eGames Inc.

FOUNDED: 1992

Contact Information:

HEADQUARTERS: 2000 Cabot Blvd., Suite 110
Langhorne, PA 19047-1833
PHONE: (215)750-6606
FAX: (215)750-3722
URL: http://www.egames.com

OVERVIEW

eGames develops and markets entertainment software targeted to home personal computer users. The entire stock of the company's games are marketed under the trademark of Family Friendly, reflecting that fact that every product sold by eGames is rated E for Everyone by the Entertainment Software Ratings Board, meaning that they are nonviolent and appropriate for all ages. Software titles are promoted as full-featured, value-priced, and easy-to-use. The majority of titles are entertainment-based, although the company also offers a limited number of home office and productivity software products.

During fiscal year 2001, ending June 30, 2001, Walgreen Company, Infogrames Inc., and Rite Aid Corporation accounted for 20 percent, 17 percent, and 10 percent of sales, respectively. During the previous fiscal year, Infogrames Inc. and Navarre Corporation accounted for 22 percent and 13 percent of sales, respectively. eGames also markets its software titles via its Web sites, egames.com and outerbounds.com.

COMPANY FINANCES

For fiscal year 2001, ending June 30, 2001, eGames posted a net loss of $5.93 million on revenues of $7.17 million, compared to a net income of approximately $252,600 on revenues of $10.79 million for fiscal year 2000, representing a decrease of $3.62 million in revenues and $6.18 million in net income. The decline in sales was primarily caused by a decrease of $4.88 million in net sales to distributors who sell to software retailers, as well as direct sales to such retailers. Of that total, eGames reported an estimated loss of $2.91 million due to a retailers' trend toward reducing their value-priced software selections, with the remaining loss sustained due to increased value-priced software competition from major software distributors, which eroded eGames' hold on its niche market. Net sales of $1.13 million to food and drug retailers only partially offset the losses incurred in the retail market. International sales also declined by $98,000.

Compounding the disparity between profit/loss and revenues was an increase in cost of sales by $1.73 million, from $4.28 million in fiscal 2000 to $6.01 million in fiscal 2001, representing a 40 percent increase. The increase in cost of sales is attributed primarily to a provision to absorb $1.27 million in costs for obsolete inventory. Other factors driving up cost of sales include processing costs for product returns totaling $324,000 and freight costs totaling $206,000.

For the first three quarters of fiscal 2002, ending March 31, eGames reported a net income of $1.01 million on net sales totaling $7.93 million, compared to a net loss of $768,000 on revenues of $6.43 million during the same period of the previous year. Income and revenues totals were significantly impacted by an agreement reached between eGames and one of its retailers in February of 2002, which made final all sales of previously shipped software and eliminated return privileges. Excluding the impact of this agreement, eGames would have reported for the first nine months of fiscal 2002 net sales of $5.82 million, representing a year-over-year decrease of $612,000, and a net loss of $113,000, representing a year-over-year net loss decrease of $2.38 million. During the first three quarters of fiscal 2002, eGames successfully reduced its operating expenses by more than $2.4 million, or 48 percent.

Until April 1, 2001, eGames traded on the NASDAQ SmallCap Market; however, the company was de-listed after its price per share fell below $1.00 for 30 consecutive days of trading, after which eGames began trading on the Over-the-Counter (OTC) Bulletin Board. Because the company's stock trades at less than $5.00 per share and its net tangible assets are less than $2 million, it is subject to restrictive trading under the rules of the Securities Exchange Act of 1934. A broker may not recommend purchase of so-called penny stocks to other than established clients with significant assets without written permission from the purchaser prior to the transaction. During fiscal 2000, stock prices peaked during the first quarter at $3.813 per share before falling to $0.500 per share during the fourth quarter. In fiscal 2001, prices in the first quarter topped out at $1.875 per share but fell to $0.100 during the fourth quarter. On June 11, 2001, eGames stocks sold for $0.27 a share; on April 12, 2002, prices reached a low of $0.03 a share.

ANALYSTS' OPINIONS

By its own assessment after the close of fiscal 2001, eGames was uncertain that a return to profitability would be possible during fiscal 2002 given the ongoing sluggish economy as well as the significant increase in competition from larger competitors with greater ability to engage in development, distribution, and marketing activities. In fact, eGames management warned its 123 shareholders that the company was holding on by a thread. After defaulting on a $2 million line of credit from Fleet Bank during 2001, the bank shut off the company's access to the credit, causing a cash flow crisis.

FAST FACTS: About eGames Inc.

Ownership: eGames is a publicly owned company that trades its stock on the OTC Bulletin Board.

Ticker Symbol: EGAM.OB

Officers: Gerald W. Klein, 53, Pres. and CEO, 2001 base salary $176,086; William C. Acheson, 51, VP, Product Development, 2001 base salary $165,961; Lawrence Fanelle, 49, VP, Operations, 2001 base salary $123,012; Richard Siporin, VP, Sales, 41, 2001 base salary $150,825

Employees: 19

Chief Competitors: Based on product and price similarities, Electronic Arts, Havas, Activision, Infogrames, Inc., Hasbro Interactive, Mattel Media, Cosmi, Take-Two Interactive, Microsoft, and Interplay are eGames' most significant competitors.

On November 2, 2001, eGames and Fleet reached an agreement that allowed eGames to repay the bank on an amortizing term loan over the course of 22 months. In return, Fleet agreed not to exercise its default agreement as long as eGames remains in compliance with the new agreement as outlined in a turnaround plan that stipulated that eGames achieve certain earnings benchmarks and periodically disclose financial performance to Fleet. If eGames defaults, Fleet may liquidate the company at the expense of shareholder investments. Because eGames no longer has access to credit, operational costs must be funded via ongoing business. With a $5.93 million loss in fiscal 2001 and a net loss, albeit much smaller, for the first three quarters of fiscal 2002, eGames' future is not yet secure. If the company cannot generate sufficient revenues to sustain operations and if the company cannot secure additional credit due to its previous default and debt load, the viability of the company may be jeopardized.

HISTORY

eGames, previously known as RomTech Inc., was incorporated in July of 1992. Between 1992 and 1997, the company experienced significant annual losses. Fiscal year 1998 was the first time that eGames turned a profit, reporting a net income of 1.253 million, followed by positive performances in both fiscal years 1999 and 2000, with earnings totaling $463,000 and $253,000, respectively. In August of 1998 eGames acquired Software Partners Publishing and Distribution Ltd., a distributor of consumer entertainment and home office applications based in the United Kingdom. On March 31, 1999, Software Partners was renamed eGames Europe Ltd. On May 11, 2001, eGames sold eGames Europe to Greenstreet Software Limited.

STRATEGY

Using the tag line "eGames—Where the 'e' is for Everybody!" eGames intends to be a leading publisher of high quality, low-priced interactive consumer entertainment software. To accomplish this, the company's strategic plan includes: building on brand name recognition of its Family Friendly products; ongoing development of high quality, top selling titles within existing brands; development of new brand lines; creating strong ties with retail and distribution partners; providing a comprehensive portfolio of software titles within the company's consumer entertainment market segment that is attractive to retail and distribution customers for its sales and profit potential; and maintaining and improving a productive Internet presence and comprehensive Web site.

The eGames model for conducting its business successfully is based on two factors: brand recognition and value pricing. eGames functions on the assumption that the under-$15 retail segment of the software entertainment industry will be the fastest growing for the foreseeable future. By using marketplace sales data eGames is able to identify products that are the hottest sellers on the market and respond by developing its own titles or obtaining rights to externally developed titles, focusing in particular on sustainable product life that appeal to a broad age range and both genders. Because the software entertainment market is in constant flux, reacting to consumer preference and technological advancements, eGames strives to correctly identify products that will retain the attention of customers and then reacts by quickly and efficiency putting similar Family Friendly titles on the shelves, packaged and priced to encourage impulse buying. Although eGames provides technical support for all its products, its software is designed to provide easy installation and use.

Another important factor in eGames' strategic plan is to develop a widespread network of retail and Internet distribution. The goal is to offer retailers multiple methods to contract for eGames products. During fiscal year 2001, direct sales to retailers made up over 50 percent of revenues; however, due to costs associated with direct-to-store shipments, eGames will focus more on sales to wholesale distributors such as Infogrames Inc., United American Video, and Triad Distributors Inc. eGames ultimate distribution goal is to place its software titles in front of as many consumers as possible.

eGames' Internet presence, which provides such features as technical support, game demos and previews, free games, and opportunities to buy software titles via download or traditional package purchase, complements the company's distribution system. The foundation of eGames' Internet strategy is the eGames browser, which was introduced in 1998 to provide a standard, user-friendly interface to present eGames products to consumers on their personal computers.

CHRONOLOGY: Key Dates for eGames Inc.

1992:

eGames incorporates

1995:

Completes initial public offering of common stock; begins trading on NASDAQ SmallCap Market

1998:

Posts first annual net profit of $1.253 million

2001:

eGames is de-listed from Nasdaq; begins trading on the Over-the-Counter (OTC) Bulletin Board; posts a net loss for the fiscal year in excess of $5 million

2002:

Stock prices fall to $0.03 a share

Building customer loyalty by providing a brand name that reflects consistent quality is important. Because the stores are inundated with rapidly changing titles from a myriad of companies, eGames believes that strong name recognition is a necessary advantage because consumers will repeatedly return to a brand name that has previously provided a high rate of satisfaction. eGames' difficulty remains in its financial troubles, which have not provided sufficient cash to invest in any significant marketing strategy. Nonetheless, eGames management understands the importance of successfully marketing the software title with attractive packaging and product promotion.

INFLUENCES

eGames offers its products to retailers under either sell-in or sell-through terms. Sell-in business means that the retailer purchases the product directly from eGames; sell-through means that eGames only realizes its profit after the end-user makes a purchase in the retail store. An ongoing and unpredictable problem for eGames has been product returns from retailers. If a sell-in retailer returns unsold software in bulk, eGames could owe the retailer a substantial refund. Although sell-through returns have not yet appeared as revenue, often by the time software is returned, the titles may have been rendered obsolete by new software advancements or changing trends in consumer preference. Although eGames may not be contractually obligated to accept the returns, the company's need to retain distribution channels may result in flexibility that impacts eGames negatively.

Because the entertainment software market is highly competitive and changes rapidly, eGames is increasingly fighting for shelf space. Retailers have a limited amount of room to display software, and they place on their shelves what is expected to sell. Because large, well-known software developers and distributors are entering the value-priced software market, eGames must struggle to compete with already-established high levels of brand recognition and much bigger promotion and marketing resources. The increased availability of low-priced software provides retailers with an advantage in negotiating the purchase of software titles due to limited shelf space, leading to ongoing price erosion.

CURRENT TRENDS

The consumer entertainment software market is expected to be valued at more than $37 billion worldwide by 2003, up from $16 billion four years earlier. According to eGames, approximately 145 million people in the United States alone confirm that they play computer games. As prices of computers and software decline and computer technology advances, eGames expects the entertainment software market to continue on its growth path.

During eGames' profitable years, large software companies produced primarily higher-end titles, leaving the below-$15 market to eGames. However, since major software developers have enters the low-end software business, eGames has found itself as a battling much larger competitors for both shelf space and customers. As competition grows fierce, retailers are empowered to require significant promotional funding commitments when contracting to display entertainment software titles on their shelves. As a result, larger competitors with greater financial resources are better able to provide these required marketing tools, thereby reducing space left available for smaller developers such as eGames. Unable to provide required promotional spending, eGames was forced to decrease its presence particularly in office superstore retail outlets.

eGames' decision to turn to food and drug retailers in 2001 as an alternative to traditional software retailers did create positive results. Often based on short-term promotional events that resulted in poorer than expected sell-through totals, eGames found itself burdened with a large inventory of returns from its food and drug customers. Because the products were returned late, their shelf life had expired and eGames was forced to scrap them, at a cost of more than $1.27 million. Still eGames and other independent software developers continue to pursue new avenue for distribution, including publishing companies.

EGAMES ONLINE

At its Web site, eGames hosts a free arcade of online games for its patrons. Games are available in nine different categories: arcade, board, card (including 14 versions of solitaire), casino, kids, puzzles, sports, strategy, and trivia. Want to buy a game? Download or order one of eGames' top ten best-sellers: Blast Thru, Bowling Mania, Crazy Puzzle, Mahjongg Empire, Mahjongg Master 3, Mahjongg Master, Mini Golf Master, RaJongg-The Curseof RA, Solitaire Master 2, or Speedy Eggbert.

PRODUCTS

eGames provides several lines of brand name software titles, including eGames Series, Galaxy of Games, Game Master Series, Galaxy of Home Office Help, and Outerbounds Games. The eGames Series usually sells at a retail price of less than $15. Game Master Series titles are sold at retail for $14.99, but the titles' attractive boxed packaging provides the products with a higher-end appearance. Outerbound Games usually retail between $9.99 and $14.99. Other software product lines are usually packaged in a jeweled CD case and sell for a retail price of $9.99.

GLOBAL PRESENCE

After selling off its wholly owned subsidiary eGames Europe in 2001, eGames began conducting its international sales via licensing agreements whereby eGames is paid a royalty fee based on product sales.

SOURCES OF INFORMATION

Bibliography

"egames announces fiscal 2002 third quarter financial results and other events." pr newswire, 19 april 2002.

"egames inc." hoovers online, 2002. available at http://www.hoovers.com.

"egames inc." multex.com, 2002. available at http://www.multex.com.

"egames inc. introduces a new line of value priced software for the mainstream-gaming market-outerbounds games." market news publishing, 15 august 2001.

"egames inc. stock moves to the otc bulletin board." market news publishing, 8 june 2001.

key, peter. "not all's been fun and egames seeks change." philadelphia business journal, 18 january 2002.

For additional industry research:

investigate companies by their standard industrial classification codes, also known as sics. egames inc.'s primary sic is:

7372 prepackaged software

also investigate companies by their north american industry classification system codes, also known as naics codes. egames inc.'s primary naics code is:

511210 software publishers