of such Debt is no earlier than the
Stated Maturity of the Debt being Refinanced; and
(d) the new Debt shall not be senior in right of payment to
the Debt that is being Refinanced;
provided, however, that Permitted Refinancing Debt shall
not include:
(1) Debt of a Subsidiary that is not the Co-Issuer or a
Subsidiary Guarantor that Refinances Debt of the Company, the
Co-Issuer or a Subsidiary Guarantor; or
(2) Debt of the Company or a Restricted Subsidiary that
Refinances Debt of an Unrestricted Subsidiary.
“Person”means any individual, corporation,
company (including any limited liability company), association,
partnership, joint venture, trust, unincorporated organization,
government or any agency or political subdivision thereof or any
other entity.
“Preferred Stock”means any Capital Stock of a
Person, however designated, which entitles the holder thereof to
a preference with respect to the payment of dividends, or as to
the distribution of assets upon any voluntary or involuntary
liquidation or dissolution of such Person, over shares of any
other class of Capital Stock issued by such Person.
“Preferred Stock Dividends”means all dividends
with respect to Preferred Stock of Restricted Subsidiaries held
by Persons other than the Company or a Wholly Owned Restricted
Subsidiary. The amount of any such dividend shall be equal to
the quotient of such dividend divided by the difference between
one and the
maximum statutory federal income rate (expressed as a decimal
number between 1 and 0) then applicable to the issuer of such
Preferred Stock.
“Property”means, with respect to any Person,
any interest of such Person in any kind of property or asset,
whether real, personal or mixed, or tangible or intangible,
including Capital Stock in, and other securities of, any other
Person. For purposes of any calculation required pursuant to the
Indenture, the value of any Property shall be its Fair Market
Value.
“Purchase Money Debt”means Debt:
(a) consisting of the deferred purchase price of Property,
conditional sale obligations, obligations under any title
retention agreement, other purchase money obligations and
obligations in respect of industrial revenue bonds, in each case
where the maturity of such Debt does not exceed the anticipated
useful life of the Property being financed, and
(b) Incurred to finance the acquisition, construction or
lease by the Company or a Restricted Subsidiary of such
Property, including additions and improvements thereto;
provided, however, that such Debt is Incurred within
180 days after the acquisition, construction or lease of
such Property by the Company or such Restricted Subsidiary.
“Rating Agencies”means Moody’s and
S&P.
“Refinance”means, in respect of any Debt, to
refinance, extend, renew, refund, repay, prepay, repurchase,
redeem, defease or retire, or to issue other Debt, in exchange
or replacement for, such Debt. “Refinanced” and
“Refinancing” shall have correlative meanings.
“Repay”means, in respect of any Debt, to
repay, prepay, repurchase, redeem, legally defease or otherwise
retire such Debt. “Repayment” and “Repaid”
shall have correlative meanings. For purposes of the covenant
described under “— Certain Covenants —
Limitation on Asset Sales” and the definition of
“Consolidated Interest Coverage Ratio,”Debt
shall be considered to have been Repaid only to the extent the
related loan commitment, if any, shall have been permanently
reduced in connection therewith.
“Restricted Payment”means:
(a) any dividend or distribution (whether made in cash,
securities or other Property) declared or paid on or with
respect to any shares of Capital Stock of the Company or any
Restricted Subsidiary (including any payment in connection with
any merger or consolidation with or into the Company or any
Restricted Subsidiary), except for any dividend or distribution
that is made solely to the Company or a Restricted Subsidiary
(and, if such Restricted Subsidiary is not a Wholly Owned
Restricted Subsidiary, to the other shareholders of such
Restricted Subsidiary on a pro rata basis or on a basis that
results in the receipt by the Company or a Restricted Subsidiary
of dividends or distributions of greater value than it would
receive on a pro rata basis) or any dividend or distribution
payable solely in shares of Capital Stock (other than
Disqualified Stock) of the Company, and except for pro rata
dividends or other distributions made by a Subsidiary that is
not a Wholly Owned Subsidiary to minority stockholders;
(b) the purchase, repurchase, redemption, acquisition or
retirement for value of any Capital Stock of the Company or any
Restricted Subsidiary (other than from the Company or a
Restricted Subsidiary) or any securities exchangeable for or
convertible into any such Capital Stock, including the exercise
of any option to exchange any Capital Stock (other than for or
into Capital Stock of the Company that is not Disqualified
Stock);
(c) the purchase, repurchase, redemption, acquisition or
retirement for value, prior to the date for any scheduled
maturity, sinking fund or amortization or other installment
payment, of any Subordinated Obligation (other than the
purchase, repurchase or other acquisition of any Subordinated
Obligation purchased in anticipation of satisfying a scheduled
maturity, sinking fund or amortization or other installment
obligation, in each case due within one year of the date of
acquisition); or
(d) any Investment (other than Permitted Investments) in
any Person.
“Restricted Subsidiary”means any Subsidiary of
the Company other than an Unrestricted Subsidiary.
“S&P”means Standard & Poor’s
Ratings Services or any successor to the rating agency business
thereof.
“Sale and Leaseback Transaction”means any
direct or indirect arrangement relating to Property now owned or
hereafter acquired whereby the Company or a Restricted
Subsidiary transfers such Property to another Person and the
Company or a Restricted Subsidiary leases it from such Person.
“Securities Act”means the Securities Act of
1933, as amended.
“Senior Credit Facility”means the Debt
represented by the Credit Agreement, dated as of
October 11, 2005, by and among (i) the Company and
certain of the Company’s Subsidiaries, as Borrowers,
(ii) Bank of America, N.A., as Administrative Agent and
Collateral Agent, (iii) Bank of America, N.A. and Citicorp
North America, Inc., as Issuing Banks, (iv) Citicorp North
America, Inc., as Syndication Agent, (v) Merrill Lynch
Capital A Division of Merrill Lynch Business Financial Services
Inc., as Documentation Agent, (vi) Bank of America
Securities LLC, Citigroup Global Markets Inc., and Merrill Lynch
Capital A Division of Merrill Lynch Business Financial Services
Inc., as Joint Lead Arrangers and Joint Lead Bookrunners and
(vii) the lenders named therein, including any notes,
guarantees, collateral and security documents (including
mortgages, pledge agreements and other security arrangements),
instruments and agreements executed in connection therewith, and
in each case as amended or refinanced from time to time,
including any agreement or agreements extending the maturity of,
or refinancing (including increasing the amount of borrowings or
other Debt outstanding or available to be borrowed thereunder),
all or any portion of the Debt under such agreement, and any
successor or replacement agreement or agreements with the same
or any other agent, creditor, lender or group of creditors or
lenders.
“Senior Floating Rate Notes”means the old
floating rate notes and the new floating rate notes.
“Senior Notes”means the old 8% notes and
the new 8% notes.
“Significant Subsidiary”means any Subsidiary
that would be a “significant subsidiary” of the
Company within the meaning of Rule 1-02 under
Regulation S-X
promulgated by the Commission.
“Stated Maturity”means, with respect to any
security, the date specified in such security as the fixed date
on which the payment of principal of such security is due and
payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the
repurchase of such security at the option of the holder thereof
upon the happening of any contingency beyond the control of the
issuer unless such contingency has occurred).
“Subordinated Obligation”means any Debt of the
Company, the Co-Issuer or any Subsidiary Guarantor (whether
outstanding on the Issue Date or thereafter Incurred) that is
subordinate or junior in right of payment to the Notes pursuant
to a written agreement to that effect.
“Subsidiary”means, in respect of any Person,
any corporation, company (including any limited liability
company), association, partnership, joint venture or other
business entity of which a majority of the total voting power of
the Voting Stock or other interests (including partnership
interests) is at the time owned or controlled, directly or
indirectly, by:
(a) such Person;
(b) such Person and one or more Subsidiaries of such
Person; or
(c) one or more Subsidiaries of such Person.
“Subsidiary Guarantee”means any Guarantee of
the Notes by any Subsidiary Guarantor.
“Subsidiary Guarantor”means each Restricted
Subsidiary of the Company, other than GameStop, Inc., that
executed the Indenture as a guarantor on the Issue Date, the EB
Guarantors that executed the Supplemental Indenture, and each
other domestic wholly-owned Subsidiary of the Company that
thereafter provides a Subsidiary Guarantee of the Notes pursuant
to the terms of the Indenture, in each case until such
Subsidiary Guarantor is released from its obligations under its
Subsidiary Guarantee pursuant to the terms of the Indenture.
“Surviving Person”means the surviving Person
in a merger or formed by a consolidation and, for purposes of
the covenant described under “— Merger,
Consolidation and Sale of Property,” a Person to whom all
or substantially all of the Property of the Company, the
Co-Issuer or a Subsidiary Guarantor is sold, transferred,
assigned, leased, conveyed or otherwise disposed.
“Tangible Assets”of any Person means, at any
date, the gross value as shown by the accounting books and
records of such Person of all its Property, both real and
personal, less the net book value of (i) all its licenses,
patents, patent applications, copyrights, trademarks, trade
names, goodwill, non-compete agreements or organizational
expenses and other like intangibles, (ii) unamortized Debt
discount and expense, (iii) all reserves for depreciation,
obsolescence, depletion and amortization of its properties and
(iv) all other Property reserves which in accordance with
GAAP should be provided in connection with the business
conducted by such Person.
“Temporary Cash Investments”means:
(a) Investments in U.S. Government Obligations, in
each case maturing within 365 days of the date of
acquisition thereof;
(b) Investments in time deposit accounts, certificates of
deposit and money market deposits maturing within 90 days
of the date of acquisition thereof issued or guaranteed by a
bank or trust company organized under the laws of the United
States of America or any state or the District of Columbia or
any U.S. branch of a foreign bank having, at the date of
acquisition thereof, combined capital, surplus and undivided
profits aggregating in excess of $250.0 million and whose
long-term debt is rated “A-3” or “A-” or
higher according to Moody’s or S&P (or such similar
equivalent rating by at least one “nationally recognized
statistical rating organization” (as defined in
Rule 436 under the Securities Act));
(c) repurchase obligations with a term of not more than
30 days for underlying securities of the types described in
clause (a) entered into with:
(1) a bank meeting the qualifications described in
clause (b) above, or
(2) any primary government securities dealer reporting to
the Market Reports Division of the Federal Reserve Bank of New
York;
(d) Investments in commercial paper, maturing not more than
90 days after the date of acquisition, issued by a
corporation (other than an Affiliate of the Company) organized
and in existence under the laws of any state or jurisdiction of
the United States of America with a rating at the time as of
which any Investment therein is made of “P-1” (or
higher) according to Moody’s or “A-1” (or higher)
according to S&P (or such similar equivalent rating by at
least one “nationally recognized statistical rating
organization” (as defined in Rule 436 under the
Securities Act));
(e) direct obligations (or certificates representing an
ownership interest in such obligations) of any state of the
United States of America or any foreign country recognized by
the United States or any political subdivision of any such
state, province or foreign country, as the case may be
(including any agency or instrumentality thereof), for the
payment of which the full faith and credit of such state is
pledged and which are not callable or redeemable at the
issuer’s option, provided that:
(1) the long-term debt of such state, province or country
is rated “A-3” or “A-” or higher according
to Moody’s or S&P (or such similar equivalent rating by
at least one “nationally recognized statistical rating
organization” (as defined in Rule 436 under the
Securities Act)), and
(2) such obligations mature within 180 days of the
date of acquisition thereof; and
(f) Investments in money market funds which invest
substantially all of their assets in securities of the types
described in clauses (a) through (e) above.
(a) any Subsidiary of the Company that is designated after
the Issue Date as an Unrestricted Subsidiary as permitted or
required pursuant to the covenant described under
“— Certain Covenants — Designation of
Restricted and Unrestricted Subsidiaries” and is not
thereafter redesignated as a Restricted Subsidiary as permitted
pursuant thereto;
(b) any Subsidiary of an Unrestricted Subsidiary.
So long as the Company and its Subsidiaries are not subject to
the Specified Covenants, all Unrestricted Subsidiaries shall be
Restricted Subsidiaries.
“U.S. Government Obligations”means direct
obligations (or certificates representing an ownership interest
in such obligations) of the United States of America (including
any agency or instrumentality thereof) for the payment of which
the full faith and credit of the United States of America is
pledged and which are not callable or redeemable at the
issuer’s option.
“Voting Stock”of any Person means all classes
of Capital Stock or other interests (including partnership
interests) of such Person then outstanding and normally entitled
(without regard to the occurrence of any contingency) to vote in
the election of directors, managers or trustees thereof.
“Wholly Owned Restricted Subsidiary”means, at
any time, a Restricted Subsidiary all the Voting Stock of which
is at such time owned, directly or indirectly, by the Company
and its other Wholly Owned Subsidiaries.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a summary of certain United States
federal income tax consequences of the acquisition, ownership
and disposition of the exchange notes by an initial beneficial
owner of old notes that purchased its old notes in the initial
offering at the initial offering price. This discussion is based
upon the United States federal tax law now in effect, which is
subject to change, possibly retroactively.
The discussion addresses only notes held as capital assets
within the meaning of Section 1221 of the Internal Revenue
Code of 1986, as amended. The tax treatment of holders of the
notes may vary depending upon their particular situations.
Certain holders (including banks, expatriates, tax-exempt
entities, real estate investment trusts, regulated investment
companies, insurance companies, dealers in securities or foreign
currencies, persons holding notes in connection with a hedging
strategy, “straddle,” conversion transaction or other
integrated transaction, holders of 10% of our voting power,
holders who are “controlled foreign corporations” with
respect to us, and holders who do not acquire the notes in the
initial offering or who do not hold the notes as a capital
asset) may be subject to special rules not discussed below. This
discussion also does not address the tax consequences to certain
persons who have a functional currency other than the
U.S. dollar or to certain persons who have ceased to be
citizens or to be taxed as resident aliens. Furthermore, it does
not include any description of any alternative minimum tax
consequences, or estate and gift tax consequences, or the tax
laws of any state, local or foreign government that may be
applicable to the notes. Prospective investors should consult
their tax advisors regarding the United States federal tax
consequences of acquiring, holding, and disposing of notes as
well as any tax consequences that may arise under the laws of
any foreign, state, local, or other taxing jurisdiction.
If a partnership or other entity or arrangement treated as a
partnership for United States federal income tax purposes holds
notes, the tax treatment of a partner generally will depend upon
the status of the partner and the activities of the partnership.
This discussion does not address the tax treatment of a
partnership investing in notes or partners of such partnership.
If you are a partner of a partnership investing in notes, you
should consult your tax advisor.
Under certain circumstances (described under “Description
of the Exchange Notes — Optional Redemption” and
“The Exchange Offer — Registration Rights;
Liquidated Damages”), we may be obligated to pay holders of
the notes amounts in excess of the stated principal or interest
thereon. As a result, the notes could be subject to certain
rules relating to debt instruments that provide for one or more
contingent payments. In the case of additional amounts payable
on the notes as a result of the optional redemption feature,
special rules apply to debt instruments with a redemption
feature if exercise of the optional redemption feature would
minimize the yield on the notes. Since the exercise of the
optional redemption feature would not reduce the yield on the
notes to us as an issuer, we have concluded that these special
rules will not apply. In addition, in the case of additional
interest that may be payable on a registration default, special
rules will apply to such additional interest unless the
likelihood of paying such additional interest is remote, or the
amount of such additional interest is deemed incidental. We
intend to take the position that the likelihood that any
additional interest will be paid is remote and that the amount
of any such additional interest if paid will be incidental and,
accordingly, that the special rules applicable to debt
instruments with contingent payments do not apply to the old
notes. Therefore, the rest of this discussion assumes that the
notes are not contingent payment debt instruments. In addition,
our determination that the possibility of the payment of
additional interest is a remote or incidental contingency is
binding on you, unless you explicitly disclose that you are
taking a different position to the Internal Revenue Service, or
IRS, on your tax return for the year during which you acquired
the old notes. However, the IRS may take a contrary position
from that described above, which could affect the timing and
character of both your income from the old notes and our
deduction with respect to the payments of additional interest.
If we do fail to register the exchange notes for sale to the
public, you should consult your tax adviser concerning the
appropriate tax treatment of the payment of additional interest
on the old notes.
This subsection describes the tax consequences to a United
States holder. You are a United States holder if you are a
beneficial owner of a note and you are for United States federal
income tax purposes:
•
an individual who is a citizen or resident of the United States;
•
a domestic corporation;
•
an estate whose income is subject to United States federal
income tax regardless of its source; or
•
a trust if a United States court can exercise primary
supervision over the trust’s administration and one or more
United States persons are authorized to control all substantial
decisions of the trust or if the trust was in existence on
August 20, 1996 and has elected to continue to be treated
as a United States person.
If you are not a United States holder, this subsection does not
apply to you and you should refer to
“— Non-U.S. Holders”
below.
Interest
You will be taxed on interest on your exchange note as ordinary
income at the time you receive the interest or when it accrues,
depending on your method of accounting for tax purposes. The old
notes were not issued with original issue discount for United
States federal income tax purposes, and you will not be required
to recognize any original issue discount with respect to the
exchange notes.
Sale, Exchange or Retirement of Notes
You will generally recognize capital gain or loss on the sale or
retirement of your exchange note equal to the difference between
the amount you realize on the sale or retirement, excluding any
amounts attributable to accrued but unpaid interest (which will
be treated as described above), and your tax basis in your
exchange note. Your tax basis in your exchange note will equal
your tax basis in your old note, which generally will be its
cost. Capital gain of a non-corporate United States holder that
is recognized before January 1, 2009 is generally taxed at
a maximum rate of 15% where the holder has a holding period
greater than one year. The deductibility of capital losses is
subject to limitations.
The exchange of an old note for an exchange note in the exchange
offer will not constitute a taxable exchange for
U.S. federal income tax purposes. Consequently, a United
States holder will not recognize any gain or loss upon the
receipt of an exchange note in the exchange offer. A United
States holder’s holding period for an exchange note will
include the holding period for the old note and the initial
basis in the exchange note will be the same as the adjusted
basis in the old note at the time of the exchange. Under
existing regulations relating to modifications and exchanges of
debt instruments, any increase in the interest rate of old notes
resulting from the exchange offer not being consummated, or a
shelf registration statement not being declared effective, would
not result in a deemed taxable exchange of the old notes as such
change in interest rate would occur pursuant to the original
terms of the old notes.
Backup Withholding
A backup withholding tax (currently at a rate of 28%) and
information reporting requirements apply in the case of certain
United States holders (not including corporations and other
exempt recipients) to certain payments of principal of, and
interest on, a note, and of proceeds on the sale of a note.
Backup withholding applies if a holder fails to provide a
correct taxpayer identification number, has been notified by the
IRS that it is subject to backup withholding, or fails to meet
certain certification requirements. An individual’s
taxpayer identification number is generally the
individual’s Social Security number. Any amount withheld
from payment to a holder under the backup withholding rules will
be allowed as a credit against the holder’s federal income
tax liability and may entitle the holder to a refund, provided
the required information is furnished to the IRS.
This subsection describes the tax consequences to a
Non-U.S. Holder.
For purposes of the following discussion, a
“Non-U.S. Holder”
is:
•
an individual who is not a citizen or resident of the United
States;
•
a corporation (or other entity treated as a corporation) that is
not organized or created under United States law;
•
an estate that is not taxable in the United States on its
worldwide income; or
•
a trust unless (a) a court within the United States is able
to exercise primary supervision over the administration of such
trust and one or more United States persons have the authority
to control all substantial decisions of the trust or
(b) such trust has in effect a valid election to be treated
as a domestic trust for United States federal income tax
purposes.
The rules governing U.S. federal income taxation of
Non-U.S. Holders
are complex.
Non-U.S. Holders
should consult with their own tax advisers to determine the
effect of federal, state, local and foreign income tax laws, as
well as treaties, with regard to an investment in the notes,
including any reporting requirements.
Withholding Taxes
Subject to the discussion below concerning backup withholding,
payments of interest on the exchange notes generally will not be
subject to United States federal income or withholding taxes,
provided that such interest is not effectively connected with
the
Non-U.S. Holder’s
conduct of a U.S. trade or business and:
•
such holder (1) does not own, actually or constructively,
10% or more of the total combined voting power of the
outstanding stock of either Issuer, (2) is not a bank that
received notes on an extension of credit made pursuant to a loan
agreement entered into in the ordinary course of its trade or
business, and (3) is not a controlled foreign corporation
related, directly or indirectly, to either Issuer through stock
ownership; and
•
the certification requirement, as described below, has been
fulfilled with respect to the beneficial owner.
The certification requirement described above will be fulfilled
if you furnish a statement, signed under penalties of perjury,
that includes your name and address and certifies that you are a
Non-U.S. Holder.
This certification is generally made on Form W-8BEN. Other
methods might be available to satisfy the certification
requirements described above, depending upon the circumstances.
Further, neither we nor our paying agent may have actual
knowledge to the contrary of any certification received.
If you do not qualify for the exemption from tax described
above, you generally will be subject to United States
withholding tax at a flat rate of 30% on payments of interest,
unless your income from the exchange notes is effectively
connected with a United States trade or business and you satisfy
certain other certification and disclosure requirements. See
“— United States Trade or Business” below.
The foregoing 30% rate may be reduced or eliminated under an
applicable tax treaty, subject to certain certification
requirements.
The rules regarding withholding are complex and vary depending
on your individual situation. They are also subject to change.
You should consult your tax advisor regarding the specific
methods for satisfying these requirements.
If you sell an exchange note or it is redeemed, subject to the
discussion below concerning backup withholding, you will not be
subject to United States federal income tax on any gain
recognized unless:
•
the gain is effectively connected with a trade or business that
you conduct in the United States;
•
you are an individual who is present in the United States for at
least 183 days during the year in which you dispose of the
exchange note and certain other conditions are satisfied; or
•
such gain represents accrued but unpaid interest not previously
included in income, in which case the rules for interest would
apply.
You will not recognize taxable gain or loss for United States
federal income tax purposes on the exchange of your old notes
for exchange notes in the exchange offer.
United States Trade or Business
If you hold your exchange note in connection with a trade or
business that you are conducting in the United States:
•
any interest on the exchange note, and any gain from disposing
of the exchange note, generally will be subject to United States
federal income tax on a net income basis in the same manner as
if you were a United States person (and the 30%
U.S. federal withholding tax will not apply provided that
certain certification requirements are satisfied); and
•
if you are a corporation, you may be subject to the “branch
profits tax” on your earnings that are effectively
connected with your United States trade or business, including
earnings from the exchange note. This tax is 30%, but may be
reduced or eliminated by an applicable income tax treaty.
Information Reporting and Backup Withholding
We must generally report to the IRS the amount of interest paid,
the name and address of the recipient, and the amount, if any,
of tax withheld. These information reporting requirements apply
even if no tax was required to be withheld. A similar report is
sent to the recipient of the interest. In general, backup
withholding will not apply to interest on the exchange notes
paid by us or our paying agents, in their capacity as such, to a
Non-U.S. Holder if
the
Non-U.S. Holder
has provided the required certification that it is a
Non-U.S. Holder.
In general, information reporting and backup withholding will
not apply to proceeds from the sale or redemption of exchange
notes paid to a
Non-U.S. Holder if
the
Non-U.S. Holder
has provided the required certification that it is a
Non-U.S. Holder.
Backup withholding is not an additional tax. Any amounts
withheld under the backup withholding rules from a payment to a
Non-U.S. Holder
can be refunded or credited against the
Non-U.S. Holder’s
United States federal income tax liability, if any,
provided that the required information is furnished to the IRS
in a timely manner.
Each broker-dealer that receives exchange notes for its own
account pursuant to the exchange offer must acknowledge that it
will deliver a prospectus in connection with any resale of such
exchange notes. This prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer
in connection with resales of exchange notes received in
exchange for old notes where such old notes were acquired as a
result of market-making activities or other trading activities.
Each Issuer has agreed that, for a period of 90 days after
the consummation of the exchange offer, it will make this
prospectus, as amended or supplemented, available to any
broker-dealer for use in connection with any such resale. In
addition, until 90 days after the date of this prospectus,
all dealers effecting transactions in the exchange notes may be
required to deliver a prospectus.
The Issuers will not receive any proceeds from any sale of
exchange notes by broker-dealers. Exchange notes received by
broker-dealers for their own account pursuant to the exchange
offer may be sold from time to time in one or more transactions
in the over-the-counter
market, in negotiated transactions, through the writing of
options on the exchange notes or a combination of such methods
of resale, at market prices prevailing at the time of resale, at
prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to
or through brokers or dealers who may receive compensation in
the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such exchange notes.
Any broker-dealer that resells exchange notes that were received
by it for its own account pursuant to the exchange offer and any
broker or dealer that participates in a distribution of such
exchange notes may be deemed to be an “underwriter”
within the meaning of the Securities Act and any profit from any
such resale of exchange notes and any commissions or concessions
received by any such persons may be deemed to be underwriting
compensation under the Securities Act. The letter of transmittal
states that by acknowledging that it will deliver and by
delivering a prospectus, a broker-dealer will not be deemed to
admit that it is an “underwriter” within the meaning
of the Securities Act.
For a period of 90 days after the consummation of the
exchange offer, the Issuers will promptly send additional copies
of this prospectus and any amendments or supplements to this
prospectus to any broker-dealer that requests such documents in
the letter of transmittal. The Issuers have agreed to pay all
expenses incident to the exchange offer (including the expenses
of one counsel for the holder of the old notes) other than
commissions or concessions of any brokers or dealers and will
indemnify the holders of the old notes (including any
broker-dealers) against certain liabilities, including
liabilities under the Securities Act.
Certain legal matters as to the validity of the exchange notes
and the guarantees thereof offered hereby will be passed upon by
Bryan Cave LLP, New York, New York, counsel for GameStop Corp.,
and Oppenheimer Wolff & Donnelly LLP, Minneapolis,
Minnesota, counsel for GameStop, Inc.
EXPERTS
GameStop
The audited consolidated balance sheets of GameStop as of
January 28, 2006 and January 29, 2005 and the related
audited consolidated statements of operations,
stockholders’ equity and cash flows for the
52-week periods ended
January 28, 2006, January 29, 2005 and
January 31, 2004 included in this prospectus have been
audited by BDO Seidman, LLP, independent registered public
accounting firm, as stated in their report appearing elsewhere
in this prospectus. Also, the audited financial statement
schedule of GameStop incorporated in this prospectus by
reference to GameStop’s Annual Report on
Form 10-K as of
January 28, 2006 and January 29, 2005, and for the
52-week periods ended
January 28, 2006, January 29, 2005 and
January 31, 2004, and management’s assessment of the
effectiveness of internal control over financial reporting as of
January 28, 2006, have been incorporated in reliance on the
reports of BDO Seidman, LLP, given on the authority of that
firm as experts in accounting and auditing.
Electronics Boutique
The consolidated financial statements of Electronics Boutique
Holding Corp. as of January 29, 2005 and January 31, 2004, and
for each of the years in the three-year period ended January 29,2005, have been included herein in reliance upon the report of
KPMG LLP, independent registered public accounting firm,
appearing elsewhere herein and upon the authority of said firm
as experts in accounting and auditing. The report refers to a
change in the method of accounting for consideration received
from a vendor.
The consolidated financial statements and schedule of
Electronics Boutique Holding Corp. as of January 29, 2005 and
January 31, 2004, and for each of the years in the three-year
period ended January 29, 2005, and management’s assessment
of the effectiveness of internal control over financial
reporting as of January 29, 2005 have been incorporated by
reference herein in reliance upon the reports of KPMG LLP,
independent registered public accounting firm, incorporated by
reference herein, and upon the authority of said firm as experts
in accounting and auditing. The report with respect to the
consolidated financial statements refers to a change in the
method of accounting for consideration received from a vendor.
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
GameStop Corp.
Grapevine, Texas
We have audited the accompanying consolidated balance sheets of
GameStop Corp. as of January 28, 2006 and January 29,2006 and the related consolidated statements of operations,
stockholders’ equity, and cash flows for the 52 week
periods ended January 28, 2006, January 29, 2005, and
January 31, 2004. We have also audited the schedule listed
in Item 15(a)(2) of this
Form 10-K (not
included herein). These financial statements and the schedule
are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial
statements and the schedule based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and
the schedule are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements and
schedule, assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall presentation of the financial statement and
schedule. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of GameStop Corp. at January 28, 2006 and
January 29, 2005 and the results of its operations and its
cash flows for each of the 52 week periods ended
January 28, 2006, January 29, 2005, and
January 31, 2004, in conformity with accounting principles
generally accepted in the United States of America.
Also, in our opinion, the schedule presents fairly, in all
material respects, the information set forth herein.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of GameStop Corp.’s internal control over
financial reporting as of January 29, 2005, based on
criteria established in Internal Control —
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report
dated March 29, 2006, (not included herein) expressed an
unqualified opinion thereon.
GameStop Corp., formerly known as GSC Holdings Corp., (the
“Company” or “GameStop”), is a Delaware
corporation formed for the purpose of consummating the business
combination (the “merger”) of GameStop Holdings Corp.,
formerly known as GameStop Corp. (“Historical
GameStop”), and Electronics Boutique Holdings Corp.
(“EB”), which was completed on October 8, 2005.
The Company is the world’s largest retailer of new and used
video game systems and software and personal computer
entertainment software and related accessories primarily through
its GameStop and EB Games trade names, web sites (gamestop.com
and ebgames.com) and Game Informer magazine. The
Company’s stores, which totaled 4,490 at January 28,2006, are located in major regional shopping malls and strip
centers in the United States, Australia, Canada and Europe. The
Company operates its business in four segments: United States,
Australia, Canada and Europe.
The merger of Historical GameStop and EB has been treated as a
purchase business combination for accounting purposes, with
Historical GameStop designated as the acquirer. Therefore, the
historical financial statements of Historical GameStop became
the historical financial statements of the Company. The
accompanying condensed consolidated statements of operations and
cash flows for the 52 weeks ended January 28, 2006
include the results of operations of EB from October 9,2005 forward. Therefore, the Company’s operating results
for the 52 weeks ended January 28, 2006 include
16 weeks of EB’s results and 52 weeks of
Historical GameStop’s results. Note 2 provides summary
unaudited pro forma information and details on the purchase
accounting.
Historical GameStop’s wholly-owned subsidiary
Babbage’s Etc. LLC (“Babbage’s”) began
operations in November 1996. In October 1999, Babbage’s was
acquired by, and became a wholly-owned subsidiary of,
Barnes & Noble, Inc. (“Barnes &
Noble”). In June 2000, Barnes & Noble acquired
Funco, Inc. (“Funco”) and thereafter, Babbage’s
became a wholly-owned subsidiary of Funco. In December 2000,
Funco changed its name to GameStop, Inc. Historical GameStop was
incorporated under the laws of the State of Delaware in August
2001 as a holding company for GameStop, Inc. In February 2002,
Historical GameStop completed a public offering of
20,764 shares of Class A common stock at
$18.00 per share (the “Offering”). Upon the
effective date of the Offering, Historical GameStop’s Board
of Directors approved the authorization of 5,000 shares of
preferred stock, 300,000 shares of Class A common
stock and 100,000 shares of Class B common stock. At
the same time, Historical GameStop’s common stock
outstanding was converted to 36,009 shares of Class B
common stock.
Until October 2004, all of the 36,009 shares of Historical
GameStop Class B common stock outstanding were held by
Barnes & Noble. In October 2004, Historical
GameStop’s Board of Directors authorized a repurchase of
6,107 shares of Class B common stock held by
Barnes & Noble. Historical GameStop repurchased the
shares at a price equal to $18.26 per share for aggregate
consideration of $111,520 before costs of $261. The repurchased
shares were immediately retired. On November 12, 2004,
Barnes & Noble distributed to its stockholders its
remaining 29,902 shares of Historical GameStop’s
Class B common stock in a tax-free dividend. The
Class B shares retained their super voting power of ten
votes per share and were separately listed on the New York Stock
Exchange under the symbol GME.B. All of the outstanding shares
of Historical GameStop’s Class A common stock and
Class B common stock were exchanged for the Company’s
Class A common stock and Class B common stock,
respectively, in the merger.
Consolidation
The consolidated financial statements include the accounts of
the Company, its wholly-owned subsidiaries and its
majority-owned subsidiary, GameStop Group Limited (formerly
Gamesworld Group Limited). All significant intercompany accounts
and transactions have been eliminated in consolidation. All
dollar and share
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
amounts in the consolidated financial statements and notes to
the consolidated financial statements are stated in thousands
unless otherwise indicated.
Year-End
The Company’s fiscal year is composed of the 52 or
53 weeks ending on the Saturday closest to the last day of
January. Fiscal 2005 consisted of the 52 weeks ending on
January 28, 2006. Fiscal 2004 consisted of the
52 weeks ending on January 29, 2005. Fiscal 2003
consisted of the 52 weeks ending on January 31, 2004.
Fiscal 2006 will consist of the 53 weeks ending on
February 3, 2007.
Cash and Cash Equivalents
The Company considers all short-term, highly-liquid instruments
purchased with an original maturity of three months or less to
be cash equivalents. The Company’s cash and cash
equivalents are carried at cost, which approximates market
value, and consist primarily of time deposits, commercial paper
and money market investment accounts.
Merchandise Inventories
Our merchandise inventories are carried at the lower of cost or
market using the average cost method. Used video game products
traded in by customers are recorded as inventory at the amount
of the store credit given to the customer. In valuing inventory,
management is required to make assumptions regarding the
necessity of reserves required to value potentially obsolete or
over-valued items at the lower of cost or market. Management
considers quantities on hand, recent sales, potential price
protections and returns to vendors, among other factors, when
making these assumptions. Inventory reserves as of
January 28, 2006 and January 29, 2005 were $53,277 and
$14,804, respectively.
Property and Equipment
Property and equipment are carried at cost less accumulated
depreciation and amortization. Depreciation on furniture,
fixtures and equipment is computed using the straight-line
method over estimated useful lives (ranging from two to eight
years). Maintenance and repairs are expensed as incurred, while
betterments and major remodeling costs are capitalized.
Leasehold improvements are capitalized and amortized over the
shorter of their estimated useful lives or the terms of the
respective leases, including option periods in which the
exercise of the option is reasonably assured (generally ranging
from three to ten years). Costs incurred in purchasing
management information systems are capitalized and included in
property and equipment; these costs are amortized over their
estimated useful lives from the date the systems become
operational.
The Company periodically reviews its property and equipment when
events or changes in circumstances indicate that their carrying
amounts may not be recoverable or their depreciation or
amortization periods should be accelerated. The Company assesses
recoverability based on several factors, including
management’s intention with respect to its stores and those
stores’ projected undiscounted cash flows. An impairment
loss would be recognized for the amount by which the carrying
amount of the assets exceeds the present value of their
projected cash flows. As a result of the merger and an analysis
of assets to be abandoned, the Company impaired retail store
assets totaling $9,016 in its United States operating segment.
Write-downs incurred by the Company through January 28,2006 which were not related to the merger have not been
material. Note 2 provides additional information concerning
the merger.
Goodwill
Goodwill, aggregating $340.0 million was recorded in the
acquisition of Funco in 2000 and through the application of
“push-down” accounting in accordance with SAB 54
in connection with the acquisition of
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Babbage’s in 1999 by a subsidiary of Barnes &
Noble. Goodwill in the amount of $2.9 million was recorded
in connection with the acquisition of Gamesworld Group Limited
in 2003. Goodwill in the amount of $1,071.5 million was
recorded in connection with the merger. Goodwill represents the
excess purchase price over tangible net assets and identifiable
intangible assets acquired.
Effective February 3, 2002, the Company adopted the
provisions of Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets
(“SFAS 142”). SFAS 142 requires, among
other things, that companies no longer amortize goodwill, but
instead evaluate goodwill for impairment on at least an annual
basis. In accordance with the requirements of SFAS 142, the
Company completed annual impairment tests of the goodwill
attributable to its reporting unit on the first day of the
fourth quarter of fiscal 2003 and fiscal 2004 and concluded that
none of its goodwill was impaired. Through January 29,2005, the Company determined that it had one reporting unit
based upon the similar economic characteristics of its
operations. The fair value of this reporting unit was estimated
using market capitalization methodologies.
Subsequent to the merger, the Company determined that it has
four reporting units, the United States, Australia, Canada and
Europe, based upon the similar economic characteristics of
operations in those regions. The Company employed the services
of an independent valuation specialist to assist in the
allocation of goodwill resulting from the merger to the four
reporting units as of October 8, 2005, the merger date.
Additionally, the Company completed its annual impairment test
of goodwill on the first day of the fourth quarter of fiscal
2005 and concluded that none of its goodwill was impaired.
Note 7 provides additional information concerning goodwill.
Revenue Recognition
Revenue from the sales of the Company’s products is
recognized at the time of sale. The sales of used video game
products are recorded at the retail price charged to the
customer. Sales returns (which are not significant) are
recognized at the time returns are made. Subscription and
advertising revenues are recorded upon release of magazines for
sale to consumers and are stated net of sales discounts.
Magazine subscription revenue is recognized on a straight-line
basis over the subscription period. Revenue from the sales of
product replacement plans is recognized on a straight-line basis
over the coverage period.
Customer Liabilities
The Company establishes a liability upon the issuance of
merchandise credits and the sale of gift cards. Revenue is
subsequently recognized when the credits and gift cards are
redeemed. In addition, income (“breakage”) is
recognized quarterly on unused customer liabilities older than
three years to the extent that the Company believes the
likelihood of redemption by the customer is remote, based on
historical redemption patterns. Breakage has historically been
immaterial. To the extent that future redemption patterns differ
from those historically experienced, there will be variations in
the recorded breakage.
Pre-Opening Expenses
All costs associated with the opening of new stores are expensed
as incurred. Pre-opening expenses are included in selling,
general and administrative expenses in the accompanying
consolidated statements of operations.
Closed Store Expenses
Upon a formal decision to close or relocate a store, the Company
charges unrecoverable costs to expense. Such costs include the
net book value of abandoned fixtures and leasehold improvements
and, once the store is vacated, a provision for future lease
obligations, net of expected sublease recoveries. Costs
associated with store closings are included in selling, general
and administrative expenses in the accompanying consolidated
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
statements of operations. Costs associated with closings of
Historical GameStop stores which are directly attributable to
the merger are included in merger-related expenses in the
accompanying consolidated statements of operations. Note 2
provides additional information concerning stores to be closed
in connection with the merger.
Advertising Expenses
The Company expenses advertising costs for newspapers and other
media when the advertising takes place. Advertising expenses for
newspapers and other media during the 52 weeks ended
January 28, 2006, January 29, 2005 and
January 31, 2004, were $12,448, $8,881 and $7,044,
respectively.
Income Taxes
The Company accounts for income taxes in accordance with the
provisions of Statement of Financial Accounting Standards
No. 109, Accounting for Income Taxes
(“SFAS 109”). SFAS 109 utilizes an asset
and liability approach, and deferred taxes are determined based
on the estimated future tax effect of differences between the
financial reporting and tax bases of assets and liabilities
using enacted tax rates.
U.S. income taxes have not been provided on remaining
undistributed earnings of foreign subsidiaries as of
January 28, 2006. The Company did not have undistributed
earnings of foreign subsidiaries prior to the merger. The
Company reinvested earnings of foreign subsidiaries in foreign
operations since the merger and expects that future earnings
will also be reinvested in foreign operations indefinitely.
Lease Accounting
As previously disclosed, in fiscal 2004, the Company, similar to
many other retailers, revised its method of accounting for rent
expense (and related deferred rent liability) and leasehold
improvements funded by landlord incentives for allowances under
operating leases (tenant improvement allowances) to conform to
generally accepted accounting principles (“GAAP”), as
clarified by the Chief Accountant of the SEC in a February 2005
letter to the American Institute of Certified Public
Accountants. For all stores opened since the beginning of fiscal
2002, the Company had calculated straight-line rent expense
using the initial lease term, but was generally depreciating
leasehold improvements over the shorter of their estimated
useful lives or the initial lease term plus the option periods.
In fiscal 2004, the Company corrected its calculation of
straight-line rent expense to include the impact of escalating
rents for periods in which it is reasonably assured of
exercising lease options and to include in the lease term any
period during which the Company is not obligated to pay rent
while the store is being constructed (“rent holiday”).
The Company also corrected its calculation of depreciation
expense for leasehold improvements for those leases which do not
include an option period. Because the effects of the correction
were not material to any previous years, a non-cash, after-tax
adjustment of $3,312 was made in the fourth quarter of fiscal
2004 to correct the method of accounting for rent expense (and
related deferred rent liability). Of the $3,312 after-tax
adjustment, $1,761 pertained to the accounting for rent
holidays, $1,404 pertained to the calculation of straight-line
rent expense to include the impact of escalating rents for
periods in which the Company is reasonably assured of exercising
lease options and $147 pertained to the calculation of
depreciation expense for leasehold improvements for the small
portion of leases which do not include an option period. The
aggregate effect of these corrections relating to prior years
was $1,929 ($948 for fiscal 2003 and $981 for years prior to
fiscal 2003). The correction does not affect historical or
future cash flows or the timing of payments under related leases.
Foreign Currency Translation
GameStop has determined that the functional currencies of its
foreign subsidiaries are the subsidiaries’ local
currencies. The accounts of the foreign subsidiaries are
translated in accordance with Statement of Financial Accounting
Standards No. 52, Foreign Currency Translation. The
assets and liabilities of the
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
subsidiaries are translated at the applicable exchange rate as
of the end of the balance sheet date and revenue and expenses
are translated at an average rate over the period. Currency
translation adjustments are recorded as a component of other
comprehensive income. Transaction gains and (losses) are
included in net income and amounted to $2,606, ($20) and $19 for
the 52 weeks ended January 28, 2006, January 29,2005 and January 31, 2004, respectively.
The merger with Electronics Boutique has significantly increased
our exposure to foreign currency fluctuations because a larger
amount of our business is now transacted in foreign currencies.
While Historical GameStop generally did not enter into
derivative instruments with respect to foreign currency risks,
Electronics Boutique routinely used forward exchange contracts
and cross-currency swaps to manage currency risk and had a
number of open positions designated as hedge transactions as of
the merger date. The Company discontinued hedge accounting
treatment for all derivative instruments acquired in connection
with the merger.
The Company follows the provisions of Statement of Financial
Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities
(“SFAS 133”), as amended by Statement of
Financial Accounting Standards No. 138, Accounting for
Certain Derivative Instruments and Certain Hedging Activities
(“SFAS 138”). SFAS 133 requires that all
derivative instruments be recorded on the balance sheet at fair
value. Changes in the fair value of derivatives are recorded
each period in current earnings or other comprehensive income,
depending on whether the derivative is designated as part of a
hedge transaction, and if it is, depending on the type of hedge
transaction.
The Company uses forward exchange contracts and cross-currency
swaps to manage currency risk primarily related to intercompany
loans denominated in non-functional currencies and certain
foreign currency assets and liabilities. These forward exchange
contracts and currency swaps are not designated as hedges and,
therefore, changes in the fair values of these derivatives are
recognized in earnings, thereby offsetting the current earnings
effect of the re-measurement of related intercompany loans and
foreign currency assets and liabilities. The aggregate fair
value of these forwards and swaps at January 28, 2006 was a
loss of $7,083, of which $6,513 is included in accrued
liabilities and the remainder is included in other long-term
liabilities in the accompanying consolidated balance sheet. The
Company had no forward exchange contracts and currency swaps
prior to October 8, 2005.
Net Earnings Per Common Share
Net earnings per Class A and Class B common share is
presented in accordance with Statement of Financial Accounting
Standards No. 128, Earnings Per Share
(“SFAS 128”). Basic earnings per Class A
and Class B common share is computed using the weighted
average number of common shares outstanding during the period
and excludes any dilutive effects of the Company’s
outstanding options. Diluted earnings per Class A and
Class B common share is computed using the weighted average
number of common and dilutive common shares outstanding during
the period. Note 4 provides additional information
regarding net earnings per common share.
Stock Options
Statement of Financial Accounting Standards No. 123,
Accounting for Stock Based Compensation
(“SFAS 123”), encourages but does not require
companies to record compensation cost for stock based employee
compensation plans at fair value. As permitted under Statement
of Financial Accounting Standards No. 148, Accounting
for Stock Based Compensation — Transition and
Disclosure (“SFAS 148”), which amended
SFAS 123, the Company has elected to continue to account
for stock based compensation using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and related
interpretations. Accordingly, compensation cost for stock
options is measured as the excess, if any, of the quoted market
price of the Company’s stock at the date of the grant over
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
the amount an employee must pay to acquire the stock.
Note 13 provides additional information regarding the
Company’s stock option plan.
The following table illustrates the effect on net earnings and
net earnings per Class A and Class B common share if
the Company had applied the fair value recognition provisions of
SFAS 123 to stock-based employee compensation for the
options granted under its plans:
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards, net of
related tax effects
6,666
9,405
7,888
Pro forma net earnings
$
94,118
$
51,521
$
55,579
Net earnings per Class A and Class B common
share — basic, as reported
$
1.74
$
1.11
$
1.13
Net earnings per Class A and Class B common
share — basic, pro forma
$
1.62
$
0.94
$
0.99
Net earnings per Class A and Class B common
share — diluted, as reported
$
1.61
$
1.05
$
1.06
Net earnings per Class A and Class B common
share — diluted, pro forma
$
1.51
$
0.89
$
0.93
The weighted-average fair value of the options granted during
the 52 weeks ended January 28, 2006, January 29,2005 and January 31, 2004 were estimated at $8.83, $7.86
and $5.30, respectively, using the Black-Scholes option pricing
model with the following assumptions:
In December 2004, the FASB issued Statement of Financial
Accounting Standards No. 123 (Revised 2004), Share-Based
Payment (“SFAS 123(R)”). This Statement
requires companies to expense the estimated fair value of stock
options and similar equity instruments issued to employees. The
fair value concepts were not changed significantly in
SFAS 123(R), however, in adopting this Standard, companies
must choose among alternative valuation models and amortization
assumptions. The valuation model and amortization assumption the
Company has used above continue to be available, and the Company
intends to continue using them. SFAS 123(R) will be
effective for the Company beginning with the first quarter of
fiscal 2006. Transition options allow companies to choose
whether to adopt prospectively, restate results to the beginning
of the year, or to restate prior periods with the amounts on a
basis consistent with pro forma amounts that have been included
in the footnotes. The Company has chosen to adopt on the
modified prospective basis.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Use of Estimates
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the
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. In preparing these
financial statements, management has made its best estimates and
judgments of certain amounts included in the financial
statements, giving due consideration to materiality. Changes in
the estimates and assumptions used by management could have
significant impact on the Company’s financial results.
Actual results could differ from those estimates.
Fair Values of Financial Instruments
The carrying values of cash and cash equivalents, accounts
receivable, accounts payable and the note payable to
Barnes & Noble reported in the accompanying
consolidated balance sheets approximate fair value due to the
short-term maturities of these assets. The carrying values of
the senior notes payable and the senior floating rate notes
payable in the accompanying consolidated balance sheets
approximate fair value due to the recent issuance of these notes
in connection with the merger. Foreign exchange contracts are
recorded at fair market value.
Guarantees
The Company remains contingently liable for the BC Sports
Collectibles store leases assigned to Sports Collectibles
Acquisition Corporation (“SCAC”). SCAC is owned by the
family of James J. Kim, Chairman of EB at the time and currently
one of the Company’s directors. If SCAC were to default on
these lease obligations, the Company would be liable to the
landlords for up to $5,400 in minimum rent and landlord charges
as of January 28, 2006. Mr. Kim has entered into an
indemnification agreement with EB with respect to these leases,
therefore no accrual was recorded for this contingent obligation.
The Company had bank guarantees relating to international store
leases totaling $3,262 as of January 28, 2006.
Vendor Concentration
The Company’s largest vendors are Sony Computer
Entertainment of America, Microsoft Corp. and Electronic Arts,
Inc., which accounted for 18%, 13% and 11%, respectively, of the
Company’s new product purchases in fiscal 2005.
Classifications
The Company includes purchasing, receiving and distribution
costs in selling, general and administrative expenses, rather
than cost of goods sold, in the statement of operations. For the
52 weeks ended January 28, 2006, January 29, 2005
and January 31, 2004 these purchasing, receiving and
distribution costs amounted to $20,583, $9,203 and $9,480,
respectively.
The Company includes processing fees associated with purchases
made by check and credit cards in cost of sales, rather than
selling, general and administrative expenses, in the statement
of operations. For the 52 weeks ended January 28,2006, January 29, 2005 and January 31, 2004 these
processing fees amounted to $20,905, $12,014 and $10,703,
respectively.
Reclassifications
Certain reclassifications have been made to conform the prior
period data to the current year presentation.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
New Accounting Pronouncements
In May 2005, the FASB issued Statement of Financial Accounting
Standard No. 154, Accounting Changes and Error
Corrections (“SFAS 154”). This Statement
defines the accounting for and reporting of a change in
accounting principle. SFAS 154 will be effective for the
Company beginning in fiscal 2006. The implementation of
SFAS 154 is not expected to have an impact on the
Company’s financial condition or results of operations.
In October 2005, the FASB issued Statement of Financial
Accounting Standard Staff Position
No. 13-1,
Accounting for Rental Costs Incurred During a Construction
Period (“SFAS SP
13-1”). This
Statement requires that rental costs associated with ground or
building operating leases that are incurred during a
construction period shall be recognized as rental expense. The
rental costs shall be included in income from continuing
operations. SFAS SP
13-1 will be effective
for the Company beginning in fiscal 2006. However, the Company
previously corrected its calculation of straight-line rent
expense to include in the lease term any period during which the
Company is not obligated to pay rent while the store is being
constructed. The implementation of SFAS SP
13-1 is not expected to
have an impact on the Company’s financial condition or
results of operations.
2.
Acquisitions
On June 23, 2003, the Company acquired a controlling
interest in Gamesworld Group Limited, an Ireland-based
electronic games retailer, for approximately $3,340. Gamesworld
Group Limited was subsequently renamed GameStop Group Limited.
The acquisition was accounted for using the purchase method of
accounting and, accordingly, the results of operations for the
period subsequent to the acquisition are included in the
consolidated financial statements. The excess of purchase price
over the net assets acquired, in the amount of approximately
$2,931, has been recorded as goodwill.
On October 8, 2005, Historical GameStop and EB completed
their previously announced merger pursuant to the Agreement and
Plan of Merger, dated as of April 17, 2005 (the
“Merger Agreement”). Upon the consummation of the
merger, Historical GameStop and EB became wholly-owned
subsidiaries of the Company. Both management and the respective
Boards of Directors of EB and Historical Gamestop believed that
the merger of the companies would create significant synergies
in operations when the companies were integrated and would
enable the Company to increase profitability as a result of
combined market share.
Under the terms of the Merger Agreement, Historical
GameStop’s stockholders received one share of the
Company’s Class A common stock for each share of
Historical GameStop’s Class A common stock owned and
one share of the Company’s Class B common stock for
each share of Historical GameStop’s Class B common
stock owned. Approximately 22.2 million shares of the
Company’s Class A common stock were issued in exchange
for all outstanding Class A common stock of Historical
GameStop based on the one-for-one ratio and approximately
29.9 million shares of the Company’s Class B
common stock were issued in exchange for all outstanding
Class B common stock of Historical GameStop based on the
one-for-one ratio. EB stockholders received $38.15 in cash and
..78795 of a share of the Company’s Class A common
stock for each EB share owned. In aggregate, 20.2 million
shares of the Company’s Class A common stock were
issued to EB stockholders at a value of approximately $437,144
(based on the closing price of $21.61 of Historical
GameStop’s Class A common stock on April 15,2005, the last trading day before the date the merger was
announced). In addition, approximately $993,254 in cash was paid
in consideration for (i) all outstanding common stock of
EB, and (ii) all outstanding stock options of EB. Including
transaction costs of $13,558 incurred by Historical GameStop,
the total consideration paid was approximately $1,443,956.
The consolidated financial statements include the results of EB
from the date of acquisition. The purchase price has been
allocated based on estimated fair values as of the acquisition
date. The purchase price allocation is preliminary and a final
determination of required purchase accounting adjustments will
be made
In determining the purchase price allocation, management
considered, among other factors, the Company’s intention to
use the acquired assets. The total weighted-average amortization
period for the intangible assets, excluding goodwill, is
approximately four years. The intangible assets are being
amortized based upon the pattern in which the economic benefits
of the intangible assets are being utilized, with no expected
residual value. None of the goodwill is deductible for income
tax purposes. Note 7 provides additional information
concerning goodwill and intangible assets.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table summarizes unaudited pro forma financial
information assuming the merger had occurred on the first day of
fiscal 2004. The unaudited pro forma financial information does
not necessarily represent what would have occurred if the
transaction had taken place on the date presented and should not
be taken as representative of our future consolidated results of
operations. We have not finalized integration plans, and
accordingly, this pro forma information does not include all
costs related to the merger. Management also expects to realize
operating synergies. Synergies will come from reduced costs in
logistics, marketing, and administration. The pro forma
information does not reflect these potential expenses and
synergies:
Net earnings per Class A and Class B common
share — basic
$
1.20
$
0.88
Weighted average shares of common stock — basic
71,925
74,891
Net earnings per Class A and Class B common
share — diluted
$
1.13
$
0.85
Weighted average shares of common stock — diluted
76,491
78,025
In connection with the merger, management incurred
merger-related costs and commenced integration activities which
have resulted in, or will result in, involuntary employment
terminations, lease terminations, disposals of property and
equipment and other costs and expenses. The liability for
involuntary termination benefits covers severance amounts,
payroll taxes and benefit costs for approximately 680 employees,
primarily in general and administrative functions in EB’s
Pennsylvania corporate office and distribution center and Nevada
call center, which are expected to be closed in the first half
of fiscal 2006. Termination of these employees began in October
2005 and is expected to be completed by July 2006. Certain
senior executives with EB received payments in the amount of
$3,960 in accordance with employment contracts. The Pennsylvania
corporate office and distribution center are owned facilities
which are currently being marketed for sale and are classified
in the accompanying balance sheet as “Assets held for
sale”.
The liability for lease terminations is associated with stores
and the Nevada call center to be closed and will be paid over
the remaining lease terms through 2015, if the Company is
unsuccessful in negotiating lease terminations or sublease
agreements. The Company began closing these stores in fiscal
2005 and intends to close the remainder of these stores in the
next year. The disposals of property and equipment are related
to assets of Historical GameStop which are either impaired or
have been, or will be, either abandoned or
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
disposed of due to the merger. Certain costs associated with the
disposition of these assets remain as an accrual until the
assets are disposed of and the costs are paid, which is expected
to occur in the next few months.
Merger-related costs include professional fees, financing costs
and other costs associated with the merger and include certain
ongoing costs associated with integrating the operations of
Historical GameStop and EB, including relocation costs. The
Company is working to finalize integration plans which may
result in additional involuntary employment terminations, lease
and other contractual terminations and employee relocations. The
Company will finalize integration plans and related liabilities
in fiscal 2006 and management anticipates completion of all
integration activities in fiscal 2006. Finalization of
integration plans may result in additional liabilities which
will increase goodwill.
The following table represents the activity during the
52 weeks ended January 28, 2006 associated with merger
costs and related liabilities:
Charged to
Balance at
Charged to
Costs and
Write-Offs and
Cash
End of
Acquisition Costs
Expenses
Non-Cash Charges
Payments
Period
(In thousands)
Severance and employee related costs
$
17,889
$
—
$
—
$
4,984
$
12,905
Lease terminations
10,641
—
—
584
10,057
Disposal of property and equipment
2,494
10,649
10,649
—
2,494
Merger costs, bridge financing and other
34,669
10,469
496
42,009
2,633
Total
$
65,693
$
21,118
$
11,145
$
47,577
$
28,089
Severance and employment related costs totaling $493 and lease
termination costs totaling $272 were charged to acquisition
costs and paid for the Europe segment and merger costs totaling
$41, $32 and $3 were charged to acquisition costs and paid for
Europe, Canada and Australia, respectively. There are no
merger-related liabilities remaining for Europe, Canada or
Australia. All other merger costs and related liabilities were
incurred for the U.S. segment.
3.
Vendor Arrangements
The Company and approximately 75 of its vendors participate in
cooperative advertising programs and other vendor marketing
programs in which the vendors provide the Company with cash
consideration in exchange for marketing and advertising the
vendors’ products. Our accounting for cooperative
advertising arrangements and other vendor marketing programs, in
accordance with FASB Emerging Issues Task Force
Issue 02-16 or
“EITF 02-16,”
results in a portion of the consideration received from our
vendors reducing the product costs in inventory rather than as
an offset to our marketing and advertising costs. The
consideration serving as a reduction in inventory is recognized
in cost of sales as inventory is sold. The amount of vendor
allowances to be recorded as a reduction of inventory was
determined by calculating the ratio of vendor allowances in
excess of specific, incremental and identifiable advertising and
promotional costs to merchandise purchases. The Company then
applied this ratio to the value of inventory in determining the
amount of vendor reimbursements to be recorded as a reduction to
inventory reflected on the balance sheet.
The cooperative advertising programs and other vendor marketing
programs generally cover a period from a few days up to a few
weeks and include items such as product catalog advertising,
in-store display promotions, internet advertising, co-op print
advertising, product training and promotion at the Company’s
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
annual store managers conference. The allowance for each event
is negotiated with the vendor and requires specific performance
by the Company to be earned.
Vendor allowances received and netted against advertising
expenses were $32,161, $21,913 and $20,035 in the 52 weeks
ended January 28, 2006, January 29, 2005 and
January 31, 2004, respectively. Vendor allowances received
in excess of advertising expenses were recorded as a reduction
of cost of sales of $74,690, $29,917 and $26,779 for the
52 weeks ended January 28, 2006, January 29, 2005
and January 31, 2004, respectively, less $4,150, $66 and
$5,210, respectively, for the effect of the amounts deferred as
a reduction in inventory.
Because prior periods were not restated when the Company
implemented
EITF 02-16 at the
beginning of the fiscal year ended January 31, 2004, the
following table presents the 52 weeks ended
January 31, 2004 on a pro forma basis as if
EITF 02-16 had
been implemented at the beginning of the fiscal year ended
February 1, 2003:
Net earnings per Class A and Class B common
share — basic
$
1.17
Weighted average shares of common stock — basic
56,330
Net earnings per Class A and Class B common
share — diluted
$
1.10
Weighted average shares of common stock — diluted
59,764
4.
Computation of Net Earnings per Common Share
The Company has two classes of common stock and computes
earnings per share using the two-class method in accordance with
Statement of Financial Accounting Standards No. 128,
Earnings per Share. As discussed in Note 20, the
holders of the Company’s Class A and Class B
common stock have identical rights to dividends or to
distributions in the event of a liquidation, dissolution or
winding up of the Company.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Accordingly, the earnings per common share for the two classes
of common stock are the same. A reconciliation of shares used in
calculating basic and diluted net earnings per common share
follows:
Dilutive effect of options and warrants on Class A common
stock
4,566
3,134
3,434
Common shares and dilutive potential common shares
62,486
57,796
59,764
Net earnings per Class A and Class B common share:
Basic
$
1.74
$
1.11
$
1.13
Diluted
$
1.61
$
1.05
$
1.06
The following table contains information on options to purchase
shares of Class A common stock which were excluded from the
computation of diluted earnings per share because they were
anti-dilutive:
Receivables consist primarily of bankcard receivables and other
receivables. Other receivables include receivables from Game
Informer magazine advertising customers, receivables from
landlords for tenant allowances and receivables from vendors for
merchandise returns, vendor marketing allowances and various
other programs. An allowance for doubtful accounts has been
recorded to reduce receivables to an amount expected to be
collectible. Receivables consisted of the following:
The changes in the carrying amount of goodwill for the
Company’s business segments for the 52 weeks ended
January 29, 2005 and January 28, 2006 were as follows:
Intangible assets consist of non-compete agreements,
point-of-sale software
and amounts attributed to favorable leasehold interests acquired
in the merger and are included in other non-current assets in
the consolidated balance sheet. The total weighted-average
amortization period for the intangible assets, excluding
goodwill, is approximately four years. The intangible assets are
being amortized based upon the pattern in which the economic
benefits of the intangible assets are being utilized, with no
expected residual value. Note 2 provides additional
information regarding intangible assets. The deferred financing
fees associated with the Company’s revolving credit
facility and the senior floating rate notes and senior notes
issued in connection with the financing of the merger are
separately shown in the consolidated balance sheet. The deferred
financing fees are being amortized over five, six and seven
years to match the terms of the revolving credit facility, the
senior floating rate notes and the senior notes, respectively.
The changes in the carrying amount of
Addition for the acquisition of Electronics Boutique, including
senior notes payable and senior floating rate notes payable
issued and revolving credit facility entered into in October 2005
19,617
20,731
Write-off of deferred financing fees remaining on June 2004
revolving credit facility
The gross carrying value and accumulated amortization of
deferred financing fees as of January 28, 2006 was $19,617
and $1,056, respectively. The estimated aggregate amortization
expenses for deferred financing fees and other intangible assets
for the next five fiscal years are approximately:
Amortization
Amortization of
of Deferred
Intangible
Year Ended
Financing Fees
Assets
(In thousands)
January 2006
$
3,216
$
5,150
January 2007
3,216
4,444
January 2008
3,216
3,582
January 2009
3,216
2,689
January 2010
2,986
1,796
$
15,850
$
17,661
8.
Debt
In October 2005, in connection with the merger, the Company
entered into a five-year, $400,000 Credit Agreement (the
“Revolver”), including a $50,000 letter of credit
sub-limit, secured by the assets of the Company. The Revolver
places certain restrictions on the Company and the borrower
subsidiaries, including limitations on asset sales, additional
liens, and the incurrence of additional indebtedness.
The availability under the Revolver is limited to a borrowing
base which allows the Company to borrow up to the lesser of
(x) approximately 70% of eligible inventory and
(y) 90% of the appraisal value of the inventory, in each
case plus 85% of eligible credit card receivables, net of
certain reserves. Letters of credit reduce the amount available
to borrow by their face value. The Company’s ability to pay
cash dividends, redeem options, and repurchase shares is
generally prohibited, except that if availability under the
Revolver is or will be after any such payment equal to or
greater than 25% of the borrowing base the Company may
repurchase its capital stock and pay cash dividends. In
addition, in the event that credit extensions under the Revolver
at any time exceed 80% of the lesser of the total commitment or
the borrowing base, the Company will be subject to a fixed
charge coverage ratio covenant of 1.5:1.0.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The interest rate on the Revolver is variable and, at the
Company’s option, is calculated by applying a margin of
(1) 0.0% to 0.25% above the higher of the prime rate of the
administrative agent or the federal funds effective rate plus
0.50% or (2) 1.25% to 1.75% above the LIBO rate. The
applicable margin is determined quarterly as a function of the
Company’s consolidated leverage ratio. As of
January 28, 2006 the applicable margin was 0.0% for prime
rate loans and 1.50% for LIBO rate loans. In addition, the
Company is required to pay a commitment fee, currently 0.375%,
for any unused portion of the total commitment under the
Revolver.
As of January 28, 2006, there were no borrowings
outstanding under the Revolver and letters of credit outstanding
totaled $2,326.
On May 31, 2005, a subsidiary of EB completed the
acquisition of Jump Ordenadores S.L.U. (“Jump”), a
privately-held retailer based in Valencia, Spain. As of
January 28, 2006, Jump had other third-party debt of
approximately $561.
As of January 28, 2006, the Company was in compliance with
all covenants associated with its credit facilities.
On September 28, 2005, the Company, along with GameStop,
Inc. (which was then a direct wholly-owned subsidiary of
Historical GameStop and is now, as a result of the merger, an
indirect wholly-owned subsidiary of the Company) as co-issuer
(together with the Company, the “Issuers”), completed
the offering of U.S. $300,000 aggregate principal amount of
Senior Floating Rate Notes due 2011 (the “Senior Floating
Rate Notes”) and U.S. $650,000 aggregate principal
amount of Senior Notes due 2012 (the “Senior Notes”
and, together with the Senior Floating Rate Notes, the
“Notes”). At such time, the gross proceeds of the
offering of the Notes were placed in escrow pending approval of
the merger by Historical GameStop’s and EB’s
stockholders, which approval was a condition to the consummation
of the merger. The offering of the Notes was conducted in a
private transaction under Rule 144A under the United States
Securities Act of 1933, as amended (the “Securities
Act”), and in transactions outside the United States in
reliance upon Regulation S under the Securities Act. The
Notes have not been registered under the Securities Act or the
securities laws of any other jurisdiction and may not be offered
or sold in the United States absent registration or an
applicable exemption from registration requirements.
The Notes were sold pursuant to a purchase agreement, dated
September 21, 2005, by and among the Issuers, the
subsidiary guarantors listed on Schedule I-A thereto, and
Citigroup Global Markets Inc., for themselves and as
representatives of the several initial purchasers listed on
Schedule II thereto (the “Purchase Agreement”). A
copy of the Purchase Agreement was filed as Exhibit 1.1 to
Historical GameStop’s Current Report on
Form 8-K, dated
September 27, 2005.
The Notes were issued under an indenture (the
“Indenture”), dated September 28, 2005, by and
among the Issuers, the subsidiary guarantors party thereto, and
Citibank, N.A., as trustee (the “Trustee”). The Senior
Floating Rate Notes were priced at 100%, bear interest at LIBOR
plus 3.875% and mature on October 1, 2011. The rate of
interest on the Senior Floating Rate Notes as of
January 28, 2006 was 8.405% per annum. The Senior
Notes were priced at 98.688%, bear interest at 8.0% per
annum and mature on October 1, 2012. The Issuers will pay
interest on the Senior Floating Rate Notes quarterly, in
arrears, every January 1, April 1, July 1 and
October 1, to holders of record on the immediately
preceding December 15, March 15, June 15 and
September 15, and at maturity. The first interest payment
was made on the first business day following its due date of
January 1, 2006. The Issuers will pay interest on the
Senior Notes semi-annually, in arrears, every April 1 and
October 1, commencing on April 1, 2006, to holders of
record on the immediately preceding March 15 and
September 15, and at maturity. A copy of the Indenture was
filed as Exhibit 4.2 to Historical GameStop’s Current
Report on
Form 8-K, dated
September 30, 2005.
In connection with the closing of the offering, the Issuers also
entered into a registration rights agreement, dated
September 28, 2005, by and among the Issuers, the
subsidiary guarantors listed on Schedule I-A
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
thereto, and Citigroup Global Markets Inc., for themselves and
as representatives of the several initial purchasers listed on
Schedule II thereto (the “Registration Rights
Agreement”). The Registration Rights Agreement requires the
Issuers to, among other things, (1) file a registration
statement with the SEC to be used in connection with the
exchange of the Notes for publicly registered notes with
substantially identical terms, (2) use their reasonable
best efforts to cause the registration statement to be declared
effective within 210 days from the date the Notes were
issued, and (3) use their commercially reasonable efforts
to consummate the exchange offer with respect to the Notes
within 270 days from the date the Notes were issued. In
addition, under certain circumstances, including (among other
things) the exchange offer not being consummated within
270 days from the date the Notes were issued, the Issuers
may be required to file a shelf registration statement. A copy
of the Registration Rights Agreement was filed as
Exhibit 4.3 to Historical GameStop’s Current Report on
Form 8-K, dated
September 30, 2005. The Company intends to file a
registration statement on
Form S-4 in order
to register new notes (the “New Notes”) with the same
terms and conditions as the Notes in order to facilitate an
exchange of the New Notes for the Notes. Under the terms of the
indenture for the Notes, if we do not complete an offer to
exchange the Notes for the New Notes by June 23, 2006, the
interest rate on the Notes will increase by 25 basis points
until we complete the exchange offer.
At the scheduled meetings of Historical GameStop’s and
Electronics Boutique’s stockholders held on October 6,2005, the proposal for the business combination was approved. On
October 7, 2005, the proceeds of the offering placed in
escrow, minus certain fees and expenses of the initial
purchasers and others, were released to the Company. Such net
proceeds of the offering were used to pay the cash portion of
the merger consideration paid to the stockholders of EB in
connection with the merger.
Concurrently with the consummation of the merger on
October 8, 2005, EB and its direct and indirect domestic
wholly-owned subsidiaries (together, the “EB
Guarantors”) became subsidiaries of the Company and entered
into: (1) a first supplemental indenture, dated
October 8, 2005, by and among the Issuers, the EB
Guarantors and the Trustee, pursuant to which the EB Guarantors
assumed all the obligations of a subsidiary guarantor under the
Notes and the Indenture; and (2) a joinder agreement, dated
October 8, 2005, pursuant to which the EB Guarantors
assumed all the obligations of a subsidiary guarantor under the
Purchase Agreement and the Registration Rights Agreement.
Under certain conditions, the Issuers may on any one or more
occasions prior to maturity redeem up to 100% of the aggregate
principal amount of Senior Floating Rate Notes and/or Senior
Notes issued under the Indenture at redemption prices at or in
excess of 100% of the principal amount thereof plus accrued and
unpaid interest, if any, to the redemption date. The
circumstances which would limit the percentage of the Notes
which may be redeemed or which would require the Company to pay
a premium in excess of 100% of the principal amount are defined
in the Indenture. The Issuers may acquire Senior Floating Rate
Notes and Senior Notes by means other than redemption, whether
by tender offer, open market purchases, negotiated transactions
or otherwise, in accordance with applicable securities laws, so
long as such acquisitions do not otherwise violate the terms of
the Indenture.
Upon a Change of Control (as defined in the Indenture), the
Issuers are required to offer to purchase all of the Notes then
outstanding at 101% of the principal amount thereof plus accrued
and unpaid interest, if any, to the date of purchase.
The Indenture contains affirmative and negative covenants
customary for such financings, including, among other things,
limitations on (1) the incurrence of additional debt,
(2) restricted payments, (3) liens, (4) sale and
leaseback transactions and (5) asset sales. Events of
default provided for in the Indenture include, among other
things, failure to pay interest or principal on the Notes, other
breaches of covenants in the Indenture, and certain events of
bankruptcy and insolvency.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The Senior Notes were priced at 98.688% , resulting in a
discount at the time of issue of $8,528. The discount is being
amortized using the effective interest method. As of
January 28, 2006, the unamortized original issue discount
was $8,212.
In October 2004, Historical GameStop issued a promissory note in
favor of Barnes & Noble in the principal amount of
$74,020 in connection with the repurchase of Historical
GameStop’s Class B common shares held by
Barnes & Noble. Payments of $37,500 and $12,173 were
made in January 2005 and October 2005, respectively, as required
by the promissory note, which also requires payments of $12,173
due in each of October 2006 and October 2007. The note is
unsecured and bears interest at 5.5% per annum, payable
when principal installments are due.
On May 25, 2005, a subsidiary of EB closed on a
10-year, $9,450
mortgage agreement collateralized by a new 315,000 square
foot distribution facility located in Sadsbury Township,
Pennsylvania. Interest is fixed at a rate of 5.4% per
annum. As of January 28, 2006, the outstanding principal
balance under the mortgage was approximately $9,301.
Maturities on debt, gross of the unamortized original issue
discount of $8,212 on the Senior Notes, are as follows:
Year Ended
Amount
(In thousands)
January 2007
$
12,527
January 2008
12,549
January 2009
390
January 2010
627
January 2011
338
Thereafter
957,771
$
984,202
9.
Comprehensive Income
Comprehensive income is net earnings, plus certain other items
that are recorded directly to stockholders’ equity and
consists of the following:
The Company leases retail stores, warehouse facilities, office
space and equipment. These are generally leased under
noncancelable agreements that expire at various dates through
2034 with various renewal options for additional periods. The
agreements, which have been classified as operating leases,
generally provide for both minimum and percentage rentals and
require the Company to pay all insurance, taxes and other
maintenance costs. Leases with step rent provisions, escalation
clauses or other lease concessions are
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
accounted for on a straight-line basis over the lease term,
which includes renewal option periods when the Company is
reasonably assured of exercising the renewal options and
includes “rent holidays” (periods in which the Company
is not obligated to pay rent). The Company does not have leases
with capital improvement funding. Percentage rentals are based
on sales performance in excess of specified minimums at various
stores.
Approximate rental expenses under operating leases are as
follows:
Future minimum annual rentals, excluding percentage rentals,
required under leases that had initial, noncancelable lease
terms greater than one year, as of January 28, 2006 are
approximately:
Year Ended
Amount
(In thousands)
January 2007
$
197,128
January 2008
183,076
January 2009
156,223
January 2010
120,540
January 2011
86,014
Thereafter
274,463
$
1,017,444
11.
Litigation
On October 19, 2004, Milton Diaz filed a complaint against
a subsidiary of EB in the U.S. District Court for the
Western District of New York. Mr. Diaz claims to represent
a group of current and former employees to whom Electronics
Boutique of America Inc. (“EBOA”) allegedly failed to
pay minimum wages and overtime compensation in violation of the
Fair Labor Standards Act (“FLSA”) and New York law.
The plaintiff, joined by another former employee, moved to
conditionally certify a group of similarly situated individuals
under the FLSA and in March 2005, there was a hearing on this
motion. In March 2005, plaintiffs filed a motion on behalf of
current and former store managers and assistant store managers
in New York to certify a class under New York wage and hour
laws. In August 2005, EBOA filed a motion for summary judgment
as to certain claims and renewed its request that certification
of the claims be denied. On October 17, 2005, the District
Court issued an Order denying plaintiffs’ request for
conditional certification under the FLSA and for class
certification of plaintiffs’ New York claims. Plaintiffs
have requested permission from the Second Circuit Court of
Appeals to appeal the District Court’s Order denying class
certification of their New York claims. EBOA’s summary
judgment motion was scheduled to be heard in December 2005.
Before the hearing on the summary judgment motion, the parties
agreed to attempt to resolve the matter without further
litigation. Both the District Court and the Second Circuit have
stayed their proceedings pending the parties’ settlement
negotiations. We do not believe there is sufficient information
to estimate the amount of the possible loss, if any, resulting
from this matter.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
On February 14, 2005, and as amended, Steve Strickland, as
personal representative of the Estate of Arnold Strickland,
deceased, Henry Mealer, as personal representative of the Estate
of Ace Mealer, deceased, and Willie Crump, as personal
representative of the Estate of James Crump, deceased, filed a
wrongful death lawsuit against GameStop, Sony, Take-Two
Interactive, Rock Star Games and Wal-Mart (collectively, the
“Defendants”) and Devin Moore in the Circuit Court of
Fayette County, Alabama, alleging that Defendants’ actions
in designing, manufacturing, marketing and supplying Defendant
Moore with violent video games were negligent and contributed to
Defendant Moore killing Arnold Strickland, Ace Mealer and James
Crump. Plaintiffs are seeking damages of $600,000 under the
Alabama wrongful death statute and punitive damages. GameStop
and the other defendants intend to vigorously defend this
action. The Defendants filed a motion to dismiss the case on
various grounds, which was heard in November 2005 and was
denied. The Defendants appealed the denial of the motion to
dismiss and on March 24, 2006, the Alabama Supreme Court
denied the Defendants’ application. Discovery is
proceeding. Mr. Moore was found guilty of capital murder in
a criminal trial in Alabama and was sentenced to death in August
2005. We do not believe there is sufficient information to
estimate the amount of the possible loss, if any, resulting from
the lawsuit.
In the ordinary course of our business, we are from time to time
subject to various other legal proceedings. We do not believe
that any such other legal proceedings, individually or in the
aggregate, will have a material adverse effect on our operations
or financial condition.
12.
Income Taxes
The provision for income tax consisted of the following:
The difference in income tax provided and the amounts determined
by applying the statutory rate to income before income taxes
result from the following:
The Company’s effective tax rate decreased from 38.4% in
the 52 weeks ended January 29, 2005 to 37.0% in the
52 weeks ended January 28, 2006 due to expenses
related to the mergers and corporate restructuring.
Differences between financial accounting principles and tax laws
cause differences between the bases of certain assets and
liabilities for financial reporting purposes and tax purposes.
The tax effects of these differences, to the extent they are
temporary, are recorded as deferred tax assets and liabilities
under SFAS 109 and consisted of the following components:
Effective October 2005, the Company’s stockholders voted to
amend the Amended and Restated 2001 Incentive Plan of Historical
GameStop (the “Option Plan”) to provide for issuance
under the Option Plan of the Company’s Class A common
stock.
The Option Plan provides a maximum aggregate amount of
20,000 shares of Class A common stock with respect to
which options may be granted and provides for the granting of
incentive stock options, non-qualified stock options, and
restricted stock, which may include, without limitation,
restrictions on the right to vote such shares and restrictions
on the right to receive dividends on such shares. The options to
purchase Class A common shares generally are issued at fair
market value on the date of grant. Generally, the options vest
and become exercisable ratably over a three-year period,
commencing one year after the grant date, and expire ten years
from issuance.
The following table summarizes information as of
January 28, 2006 concerning outstanding and exercisable
options:
Options Outstanding
Options Exercisable
Weighted-
Weighted-
Weighted-
Number
Average
Average
Number
Average
Outstanding
Remaining
Contractual
Exercisable
Exercise
Range of Exercise Prices
(000s)
Life
Price
(000s)
Price
$ 3.53 - $ 4.51
4,987
5.32
$
4.41
4,987
$
4.41
$11.80 - $12.71
542
7.18
$
11.88
284
$
11.85
$15.10 - $16.48
166
8.01
$
15.62
77
$
15.79
$18.00 - $21.25
5,641
7.45
$
18.85
2,961
$
18.09
$35.88
120
9.62
$
35.88
—
$
—
$ 3.53 - $35.88
11,456
6.55
$
12.31
8,309
$
9.64
In September 2005, the Company granted 50 shares of
restricted stock to non-employee members of its Board of
Directors. The shares had a fair market value of $35.88 on the
grant date and vest in equal installments over two years. During
the 52 weeks ended January 28, 2006, the Company
included compensation expense relating to the grant of these
restricted shares in the amount of $347 in selling, general and
administrative expenses in the accompanying consolidated
statements of operations.
14.
Employees’ Defined Contribution Plan
The Company sponsors a defined contribution plan (the
“Savings Plan”) for the benefit of substantially all
of its employees who meet certain eligibility requirements,
primarily age and length of service. The Savings Plan allows
employees to invest up to 15% of their current gross cash
compensation invested on a pre-tax basis, at their option. The
Company’s optional contributions to the Savings Plan are
generally in amounts based upon a certain percentage of the
employees’ contributions. The Company’s contributions
to the Savings Plan during the 52 weeks ended
January 28, 2006, January 29, 2005 and
January 31, 2004, were $1,196, $992 and
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
$849, respectively. EB also sponsors a defined contribution plan
for the benefit of substantially all of its employees who meet
certain eligibility requirements, primarily age and length of
service. The Company’s contributions to the EB savings plan
during the 16 weeks from October 9, 2005 to
January 28, 2006 were $137.
15.
Certain Relationships and Related Transactions
The Company operates departments within ten bookstores operated
by Barnes & Noble. The Company pays a license fee to
Barnes & Noble in amounts equal to 7.0% of the gross
sales of such departments. Management deems the license fee to
be reasonable and based upon terms equivalent to those that
would prevail in an arm’s length transaction. During the
52 weeks ended January 28, 2006, January 29, 2005
and January 31, 2004, these charges amounted to $857, $859
and $974, respectively.
Until June 2005, Historical GameStop participated in
Barnes & Noble’s workers’ compensation,
property and general liability insurance programs. The costs
incurred by Barnes & Noble under these programs were
allocated to Historical GameStop based upon Historical
GameStop’s total payroll expense, property and equipment,
and insurance claim history. Management deemed the allocation
methodology to be reasonable. During the 52 weeks ended
January 28, 2006, January 29, 2005 and
January 31, 2004, these allocated charges amounted to
$1,726, $2,662 and $2,363, respectively. Although Historical
GameStop secured its own insurance coverage, costs will likely
continue to be incurred by Barnes & Noble on insurance
claims which were incurred under its programs prior to June 2005
and any such costs applicable to insurance claims against
Historical GameStop will be allocated to the Company.
In July 2003, the Company purchased an airplane from a company
controlled by a member of the Board of Directors. The purchase
price was $9,500 and was negotiated through an independent third
party following an independent appraisal.
In October 2004, the Board of Directors of Historical GameStop
authorized a repurchase of Historical GameStop Class B
common stock held by Barnes & Noble. Historical
GameStop repurchased 6,107 shares of Class B common
stock at a price equal to $18.26 per share for aggregate
consideration before expenses of $111,520. The repurchase price
per share was determined by using a discount of 3.5% on the last
reported trade of Historical GameStop’s Class A common
stock on the New York Stock Exchange prior to the time of the
transaction. Historical GameStop paid $37,500 in cash and issued
a promissory note in the principal amount of $74,020, which is
payable in installments over the next three years and bears
interest at 5.5% per annum, payable when principal
installments are due. The Company made scheduled principal
payments of $37,500 and $12,173 on the promissory note in
January 2005 and October 2005, respectively. Interest expense on
the promissory note for the 52 weeks ended January 28,2006 and January 29, 2005 totaled $1,785 and $1,271,
respectively.
In May 2005, we entered into an arrangement with
Barnes & Noble under which www.gamestop.com is the
exclusive specialty video game retailer listed on bn.com,
Barnes & Noble’s
e-commerce site. Under
the terms of this agreement, the Company pays a fee to
Barnes & Noble for sales of video game or PC
entertainment products sold through bn.com. For the
52 weeks ended January 28, 2006, the fee to
Barnes & Noble totaled $255.
In connection with the merger, Historical GameStop agreed to pay
the legal fees and expenses of one if its directors, Leonard
Riggio, including legal fees and expenses incurred in connection
with the preparation and filing of Mr. Riggio’s
notification and report form under the Hart Scott Rodino
Antitrust Improvements Act of 1976. The Company estimates
that Mr. Riggio’s fees and expenses in connection with
the merger were approximately $150.
Following the completion of the merger, the Company now operates
its business in the following segments: United States, Canada,
Australia and Europe. The Company identifies segments based on a
combination of geographic areas and management responsibility.
Each of the segments includes significant retail operations with
all stores engaged in the sale of new and used video game
systems and software and personal computer entertainment
software and related accessories. Segment results for the United
States include retail operations in 50 states, the District
of Columbia, Guam and Puerto Rico, electronic commerce web sites
under the names gamestop.com and ebgames.com and Game
Informer magazine. Segment results for Canada include retail
operations in Canada and segment results for Australia include
retail operations in Australia and New Zealand. Segment results
for Europe include retail operations in 11 European countries.
Prior to the merger, Historical GameStop had operations in
Ireland and the United Kingdom which were not material. The
Company measures segment profit using operating earnings, which
is defined as income from continuing operations before net
interest expense and income taxes. Transactions between
reportable segments consist primarily of intersegment loans and
related interest.
In March 2003, the Historical GameStop Board of Directors
authorized a common stock repurchase program for the purchase of
up to $50,000 of Historical GameStop’s Class A common
shares. Historical GameStop was authorized to repurchase shares
from time to time in the open market or through privately
negotiated transactions, depending on prevailing market
conditions and other factors. During the 52 weeks ended
January 29, 2005, Historical GameStop repurchased
959 shares at an average share price of $15.64. During the
52 weeks ended January 31, 2004, Historical GameStop
repurchased 2,304 shares at an average share price of
$15.19. From the inception of this repurchase program through
January 29, 2005, Historical GameStop repurchased
3,263 shares at an average share price of $15.32, totaling
$50,000, and, as of January 29, 2005, had no amount
remaining available for purchases under this repurchase program.
The repurchased shares were held in treasury until the
consummation of the merger, at which time they were retired.
In October 2004, the Board of Directors of Historical GameStop
authorized a repurchase of Historical GameStop’s
Class B common stock held by Barnes & Noble.
Historical GameStop repurchased 6,107 shares of
Class B common stock at a price equal to $18.26 per
share for aggregate consideration before expenses of $111,520.
The repurchased shares were immediately retired.
20.
Shareholders’ Equity
The holders of Class A common stock and Class B common
stock generally have identical rights except that holders of
Class A common stock are entitled to one vote per share
while holders of Class B common stock are entitled to ten
votes per share on all matters to be voted on by stockholders.
Holders of Class A common stock and Class B common
stock will share in an equal amount per share in any dividend
declared by the board of directors, subject to any preferential
rights of any outstanding preferred stock. In the event of our
liquidation, dissolution or winding up, all holders of common
stock, regardless of class, are entitled to share ratably in any
assets available for distribution to holders of shares of common
stock after payment in full of any amounts required to be paid
to holders of preferred stock.
In connection with the merger, the Company adopted a rights
agreement substantially similar to the rights agreement adopted
by Historical GameStop. Under the Company’s rights
agreement, one right (a “Right”) is attached to
each outstanding share of the Company’s Class A common
stock and Class B
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
common stock (together the “Common Stock”). Each Right
entitles the holder to purchase from the Company one
one-thousandth of a share of a series of preferred stock,
designated as Series A Junior Participating Preferred Stock
(the “Series A Preferred Stock”), at a price of
$100.00 per one one-thousandth of a share. The Rights will
be exercisable only if a person or group acquires 15% or more of
the voting power of the Company’s outstanding Common Stock
or announces a tender offer or exchange offer, the consummation
of which would result in such person or group owning 15% or more
of the voting power of the Company’s outstanding Common
Stock.
If a person or group acquires 15% or more of the voting power of
the Company’s outstanding Common Stock, each Right will
entitle a holder (other than such person or any member of such
group) to purchase, at the Right’s then current exercise
price, a number of shares of Common Stock having a market value
of twice the exercise price of the Right. In addition, if the
Company is acquired in a merger or other business combination
transaction or 50% or more of its consolidated assets or earning
power are sold at any time after the Rights have become
exercisable, each Right will entitle its holder to purchase, at
the Right’s then current exercise price, a number of the
acquiring company’s common shares having a market value at
that time of twice the exercise price of the Right. Furthermore,
at any time after a person or group acquires 15% or more of the
voting power of the outstanding Common Stock of the Company but
prior to the acquisition of 50% of such voting power, the Board
of Directors may, at its option, exchange part or all of the
Rights (other than Rights held by the acquiring person or group)
at an exchange rate of one one-thousandth of a share of
Series A Preferred Stock or one share of the Company’s
Common Stock for each Right.
The Company will be entitled to redeem the Rights at any time
prior to the acquisition by a person or group of 15% or more of
the voting power of the outstanding Common Stock of the Company,
at a price of $.01 per Right. The Rights will expire on
October 28, 2014.
The Company has 5,000 shares of $.001 par value
preferred stock authorized for issuance, of which
500 shares have been designated by the Board of Directors
as Series A Preferred Stock and reserved for issuance upon
exercise of the Rights. Each such share of Series A
Preferred Stock will be nonredeemable and junior to any other
series of preferred stock the Company may issue (unless
otherwise provided in the terms of such stock) and will be
entitled to a preferred dividend equal to the greater of $1.00
or one thousand times any dividend declared on the
Company’s Common Stock. In the event of liquidation, the
holders of Series A Preferred Stock will receive a
preferred liquidation payment of $1,000.00 per share, plus
an amount equal to accrued and unpaid dividends and
distributions thereon. Each share of Series A Preferred
Stock will have ten thousand votes, voting together with the
Company’s Common Stock. However, in the event that
dividends on the Series A Preferred Stock shall be in
arrears in an amount equal to six quarterly dividends thereon,
holders of the Series A Preferred Stock shall have the
right, voting as a class, to elect two of the Company’s
Directors. In the event of any merger, consolidation or other
transaction in which the Company’s Common Stock is
exchanged, each share of Series A Preferred Stock will be
entitled to receive one thousand times the amount and type of
consideration received per share of the Company’s Common
Stock. At January 28, 2006 there were no shares of
Series A Preferred Stock outstanding.
21.
Consolidating Financial Statements
In order to finance the merger, as described in Note 8, on
September 28, 2005, the Company, along with GameStop, Inc.
as co-issuer, completed the offering of the Notes. The direct
and indirect domestic wholly-owned subsidiaries of the Company,
excluding GameStop, Inc., as co-issuer, have guaranteed the
Notes on a senior unsecured basis with unconditional guarantees.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
22.
Unaudited Quarterly Financial Information
The following table sets forth certain unaudited quarterly
consolidated statement of operations information for the fiscal
years ended January 28, 2006 and January 29, 2005. The
unaudited quarterly information includes all normal recurring
adjustments that management considers necessary for a fair
presentation of the information shown.
Net earnings (loss) per Class A and Class B common
share — basic(3)
0.20
0.15
(0.04
)
1.17
0.12
0.14
0.22
0.68
Net earnings (loss) per Class A and Class B common
share — diluted(3)
0.19
0.14
(0.04
)
1.10
0.11
0.13
0.21
0.64
(1)
Includes the following pre-tax charges:
•
$2,750 in the first quarter of the fiscal year ended
January 29, 2005 attributable to the California labor
litigation settlement,
•
$2,800 in the third quarter of the fiscal year ended
January 29, 2005 attributable to the professional fees
related to the spin-off by Barnes & Noble of Historical
GameStop’s Class B common shares, and
•
$5,373 in the fourth quarter of the fiscal year ended
January 29, 2005 attributable to correcting the
Company’s method of accounting for rent expense and
depreciation expense on leasehold improvements for those leases
that do not contain a renewal option.
(2)
Includes the following after-tax charges:
•
$1,708 in the first quarter of the fiscal year ended
January 29, 2005 attributable to the California labor
litigation settlement,
•
$1,739 in the third quarter of the fiscal year ended
January 29, 2005 attributable to the professional fees
related to the spin-off by Barnes & Noble of Historical
GameStop’s Class B common shares, and
•
$3,312 in the fourth quarter of the fiscal year ended
January 29, 2005 attributable to correcting the
Company’s method of accounting for rent expense and
depreciation expense on leasehold improvements for those leases
that do not contain a renewal option.
(3)
Includes the following charges per basic and diluted share:
•
$0.03 per basic and diluted share in the first quarter of
the fiscal year ended January 29, 2005 attributable to the
California labor litigation settlement,
•
$0.03 per basic and diluted share in the third quarter of
the fiscal year ended January 29, 2005 attributable to the
professional fees related to the spin-off by Barnes &
Noble of Historical GameStop’s Class B common
shares, and
•
$0.07 and $0.06 per basic and diluted share, respectively,
in the fourth quarter of the fiscal year ended January 29,2005 attributable to correcting the Company’s method of
accounting for rent expense and depreciation expense on
leasehold improvements for those leases that do not contain a
renewal option.
(4)
The results for the third quarter of the fiscal year ended
January 28, 2006 include the results of EB from
October 9, 2005, the merger date, through October 29,2005 and include merger-related expenses of $11,329 and
merger-related interest expense of $7,518. The results for the
fourth quarter of the fiscal year ended January 28, 2006
include the results of EB and merger-related expenses of $2,271.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Electronics Boutique Holdings Corp.:
We have audited the accompanying consolidated balance sheets of
Electronics Boutique Holdings Corp. and subsidiaries as of
January 29, 2005 and January 31, 2004, and the related
consolidated statements of income, stockholders’ equity,
and cash flows for each of the years in the three-year period
ended January 29, 2005. These consolidated financial
statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Electronics Boutique Holdings Corp. and subsidiaries
as of January 29, 2005 and January 31, 2004, and the
results of their operations and their cash flows for each of the
years in the three-year period ended January 29, 2005, in
conformity with U.S. generally accepted accounting
principles.
As discussed in note 2 to the consolidated financial
statements, the Company changed its method of accounting for
consideration received from a vendor in the year ended
February 1, 2003.
Goodwill and other intangible assets, net of accumulated
amortization of $1,155 and $666
16,308
13,662
Deferred tax asset
12,433
10,476
Other non-current assets
6,402
4,103
Total assets
$
724,200
$
643,932
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
$
228,825
$
220,481
Accrued expenses
99,939
75,922
Income taxes payable
11,450
17,862
Total current liabilities
340,214
314,265
Deferred rent and other long-term liabilities
32,518
25,687
Total liabilities
372,732
339,952
Stockholders’ equity:
Preferred stock — authorized 25,000 shares;
$.01 par value; no shares issued and outstanding at
January 29, 2005 and January 31, 2004
—
—
Common stock — authorized 100,000 shares;
$.01 par value; 27,433 shares issued and
24,648 shares outstanding at January 29, 2005;
26,449 shares issued and 24,834 shares outstanding at
January 31, 2004
ELECTRONICS BOUTIQUE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1)
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Description of Business
Electronics Boutique Holdings Corp. (collectively with its
subsidiaries, the “Company”) is the leading global
specialty retailer of video game hardware and software, PC
entertainment software, pre-played video games and related
accessories and products. The Company operates in only one
business segment, as substantially all of its revenues, net
income and assets are derived from these primary products.
The Company had 1,977, 1,528 and 1,145 operating retail stores
throughout the United States, Australia, Canada, Denmark,
Germany, Italy, New Zealand, Norway, Puerto Rico, South Korea
and Sweden at January 29, 2005, January 31, 2004 and
February 1, 2003, respectively. Total revenues from the
Company’s United States, Canada and other foreign
operations were 71%, 11% and 18%, respectively in fiscal 2005,
75%, 10% and 15%, respectively in fiscal 2004 and 81%, 9% and
10%, respectively in fiscal 2003. Long-lived assets located in
the United States, Canada and other foreign countries were 67%,
13% and 20%, respectively for the fiscal year ended
January 29, 2005 and 71%, 14% and 15%, respectively for the
fiscal year ended January 31, 2004. The Company is subject
to the risks inherent in conducting business across national
boundaries. The Company also operates a mail order business and
sells its products via the Internet. Approximately 36%, 38% and
39% of fiscal 2005, fiscal 2004 and fiscal 2003 gross purchases,
respectively, were made from its three largest vendors. The
Company is highly dependent on the introduction by its vendors
of new and enhanced video game and PC hardware and software.
Fiscal Year-End
The Company’s fiscal year ends on the Saturday nearest
January 31.
Principles of Consolidation
The consolidated financial statements include the financial
position and results of operations of Electronics Boutique
Holding Corp. and its subsidiaries. All significant intercompany
transactions have been eliminated in consolidation. Certain
amounts have been reclassified to conform to the current
presentation.
Revenue Recognition
Retail sales are recognized as revenue at the point of sale.
Mail order and Internet sales are recognized as revenue upon
delivery to and acceptance by the customer. Warranty revenue is
amortized over the life of the warranty. Loyalty card revenue is
amortized over the life of the card. Magazine subscription
revenue is recognized over the life of the subscription.
Management fees are recognized in the period that related
services are provided. Sales are recorded net of estimated
amounts for sales returns and other allowances. Shipping and
handling fee income from the Company’s mail order and
Internet operations is recognized as net sales. The Company
records shipping and handling costs in cost of goods sold.
Cost of Goods Sold
Cost of goods sold includes the following: cost of merchandise
purchased, freight expense, purchase discounts, vendor
advertising allowances in excess of incremental related
advertising expenses, volume
ELECTRONICS BOUTIQUE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
purchase rebates and inventory shrinkage expense. The
Company’s gross margins may not be comparable to those of
other retailers or companies in general due to the items the
Company includes in cost of goods sold.
Selling, General and Administrative Expense
Selling, general and administrative expense includes the
following: retail store operating costs, distribution center
operating costs, marketing and promotional expenses net of
vendor reimbursements for these expenses and corporate operating
expenses.
Vendor Programs
The Company receives vendor allowances for certain advertising
and promotional events offered to a majority of its vendors.
These events generally cover a period from a few days up to
thirty days and include items such as product catalog
advertising, in-store display promotions, Internet advertising,
co-op print advertising, product training and promotion at the
Company’s trade show and inclusion in its
vendor-of-the-month
program. The allowance for each event is negotiated with the
vendor and requires specific performance by the Company to be
earned. Due to the fact that the Company must complete the
required marketing and merchandising initiatives prior to
earning the allowance, the Company records the allowance in its
financial statements in the same period that it completes its
responsibilities under each event agreement. When an event
starts in one period and ends in a subsequent period, the
Company prorates the allowance over the appropriate periods.
In fiscal 2003, the Company adopted Emerging Issues Task Force
(EITF) Issue 02-16,
“Accounting by a Customer (Including a Reseller) for Cash
Consideration Received from a Vendor,” effective as of the
beginning of fiscal 2003. In accordance with the provisions of
Issue 02-16,
vendor advertising allowances that exceed specific, incremental
and identifiable costs incurred in relation to the advertising
and promotional events offered by the Company to its vendors are
classified as a reduction in the purchase price of merchandise.
See Note 2, “Change in Accounting Principle” for
further discussion.
The Company received vendor allowances totaling
$70.7 million, $64.0 million and $54.1 million in
fiscal 2005, fiscal 2004 and fiscal 2003, respectively.
Advertising expenses, excluding the vendor allowances, were
$26.5 million, $16.8 million and $11.3 million in
fiscal 2005, fiscal 2004 and fiscal 2003, respectively.
The Company believes that its advertising programs are effective
and generate customer interest and traffic to its retail stores
and Internet site. It is unlikely that the Company would
continue to incur the same level of advertising expense without
this vendor support. The Company believes that revenues would be
adversely affected by a reduction in vendor allowances, but is
unable to specifically quantify the impact.
Cash and Cash Equivalents
The Company considers all highly liquid investments with
original maturities of three months or less to be cash
equivalents. As of January 29, 2005, the Company had
$3.3 million in short-term restricted cash that was
recorded as other current assets and $1.4 million of
long-term restricted cash that was recorded as other non-current
assets on the consolidated balance sheet. As of January 31,2004, the Company had $4.3 million in restricted cash that
was recorded as other current assets on the consolidated balance
sheet. Restricted cash represents funds held as security against
certain European vendor and landlord liabilities.
Marketable Securities
The Company invests in auction rate securities as part of its
cash management strategy. The Company concluded that it is
appropriate to classify its holdings of auction rate securities
as marketable securities. Previously, such investments had been
classified as cash and cash equivalents. Accordingly, the
Company has revised its classification to report these
securities as marketable securities in its prior year financial
statements.
ELECTRONICS BOUTIQUE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
This reclassification resulted in a decrease to “Cash and
cash equivalents” and an increase to “Marketable
securities” of $60.2 million on the Company’s
January 31, 2004 consolidated balance sheet. The Company
has also made corresponding adjustments to its consolidated
statements of cash flows to reflect the gross purchases and
sales of these securities as investing activities rather than as
a component of cash and cash equivalents. These adjustments
resulted in a decrease of $11.3 million for fiscal 2004 and
an increase of $47.0 million for fiscal 2003 to “Net
cash (used in) provided by investing activities” on the
Company’s consolidated statements of cash flows. This
change in classification does not affect previously reported
cash flows from operations in the Company’s consolidated
statements of cash flows or its previously reported consolidated
statements of income for any period. As of January 29, 2005
and January 31, 2004, the Company held $81.0 million
and $60.2 million, respectively, of these auction rate
securities.
The Company classifies its investments in marketable securities
with readily determinable fair values as investments
available-for-sale in accordance with Statement of Financial
Accounting Standards (“SFAS”) No. 115,
“Accounting for Certain Investments in Debt and Equity
Securities”. The Company has classified all investments as
available-for-sale. Unrealized holding gains and losses on
available-for-sale securities are reported as a net amount in
accumulated other comprehensive income in stockholders’
equity until realized. Gains and losses on the sale of
available-for-sale securities are determined using the specific
identification method.
Merchandise Inventories
Merchandise is valued at the lower of cost or market. Cost is
determined principally by a weighted-average method.
Property and Equipment
Property and equipment is recorded at cost and depreciated or
amortized over the estimated useful life of the asset using the
straight-line method. The estimated useful lives are as follows:
Leasehold improvements
Lesser of 10 years or the lease term
Furniture and fixtures
5 years
Computer equipment
3 years
Buildings
30 years
The Company capitalizes significant costs to acquire management
information systems software and significant costs of system
improvements. Computer software costs are amortized over
estimated useful lives of three to five years.
Deferred Revenue
Amounts received under the Company’s pre-sell program are
recorded as a liability. Revenue is recognized when the customer
receives the related product.
Gift Certificates
The Company records gift certificate sales as a current
liability until the gift certificates are redeemed by the
customer. The liability is relieved when a gift certificate is
used by the customer to make a purchase.
Goodwill and Other Intangible Assets
In July 2001, the Financial Accounting Standards Board
(“FASB”) issued Statement of Financial Standards
(SFAS) No. 141, “Business Combinations,” and
SFAS No. 142, “Goodwill and Other Intangible
Assets.” SFAS No. 141 requires that intangible
assets acquired in a purchase method business combination
ELECTRONICS BOUTIQUE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
must meet certain criteria to be recognized and reported apart
from goodwill and should be used for all business combinations
initiated after June 30, 2001.
SFAS No. 142 states that goodwill and intangible
assets with indefinite useful lives will no longer be amortized,
but instead be tested for impairment at least annually. See
Note 14, “Goodwill and Other Intangible Assets”,
for disclosures required by SFAS No. 142.
Other Assets
Other assets consist principally of life insurance programs for
certain key executives, long-term restricted cash and security
deposits.
Guarantees
The Company remains contingently liable for 21 of the BC Sports
Collectibles store leases assigned to Sports Collectibles
Acquisition Corporation (“SCAC”) which are discussed
further in Note 7. Mr. Kim has entered into an
indemnification agreement with the Company with respect to these
leases. If SCAC were to default on these lease obligations, the
Company would be liable to the landlords for up to
$8 million in minimum rent and landlord charges as of
January 29, 2005. Due to Mr. Kim’s agreement to
indemnify the Company for any costs arising from the BC Sports
Collectibles leases, no accrual was recorded for this potential
liability. See Note 7, “Related Party
Transactions,” for more details on the BC Sports
Collectibles sale.
Leasing Expense
The Company recognizes lease expense on a straight-line basis
starting on the date the Company takes possession of the
location through the end of the lease commitment. The difference
between lease expense recognized and actual payments made is
included in deferred rent on the consolidated balance sheet.
In February 2005, the Company initiated a review of its
lease-related accounting methods for rent holidays (the period
prior to the store opening when the Company pays reduced or no
rent) and for recognizing tenant improvement allowances.
Previously, the Company started recording rent expense at the
time of a new store opening. The Company now records rent
expense at the time it takes possession of a location, which
occurs up to two months prior to the store opening. The Company
determined that corrections resulting from this error were
immaterial to prior period results. The Company recorded a one
time, cumulative, non-cash charge to rent expense of
$4.2 million ($2.7 million after tax, or
$0.11 per diluted share) in the fourth quarter of fiscal
2005.
The Company recognizes tenant improvement allowances as deferred
rent to be amortized as a reduction in rent expense over the
life of the related leases. Previously, the Company recognized
such tenant improvement allowances as a reduction of related
leasehold improvements and amortized the allowances over the
shorter of the useful life of those assets or the initial lease
term. The reclassification of tenant allowances resulted in a
decrease to “Selling, general and administrative
expense” and an increase to “Depreciation and
amortization” of $1.3 million and $0.8 million on
the Company’s consolidated statements of income for fiscal
2004 and fiscal 2003, respectively. Additionally, the
reclassification of tenant allowances resulted in an increase to
“Net property and equipment” and “Deferred rent
and other long-term liabilities” of $7.6 million on
the Company’s January 31, 2004 consolidated balance
sheet. On the Company’s consolidated statement of cash
flows, the reclassification of tenant allowances resulted in an
increase to “Net cash provided by operating
activities” and an increase to “Net cash used in
investing activities” of $2.9 million and
$2.7 million for fiscal 2004 and fiscal 2003, respectively.
Since the useful life of the assets was the same as the initial
lease term, there was no impact on operating income or net
income for any period as a result of these reclassifications.
ELECTRONICS BOUTIQUE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Pre-opening Costs and Advertising Expense
Pre-opening and
start-up costs for new
stores are expensed as incurred. Costs of advertising and sales
promotion programs are charged to operations, offset by direct
vendor reimbursements, as incurred.
Foreign Currency
The accounts of the foreign subsidiaries are translated in
accordance with SFAS 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 the
operations are translated using an average exchange rate for the
year. The effects of the rate fluctuations in translating assets
and liabilities of international operations into
U.S. dollars are accumulated and reflected as accumulated
other comprehensive income in the statements of
stockholders’ equity. Transaction gains and losses are
included in net income.
SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities,” as amended by
Statement 137 and Statement 138 requires that an
entity recognize all derivatives as either assets or liabilities
in the statement of financial position and measures those
instruments at fair value.
Market risks relating to the Company’s foreign operations
result primarily from changes in foreign exchange rates. The
Company routinely enters into forward and cross-currency swap
exchange contracts in the regular course of business to manage
its exposure against foreign currency fluctuations on
intercompany loans, investments in subsidiaries, and accounts
payable. These contracts vary in length of duration. On
January 29, 2005, the Company had two forward contracts and
40 cross-currency swap contracts. The forward contracts had a
notional amount of $7.1 million and the cross-currency swap
contracts had a notional amount of $52.8 million. The total
fair market value of all contracts at January 29, 2005 was
a deficit of approximately $12.9 million, of which
$0.7 million was recorded in accrued expenses and
$12.2 million was recorded in other long-term liabilities
on the Company’s consolidated balance sheet. On
January 31, 2004, the Company had four forward contracts
and 34 cross-currency swap contracts. The forward contracts had
a notional amount of $9.6 million and the cross-currency
swap contracts had a notional amount of $35.4 million. The
total fair market value of all contracts at January 31,2004 was a deficit of approximately $10.7 million, of which
$2.6 million was recorded in accrued expenses and
$8.1 million was recorded in other long-term liabilities on
the Company’s consolidated balance sheet. These contracts
were purchased as fair value hedges of intercompany loans and
investments in subsidiaries, and cash flow hedges of trade
payables. The Company recorded an immaterial net loss related to
hedge ineffectiveness in fiscal 2005, fiscal 2004 and fiscal
2003. Changes in the fair value of derivatives are recorded on
the same statement of income line as the change in value of the
underlying hedged item. Five contracts with a notional amount of
$9.9 million expire during fiscal 2006 and the remaining
contracts with a notional amount of $50.0 million expire in
future years.
Income Taxes
The Company is subject to federal, state and foreign income
taxes as a C Corporation. Income taxes are accounted for under
the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date.
ELECTRONICS BOUTIQUE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Net Income Per Share
Basic income per share is calculated by dividing net income by
the weighted average number of shares of the Company’s
common stock outstanding during the period. Diluted income per
share is calculated by adjusting the weighted average common
shares outstanding for the dilutive effect of common stock
equivalents related to stock options.
The following is a reconciliation of the basic weighted average
number of shares outstanding to the diluted weighted average
number of shares outstanding (amounts in thousands):
Fiscal 2005
Fiscal 2004
Fiscal 2003
Weighted average shares outstanding — basic
24,159
25,114
25,833
Dilutive effect of stock options
388
301
414
Weighted average shares outstanding — diluted
24,547
25,415
26,247
Use of Estimates
The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.
Fair Value of Financial Instruments
The Company’s financial instruments are its accounts
receivable, accounts payable, life insurance policies and
foreign exchange contracts. The carrying value of accounts
receivable and accounts payable approximates fair value due to
the short maturity of these instruments. The carrying value of
life insurance policies included in other assets approximates
fair value based on estimates received from insurance companies.
The foreign exchange contracts are recorded at fair market value.
Stock-Based Employee Compensation
The Company accounts for its employee stock options and employee
stock purchase plan under the intrinsic value recognition and
measurement principles of Accounting Principles Board Opinion
No. 25, “Accounting for Stock Issued to
Employees,” and related Interpretations. The following
table illustrates the effect on net income if the Company had
applied the fair value recognition provisions of
SFAS No. 123,
ELECTRONICS BOUTIQUE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
“Accounting for Stock-Based Compensation,” as amended
by SFAS No. 148, “Accounting for Stock-Based
Compensation — Transition and Disclosure,” to
stock-based employee compensation.
Fiscal 2005
Fiscal 2004
Fiscal 2003
(Amounts in thousands, except per
share amounts)
Net income, as reported
$
52,287
$
45,729
$
32,627
Less: total stock based employee compensation
3,294
4,350
4,796
Pro forma net income
$
48,993
$
41,379
$
27,831
Net income per share:
Basic — as reported
$
2.16
$
1.82
$
1.26
Diluted — as reported
$
2.13
$
1.80
$
1.24
Basic — pro forma
$
2.03
$
1.65
$
1.08
Diluted — pro forma
$
2.00
$
1.63
$
1.06
New Accounting Pronouncements Adopted
In January 2003, the FASB issued Interpretation No. 46,
“Consolidation of Variable Interest
Entities”(“FIN 46”). In December 2003,
FIN 46R, a modification to FIN 46, was issued which
delayed the effective date until no later than fiscal periods
ending after March 15, 2004 and provided additional
technical clarifications to implementation issues. The Company
adopted this statement effective for its fiscal year ended
January 29, 2005. The adoption of this Interpretation in
fiscal 2005 had no effect on the Company’s consolidated
results of operations and financial condition.
(2)
CHANGE IN ACCOUNTING PRINCIPLE
In November 2002, the EITF reached consensus on
Issue 02-16,
“Accounting by a Customer (Including a Reseller) for Cash
Consideration Received from a Vendor.”
Issue 02-16
addresses the accounting for cash consideration received from a
vendor by a reseller for various vendor funded allowances,
including cooperative advertising support.
Issue 02-16 is
effective for new arrangements or modifications to existing
arrangements entered into after December 31, 2002, although
early adoption was permitted. The Company elected to adopt
early, effective February 3, 2002, the provisions of
Issue 02-16. In
accordance with the provisions of
Issue 02-16,
vendor advertising allowances which exceed specific, incremental
and identifiable costs incurred in relation to the advertising
and promotional events the Company conducts for its vendors are
to be classified as a reduction in the purchase price of
merchandise and recognized in income as the merchandise is sold.
The amount of vendor allowances to be recorded as a reduction of
inventory was determined by calculating the ratio of vendor
allowances in excess of specific, incremental and identifiable
advertising and promotional costs to merchandise purchases. The
Company then applied this ratio to the value of inventory in
determining the amount of the vendor reimbursements to be
recorded as a reduction to inventory reflected on the balance
sheet. This methodology resulted in a $7.6 million
reduction in inventory as of February 3, 2002, the date of
adoption of
Issue 02-16. The
$7.6 million, $4.8 million net of tax, was recorded as
a cumulative effect of change in accounting principle in fiscal
2003 for the impact of this adoption on prior fiscal years.
Prior to adoption of
Issue 02-16, all
vendor advertising allowances were recognized as an offset to
selling, general and administrative expense. These allowances
exceeded the specific, incremental costs of the advertising and
promotional events conducted by the Company. The portion of the
allowances in excess of the specific, incremental costs was
recorded as an offset to other operating expenses within
selling, general and administrative expenses. These other
operating expenses, which were incurred to support advertising
and
ELECTRONICS BOUTIQUE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
promotional expenses, included such items as: marketing and
merchandise department expenses to develop, promote and manage
the events; direct store and store supervisory payroll expenses
to implement, manage and monitor the events; distribution
expenses associated with receiving and shipping of materials
necessary for the events; and corporate expenses related to the
design, production and maintenance of Internet advertising
events. In fiscal 2005, fiscal 2004 and fiscal 2003, the Company
recorded vendor advertising allowances as a reduction in cost of
goods sold in the amount of $52.0 million,
$49.4 million and $42.9 million, respectively. In
fiscal 2005, fiscal 2004 and fiscal 2003, the Company recorded
vendor advertising allowances as a reduction of selling, general
and administrative expense in the amount of $19.3 million,
$13.7 million and $8.8 million, respectively.
As of January 29, 2005 and January 31, 2004,
$10.2 million and $10.8 million, respectively, of the
Company’s vendor advertising allowances have been recorded
as a reduction of inventory.
(3)
COMMITMENTS
Lease Commitments
At January 29, 2005, the future annual minimum lease
payments under operating leases for the following five fiscal
years and thereafter were as follows (amounts in thousands):
Retail
Distribution
Store
Facilities and
Total Lease
Locations
Other
Commitments
Fiscal 2006
$
101,880
$
1,833
$
103,713
Fiscal 2007
99,395
1,403
100,798
Fiscal 2008
93,451
1,204
94,655
Fiscal 2009
77,009
1,142
78,151
Fiscal 2010
55,001
1,023
56,024
Thereafter
89,450
533
89,983
$
516,186
$
7,138
$
523,324
The total future minimum lease payments include lease
commitments for new retail locations not in operation at
January 29, 2005, and exclude contingent rentals based upon
sales volume and owner expense reimbursements. The terms of the
operating leases for the retail locations provide that, in
addition to the minimum lease payments, the Company is required
to pay additional rent to the extent retail sales, as defined in
the lease agreements, exceed thresholds set forth in the lease
agreements and to reimburse the landlord for the Company’s
proportionate share of the landlord’s costs and expenses
incurred in the maintenance and operation of the real estate.
Contingent rentals were approximately $8.8 million,
$9.9 million and $12.2 million in fiscal 2005, fiscal
2004 and fiscal 2003, respectively. Rent expense, including
contingent rental amounts, was approximately
$130.9 million, $101.4 million and $84.3 million
in fiscal 2005, fiscal 2004 and fiscal 2003, respectively.
Certain of the Company’s lease agreements provide for
varying lease payments over the life of the leases. For
financial statement purposes, rental expense is recognized on a
straight-line basis over the original term of the agreements.
Actual lease payments are less than the rental expense reflected
in the statements of operations by approximately
$7.3 million, $3.1 million and $2.5 million for
fiscal 2005, fiscal 2004 and fiscal 2003, respectively.
In March 2005, the Company entered into a fourth amendment to
its $50.0 million asset based revolving credit facility
with Fleet Retail Group, Inc., a successor to Fleet Capital
Group. Pursuant to the amendment, Fleet agreed to eliminate
certain covenant requirements in the credit facility, added a
covenant requiring the Company to maintain a certain inventory
coverage ratio and extended the facility through March 16,2006. Interest accrues on borrowings at a per annum rate equal
to either LIBOR plus 250 points or Fleet’s base rate of
interest, at the Company’s option. The revolving credit
agreement contains restrictive covenants regarding transactions
with affiliates, the payment of dividends, and other financial
and non-financial matters and is secured by certain assets,
including accounts receivable, inventory, fixtures and
equipment. There was no outstanding balance at January 29,2005 and January 31, 2004 on this facility.
In March 2005, the Company executed a commitment to secure a
mortgage for $9.5 million on its new Sadsbury Township
distribution center. The Company expects the closing to occur in
May 2005 or earlier.
Letters of credit outstanding with various financial
institutions were $1.4 million and $0.9 million at
January 29, 2005 and January 31, 2004, respectively.
(6)
GAME GROUP SERVICES AGREEMENT
On January 30, 2004, the Company terminated the services
agreement with Game Group initially established in fiscal 1996.
Under the services agreement, Game Group was responsible for the
payment of management fees equal to 1.0% of Game Group’s
adjusted sales, plus a bonus calculated on the basis of net
income in excess of a pre-established target set by Game Group.
The Company had no management fee receivables as of
January 29, 2005. The Company’s management fees
receivable at January 31, 2004 was $2.7 million, which
is included in Accounts receivable-Trade and vendors on the
consolidated balance sheet. In fiscal 2005, the Company
performed no management services for Game Group. Management fees
received from Game Group under the services agreement for fiscal
2004 and fiscal 2003 were $8.6 million and
$7.4 million, respectively. As part of the agreement to
terminate the services agreement, Game Group agreed to pay the
Company $15.0 million, which was recorded in Accounts
receivable — Other on the Company’s consolidated
balance sheet at January 31, 2004. The $15.0 million
was received by the Company on February 12, 2004. The
Company recognized $4.7 million of this payment as revenue
earned on its consolidated statement of income for fiscal 2004.
The termination agreement places restrictions on the
Company’s ability to compete with Game Group in the United
Kingdom and Ireland until February 2006. Certain other covenants
not to compete specified in the termination agreement expired as
of January 31, 2005. Based on an independent analysis
performed in fiscal 2005, these covenants not to compete were
determined to have a value of $10.3 million, which was
recorded as deferred revenue at January 31, 2004. In fiscal
2005,
ELECTRONICS BOUTIQUE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
$5.8 million of this deferred revenue was recognized as
management fee income. As of January 29, 2005,
$4.5 million is still recorded as short-term deferred
revenue (Accrued expenses) and will be recognized as income in
fiscal 2006.
(7)
RELATED PARTY TRANSACTIONS
The Kim family beneficially owns approximately 48.3% of the
Company’s common stock. Accordingly, the Kim family
effectively controls the Company and all matters requiring
stockholder approval, including the election of directors and
approval of significant corporate transactions.
On November 2, 2002, the Company sold its BC Sports
Collectibles business to SCAC for $2.2 million in cash and
the assumption of lease related liabilities in excess of
$13 million. The purchaser, SCAC, is owned by the family of
James Kim, the Chairman of the Board. The transaction included
the sale of all assets of the business including inventory,
intellectual property and furniture, fixtures and equipment, and
transitional services which were provided by the Company to SCAC
for a six-month period after the closing for an additional
$300,000. $150,000 of the fee received for transition services
was earned and recognized as income in fiscal 2003 and the
remaining $150,000 in fiscal 2004. The transaction was
negotiated and approved by a committee of the Company’s
Board of Directors comprised solely of independent directors
with the assistance of an investment banking firm engaged to
solicit offers for the BC Sports Collectibles business.
(8)
EMPLOYEES’ RETIREMENT PLAN
The Company provides its United States employees with retirement
benefits under a 401(k) salary reduction plan. Generally,
employees are eligible to participate in the plan after reaching
age 21 and completing one year of service to the Company.
Eligible employees may contribute up to 60% of their
compensation to the plan up to the IRS annual limit. Company
contributions are at the Company’s discretion. Company
contributions to the plan are fully vested for eligible
employees with five years or more of service. Contributions
under this plan were approximately $834,000, $804,000 and
$624,000 in fiscal 2005, fiscal 2004 and fiscal 2003,
respectively.
(9)
EQUITY PLANS
Equity Participation Plans
The Company adopted equity participation plans (the “Equity
Participation Plans”), pursuant to which 2.1 million
and 2.0 million shares of common stock were reserved in
1998 and 2000, respectively, for issuance upon the exercise of
stock options granted to employees, consultants and directors.
The exercise price of options granted under the Equity
Participation Plans may not be less than fair market value per
share of common stock at the grant date; options become
exercisable one to three years after the grant date and expire
over a period of not more than ten years. Exercisability could
be accelerated on a change in control of the Company as well as
certain other events as defined in the Equity Participation
Plans.
Employee Stock Purchase Plan
Under the Company’s Employee Stock Purchase Plan (the
“Purchase Plan”), associates meeting specific
employment qualifications are eligible to participate and can
purchase shares quarterly through payroll deductions at the
lower of 85% of the fair market value of the stock at the
commencement or end of the quarterly period. The Purchase Plan
permits eligible associates to purchase common stock through
payroll deductions for up to 10% of qualified compensation. As
of January 29, 2005, 873,000 shares remain available
for issuance under the Purchase Plan. The weighted-average fair
value, net of the 15% discount, of the shares purchased by
employees in fiscal 2005, fiscal 2004 and fiscal 2003 was
$23.09, $16.53 and $20.27, respectively.
ELECTRONICS BOUTIQUE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Pro forma information regarding net income and income per share
is required by SFAS No. 123, and has been determined
as if the Company had accounted for its employee stock options
and the purchase plan under the fair value method of
SFAS No. 123, as amended by SFAS No. 148.
The fair value was estimated at the date of grant using a
Black-Scholes option-pricing model with the following weighted
average assumptions:
Fiscal 2005
Fiscal 2004
Fiscal 2003
Expected volatility
57.66
%
60.89
%
62.38
%
Risk-free interest rate
3.68
%
3.15
%
2.98
%
Expected life of options in years
4.91
4.92
4.76
Expected life of purchase rights in months
3.0
3.0
3.0
Dividend yield
—
%
—
%
—
%
The Black-Scholes option valuation model was developed for use
in estimating the fair value of traded options, which have no
vesting restrictions and are fully transferable. In addition,
option valuation models require the input of highly subjective
assumptions including the expected stock price volatility. The
weighted-average grant-date fair value of options granted during
fiscal 2005, fiscal 2004 and fiscal 2003 was $15.32, $9.19 and
$17.07, respectively.
A summary of the Company’s stock option activity, and
related information for the fiscal years ended January 29,2005, January 31, 2004 and February 1, 2003 follows
(amounts in thousands, except per share amounts):
Fiscal 2005
Fiscal 2004
Fiscal 2003
Outstanding at beginning of year
2,126
2,388
2,093
Granted
272
431
433
Exercised
(952
)
(535
)
(76
)
Forfeited
(45
)
(158
)
(62
)
Outstanding at end of year
1,401
2,126
2,388
Exercisable at end of year
744
1,200
1,215
Weighted average price per share:
Granted
$
28.60
$
16.95
$
31.74
Exercised
19.20
16.04
16.72
Forfeited
24.65
28.32
22.59
The weighted average exercise price for all options outstanding
and exercisable as of January 29, 2005 and January 31,2004 were $21.54 and $19.32, respectively. The weighted average
exercise price for all options outstanding as of
January 29, 2005 and January 31, 2004 were $22.92 and
$20.56, respectively.
Income before income tax expense and cumulative effect of change
in accounting principle was as follows (amounts in thousands,
except tax rates):
Fiscal 2005
Fiscal 2004
Fiscal 2003
Domestic
$
43,415
$
44,344
$
52,989
Foreign
38,265
28,288
6,784
Total
$
81,680
$
72,632
$
59,773
The provision for income taxes for fiscal 2005, fiscal 2004 and
fiscal 2003 consisted of the following:
Fiscal 2005
Fiscal 2004
Fiscal 2003
Federal statutory tax rate
35.00
%
35.00
%
35.00
%
State income taxes, net of federal benefit
1.06
2.88
3.17
Permanent differences- domestic and foreign
0.41
(0.26
)
(0.30
)
Difference in foreign tax rates
(0.93
)
(0.25
)
(0.33
)
Other
(0.07
)
0.17
(0.14
)
Change in valuation allowance
0.52
(0.50
)
0.03
Income tax expense
35.99
%
37.04
%
37.43
%
Current:
Domestic — Federal
$
14,484
$
12,577
$
11,191
Domestic — State
1,382
2,371
2,091
Foreign
13,652
10,600
5,092
Deferred:
Domestic — Federal
544
2,059
5,932
Domestic — State
(45
)
873
994
Foreign
(624
)
(1,577
)
(2,927
)
Income tax expense
$
29,393
$
26,903
$
22,373
The Company does not pay or record federal income taxes on the
undistributed earnings of its foreign subsidiaries as long as
those earnings are deemed permanently reinvested in the
companies that produced them. An estimated $968,000 in federal
income and foreign withholding taxes would be due if such
permanently reinvested earnings were remitted as dividends.
ELECTRONICS BOUTIQUE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Deferred income taxes reflect the net tax effect of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes. The following is a summary of the
significant components of the Company’s deferred tax assets
and liabilities as of January 29, 2005 and January 31,2004 (amounts in thousands):
Management believes it is more likely than not that the results
of future operations will generate sufficient taxable income to
realize deferred tax assets, except for certain net operating
loss carryforwards for which the Company has provided a
valuation allowance. The increase in the valuation allowance of
$403,000 in fiscal 2005 resulted primarily from the addition of
a valuation allowance for a certain foreign subsidiary, offset
in part by the utilization of net operating loss carryforwards
of certain other foreign subsidiaries. The Company has
$4.0 million of foreign net operating loss carryforwards
that do not expire. The remaining $0.6 million of foreign
net operating loss carryforwards start to expire in fiscal 2007
through fiscal 2012.
(11)
RESTRUCTURING CHARGE
On February 1, 2002, the Board of Directors of the Company
adopted a plan related to the closing of the Company’s 29
EB Kids stores and the sale of its 22 store BC Sports
Collectibles business. A $14.9 million pre-tax charge
($9.2 million after-tax or $0.35 per diluted share)
was recorded in fiscal 2002 related to this decision. The
pre-tax charge was recorded as follows: $2.3 million
related to a write-down of inventory within cost of goods sold
and $12.6 million as a restructuring and asset impairment
charge. The $12.6 million charge consisted of a
$3.5 million write-down of store leasehold improvements, a
$2.3 million write down of store furniture, fixtures and
equipment and $6.7 million in lease termination expenses.
The following table summarizes activity in the restructuring
accrual for the fiscal years ended January 31, 2004 and
January 29, 2005 (amounts in thousands):
As of January 31, 2004, the restructuring accrual had a
balance of $204,000 related to the costs associated with the
potential assignment back to the Company of two of the BC Sports
Collectibles store leases.
The Company reached an agreement with SCAC under which SCAC
agreed to not assign back to the Company either of the two BC
Sports Collectibles store leases identified in the original
agreement. As part of
ELECTRONICS BOUTIQUE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
this new agreement, the Company assumed the lease of a BC Sports
Collectibles store not referenced in the original agreement with
SCAC. The Company has converted this location to an EB Games
store and plans to operate in the location until the lease
terminates in fiscal 2008. Consequently, the balance of the
restructuring accrual was reversed as of January 29, 2005.
(12)
LEGAL CONTINGENCIES
On December 3, 2003, a subsidiary of the Company was served
with a complaint in a proposed class action suit entitled
“Chalmers v. Electronics Boutique of America
Inc.” in the California Superior Court in Los Angeles
County. The suit alleged that Electronics Boutique of America
Inc. improperly classified store management employees as exempt
from the overtime provisions of California wage-and-hour laws
and sought recovery of wages for overtime hours worked and
related relief. In December 2004, the court approved a final
settlement in the amount of $950,000. An accrual for settlement
costs was recorded in fiscal 2004. Consequently, this settlement
had no material impact on the Company’s results of
operations or financial condition for fiscal 2005.
On October 19, 2004, Milton Diaz filed a complaint against
a subsidiary of Electronics Boutique in the U.S. District
Court for the Western District of New York. Mr. Diaz claims
to represent a group of current and former employees to whom
Electronics Boutique of America Inc. allegedly failed to pay
minimum wages and overtime compensation in violation of the Fair
Labor Standards Act (FLSA) and New York law. The plaintiff
moved to conditionally certify a group of similarly situated
individuals under the FLSA and in March 2005, there was a
hearing on this motion. In March 2005, the plaintiff filed a
motion on behalf of current and former store managers and
assistant store managers in New York to certify a class under
New York wage and hour laws. Also, in March 2005, the Company
filed a motion to dismiss the New York state law claims. The
Company intends to vigorously defend this action. At this stage
of the matter, it is not possible to predict the outcome of this
matter.
In the opinion of management and except as described above, no
pending proceedings could have a material adverse effect on the
Company’s results of operations or financial condition.
(13)
COMPREHENSIVE INCOME
Comprehensive income is computed as follows (amounts in
thousands):
Fiscal 2005
Fiscal 2004
Fiscal 2003
Net income
$
52,287
$
45,729
$
32,627
Foreign currency translations
4,849
12,981
6,574
Hedging activities
(3,280
)
(6,457
)
(5,077
)
Comprehensive income
$
53,856
$
52,253
$
34,124
Gains on foreign currency translations are a result of the
Company’s investment in its foreign subsidiaries in
Australia, Canada, Denmark, Germany, Italy, New Zealand, Norway,
South Korea and Sweden. Losses on hedging activities are
primarily the result of foreign exchange forward contracts and
cross currency swap agreements the Company has entered into to
protect its investments in its European subsidiaries from
foreign currency fluctuations. The net gains on these activities
are primarily the result of the Company’s investment in its
Australia, Canada and South Korea subsidiaries that have not
been hedged.
Key Money represents payments made to landlords, outgoing
tenants or other third parties to enter into certain store
leases.
Intangible assets are amortized over five years. Amortization
expense of amortizable intangible assets for fiscal 2005, 2004
and 2003 was $602,000, $442,000 and $315,000, respectively.
Amortization expense for amortizable intangible assets for the
next five years is: $727,000 in fiscal 2006, $696,000 in fiscal
2007, $590,000 in fiscal 2008, $417,000 in fiscal 2009 and
$185,000 in fiscal 2010.
Goodwill
The changes in carrying amount of goodwill for the years ended
January 29, 2005 and January 31, 2004 are as follows
(amounts in thousands):
In June 2003, the Company bought out the last of its partners in
the German subsidiary. This resulted in an increase in ownership
of .3125%. The Company now owns 100% of its German subsidiary.
(15)
STOCK BUY-BACK PROGRAM
In May 2003, the Company’s Board of Directors approved a
program to repurchase up to 1.5 million shares of its
outstanding common stock. During fiscal 2004, the Company
completed the program and repurchased 1.5 million shares of
common stock at a weighted average cost, including broker
commissions, of $21.18 per share. Cash expenditures to
complete the stock buy-back totaled $31.8 million.
In November 2003, the Company’s Board of Directors approved
a program to repurchase up to 2.0 million additional shares
of its outstanding common stock. As of January 31, 2004,
the Company repurchased 115,700 shares of common stock at a
weighted average cost, including broker commissions, of
$23.21 per share. Cash expenditures for these stock
repurchases totaled $2.7 million.
ELECTRONICS BOUTIQUE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
During fiscal 2005, the Company repurchased an additional
1.2 million shares of common stock at a weighted average
cost, including broker commissions, of $27.10 per share.
Cash expenditures for these stock repurchases totaled
$31.7 million. As of January 29, 2005, the Company had
repurchased 1.3 million aggregate shares of common stock at
a weighted average cost, including broker commissions, of
$26.75 per share. Aggregate cash expenditures for these
stock repurchases totaled $34.4 million.
(16) CONSOLIDATING FINANCIAL STATEMENTS
On October 8, 2005, the Company and GameStop Corp.
(“GameStop”) completed their previously announced
business combination (the “merger”). As a result of
the merger, certain subsidiaries of the Company became
guarantors of senior notes issued by GameStop. The following
consolidating financial statements present the financial
position as of January 29, 2005 and January 31, 2004
and results of operations and cash flows for the fiscal years
ended January 29, 2005, January 31, 2004 and
February 1, 2003 of the Company’s guarantor and
non-guarantor subsidiaries.
Goodwill and other intangible assets, net of accumulated
amortization of $1,489 and $1,155
18,418
16,308
Deferred tax asset
15,770
12,433
Other non-current assets
7,757
6,402
Total assets
$
683,949
$
724,200
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt
$
813
$
—
Accounts payable
166,644
228,825
Accrued expenses
96,167
99,939
Income taxes payable
—
11,450
Total current liabilities
263,624
340,214
Long-term debt, less current portion
10,210
—
Deferred rent and other long-term liabilities
30,591
32,518
Total liabilities
304,425
372,732
Stockholders’ equity:
Preferred stock — authorized 25,000 shares;
$.01 par value; no shares issued and outstanding at
July 30, 2005 and January 29, 2005
—
—
Common stock — authorized 100,000 shares;
$.01 par value; 28,168 shares issued and
25,383 shares outstanding at July 30, 2005;
27,433 shares issued and 24,648 shares outstanding at
January 29, 2005
ELECTRONICS BOUTIQUE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1)
Basis of Presentation
The consolidated financial statements include the accounts of
Electronics Boutique Holdings Corp. and its wholly owned
subsidiaries (the “Company”). All significant
intercompany transactions have been eliminated in consolidation.
In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair
presentation have been included.
The accompanying unaudited consolidated financial statements of
the Company have been prepared in accordance with generally
accepted accounting principles for interim financial information
and with the instructions to
Form 10-Q and
Article 10 of
Regulation S-X.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles
for complete financial statements. These financial statements
should be read in conjunction with the more complete disclosures
contained in the consolidated financial statements and notes
thereto for the fiscal year ended January 29, 2005
contained in the Company’s Annual Report on
Form 10-K/ A filed
with the Securities and Exchange Commission. Operating results
for the 13 and 26 week periods ended July 30, 2005 are
not necessarily indicative of the results that may be expected
for the fiscal year ending January 28, 2006.
On April 18, 2005, the Company entered into a definitive
agreement and plan of merger with GameStop Corp. that will
create a leading video game retailer with approximately 4,300
stores worldwide. The transaction is subject to certain
regulatory and shareholder approvals and is currently expected
to be completed in October 2005. The Company will continue to
operate under its normal course of business until the merger is
completed.
(2)
Net Income Per Share
Basic net income per share is calculated by dividing net income
by the weighted average number of shares of common stock
outstanding during the period. Diluted net income per share is
calculated by adjusting the weighted average number of shares of
common stock outstanding during the period for the dilutive
effect of common stock equivalents related to stock options.
The following is a reconciliation of the basic weighted average
number of shares of common stock outstanding to the diluted
weighted average number of shares of common stock outstanding
(amounts in thousands):
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss
and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the
enactment date.
ELECTRONICS BOUTIQUE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
In October 2004, the American Jobs Creation Act (the
“Act”) was signed into law. The Act provides for a
one-time deduction for U.S. federal income tax purposes of
85% of certain foreign earnings that are repatriated. The
deduction can be taken in either the company’s last tax
year that began before the enactment date, or the first tax year
that begins during the one-year period beginning on the date of
enactment and is subject to a number of limitations. In July
2005, the Company repatriated $20.0 million from its
subsidiary in Australia. As a result of the tax benefits
provided by the Act, this dividend did not materially impact its
consolidated financial results.
(4)
Marketable Securities
The Company invests in auction rate securities as part of its
cash management strategy. In the first quarter of fiscal 2006,
the Company concluded that it was appropriate to classify its
holdings of auction rate securities as marketable securities.
Prior to the reclassification, the Company had classified such
investments as cash and cash equivalents. Accordingly, the
Company has revised the classification to report these
securities as marketable securities in its consolidated balance
sheets. The Company has also made corresponding adjustments to
its consolidated statements of cash flows to reflect the gross
purchases and sales of these securities as investing activities
rather than as a component of cash and cash equivalents.
This change in classification does not affect previously
reported cash flows from operations in the Company’s
consolidated statements of cash flows or its previously reported
consolidated statements of income for any period. As of
July 30, 2005 and January 29, 2005, the Company held
$35.7 million and $81.0 million, respectively, of
these auction rate securities.
The Company classifies its investments in marketable securities
with readily determinable fair values as investments
available-for-sale in accordance with Statement of Financial
Accounting Standards No. 115, “Accounting for Certain
Investments in Debt and Equity Securities.” The Company has
classified all investments as available-for-sale. Unrealized
holding gains and losses on available-for-sale securities are
reported as a net amount in accumulated other comprehensive
income in stockholders’ equity until realized. Gains and
losses on the sale of available-for-sale securities are
determined using the specific identification method.
(5)
Debt
The Company has available a revolving credit facility with Fleet
Retail Group for maximum borrowings of $50.0 million. As of
July 30, 2005, there were no outstanding borrowings on this
facility.
On May 25, 2005, the Company closed on a
10-year,
$9.5 million mortgage agreement collateralized by its
315,000 square foot distribution facility in Sadsbury
Township, Pennsylvania. Interest is fixed at a rate of
5.4% per annum. The loan is amortized based on a
20-year period. Monthly
payments of $64,473, including interest, commenced in July. A
final “balloon” payment of $6.0 million is due
June 15, 2015.
The Company’s newly acquired Spanish subsidiary, Jump
Ordenadores S.L.U. (“Jump”), had outstanding third
party debt of $1.6 million as of July 30, 2005. This
debt consists primarily of bank loans and notes due to
Jump’s former owner.
Losses on foreign currency translations are a result of the
Company’s investment in its foreign subsidiaries in
Australia, Canada, Denmark, Finland, Germany, Italy, Norway,
Spain and Sweden. Gains (losses) on hedging activities are
primarily the result of foreign exchange forward contracts and
cross currency swap agreements the Company has entered into to
protect its investments in its European subsidiaries from
foreign currency fluctuations. The net impact of these
activities is primarily the result of the Company’s
investments in its international subsidiaries that have not been
hedged.
(7)
Goodwill and Other Intangible Assets
The following tables show the intangible assets and goodwill as
of July 30, 2005 and January 29, 2005 (amounts in
thousands):
In May 2005, the Company acquired all the outstanding shares of
Jump, a Spanish company consisting of 138 retail stores and a
distribution facility.
(8)
Game Group Services Agreement
On January 30, 2004, the Company terminated the services
agreement with Game Group initially established in fiscal 1996.
Under the services agreement, Game Group was responsible for the
payment of management fees equal to 1.0% of Game Group’s
adjusted sales, plus a bonus calculated on the basis of net
income in excess of a pre-established target set by Game Group.
As part of the agreement to terminate the services agreement,
Game Group agreed to pay the Company $15.0 million which
was received in February 2004. The termination agreement places
restrictions on the Company’s ability to compete with Game
Group in the United Kingdom and Ireland until February 2006.
Certain other covenants not to compete specified in the
termination agreement expired as of January 31, 2005. Based
on an independent analysis performed in fiscal 2005, these
covenants not to compete were determined to have a value of
$10.3 million, which was recorded as deferred revenue at
January 31, 2004. As of July 30, 2005 and
January 29, 2005, $2.2 million and $4.5 million,
respectively, was still recorded as deferred revenue within
“Accrued expenses” on the Company’s consolidated
balance sheets. For the 13 weeks ended July 30, 2005
and July 31, 2004, $1.1 million and $1.5 million,
respectively, of this deferred revenue was recognized as
management fee income.
(9)
Related Party Transactions
On November 2, 2002, the Company sold its BC Sports
Collectibles business to Sports Collectibles Acquisition
Corporation (“SCAC”) for $2.2 million in cash and
the assumption of lease related liabilities in excess of
$13 million. The purchaser, SCAC, is owned by the family of
James J. Kim, the Company’s Chairman. The transaction was
negotiated and approved by a committee of the Company’s
Board of Directors comprised solely of independent directors
with the assistance of an investment banking firm engaged to
solicit offers for the BC Sports Collectibles business. As of
July 30, 2005, each of the BC store leases had been
assigned to SCAC. As the Company remains contingently liable for
these leases, Mr. Kim has agreed to indemnify the Company
against any liabilities associated with these leases.
On April 18, 2005, the Company entered into a definitive
agreement and plan of merger with GameStop Corp. The merger
agreement is subject to both regulatory and stockholder
approval. The Company has agreed to pay the legal fees and
expenses of its Chairman, James J. Kim, in connection with the
transactions contemplated under the merger agreement, including
Mr. Kim’s legal fees and expenses incurred in
connection with the preparation and filing of
Mr. Kim’s notification and report forms under the
Hart-Scott-Rodino
Antitrust Improvement Act of 1976 and in connection with
the negotiation of the Kim Group voting agreement,
non-competition agreement and the registration rights agreement.
The Company estimates these legal fees and expenses to be
approximately $200,000.
ELECTRONICS BOUTIQUE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(10)
Stock-Based Employee Compensation
The Company accounts for its employee stock options and purchase
plans under the intrinsic value recognition and measurement
principles of Accounting Principles Board Opinion No. 25,
“Accounting for Stock Issued to Employees,” and
related Interpretations. The following table illustrates the
effect on net income if the Company had applied the fair value
recognition provisions of Financial Accounting Standards Board
(“FASB”) Statement No. 123, “Accounting for
Stock-based Compensation,” to stock-based employee
compensation:
Less: stock-based employee compensation, net of income tax
433
739
1,052
1,702
Pro forma net income
$
1,187
$
3,145
$
3,334
$
5,228
Net income per share:
Basic — as reported
$
0.06
$
0.16
$
0.18
$
0.29
Diluted — as reported
$
0.06
$
0.16
$
0.17
$
0.28
Basic — pro forma
$
0.05
$
0.13
$
0.13
$
0.22
Diluted — pro forma
$
0.05
$
0.13
$
0.13
$
0.21
(11)
Stock Buy-Back Program
In May 2003, the Company’s Board of Directors approved a
program to repurchase up to 1.5 million shares of its
outstanding common stock. During fiscal 2004, the Company
completed the program and repurchased 1.5 million shares of
common stock at a weighted average cost, including broker
commissions, of $21.18 per share. Cash expenditures to
complete the stock buy-back totaled $31.8 million.
In November 2003, the Company’s Board of Directors approved
a program to repurchase up to 2.0 million additional shares
of its outstanding common stock. As of July 30, 2005, the
Company had repurchased 1.3 million shares of common stock
at a weighted average cost, including broker commissions, of
$26.75 per share. Cash expenditures for these stock
repurchases totaled $34.4 million. During the 26 weeks
ended July 30, 2005, the Company made no additional stock
repurchases.
(12)
Acquisition
On May 31, 2005, the Company acquired all the outstanding
shares of a Spanish company, Jump, consisting of 138 retail
stores and a distribution facility for $1.1 million. This
acquisition was accounted for using the purchase method of
accounting and the preliminary allocation of the purchase price
to the assets and liabilities acquired resulted in goodwill of
$2.8 million. The results of Jump’s operations have
been included in the Company’s financial results since the
date of acquisition.
(13)
Subsequent Event
On August 5, 2005, the Company completed the acquisition of
PC-Joy AG, a Zurich, Switzerland-based video game retailer with
nine store locations.
ELECTRONICS BOUTIQUE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(14)
Consolidating Financial Statements
On October 8, 2005, the Company and GameStop Corp.
(“GameStop”) completed their previously announced
business combination (the “merger”). As a result of
the merger, certain subsidiaries of the Company became
guarantors of senior notes issued by GameStop. The following
consolidating financial statements present the financial
position as of July 30, 2005 and results of operations and
cash flows for the twenty-six week periods ended July 30,2005 and July 31, 2004 of the Company’s guarantor and
non-guarantor subsidiaries.
Item 20. Indemnification
of Directors and Officers
GameStop Corp.
Pursuant to the Delaware General Corporation Law (the DGCL), a
corporation may indemnify any person in connection with any
threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other
than a derivative action by or in the right of such corporation)
who is or was a director, officer, employee or agent of such
corporation, or serving at the request of such corporation in
such capacity for 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 in connection with
such action, suit or proceeding, if such person acted in good
faith and in a manner he or she reasonably believed to be in or
not opposed to the best interests of such corporation, and, with
respect to any criminal action or proceeding, had no reasonable
cause to believe his or her conduct was unlawful.
The DGCL also permits indemnification by a corporation under
similar circumstances for expenses (including attorneys’
fees) actually and reasonably incurred by such persons in
connection with the defense or settlement of a derivative action
or suit, 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 such corporation unless the
Delaware Court of Chancery or the court in which such action or
suit was brought shall determine upon application that such
person is fairly and reasonably entitled to indemnity for such
expenses which such court shall deem proper.
To the extent a director, officer, employee or agent is
successful in the defense of such an action, suit or proceeding,
the corporation is required by the DGCL to indemnify such person
for actual and reasonable expenses incurred thereby. Expenses
(including attorneys’ fees) incurred by such persons in
defending any action, suit or proceeding may be paid in advance
of the final disposition of such action, suit or proceeding upon
receipt of an undertaking by or on behalf of such person to
repay such amount if it is ultimately determined that such
person is not entitled to be so indemnified.
The DGCL provides that the indemnification described above shall
not be deemed exclusive of other indemnification that may be
granted by a corporation pursuant to its bylaws, disinterested
directors’ vote, stockholders’ vote, agreement or
otherwise.
The DGCL also provides corporations with the power to purchase
and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the corporation, or is
or was serving at the request of the corporation in a similar
capacity for another corporation, partnership, joint venture,
trust or other enterprise, against any liability asserted
against him or her in any such capacity, or arising out of his
or her status as such, whether or not the corporation would have
the power to indemnify him or her against such liability as
described above.
GameStop Corp.’s amended and restated certificate of
incorporation authorizes the corporation to indemnify all
persons to the fullest extent permitted by the DGCL. The amended
and restated bylaws of GameStop Corp. require the corporation to
indemnify each person who was or is made a party or is
threatened to be made a party to or is otherwise involved in any
action, suit or proceeding, by reason of the fact that he or she
is or was a director or an officer of GameStop Corp. or is or
was serving at the request of GameStop Corp. as a director,
officer, employee or agent of another corporation or of a
partnership, joint venture, trust or other enterprise, including
service with respect to an employee benefit plan, against all
expense, liability and loss (including attorneys’ fees,
judgments, fines, ERISA excise taxes or penalties and amounts
paid in settlement) reasonably incurred or suffered by such
person in connection with such action, suit or proceeding. The
amended and restated bylaws provide that GameStop Corp. will
indemnify such a director or officer who initiates an action,
suit or proceeding only if the action, suit or proceeding was
authorized by the board of directors of GameStop Corp.
Section 302A.521, subd. 2, of the Minnesota Business
Corporation Act (the MBCA) requires corporations to indemnify a
person made or threatened to be made a party to a proceeding by
reason of the former or present official capacity of the person
with respect to the corporation, against judgments, penalties,
fines, settlements, and reasonable expenses, including
attorneys’ fees and disbursements, incurred by the person
in connection with the proceeding with respect to the same acts
or omissions if, with respect to the acts or omissions the
subject of the proceeding, certain criteria are met. These
criteria, all of which must be met with respect to the person to
be indemnified, are:
•
such person has not been indemnified by another organization or
employee benefit plan for the same judgments, penalties or fines;
•
such person has acted in good faith;
•
such person has received no improper personal benefit, and
statutory procedure has been followed in the case of any
conflict of interest by a director;
•
in the case of a criminal proceeding, such person had no
reasonable cause to believe the conduct was unlawful; and
•
in the case of acts or omissions occurring in the person’s
performance in the official capacity of director or, for a
person not a director, in the official capacity of officer,
board committee member or employee, such person reasonably
believed that the conduct was in the best interests of the
corporation, or, in the case of performance by a director,
officer or employee of the corporation who was serving at the
request of the corporation or whose duties involved service as a
director, officer, partner, trustee, employee or agent of
another organization or employee benefit plan, such person
reasonably believed that the conduct was not opposed to the best
interests of the corporation.
In addition, Section 302A.521, subd. 3, of the MBCA,
requires payment by the corporation, upon written request, of
reasonable expenses in advance of final disposition of the
proceeding in certain instances upon, among other things,
receipt of a written undertaking by the person to repay all
amounts so advanced if it is ultimately determined that the
person is not entitled to indemnification, unless otherwise
limited by the articles of incorporation or bylaws of the
corporation in question. A decision as to required
indemnification is made by a disinterested majority of the board
of directors present at a meeting at which a disinterested
quorum is present, or by a designated committee of the board, by
special legal counsel, by the shareholders, or by a court.
Section 302A.521 contains detailed terms regarding such
right of indemnification and reference is made thereto for a
complete statement of such indemnification rights.
GameStop, Inc.’s amended and restated certificate of
incorporation states that, to the fullest extent permitted by
the MBCA, no director shall be personally liable to the
corporation. or its shareholders for monetary damages for breach
of fiduciary duty as a director. The amended and restated bylaws
of GameStop, Inc. require the corporation to indemnify such
persons, for such expenses and liabilities, in such manner,
under such circumstances, and to such extent, as required or
permitted by Section 302A.521 of the MBCA, or as required
or permitted by other provisions of law. The amended and
restated bylaws of GameStop, Inc. also permit the corporation to
purchase and maintain insurance on behalf of any person in such
person’s official capacity against any liability asserted
against and incurred by such person in or arising from that
capacity, whether or not the corporation would otherwise be
required to indemnify the person against the liability.
Agreement and Plan of Merger, dated as of April 17, 2005,
among GameStop Corp. (f/k/a GSC Holdings Corp.), Electronics
Boutique Holdings Corp., GameStop, Inc., GameStop Holdings Corp.
(f/k/a GameStop Corp.), Cowboy Subsidiary LLC and Eagle
Subsidiary LLC.(1)
3
.1
Amended and Restated Certificate of Incorporation of GameStop
Corp. (f/k/a GSC Holdings Corp.).(2)
3
.2
Amended and Restated Bylaws of GameStop Corp. (f/k/a GSC
Holdings Corp.).(2)
3
.3
Amendment to the Amended and Restated Certificate of
Incorporation of GameStop Corp. (f/k/a GSC Holdings
Corp.).(3)
3
.4
Amended and Restated Articles of Incorporation of GameStop, Inc.
3
.5
Amended and Restated Bylaws of GameStop, Inc.
3
.6
Certificate of Limited Partnership of GameStop Texas LP.
3
.7
Limited Partnership Agreement of GameStop Texas LP, dated as of
May 27, 2004.
3
.8
Certificate of Incorporation of GameStop Brands, Inc.
3
.9
Certificate of Amendment of Certificate of Incorporation of
GameStop Brands, Inc.
3
.10
Bylaws of GameStop Brands, Inc.
3
.11
Amended and Restated Certificate of Incorporation of GameStop
Holdings Corp. (f/k/a GameStop Corp.).
3
.12
Bylaws of GameStop Holdings Corp. (f/k/a GameStop Corp.).
3
.13
Articles of Incorporation of Sunrise Publications, Inc.
3
.14
Bylaws of Sunrise Publications, Inc.
3
.15
Articles of Incorporation of Marketing Control Services, Inc.
3
.16
Bylaws of Marketing Control Services, Inc.
3
.17
Certificate of Formation of GameStop of Texas (GP), LLC.
3
.18
Certificate of Amendment of the Certificate of Formation of
GameStop of Texas (GP), LLC.
3
.19
Limited Liability Company Agreement of GameStop of Texas (GP),
LLC, dated as of May 25, 2004.
3
.20
Certificate of Formation of GameStop (LP), LLC.
3
.21
Certificate of Amendment of the Certificate of Formation of
GameStop (LP), LLC.
3
.22
Limited Liability Company Agreement of GameStop (LP), LLC, dated
as of May 26, 2004.
3
.23
Certificate of Incorporation of Electronics Boutique Holdings
Corp.
3
.24
Certificate of Amendment of the Certificate of Incorporation of
Electronics Boutique Holdings Corp.
3
.25
Amended and Restated Bylaws of Electronics Boutique Holdings
Corp.
3
.26
Articles of Incorporation of EB Catalog Company, Inc.
3
.27
Bylaws of EB Catalog Company, Inc.
3
.28
Certificate of Incorporation of ELBO Inc.
3
.29
Bylaws of ELBO Inc.
3
.30
Certificate of Formation of FR Sadsbury Second, LLC.
3
.31
Certificate of Amendment to the Certificate of Formation of FR
Sadsbury Second, LLC (changing name to EB Sadsbury Second, LLC).
3
.32
Limited Liability Company Agreement of FR Sadsbury Second, LLC,
dated as of August 10, 2004, by its sole member, FR
Sadsbury, LLC.
Certificate of Limited Partnership of FR Sadsbury General
Partner, LP. Certificate of Amendment to the Certificate of
Limited Partnership of FR Sadsbury General Partner, LP (changing
name to EB Sadsbury General Partner, LP).
3
.34
Limited Partnership Agreement of FR Sadsbury General Partner,
LP, dated as of May 23, 2005, by and between EB Sadsbury
Second, LLC and EB Sadsbury, LLC.
3
.35
Certificate of Limited Partnership of FR Sadsbury Property
Holding, LP. Certificate of Amendment to the Certificate of
Limited Partnership of FR Sadsbury Property Holding, LP
(changing name to EB Sadsbury Property Holding, LP).
3
.36
Limited Partnership Agreement of FR Sadsbury Property Holding,
LP, dated as of August 10, 2004, by and between FR Sadsbury
General Partner, LP and FR Sadsbury, LLC.
3
.37
Certificate of Incorporation of EB International Holdings, Inc.
3
.38
Certificate of Merger of E.B. International, Inc. with and into
EB International Holdings, Inc.
3
.39
Bylaws of EB International Holdings, Inc.
4
.1
Indenture, dated September 28, 2005, by and among GameStop
Corp. (f/k/a GSC Holdings Corp.), GameStop, Inc., the Subsidiary
Guarantors party thereto, and Citibank, N.A., as Trustee.(4)
4
.2
Form of Senior Floating Rate Notes due 2011 (included in
Exhibit 4.1 hereto).
4
.3
Form of 8% Senior Notes due 2012 (included in
Exhibit 4.1 hereto).
4
.4
Form of Guarantees of Senior Floating Rate Notes due 2011 and
8% Senior Notes due 2012 (included in Exhibit 4.1
hereto).
4
.5
First Supplemental Indenture, dated October 8, 2005, by and
among GameStop Corp. (f/k/a GSC Holdings Corp.), GameStop, Inc.,
the Subsidiary Guarantors party thereto, and Citibank, N.A., as
Trustee.(5)
4
.6
Registration Rights Agreement, dated September 28, 2005, by
and among GameStop Corp. (f/k/a GSC Holdings Corp.),
GameStop, Inc., the Subsidiary Guarantors listed on Schedule I-A
thereto, and Citigroup Global Markets Inc., for themselves and
as representatives of the several Initial Purchasers listed on
Schedule II thereto.(4)
4
.7
Rights Agreement, dated as of June 27, 2005, between
GameStop Corp. (f/k/a GSC Holdings Corp.) and The Bank of New
York, as Rights Agent.(2)
5
.1
Opinion of Bryan Cave LLP.
5
.2
Opinion of Oppenheimer Wolff & Donnelly LLP.
10
.1
Separation Agreement, dated as of January 1, 2002, between
Barnes & Noble, Inc. and GameStop Holdings Corp.(f/k/a
GameStop Corp.).(6)
10
.2
Tax Disaffiliation Agreement, dated as of January 1, 2002,
between Barnes & Noble, Inc. and GameStop Holdings
Corp.(f/k/a GameStop Corp.).(7)
10
.3
Insurance Agreement, dated as of January 1, 2002, between
Barnes & Noble, Inc. and GameStop Holdings Corp. (f/k/a
GameStop Corp.).(7)
10
.4
Operating Agreement, dated as of January 1, 2002, between
Barnes & Noble, Inc. and GameStop Holdings Corp. (f/k/a
GameStop Corp.).(7)
10
.5
Amended and Restated 2001 Incentive Plan.(8)
10
.6
Amendment to Amended and Restated 2001 Incentive Plan.(5)
10
.7
Supplemental Compensation Plan.(8)
10
.8
Form of Option Agreement.(8)
10
.9
Form of Restricted Share Agreement.(9)
10
.10
Stock Purchase Agreement, dated as of October 1, 2004, by
and among GameStop Holdings Corp. (f/k/a GameStop Corp.),
B&N GameStop Holding Corp. and Barnes & Noble,
Inc.(10)
10
.11
Promissory Note, dated as of October 1, 2004, made by
GameStop Holdings Corp. (f/k/a GameStop Corp.) in favor of
B&N GameStop Holding Corp.(10)
Credit Agreement, dated October 11, 2005, by and among
GameStop Corp. (f/k/a GSC Holdings Corp.), certain subsidiaries
of GameStop Corp., Bank of America, N.A. and the other lending
institutions listed in the Agreement, Bank of America, N.A. and
Citicorp North America, Inc., as Issuing Banks, Bank of America,
N.A., as Administrative Agent and Collateral Agent, Citicorp
North America, Inc., as Syndication Agent, and Merrill Lynch
Capital, a division of Merrill Lynch Business Financial Services
Inc., as Documentation Agent.(3)
10
.13
Guaranty, dated as of October 11, 2005, by GameStop Corp.
(f/k/a GSC Holdings Corp.) and certain subsidiaries of GameStop
Corp. in favor of the agents and lenders.(3)
Patent and Trademark Security Agreement, dated as of
October 11, 2005.(3)
10
.16
Mortgage, Security Agreement, and Assignment and Deeds of Trust
between GameStop Texas LP and Bank of America, N.A., as
Collateral Agent.(3)
10
.17
Mortgage, Security Agreement, and Assignment and Deeds of Trust
between Electronics Boutique of America, Inc. and Bank of
America, N.A., as Collateral Agent.(3)
10
.18
Form of Securities Collateral Pledge Agreement.(3)
10
.19
Registration Rights Agreement, dated October 8, 2005, among
EB Nevada Inc., James J. Kim and GameStop Corp. (f/k/a GSC
Holdings Corp.)(3)
10
.20
Executive Employment Agreement, dated as of April 11, 2005,
between GameStop Holdings Corp. (f/k/a GameStop Corp.) and R.
Richard Fontaine.(11)
10
.21
Executive Employment Agreement, dated as of April 11, 2005,
between GameStop Holdings Corp. (f/k/a GameStop Corp.) and
Daniel A. DeMatteo.(11)
10
.22
Executive Employment Agreement, dated as of December 9,2005, between GameStop Corp. and Steven R. Morgan.(12)
10
.23
Executive Employment Agreement, dated as of April 3, 2006,
between GameStop Corp. (f/k/a GSC Holdings Corp.) and David W.
Carlson.(13)
21
.1
List of Subsidiaries of GameStop Corp. (f/k/a GSC Holdings
Corp.).
Consent of Bryan Cave LLP (included in Exhibit 5.1 hereto).
23
.4
Consent of Oppenheimer Wolff & Donnelly LLP (included in
Exhibit 5.2 hereto).
24
.1
Power of Attorney (included on signature pages to this
Registration Statement).
25
.1
Statement of Eligibility and Qualification on Form T-1 of
Citibank, N.A as Trustee under the Indenture.
99
.1
Form of Letter of Transmittal.
99
.2
Form of Letter to Brokers, Dealers, Commercial Banks, Trust
Companies and Other Nominees.
99
.3
Form of Letter to Clients.
99
.4
Form of Notice of Guaranteed Delivery.
(1)
Incorporated by reference to GameStop Holdings Corp.’s
(f/k/a GameStop Corp.)
Form 8-K, filed
with the Securities and Exchange Commission on April 18,2005.
(2)
Incorporated by reference to Amendment No. 1 to
Registration Statement on
Form S-4 of
GameStop Corp. (f/k/a GSC Holdings Corp.), filed with the
Securities and Exchange Commission on July 8, 2005.
Incorporated by reference to GameStop Holdings Corp.’s
(f/k/a GameStop Corp.)
Form 8-K, filed
with the Securities and Exchange Commission on October 5,2004.
Incorporated by reference to GameStop Holdings Corp.’s
(f/k/a GameStop Corp.)
Form 8-K filed
with the Securities and Exchange Commission on April 15,2005.
(b) Financial statement schedules are omitted because they
are either not required, are not applicable or because
equivalent information has been incorporated herein by reference
or included in the financial statements, the notes thereto or
elsewhere herein.
Item 22.
Undertakings.
The undersigned registrants hereby undertake:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration
statement:
(i) to include any prospectus required by
Section 10(a)(3) of the Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events
arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement
(notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to
Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum
aggregate offering price set forth in the “Calculation of
Registration Fee” table in the effective registration
statement); and
(iii) to include any material information with respect to
the plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement;
provided, however, that the undertakings set forth in
paragraphs (1)(i) and (ii) above do not apply if the
information required to be included in a post-effective
amendment by those paragraphs is contained in
periodic reports filed by GameStop Corp. pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934
that are incorporated by reference in this registration
statement.
(2) That, for the purpose of determining any liability
under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a
post-effective amendment any of the securities being registered
which remain unsold at the termination of the offering.
(4) That, for purposes of determining any liability under
the Securities Act of 1933, each filing of GameStop Corp.’s
annual report pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each
filing of an employee benefit plan’s annual report pursuant
to Section 15(d) of the Securities Exchange Act of 1934)
that is incorporated by reference in this registration statement
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.
(5) That prior to any public reoffering of the securities
registered hereunder through use of a prospectus which is a part
of this registration statement, by any person or party who is
deemed to be an underwriter within the meaning of
Rule 145(c), that such reoffering prospectus will contain
the information called for by the applicable registration form
with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the
other items of the applicable form.
(6) That every prospectus (i) that is filed pursuant
to paragraph (5) above, or (ii) that purports to
meet the requirements of Section 10(a)(3) of the Securities
Act of 1933 and is used in connection with an offering of
securities subject to Rule 415, will be filed as a part of
an amendment to the registration statement and will not be used
until such amendment has become effective, and that for the
purpose of determining liabilities under the Securities Act of
1933, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(7) Insofar as indemnification for liabilities under the
Securities Act of 1933 may be permitted to directors, officers
and controlling persons of each registrant pursuant to the
foregoing provisions, or otherwise, each registrant has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Securities Act of 1933 and is therefore
unenforceable. In the event a claim of indemnification against
such liabilities (other than the payment by a registrant of
expenses incurred or paid by a director, officer or controlling
person of such registrant in a successful defense of any action,
suit or proceeding) is asserted by such director, officer, or
controlling person in connection with the securities being
registered, each registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as
expressed in the Securities Act of 1933 and will be governed by
the final adjudication of such issue.
(8) To respond to requests for information that is
incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this form, within one business
day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means.
This includes information contained in documents filed
subsequent to the effective date of the registration statement
through the date of responding to the request.
(9) To supply by means of a post-effective amendment all
information concerning a transaction, and the company being
acquired involved therein, that was not the subject of and
included in this registration statement when it became effective.
Pursuant to the requirements of the Securities Act, the
registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Grapevine, State of Texas on
April 26, 2006.
KNOW ALL MEN BY THESE PRESENT, that each person whose signature
appears below hereby constitutes and appoints R. Richard
Fontaine, Daniel A. DeMatteo and David W. Carlson, and each or
any of them, his true and lawful
attorney-in-fact and
agent, 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
documents in connection therewith), with the Securities and
Exchange Commission, granting unto each said
attorney-in-fact and
agent full power and authority to do and perform each and every
act and thing requisite and necessary to be done, as fully to
all intents and purposes as he might or could do in person,
hereby ratifying and confirming all that said
attorney-in-fact and
agent or either 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 by the following persons
in the capacities and on the dates indicated.
Pursuant to the requirements of the Securities Act, the
registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Grapevine, State of Texas on
April 26, 2006.
KNOW ALL MEN BY THESE PRESENT, that each person whose signature
appears below hereby constitutes and appoints R. Richard
Fontaine, Daniel A. DeMatteo and David W. Carlson, and each or
any of them, his true and lawful
attorney-in-fact and
agent, 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
documents in connection therewith), with the Securities and
Exchange Commission, granting unto each said
attorney-in-fact and
agent full power and authority to do and perform each and every
act and thing requisite and necessary to be done, as fully to
all intents and purposes as he might or could do in person,
hereby ratifying and confirming all that said
attorney-in-fact and
agent or either 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 by the following persons
in the capacities and on the dates indicated.
Pursuant to the requirements of the Securities Act, the
registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Grapevine, State of Texas on
April 26, 2006.
KNOW ALL MEN BY THESE PRESENT, that each person whose signature
appears below hereby constitutes and appoints R. Richard
Fontaine, Daniel A. DeMatteo and David W. Carlson, and each or
any of them, his true and lawful
attorney-in-fact and
agent, 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
documents in connection therewith), with the Securities and
Exchange Commission, granting unto each said
attorney-in-fact and
agent full power and authority to do and perform each and every
act and thing requisite and necessary to be done, as fully to
all intents and purposes as he might or could do in person,
hereby ratifying and confirming all that said
attorney-in-fact and
agent or either 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 by the following persons
in the capacities and on the dates indicated.
Pursuant to the requirements of the Securities Act, the
registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Grapevine, State of Texas on
April 26, 2006.
KNOW ALL MEN BY THESE PRESENT, that each person whose signature
appears below hereby constitutes and appoints R. Richard
Fontaine, Daniel A. DeMatteo and David W. Carlson, and each or
any of them, his true and lawful
attorney-in-fact and
agent, 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
documents in connection therewith), with the Securities and
Exchange Commission, granting unto each said
attorney-in-fact and
agent full power and authority to do and perform each and every
act and thing requisite and necessary to be done, as fully to
all intents and purposes as he might or could do in person,
hereby ratifying and confirming all that said
attorney-in-fact and
agent or either 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 by the following persons
in the capacities and on the dates indicated.
Pursuant to the requirements of the Securities Act, the
registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Grapevine, State of Texas on
April 26, 2006.
KNOW ALL MEN BY THESE PRESENT, that each person whose signature
appears below hereby constitutes and appoints R. Richard
Fontaine, Daniel A. DeMatteo and David W. Carlson, and each or
any of them, his true and lawful
attorney-in-fact and
agent, 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
documents in connection therewith), with the Securities and
Exchange Commission, granting unto each said
attorney-in-fact and
agent full power and authority to do and perform each and every
act and thing requisite and necessary to be done, as fully to
all intents and purposes as he might or could do in person,
hereby ratifying and confirming all that said
attorney-in-fact and
agent or either 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 by the following persons
in the capacities and on the dates indicated.
Pursuant to the requirements of the Securities Act, the
registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Grapevine, State of Texas on April26, 2006.
KNOW ALL MEN BY THESE PRESENT, that each person whose signature
appears below hereby constitutes and appoints R. Richard
Fontaine, Daniel A. DeMatteo and David W. Carlson, and each or
any of them, his true and lawful
attorney-in-fact and
agent, 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
documents in connection therewith), with the Securities and
Exchange Commission, granting unto each said
attorney-in-fact and
agent full power and authority to do and perform each and every
act and thing requisite and necessary to be done, as fully to
all intents and purposes as he might or could do in person,
hereby ratifying and confirming all that said
attorney-in-fact and
agent or either 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 by the following persons
in the capacities and on the dates indicated.
Pursuant to the requirements of the Securities Act, the
registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Grapevine, State of Texas on
April 26, 2006.
KNOW ALL MEN BY THESE PRESENT, that each person whose signature
appears below hereby constitutes and appoints R. Richard
Fontaine, Daniel A. DeMatteo and David W. Carlson, and each or
any of them, his true and lawful
attorney-in-fact and
agent, 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
documents in connection therewith), with the Securities and
Exchange Commission, granting unto each said
attorney-in-fact and
agent full power and authority to do and perform each and every
act and thing requisite and necessary to be done, as fully to
all intents and purposes as he might or could do in person,
hereby ratifying and confirming all that said
attorney-in-fact and
agent or either 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 by the following persons
in the capacities and on the dates indicated.
Pursuant to the requirements of the Securities Act, the
registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Grapevine, State of Texas on
April 26, 2006.
KNOW ALL MEN BY THESE PRESENT, that each person whose signature
appears below hereby constitutes and appoints R. Richard
Fontaine, Daniel A. DeMatteo and David W. Carlson, and each or
any of them, his true and lawful
attorney-in-fact and
agent, 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
documents in connection therewith), with the Securities and
Exchange Commission, granting unto each said
attorney-in-fact and
agent full power and authority to do and perform each and every
act and thing requisite and necessary to be done, as fully to
all intents and purposes as he might or could do in person,
hereby ratifying and confirming all that said
attorney-in-fact and
agent or either 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 by the following persons
in the capacities and on the dates indicated.
Pursuant to the requirements of the Securities Act, the
registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Grapevine, State of Texas on
April 26, 2006.
KNOW ALL MEN BY THESE PRESENT, that each person whose signature
appears below hereby constitutes and appoints R. Richard
Fontaine, Daniel A. DeMatteo and David W. Carlson, and each or
any of them, his true and lawful
attorney-in-fact and
agent, 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
documents in connection therewith), with the Securities and
Exchange Commission, granting unto each said
attorney-in-fact and
agent full power and authority to do and perform each and every
act and thing requisite and necessary to be done, as fully to
all intents and purposes as he might or could do in person,
hereby ratifying and confirming all that said
attorney-in-fact and
agent or either 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 by the following persons
in the capacities and on the dates indicated.
Pursuant to the requirements of the Securities Act, the
registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Grapevine, State of Texas on
April 26, 2006.
KNOW ALL MEN BY THESE PRESENT, that each person whose signature
appears below hereby constitutes and appoints R. Richard
Fontaine, Daniel A. DeMatteo and David W. Carlson, and each or
any of them, his true and lawful
attorney-in-fact and
agent, 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
documents in connection therewith), with the Securities and
Exchange Commission, granting unto each said
attorney-in-fact and
agent full power and authority to do and perform each and every
act and thing requisite and necessary to be done, as fully to
all intents and purposes as he might or could do in person,
hereby ratifying and confirming all that said
attorney-in-fact and
agent or either 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 by the following persons
in the capacities and on the dates indicated.
Pursuant to the requirements of the Securities Act, the
registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Grapevine, State of Texas on
April 26, 2006.
KNOW ALL MEN BY THESE PRESENT, that each person whose signature
appears below hereby constitutes and appoints R. Richard
Fontaine, Daniel A. DeMatteo and David W. Carlson, and each or
any of them, his true and lawful
attorney-in-fact and
agent, 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
documents in connection therewith), with the Securities and
Exchange Commission, granting unto each said
attorney-in-fact and
agent full power and authority to do and perform each and every
act and thing requisite and necessary to be done, as fully to
all intents and purposes as he might or could do in person,
hereby ratifying and confirming all that said
attorney-in-fact and
agent or either 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 by the following persons
in the capacities and on the dates indicated.
Pursuant to the requirements of the Securities Act, the
registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Grapevine, State of Texas on
April 26, 2006.
KNOW ALL MEN BY THESE PRESENT, that each person whose signature
appears below hereby constitutes and appoints R. Richard
Fontaine, Daniel A. DeMatteo and David W. Carlson, and each or
any of them, his true and lawful
attorney-in-fact and
agent, 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
documents in connection therewith), with the Securities and
Exchange Commission, granting unto each said
attorney-in-fact and
agent full power and authority to do and perform each and every
act and thing requisite and necessary to be done, as fully to
all intents and purposes as he might or could do in person,
hereby ratifying and confirming all that said
attorney-in-fact and
agent or either 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 by the following persons
in the capacities and on the dates indicated.
Pursuant to the requirements of the Securities Act, the
registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Grapevine, State of Texas on
April 26, 2006.
KNOW ALL MEN BY THESE PRESENT, that each person whose signature
appears below hereby constitutes and appoints R. Richard
Fontaine, Daniel A. DeMatteo and David W. Carlson, and each or
any of them, his true and lawful
attorney-in-fact and
agent, 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
documents in connection therewith), with the Securities and
Exchange Commission, granting unto each said
attorney-in-fact and
agent full power and authority to do and perform each and every
act and thing requisite and necessary to be done, as fully to
all intents and purposes as he might or could do in person,
hereby ratifying and confirming all that said
attorney-in-fact and
agent or either 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 by the following persons
in the capacities and on the dates indicated.
Pursuant to the requirements of the Securities Act, the
registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Grapevine, State of Texas on
April 26, 2006.
KNOW ALL MEN BY THESE PRESENT, that each person whose signature
appears below hereby constitutes and appoints R. Richard
Fontaine, Daniel A. DeMatteo and David W. Carlson, and each or
any of them, his true and lawful
attorney-in-fact and
agent, 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
documents in connection therewith), with the Securities and
Exchange Commission, granting unto each said
attorney-in-fact and
agent full power and authority to do and perform each and every
act and thing requisite and necessary to be done, as fully to
all intents and purposes as he might or could do in person,
hereby ratifying and confirming all that said
attorney-in-fact and
agent or either 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 by the following persons
in the capacities and on the dates indicated.
Pursuant to the requirements of the Securities Act, the
registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Grapevine, State of Texas on
April 26, 2006.
KNOW ALL MEN BY THESE PRESENT, that each person whose signature
appears below hereby constitutes and appoints R. Richard
Fontaine, Daniel A. DeMatteo and David W. Carlson, and each or
any of them, his true and lawful
attorney-in-fact and
agent, 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
documents in connection therewith), with the Securities and
Exchange Commission, granting unto each said
attorney-in-fact and
agent full power and authority to do and perform each and every
act and thing requisite and necessary to be done, as fully to
all intents and purposes as he might or could do in person,
hereby ratifying and confirming all that said
attorney-in-fact and
agent or either 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 by the following persons
in the capacities and on the dates indicated.
Pursuant to the requirements of the Securities Act, the
registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Grapevine, State of Texas on
April 26, 2006.
EB Sadsbury Property Holding, LP
By:
EB Sadsbury General Partner, LP, its General Partner
KNOW ALL MEN BY THESE PRESENT, that each person whose signature
appears below hereby constitutes and appoints R. Richard
Fontaine, Daniel A. DeMatteo and David W. Carlson, and each or
any of them, his true and lawful
attorney-in-fact and
agent, 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
documents in connection therewith), with the Securities and
Exchange Commission, granting unto each said
attorney-in-fact and
agent full power and authority to do and perform each and every
act and thing requisite and necessary to be done, as fully to
all intents and purposes as he might or could do in person,
hereby ratifying and confirming all that said
attorney-in-fact and
agent or either 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 by the following persons
in the capacities and on the dates indicated.
Agreement and Plan of Merger, dated as of April 17, 2005,
among GameStop Corp. (f/k/a GSC Holdings Corp.), Electronics
Boutique Holdings Corp., GameStop, Inc., GameStop Holdings Corp.
(f/k/a GameStop Corp.), Cowboy Subsidiary LLC and Eagle
Subsidiary LLC.(1)
3
.1
Amended and Restated Certificate of Incorporation of GameStop
Corp. (f/k/a GSC Holdings Corp.).(2)
3
.2
Amended and Restated Bylaws of GameStop Corp. (f/k/a GSC
Holdings Corp.).(2)
3
.3
Amendment to the Amended and Restated Certificate of
Incorporation of GameStop Corp. (f/k/a GSC Holdings Corp.).(3)
3
.4
Amended and Restated Articles of Incorporation of GameStop, Inc.
3
.5
Amended and Restated Bylaws of GameStop, Inc.
3
.6
Certificate of Limited Partnership of GameStop Texas LP.
3
.7
Limited Partnership Agreement of GameStop Texas LP, dated as of
May 27, 2004.
3
.8
Certificate of Incorporation of GameStop Brands, Inc.
3
.9
Certificate of Amendment of Certificate of Incorporation of
GameStop Brands, Inc.
3
.10
Bylaws of GameStop Brands, Inc.
3
.11
Amended and Restated Certificate of Incorporation of GameStop
Holdings Corp. (f/k/a GameStop Corp.).
3
.12
Bylaws of GameStop Holdings Corp. (f/k/a GameStop Corp.).
3
.13
Articles of Incorporation of Sunrise Publications, Inc.
3
.14
Bylaws of Sunrise Publications, Inc.
3
.15
Articles of Incorporation of Marketing Control Services, Inc.
3
.16
Bylaws of Marketing Control Services, Inc.
3
.17
Certificate of Formation of GameStop of Texas (GP), LLC.
3
.18
Certificate of Amendment of the Certificate of Formation of
GameStop of Texas (GP), LLC.
3
.19
Limited Liability Company Agreement of GameStop of Texas (GP),
LLC, dated as of May 25, 2004.
3
.20
Certificate of Formation of GameStop (LP), LLC.
3
.21
Certificate of Amendment of the Certificate of Formation of
GameStop (LP), LLC.
3
.22
Limited Liability Company Agreement of GameStop (LP), LLC, dated
as of May 26, 2004.
3
.23
Certificate of Incorporation of Electronics Boutique Holdings
Corp.
3
.24
Certificate of Amendment of the Certificate of Incorporation of
Electronics Boutique Holdings Corp.
3
.25
Amended and Restated Bylaws of Electronics Boutique Holdings
Corp.
3
.26
Articles of Incorporation of EB Catalog Company, Inc.
3
.27
Bylaws of EB Catalog Company, Inc.
3
.28
Certificate of Incorporation of ELBO Inc.
3
.29
Bylaws of ELBO Inc.
3
.30
Certificate of Formation of FR Sadsbury Second, LLC.
3
.31
Certificate of Amendment to the Certificate of Formation of FR
Sadsbury Second, LLC (changing name to EB Sadsbury Second, LLC).
3
.32
Limited Liability Company Agreement of FR Sadsbury Second, LLC,
dated as of August 10, 2004, by its sole member, FR
Sadsbury, LLC.
3
.33
Certificate of Limited Partnership of FR Sadsbury General
Partner, LP. Certificate of Amendment to the Certificate of
Limited Partnership of FR Sadsbury General Partner, LP (changing
name to EB Sadsbury General Partner, LP).
3
.34
Limited Partnership Agreement of FR Sadsbury General Partner,
LP, dated as of May 23, 2005, by and between EB Sadsbury
Second, LLC and EB Sadsbury, LLC.
Certificate of Limited Partnership of FR Sadsbury Property
Holding, LP. Certificate of Amendment to the Certificate of
Limited Partnership of FR Sadsbury Property Holding, LP
(changing name to EB Sadsbury Property Holding, LP).
3
.36
Limited Partnership Agreement of FR Sadsbury Property Holding,
LP, dated as of August 10, 2004, by and between FR Sadsbury
General Partner, LP and FR Sadsbury, LLC.
3
.37
Certificate of Incorporation of EB International Holdings, Inc.
3
.38
Certificate of Merger of E.B. International, Inc. with and into
EB International Holdings, Inc.
3
.39
Bylaws of EB International Holdings, Inc.
4
.1
Indenture, dated September 28, 2005, by and among GameStop
Corp. (f/k/a GSC Holdings Corp.), GameStop, Inc., the Subsidiary
Guarantors party thereto, and Citibank, N.A., as Trustee.(4)
4
.2
Form of Senior Floating Rate Notes due 2011 (included in
Exhibit 4.1 hereto).
4
.3
Form of 8% Senior Notes due 2012 (included in
Exhibit 4.1 hereto).
4
.4
Form of Guarantees of Senior Floating Rate Notes due 2011 and
8% Senior Notes due 2012 (included in Exhibit 4.1
hereto).
4
.5
First Supplemental Indenture, dated October 8, 2005, by and
among GameStop Corp. (f/k/a GSC Holdings Corp.), GameStop, Inc.,
the Subsidiary Guarantors party thereto, and Citibank, N.A., as
Trustee.(5)
4
.6
Registration Rights Agreement, dated September 28, 2005, by
and among GameStop Corp. (f/k/a GSC Holdings Corp.), GameStop,
Inc., the Subsidiary Guarantors listed on Schedule I-A
thereto, and Citigroup Global Markets Inc., for themselves and
as representatives of the several Initial Purchasers listed on
Schedule II thereto.(4)
4
.7
Rights Agreement, dated as of June 27, 2005, between
GameStop Corp. (f/k/a GSC Holdings Corp.) and The Bank of New
York, as Rights Agent.(2)
5
.1
Opinion of Bryan Cave LLP.
5
.2
Opinion of Oppenheimer Wolff & Donnelly LLP.
10
.1
Separation Agreement, dated as of January 1, 2002, between
Barnes & Noble, Inc. and GameStop Holdings Corp.(f/k/a
GameStop Corp.).(6)
10
.2
Tax Disaffiliation Agreement, dated as of January 1, 2002,
between Barnes & Noble, Inc. and GameStop Holdings
Corp.(f/k/a GameStop Corp.).(7)
10
.3
Insurance Agreement, dated as of January 1, 2002, between
Barnes & Noble, Inc. and GameStop Holdings Corp. (f/k/a
GameStop Corp.).(7)
10
.4
Operating Agreement, dated as of January 1, 2002, between
Barnes & Noble, Inc. and GameStop Holdings Corp. (f/k/a
GameStop Corp.).(7)
10
.5
Amended and Restated 2001 Incentive Plan.(8)
10
.6
Amendment to Amended and Restated 2001 Incentive Plan.(5)
10
.7
Supplemental Compensation Plan.(8)
10
.8
Form of Option Agreement.(8)
10
.9
Form of Restricted Share Agreement.(9)
10
.10
Stock Purchase Agreement, dated as of October 1, 2004, by
and among GameStop Holdings Corp. (f/k/a GameStop Corp.),
B&N GameStop Holding Corp. and Barnes & Noble,
Inc.(10)
10
.11
Promissory Note, dated as of October 1, 2004, made by
GameStop Holdings Corp. (f/k/a GameStop Corp.) in favor of
B&N GameStop Holding Corp.(10)
10
.12
Credit Agreement, dated October 11, 2005, by and among
GameStop Corp. (f/k/a GSC Holdings Corp.), certain subsidiaries
of GameStop Corp., Bank of America, N.A. and the other lending
institutions listed in the Agreement, Bank of America, N.A. and
Citicorp North America, Inc., as Issuing Banks, Bank of America,
N.A., as Administrative Agent and Collateral Agent, Citicorp
North America, Inc., as Syndication Agent, and Merrill Lynch
Capital, a division of Merrill Lynch Business Financial Services
Inc., as Documentation Agent.(3)
10
.13
Guaranty, dated as of October 11, 2005, by GameStop Corp.
(f/k/a GSC Holdings Corp.) and certain subsidiaries of GameStop
Corp. in favor of the agents and lenders.(3)
Patent and Trademark Security Agreement, dated as of
October 11, 2005.(3)
10
.16
Mortgage, Security Agreement, and Assignment and Deeds of Trust
between GameStop Texas LP and Bank of America, N.A., as
Collateral Agent.(3)
10
.17
Mortgage, Security Agreement, and Assignment and Deeds of Trust
between Electronics Boutique of America, Inc. and Bank of
America, N.A., as Collateral Agent.(3)
10
.18
Form of Securities Collateral Pledge Agreement.(3)
10
.19
Registration Rights Agreement, dated October 8, 2005, among
EB Nevada Inc., James J. Kim and GameStop Corp. (f/k/a GSC
Holdings Corp.)(3)
10
.20
Executive Employment Agreement, dated as of April 11, 2005,
between GameStop Holdings Corp. (f/k/a GameStop Corp.) and R.
Richard Fontaine.(11)
10
.21
Executive Employment Agreement, dated as of April 11, 2005,
between GameStop Holdings Corp. (f/k/a GameStop Corp.) and
Daniel A. DeMatteo.(11)
10
.22
Executive Employment Agreement, dated as of December 9,2005, between GameStop Corp. and Steven R. Morgan.(12)
10
.23
Executive Employment Agreement, dated as of April 3, 2006,
between GameStop Corp. (f/k/a GSC Holdings Corp.) and David W.
Carlson.(13)
21
.1
List of Subsidiaries of GameStop Corp. (f/k/a GSC Holdings
Corp.).
Consent of Bryan Cave LLP (included in Exhibit 5.1 hereto).
23
.4
Consent of Oppenheimer Wolff & Donnelly LLP (included
in Exhibit 5.2 hereto).
24
.1
Power of Attorney (included on signature pages to this
Registration Statement).
25
.1
Statement of Eligibility and Qualification on Form T-1 of
Citibank, N.A as Trustee under the Indenture.
99
.1
Form of Letter of Transmittal.
99
.2
Form of Letter to Brokers, Dealers, Commercial Banks, Trust
Companies and Other Nominees.
99
.3
Form of Letter to Clients.
99
.4
Form of Notice of Guaranteed Delivery.
(1)
Incorporated by reference to GameStop Holdings Corp.’s
(f/k/a GameStop Corp.)
Form 8-K, filed
with the Securities and Exchange Commission on April 18,2005.
(2)
Incorporated by reference to Amendment No. 1 to
Registration Statement on
Form S-4 of
GameStop Corp. (f/k/a GSC Holdings Corp.), filed with the
Securities and Exchange Commission on July 8, 2005.
Incorporated by reference to GameStop Holdings Corp.’s
(f/k/a GameStop Corp.)
Form 8-K, filed
with the Securities and Exchange Commission on October 5,2004.
Incorporated by reference to GameStop Holdings Corp.’s
(f/k/a GameStop Corp.)
Form 8-K filed
with the Securities and Exchange Commission on April 15,2005.
