UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR
15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File Number 0-24860
PIERCING PAGODA, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 23-1894725
(State or Other Jurisdiction of (I.R.S. Employer Identification
Incorporation or Organization) Number)
3910 Adler Place
Bethlehem, PA 18017
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (610) 691-0437
N/A
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
The number of shares outstanding of the registrant's common stock is 5,261,095
(as of November 12, 1996)
<PAGE>
PIERCING PAGODA, INC.
INDEX
PAGE
PART I - FINANCIAL INFORMATION NUMBER
Item 1. Financial Statements
Consolidated balance sheets as of
September 30, 1996 and March 31, 1996 3
Consolidated statements of operations for the three months
ended September 30, 1996 and 1995 and six months ended
September 30, 1996 and 1995 4
Consolidated statements of cash flows for the six months
ended September 30, 1996 and 1995 5
Notes to consolidated financial statements 7
Item 2 Management's discussion and analysis of financial condition
and results of operations 8
PART II - OTHER INFORMATION
Item 4 Submission of matters to a vote of security holders 12
Item 6 Exhibits and reports on form 8-k 13
Signatures 14
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PIERCING PAGODA, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
September, 30 March 31,
1996 1996
Assets (Unaudited)
<S> <C> <C>
Current assets:
Cash $ 2,276 $ 1,864
Accounts receivable 877 794
Inventory 37,383 25,390
Deposits for inventory purchases 3,431 361
Prepaid expenses and other current assets 298 468
Prepaid income taxes 1,138 883
Deferred tax assets 693 693
------- -------
Total current assets 46,096 30,453
Property, fixtures and equipment, net 19,223 15,806
Other assets 1,664 1,647
======= =======
$66,983 $47,906
======= =======
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 9,243 $ 1,811
Current installments of long-term debt and revolving line of credit 17,388 5,910
Accrued expenses and taxes withheld 6,436 6,784
------- -------
Total current liabilities 33,067 14,505
Long-term debt, less current installments 2,707 2,350
Deferred tax liabilities 1,259 1,259
Unbilled rent 270 213
------- -------
Total liabilities 37,303 18,327
Commitments and contingencies
Stockholders' equity
Preferred stock, par value $.01 per share,
authorized 3,000,000 shares. None issued -- --
Common stock, par value $.01 per share, authorized
15,000,000 shares. Issued 5,258,952 shares and 5,240,293
at September, 30, 1996 and March 31, 1996, respectively 53 53
Additional paid-in capital 22,354 22,183
Retained earnings 7,273 7,343
------- -------
Total stockholders' equity 29,680 29,579
------- -------
$66,983 $47,906
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
PIERCING PAGODA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30, September 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Net sales $ 32,439 $ 23,012 $ 62,683 $ 45,387
Cost of goods sold and occupancy expenses,
(excluding depreciation on kiosks) 18,723 13,142 36,186 26,222
-------- -------- -------- --------
Gross profit 13,716 9,870 26,497 19,165
Selling, general and administrative expenses,
(including depreciation on kiosks) 13,477 9,528 25,898 18,455
-------- -------- -------- --------
Income from operations 239 342 599 710
Interest and other income 74 60 134 108
Interest expense 487 311 848 451
-------- -------- -------- --------
Earnings (loss) before income taxes (174) 91 (115) 367
Income tax expense (benefit) (69) 46 (45) 160
======== ======== ======== ========
Net income (loss) ($ 105) $ 45 ($ 70) $ 207
======== ======== ======== ========
Earnings (loss) per share ($ 0.02) $ 0.01 ($ 0.01) $ 0.04
======== ======== ======== ========
Weighted average common shares and
common share equivalents 5,370 5,315 5,369 5,294
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
PIERCING PAGODA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six-months ended
September 30,
1996 1995
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ($ 70) $ 207
Adjustments to reconcile net income to net cash used
in operating activities:
Depreciation and amortization 1,639 1,291
Loss on disposal of property, fixtures and equipment 48 27
Other changes in other assets (85) (189)
Deferred income taxes -- (126)
Decrease (increase) in assets:
Accounts receivable (83) 264
Inventory (11,993) (13,169)
Deposits for inventory purchases (3,070) (2,730)
Prepaid expenses and other current assets 170 (1,420)
Prepaid income taxes (255) --
Increase (decrease) in liabilities:
Accounts payable 7,432 4,545
Tax indemnification payable -- (1,202)
Income taxes payable -- (20)
Accrued expenses and taxes withheld (348) 658
Unbilled rent 57 (12)
-------- --------
Net cash used in operating activities (6,558) (11,876)
Cash flows from investing activities:
Additions to property, fixtures and equipment (5,070) (3,764)
Proceeds from disposal of property, fixtures and equipment 19 --
Noncurrent deposits, net 15 (49)
-------- --------
Net cash used in investing activities (5,036) (3,813)
Cash flows from financing activities:
Repayments of long-term debt (10) --
Revolving line of credit, net 11,445 14,300
Proceeds from issuance of long-term debt 400 --
Cash dividends paid -- (45)
Proceeds from issuance of common stock 171 --
-------- --------
Net cash provided by financing activities 12,006 14,255
-------- --------
Net increase (decrease) in cash 412 (1,434)
Cash at beginning of period 1,864 2,320
======== ========
Cash at end of period $ 2,276 $ 886
======== ========
</TABLE>
5
<PAGE>
PIERCING PAGODA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six months ended
September 30,
1996 1995
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 801 $ 433
====== ======
Income taxes, net $ 210 $1,763
====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Summary of significant accounting policies
The accompanying consolidated financial statements of Piercing Pagoda,
Inc. and subsidiary (the "Company") have been prepared in accordance with
the instructions to Form 10-Q and do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. These consolidated financial statements
include the results of operations for Piercing Pagoda, Inc. and a wholly
owned subsidiary. All intercompany transactions have been eliminated in
consolidation. These consolidated financial statements should be read in
conjunction with the Company's financial statements and notes thereto for
the year ended March 31, 1996. The financial information included herein
is unaudited; however, the information reflects all adjustments
(consisting solely of normal recurring adjustments) that are, in the
opinion of management, necessary for a fair presentation of the financial
position, results of operations and cash flows for the interim periods.
Operating results for the three-month and six-month periods ended
September 30, 1996 are not necessarily indicative of the results that may
be expected for the entire fiscal year.
Note 2 Property, Fixtures and Equipment
A summary of major classes of property, fixtures and equipment follows
(in thousands):
<TABLE>
<CAPTION>
September 30, March 31,
1996 1996
<S> <C> <C>
Land $ 688 $ 688
Furniture and fixtures 2,352 2,077
Kiosks 16,523 13,908
Building and improvements 4,005 3,822
Computer equipment, software and other equipment 6,700 5,130
------- -------
30,268 25,625
Less accumulated depreciation and amortization 11,045 9,819
======= =======
$19,223 $15,806
======= =======
</TABLE>
7
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Background
The Company's consolidated net sales are comprised primarily of sales
generated by the Company's stores and, to a much lesser extent, wholesale
sales primarily to an independent store operator in Florida to which the
Company licenses the use of its store name and concept (the "Florida
Licensee"). Cost of goods sold and occupancy expenses include the cost of
merchandise, rent and occupancy and the cost of preparing merchandise for
sale. Selling, general and administrative expenses include store and
supervisory payroll, corporate overhead and non-occupancy store expenses
including depreciation of kiosks.
Results of operations
Three months ended September 30, 1996 and 1995
Consolidated net sales increased $9.4 million, or 41%, from $23.0 million
for the three months ended September 30, 1995 to $32.4 million for the
three months ended September 30, 1996. This increase was primarily due to
an increase in the average number of stores open for the three months
ended September 30, 1996 as compared to the three months ended September
30, 1995 and a $2.1 million, or 9%, increase in comparable store net
sales. There were a total of 565 stores open at September 30, 1996
compared to 416 at September 30, 1995, an increase of 36%. The average
jewelry units sold per store increased 4% to 2,500 for the three months
ended September 30, 1996 compared to 2,400 at September 30, 1995. The
average price per jewelry unit sold was relatively unchanged at $22.72
for the three months ended September 30, 1996 compared to $22.90 for the
three months ended September 30, 1995.
Gross profit increased $3.8 million, or 38%, from $9.9 million for the
three months ended September 30, 1995 to $13.7 million for the three
months ended September 30, 1996. The Company's gross profit margin
decreased from 42.9% for the three months ended September 30, 1995 to
42.3% for the three months ended September 30, 1996. The increase in
gross profit dollars was attributable primarily to the Company's increase
in net sales. The decrease in the Company's gross profit margin reflects
a lower gross profit on merchandise sold, partially offset by decreases
in rent and occupancy expenses as a percentage of net sales. The decrease
in gross profit margin reflects the Company's efforts to provide better
customer value and increase dollar and unit sales. The decrease in rent
and occupancy as a percentage of net sales reflects the fact that despite
the increase in net sales, many stores were below the points at which
percentage rents would have been required. Additionally, relatively fixed
common area maintenance, mall advertising and other costs were spread
over a higher level of net sales.
Selling, general and administrative expenses increased $4.0 million, or
42%, from $9.5 million for the three
8
<PAGE>
months ended September 30, 1995 to $13.5 million for the three months
ended September 30, 1996. As a percentage of net sales, selling, general
and administrative expenses increased from 41.4% for the three months
ended September 30, 1995 to 41.5% for the three months ended September
30, 1996. The increase in dollars was attributable primarily to the
increase in the number of stores and the pre-opening costs for new
stores, as well as higher supervisory and administrative expenses to
support the current and expected growth in stores. Selling, general and
administrative expenses increased as a percentage of net sales due to
higher expenses associated with new store growth and an improved
incentive package for store personnel implemented in the third quarter of
fiscal 1996. Depreciation and amortization expense increased 11% from
$771,000 for the three months ended September 30, 1995 to $858,000 for
the three months ended September 30, 1996 due primarily to capital
expenditures for new stores, the upgrading of kiosks in existing
locations and the expansion of the Company's corporate headquarters and
distribution center completed in fiscal 1996.
Interest expense increased $176,000, or 57%, from $311,000 for the three
months ended September 30, 1995 to $487,000 for the three months ended
September 30, 1996, and as a percentage of net sales increased from 1.4%
for the three months ended September 30, 1995 to 1.5% for the three
months ended September 30, 1996. The increase in interest expense was due
primarily to higher average balances on the Company's revolving line of
credit agreement, an increase in fees paid under the Company's gold
consignment arrangements due to a greater number of ounces consigned,
outstanding long-term debt of $2.9 million issued in connection with the
expansion of the Company's corporate headquarters and distribution
facility in the prior fiscal year.
As a result of the foregoing, the Company's net income fell from $45,000
for the three months ended September 30, 1995 to a net loss of $105,000
for the three months ended September 30, 1996.
Six months ended September 30, 1996 and 1995
Consolidated net sales increased $17.3 million, or 38%, from $45.4
million for the six months ended September 30, 1995 to $62.7 million for
the six months ended September 30, 1996. This increase was primarily due
to an increase in the average number of stores open for the six months
ended September 30, 1996 as compared to the six months ended September
30, 1995 and a $3.0 million, or 7%, increase in comparable store net
sales. There were a total of 565 stores open at September 30, 1996
compared to 416 at September 30, 1995, an increase of 36%. The average
jewelry units sold per store increased 4% to 4,900 for the six months
ended September 30, 1996 compared to 4,700 for the six months ended
September 30, 1995. The average price per jewelry unit sold increased 3%
to $23.60 for the six months ended September 30, 1996 compared to $22.90
for the six months ended September 30, 1995.
Gross profit increased $7.3 million, or 38%, from $19.2 million for the
six months ended September 30, 1995 to $26.5 million for the six months
ended September 30, 1996. The Company's gross profit margin improved
slightly from 42.2% for the six months ended September 30, 1995 to 42.3%
for the six months ended September 30, 1996. The increase in gross profit
dollars was attributable primarily to the Company's increase in net
sales. The increase in the Company's gross profit margin reflects a
slightly lower
9
<PAGE>
gross profit on merchandise sold, offset by a reduction in sales to the
Florida licensee relative to the total sales of the Company. Sales to the
Florida licensee provide a lower gross margin than the Company's own
retail sales.
Selling, general and administrative expenses increased $7.4 million, or
40%, from $18.5 million for the six months ended September 30, 1995 to
$25.9 million for the six months ended September 30, 1996. As a
percentage of net sales, selling, general and administrative expenses
increased from 40.7% for the six months ended September 30, 1995 to 41.3%
for the six months ended September 30, 1996. The increase in dollars was
attributable primarily to the increase in the number of stores and the
pre-opening costs for new stores, as well as higher supervisory and
administrative expenses to support the current and expected growth in
stores. Selling, general and administrative expenses increased as a
percentage of net sales due to higher expenses associated with new store
growth and an improved incentive package for store personnel implemented
in the third quarter of fiscal 1996. Depreciation and amortization
expense increased 23% from $1.3 million for the six months ended
September 30, 1995 to $1.6 million for the six months ended September 30,
1996 due primarily to capital expenditures for new stores, the upgrading
of kiosks in existing locations and the expansion of the Company's
corporate headquarters and distribution center completed in fiscal 1996.
Interest expense increased $397,000, or 88%, from $451,000 for the six
months ended September 30, 1995 to $848,000 for the six months ended
September 30, 1996, and as a percentage of net sales increased from 1.0%
for the six months ended September 30, 1995 to 1.4% for the six months
ended September 30, 1996. The increase in interest expense was due
primarily to higher average balances on the Company's revolving line of
credit agreement, an increase in fees paid under the Company's gold
consignment arrangements due to a greater number of ounces consigned,
outstanding long-term debt of $2.9 million issued in connection with the
expansion of the Company's corporate headquarters and distribution
facility in the prior fiscal year.
As a result of the foregoing, the Company's net income decreased from
$207,000 for the six months ended September 30, 1995 to a net loss of
$70,000 for the six months ended September 30, 1996.
Liquidity and capital resources
The Company's primary on-going capital requirements are to fund an
increase in inventory and to fund capital expenditures and working
capital (mostly inventory) for new stores. The Company's primary sources
of liquidity are funds provided by operations, its gold consignment
program and bank borrowings. Due to the seasonal nature of the Company's
business, outstanding borrowings under its credit facilities generally
peak during the second and third fiscal quarters as the Company finances
inventory purchases in advance of the year-end holiday shopping season.
At September 30, 1996, the Company had outstanding borrowings of $17.2
million under its revolving line of credit and $2.9 million of long-term
debt outstanding. In addition, the Company had consigned 65,000 ounces of
gold under its gold consignment program valued at approximately $24.6
million.
10
<PAGE>
Net cash used in operating activities was $6.6 million for the six months
ended September 30, 1996 compared to $11.9 million for the same period in
the prior year. Net cash used in operating activities primarily reflects
increases in inventory and deposits for merchandise purchases to support
newly opened stores and future scheduled store openings.
Net cash used in investing activities was $5.0 million during the six
months ended September 30, 1996 compared to $3.8 million during the six
months ended September 30, 1995. Net cash used in investing activities
primarily reflects the addition of property, fixtures and equipment in
connection with the opening of new stores.
Net cash provided by financing activities was $12.0 million for the six
months ended September 30, 1996 versus $14.3 million provided by
financing activities during the six months ended September 30, 1995. Cash
provided by financing activities during the six months ended September
30, 1996 primarily reflects an increase in borrowings under the Company's
revolving line of credit agreement to support the increased number of
stores currently operating and anticipated new store openings. Also, the
Company obtained an additional $400,000 long term loan in connection with
the expansion of the Company's corporate headquarters and distribution
facility in the prior fiscal year.
On September 5, 1996, the Company's revolving credit facility was amended
to extend the term of the agreement to October 31, 1996 and to increase
the amount of funds available. The amended agreement provided for maximum
borrowings of $50.0 million with a cash advance sub-limit of $30.0
million. This credit facility was further amended on October 18, 1996 to
extend the term of the agreement to December 31, 1996 and to increase the
borrowing limit to $60.0 million, with a $36.0 million cash advance
sub-limit. At September 30, 1996, the Company had $7.6 million available
to be borrowed under its then existing revolving credit facility and was
in compliance with covenants contained in the agreement or had obtained
appropriate waivers. The Company believes that the expected cash flows
from operations, its gold consignment program and bank borrowings will be
sufficient to fund the Company's currently anticipated capital and
liquidity needs.
Seasonality
The Company's business is highly seasonal. Due to the impact of the
year-end holiday shopping season, the Company experiences a substantial
portion of its annual net sales and profitability in its third fiscal
quarter (ending December 31st). The Company has generally experienced
lower net sales in each of the first, second and fourth quarters and
lower net income or net losses in each of those quarters.
The Company's results of operations may also fluctuate from quarter to
quarter as a result of a variety of factors, including fluctuations in
the price of gold or gold consignment rates, the amount and timing of new
store openings, the integration of such new stores into the operations of
the Company and the net sales contributed by new stores. The addition of
a large number of new stores significantly affects results of operations
on a quarter-to-quarter basis.
11
<PAGE>
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a safe
harbor for forward-looking statements. A number of the matters and
subject areas discussed in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" are not limited to
historical or current facts and deal with potential future circumstances
and developments. Forward-looking statements include those related to the
Company's ability to fund anticipated capital and liquidity needs. A
variety of factors could cause the Company's actual results to differ
materially from the expected results expressed in the Company's
forward-looking statements. The risks and uncertainties which may affect
the operation and results of the Company's business include, but are not
limited to, general economic conditions and the impact on discretionary
spending in the geographic areas where a significant number of the
Company's stores are located, fluctuations in the price of gold, the
Company's ability to finance its gold merchandise and the cost of such
financing, future regulation regarding ear piercing activities, the
ability to obtain favorable store locations on satisfactory lease terms,
the Company's ability to finance expansion plans and changes in the
competitive environment in which the Company operates.
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On September 18, 1996, the Registrant held its Annual Meeting of
Stockholders. The stockholders approved the following proposals:
To elect one director to hold office until the 1999 Annual Meeting of
Stockholders and until his successor has been duly elected and qualified.
Director For Against
John F. Eureyecko 4,660,816 2,942
To approve the Piercing Pagoda, Inc. Employee Stock Purchase Plan.
For Against Abstain
4,644,883 9,522 5,399
To ratify the appointment of KPMG Peat Marwick LLP as the Company's
independent auditors for the 1997 fiscal year.
For Against Abstain
4,662,358 100 1,300
12
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
3.1 Restated Certificate of Incorporation of the Registrant
(incorporated by reference to Exhibit 3.1 to the Registrant's
Registration Statement on Form S-1, File No. 33-80200, initially
filed with the Securities and Exchange Commission on June 14,
1994).
3.2 Amended and Restated By-Laws of the Registrant (incorporated by
reference to Exhibit 3.2 to the Registrant's Registration
Statement on Form S-1, File No. 33-80200, initially filed with
the Securities and Exchange Commission on June 14, 1994).
4 Specimen Common Stock Certificate (incorporated by reference to
Exhibit 4 to the Registrant's Registration Statement on Form S-1,
File No. 33-80200, initially filed with the Securities and
Exchange Commission on June 14, 1994).
10.1 Third Amendment to Third Amended and Restated Loan Agreement
dated September 5, 1996 between the Registrant and Summit Bank.
10.2 Eleventh Replacement Revolving Loan Note dated September 5, 1996
between the Registrant and Summit Bank.
10.3 Fourth Amendment to Third Amended and Restated Loan Agreement
dated October 18, 1996 between the Registrant and Summit Bank.
10.4 Twelfth Replacement Revolving Loan Note dated October 18, 1996
between the Registrant and Summit Bank.
11 Statement regarding computation of net income per common share
and common share equivalent.
b) Reports on Form 8-K
During the quarter ended September 30, 1996, no reports on Form 8-K
were filed.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PIERCING PAGODA, INC.
(Registrant)
Date: November 12, 1996 /s/ John F. Eureyecko
---------------------
John F. Eureyecko
President,
Chief Operating Officer
(Principal Financial Officer)
Date: November 12, 1996 /s/ Brandon R. Lehman
---------------------
Brandon R. Lehman
Treasurer
(Principal Accounting Officer)
14
<PAGE>
INDEX TO EXHIBITS
Sequentially
Exhibit Numbered
Number Page
10.1 Third Amendment to Third Amended and Restated Loan
Agreement dated September 5, 1996 between the
Registrant and Summit Bank. 16
10.2 Eleventh Replacement Revolving Loan Note dated
September 5, 1996 between the Registrant and Summit
Bank. 20
10.3 Fourth Amendment to Third Amended and Restated Loan
Agreement dated October 18, 1996 between the
Registrant and Summit Bank. 23
10.4 Twelfth Replacement Revolving Loan Note dated October
18, 1996 between the Registrant and Summit Bank. 27
11 Statement regarding computation of net income per
common share and common share equivalent 30
15
THIRD AMENDMENT TO THIRD AMENDED
AND RESTATED LOAN AGREEMENT
This Third Amendment to Third Amended and Restated Loan Agreement
("Amendment") is made this 5th day of September, 1996 by and between Piercing
Pagoda, Inc. ("Borrower"), a Delaware corporation having its chief executive
office at 3910 Adler Place, Bethlehem, Pennsylvania 18017, and Summit Bank,
successor-in-interest to First Valley Bank ("Bank"), a Pennsylvania bank having
offices at One Bethlehem Plaza, Bethlehem, Pennsylvania 18018.
BACKGROUND
A. Pursuant to the terms and subject to the conditions set forth in that
certain Third Amended and Restated Loan Agreement dated February 13, 1995 by and
between Borrower and Bank (under its former name), as amended pursuant to a
letter agreement dated April 21, 1995 between Borrower and Bank (under its
former name), that certain Amendment to Third Amended and Restated Loan
Agreement dated August 4, 1995 between Borrower and Bank (under its former
name), and as amended by that certain Second Amendment to Third Amended and
Restated Loan Agreement dated November 21, 1995 between Borrower and Bank (under
its former name) (as amended, the "Loan Agreement") and related instruments,
agreements and documents (collectively, along with the Loan Agreement, the
"Financing Agreements"), Borrower is currently indebted to Bank for repayment of
various loans, advances and extensions of credit made by Bank from time to time
to or for the benefit of Borrower under a certain revolving credit facility in
the sum of up to Forty Million ($40,000,000.00) Dollars (the "Revolving Loan"),
which indebtedness is evidenced by that certain Tenth Replacement Revolving Loan
Note dated November 21, 1995 in the principal sum of Forty-Three Million
($43,000,000.00) Dollars executed and delivered by Borrower to Bank (under its
former name) (the "Tenth Replacement Revolving Loan Note").
B. Borrower has requested that Bank (a) increase the amount of the
Revolving Loan, (b) extend the maturity date of the Revolving Loan and (c)
otherwise amend and modify certain of the other terms and conditions set forth
in the Loan Agreement and the other Financing Agreements, and Bank is willing to
do so under the terms and subject to the conditions set forth in this Amendment
and in the instruments, agreements and documents to be executed and/or delivered
pursuant to this Third Amendment.
NOW, THEREFORE, with the foregoing Background deemed incorporated
hereinafter by this reference and hereby made a part hereof, the parties hereto,
intending to be legally bound, hereby further covenant and agree as follows:
SECTION 1. DEFINITIONS.
1.01 Capitalized Terms. All capitalized terms not otherwise defined in this
Amendment shall have the meanings ascribed to such terms in the Loan Agreement.
SECTION 2. CONFIRMATION OF EXISTING INDEBTEDNESS AND RATIFICATION OF
FINANCING AGREEMENTS.
2.01 Confirmation of Existing Indebtedness. Borrower hereby unconditionally
acknowledges and confirms that: the outstanding principal balance of Borrower to
Bank evidenced by the Tenth Replacement Revolving Loan Note is, as of the date
hereof, Fourteen Million Two-Hundred Fifty-Four Thousand Eight Hundred and
Thirty-Three and 36/100 ($14,254,833.36) Dollars; the aggregate face amount of
Letters of Credit issued by Bank or CoreStates Bank, N.A., successor-in-interest
to Meridian Bank for the account of Borrower under the Revolving Loan is, as of
the date hereof, Twenty-Two Million One-hundred Sixty-
16
<PAGE>
Three Thousand Three-hundred and 00/100 ($22,163,300.00) Dollars; interest on
the Obligations has been paid through August 15, 1996; and the foregoing
indebtedness, together with continually accruing interest and related costs,
fees and expenses is, as of the date hereof, owing without claim, counterclaim,
right of recoupment, defense or set-off of any kind or of any nature whatsoever.
2.02 Ratification of Financing Agreements.
(A) Borrower hereby unconditionally ratifies and confirms and
reaffirms in all respects and without condition, all of the terms, covenants and
conditions set forth in the Financing Agreements, and agrees that it remains
unconditionally liable to Bank in accordance with the respective terms,
covenants and conditions of such instruments, agreements and documents.
(B) Without limiting the generality of the immediately preceding
Subparagraph 2.02(A), the Borrower hereby unconditionally ratifies and confirms
and reaffirms in all respects and without condition, the provisions of the
Financing Agreements permitting Bank to Confess Judgment against the Borrower.
SECTION 3. AMENDMENTS TO FINANCING AGREEMENTS.
(A) The text of Paragraph 1.2.1 of the Loan Agreement is deleted in
its entirety and replaced with the following:
"Revolving Loan Termination Date" means October 31, 1996, unless such
date is extended by Bank and evidenced by a confirming written notice
to Borrower.
3.01 The Revolving Loan.
(A) For the period from the date of this Third Amendment through
Revolving Loan Termination Date, the Line Limit shall be Fifty Million
($50,000,000.00) Dollars and the Cash Advance Sublimit shall be Thirty Million
($30,000,000.00) Dollars.
3.02 The Eleventh Replacement Revolving Loan Note. Contemporaneously
herewith, Borrower shall execute and deliver to Bank its note in the principal
sum of Fifty Million ($50,000,000.00) Dollars (the "Eleventh Replacement
Revolving Loan Note") to evidence Borrower's Obligations to repay Bank, on the
Revolving Loan Termination Date, with interest at the applicable Rate set forth
at Paragraph 2.08 of the Loan Agreement, for all loans, advances and extensions
of credit made or to be made by Bank to or for the benefit of Borrower under the
Revolving Loan, all as more fully described in the Eleventh Replacement
Revolving Loan Note, the terms, covenants and conditions of which are hereby
deemed incorporated herein by this reference and made a part hereof. The term
"Note" is hereby amended to mean and include the Eleventh Replacement Revolving
Loan Note.
SECTION 4. WARRANTIES AND REPRESENTATIONS.
4.01 Reaffirmation of Warranties and Representations. All warranties and
representations set forth in the Loan Agreement and the other Financing
Agreements are hereby reasserted and restated by Borrower as of the date hereof
as if set forth at length herein, except as modified by information previously
provided, in writing, to Bank or acknowledged, in writing, by Bank. Borrower
hereby acknowledges that such warranties and representations, and the warranties
and representations set forth below, are being specifically relied upon by Bank
as a material inducement to Bank to enter into this Third Amendment and increase
the amount of the Revolving Loan.
17
<PAGE>
4.02 Additional Warranties and Representations. To induce Bank to enter
into this Third Amendment, Borrower represents and warrants to Bank that:
(A) Borrower has the power, authority and capacity to enter into and
perform this Third Amendment, the Eleventh Replacement Revolving Loan Note and
all related instruments, agreements and documents, and to incur the Obligations
herein and therein provided for, and Borrower has taken all proper and necessary
corporate action to authorize the execution, delivery and performance of this
Third Amendment, the Eleventh Replacement Revolving Loan Note and related
instruments, agreements and documents;
(B) This Third Amendment is, and the Eleventh Replacement Revolving
Loan Note when delivered will be, valid, binding and enforceable against
Borrower in accordance with their respective terms; and
(C) No consent, approval or authorization of, or filing, registration
or qualification with, any Person is required to be obtained by Borrower in
connection with the execution and delivery of this Third Amendment, the Eleventh
Replacement Revolving Loan Note or any related instrument, agreement or
document, or undertaking or performance of any Obligation hereunder or
thereunder.
SECTION 5. CONDITIONS PRECEDENT.
This Third Amendment is subject to the following conditions precedent (all
instruments, agreements and documents to be in form and substance satisfactory
to Bank and its counsel):
5.01 Documents Required for Closing. Borrower shall have duly executed
and/or delivered (or caused to be duly executed and/or delivered) to Bank the
following:
(A) The Eleventh Replacement Revolving Loan Note and each other
instrument, agreement and document to be executed and/or delivered pursuant to
this Amendment and/or the instruments, agreements and documents referred to in
this Amendment;
(B) A certified (as of the date of this Third Amendment) copy of
resolutions of Borrower's Board of Directors authorizing the execution, delivery
and performance of this Third Amendment, the Eleventh Replacement Revolving Loan
Note and each other document to be executed and/or delivered pursuant hereto and
any other instrument, agreement or document referred to herein;
(C) A certification that Borrower's certificate of incorporation and
by-laws remain unchanged from Closing;
(D) A certificate (dated the date of this Third Amendment) of
Borrower's corporate secretary as to the incumbency and specimen signatures of
the officers of Borrower executing this Third Amendment, the Eleventh
Replacement Revolving Loan Note and each other document to be executed and/or
delivered pursuant hereto or thereto; and
(E) Such other instruments, agreements and documents as may be
required by Bank and/or its counsel.
SECTION 6. MISCELLANEOUS.
6.01 Integrated Agreement. This Third Amendment and all of the instruments,
agreements and documents executed and/or delivered in conjunction with this
Third Amendment shall be effective upon the date of execution hereof and thereof
by all parties hereto and thereto,
18
<PAGE>
and shall be deemed incorporated into and made a part of the Loan Agreement and
the other Financing Agreements. All such instruments, agreements and documents,
and this Third Amendment, shall be construed as integrated and complementary of
each other, and as augmenting and not restricting Bank's rights, remedies,
benefits and security. If, after applying the foregoing, an inconsistency still
exists, the provisions of this Third Amendment shall constitute an amendment
thereto and shall govern and control.
6.02 Expenses of Bank. Borrower will pay, on demand, all reasonable
out-of-pocket expenses, including the reasonable fees and expenses of legal
counsel for Bank, incurred in connection with this Third Amendment and all
instruments, agreements and documents executed and/or delivered in connection
with this Third Amendment. Subject to Paragraph 2.07 of the Loan Agreement, Bank
may charge any deposit account of Borrower maintained at Bank for all or any
part of any amount due hereunder.
IN WITNESS WHEREOF, the parties hereto have caused this Third Amendment to
Third Amended and Restated Loan Agreement to be duly executed and exchanged as
of the day and year first above written.
PIERCING PAGODA, INC.,
a Delaware corporation
By:/s/ John F. Eureyecko
-----------------------------------
Name: John F. Eureyecko
Title: President,
Attest: /s/ Brandon R. Lehman
-----------------------------------
Name: Brandon R. Lehman
Title: Treasurer
(Corporate Seal)
SUMMIT BANK
By: /s/ Ammon J. Baus
-----------------------------------
Name: Ammon J. Baus
Title: Vice President
19
$50,000,000.00 September 5, 1996
ELEVENTH REPLACEMENT REVOLVING LOAN NOTE
FOR VALUE RECEIVED, PIERCING PAGODA, INC. ("Borrower"), a Delaware
corporation having its chief executive office at 3910 Adler Place, Bethlehem,
Pennsylvania 18016, promises to pay to the order of SUMMIT BANK,
successor-in-interest to First Valley Bank ("Bank"), its successors and assigns,
at the office of Bank located at One Bethlehem Plaza, Bethlehem, Pennsylvania
18018 or at such other location as designated by Bank from time to time, on or
before October 31, 1996, the principal sum of Fifty Million ($50,000,000.00)
Dollars or, if less, the unpaid principal amount of all loans and advances made
by Bank to or for the benefit of Borrower under and as part of the Revolving
Loan described in that certain Third Amended and Restated Loan Agreement dated
February 13, 1995 between Borrower and Bank (under its former name), as amended
by that certain letter agreement dated April 21, 1995 between Borrower and Bank
(under its former name), that certain Amendment to Third Amended and Restated
Loan Agreement dated August 4, 1995 between Borrower and Bank (under its former
name), that certain Second Amendment to Third Amended and Restated Loan
Agreement dated November 21, 1995 between Borrower and Bank (under its former
name), and that certain Third Amendment to Third Amended and Restated Loan
Agreement of even date herewith (the "Third Amendment") between Borrower and
Bank (as amended, the "Loan Agreement"), together with interest thereon as
specified herein.
This Note is that certain Eleventh Replacement Revolving Loan Note issued
in accordance with the terms and subject to the conditions of, and referred to
in, the Third Amendment and the Loan Agreement and all related instruments,
agreements and documents. All capitalized terms not otherwise defined in this
Note shall have the meanings ascribed to such terms in the Loan Agreement. The
outstanding principal balance of all loans made hereunder pursuant to the Loan
Agreement at any time shall be evidenced by Bank's books and records, which
shall be deemed to be conclusive and irrefutable evidence of the correctness
thereof unless Borrower objects thereto within thirty (30) days of receiving
notice thereof.
Notwithstanding the face amount of this Note the Line Limit shall be Fifty
Million ($50,000,000.00) Dollars and the Cash Advance Sublimit shall be Thirty
Million and 00/100 ($30,000,000.00) Dollars.
Interest on the outstanding principal balance of the Revolving Loan shall
accrue and be payable at a per annum rate equal to the Prime Rate in effect from
time to time minus three-quarters (3/4%) percent (the "Variable Revolving Loan
Rate"). Each time the Prime Rate shall change, the Variable Revolving Loan Rate
shall change contemporaneously with such change in the Prime Rate.
Interest on all Loans shall be calculated on the basis of a year of 360
days for the actual number of days elapsed, and shall be due and payable
monthly, in arrears, on the fifteenth day of each month, commencing September
15, 1996.
Except as hereinafter provided, interest shall continue to accrue and be
payable on the unpaid principal balance of this Note at the aforesaid rate of
interest notwithstanding any demand for payment, acceleration and/or entry of
judgment for such sums. If any scheduled payment of principal or interest is not
made within five (5) days after Bank mails notice of non-payment to Borrower,
there shall become immediately due and payable, and Borrower shall pay to Bank,
an additional sum equal to five (5%) percent of the amount of such payment.
20
<PAGE>
Each installment shall be applied on account of the interest,
principal, late charges, or other sums payable hereunder in such order as the
Bank may, in its sole discretion, determine.
DISBURSEMENT OF PROCEEDS - Borrower hereby represents and warrants to Bank that
the principal of this Note will be used solely for business and/or commercial
purposes.
RIGHT TO COMPLETE NOTE - Bank may at any time from time to time, without notice
to any obligor for the Obligations: (1) date this Note as of the date when the
loan evidenced hereby was made; (2) complete any blank spaces according to the
terms upon which Bank has granted such loan; and (3) cause the signature of one
or more Persons to be added as additional borrowers without in any way affecting
or limiting the liability of the existing obligors for the Obligations to Bank.
EVENTS OF DEFAULT - Each of the following shall be an "Event of Default"
hereunder: (1) Borrower shall fail to pay when due any installment of principal
or interest payable hereunder or any Obligations and such failure shall continue
for a period of five (5) Business Days after the mailing of notice of such
default by Bank; (2) Borrower shall fail to observe or perform any other
Obligation to be observed or performed by them hereunder, under the Loan
Agreement or under any other agreement between Borrower and Bank.
BANK'S RIGHTS UPON DEFAULT - Upon the occurrence of an Event of Default, Bank
shall have all rights and remedies set forth in the Loan Agreement including,
but not limited to:
(1) the right to accelerate the maturity of this Note and demand
immediate payment of all outstanding principal and accrued interest thereon;
(2) the right to exercise its right of set-off and all of the rights,
privileges and remedies under the Pennsylvania Uniform Commercial Code and all
of its rights and remedies under the Loan Agreement, this Note or any other
note, or other agreement, instrument or document issued in connection with or
arising out of any of the Obligations, or at law or in equity, all of which
remedies shall be cumulative and not alternative. Borrower and each other
obligor for the Obligations waives and releases any right to require Bank to
collect any of the Obligations from any other collateral under any theory of
marshalling of assets or otherwise, and specifically authorizes Bank to apply
any collateral in which any such obligor has any right, title or interest
against any of the Obligations in any manner that Bank may determine; and
(3) the right upon five (5) days written notice to Borrower forwarded
to the address of Borrower on the books of Bank, to begin accruing interest, in
addition to the interest provided for above, at a rate not to exceed five
percent (5%) per annum on the unpaid principal balance of this Note; provided,
however, that no interest shall accrue hereunder in excess of the maximum amount
of interest then allowed by law. Such interest shall accrue notwithstanding the
entry or obtaining of any judgment and shall be added to and become part of the
Obligations. Borrower agrees to pay such accrued interest upon demand. The
waiver of any Event of Default shall not be a waiver of any subsequent Event of
Default.
WARRANT OF ATTORNEY - Borrower hereby irrevocably authorizes and empowers any
Attorney or any Clerk of any court of record upon or after the occurrence of any
Event of Default to appear for and CONFESS JUDGMENT against Borrower, (A) for
such sums as are due and/or may become due on the Obligations, and/or (B) in any
action of replevin instituted by Bank to obtain possession on any collateral
securing this Note or securing any of the Obligations, in either case with or
without declaration, with costs of suit, without stay of execution and with an
amount not to exceed five (5%) percent of the unpaid principal amount of the
Obligations, but not less than Five Thousand ($5,000.00) Dollars, added for
attorney's collection fees. Borrower: (1) waives the right of inquisition on any
real estate levied on, voluntarily condemns the same, authorizes the
Prothonotary or Clerk to enter upon the Writ of Execution said voluntary
21
<PAGE>
condemnation and agrees that said real estate may be sold on a Writ of
Execution; (2) to the extent permitted by law, waives and releases all relief
from all redemption, appraisement, stay, exemption or appeal laws of any state
now in force or hereafter enacted; and (3) releases all errors in such
proceedings. If a copy of this Note, verified by affidavit by or on behalf of
Bank shall have been filed in such action, it shall not be necessary to file the
original Note as a Warrant of Attorney. The authority and power to appear for
and enter judgment against Borrower shall not be exhausted by the initial
exercise thereof, and the same may be exercised, from time to time, as often as
Bank shall deem necessary and desirable, and this Note shall be a sufficient
Warrant therefore. Bank may enter one or more judgments in the same or different
counties for all or part of the Obligations, without regard to whether judgment
has been entered on more than one occasion for the same Obligations. In the
event any judgment entered against Borrower hereunder is stricken or opened upon
application by or on Borrower's behalf for any reason whatsoever, Bank is hereby
authorized and empowered to again appear for and Confess Judgment against
Borrower; subject, however, to the limitation that such subsequent entry or
entries of judgment by Bank may only be done to cure any errors in prior
proceedings, only and to the extent that such errors are subject to cure in the
later proceedings.
MISCELLANEOUS - Borrower hereby waives protest, notice of protest, presentment,
dishonor, notice of dishonor and demand. Borrower agrees to reimburse Bank for
all costs, including court costs (whether incurred in any bankruptcy,
insolvency, appellate or other proceeding) and reasonable attorneys' fees,
incurred by Bank in connection with the collection and enforcement hereof.
Interest shall be calculated hereunder for the actual number of days that the
principal is outstanding, based on a year of three hundred sixty (360) days.
Changes in the rate of interest hereon shall become effective on the days on
which Bank announces changes in its Prime Rate. The rights and privileges of
Bank under this Note shall inure to the benefit of its successors and assigns.
All representations, warranties and agreements of Borrower and each obligor for
the Obligations made in connection with this Note shall bind Borrower's and such
obligor's personal representatives, heirs, successors and assigns. If any
provision of this Note shall for any reason be held to be invalid or
unenforceable, such invalidity or unenforceability shall not affect any other
provision hereof, but this Note shall be construed as if such invalid or
unenforceable provision had never been contained herein. The waiver of any Event
of Default or the failure of Bank to exercise any right or remedy to which it
may be entitled shall not be deemed a waiver of any subsequent Event of Default
or of Bank's right to exercise that or any other right or remedy to which Bank
is entitled. This Note has been delivered to and accepted by Bank in, and shall
be governed by, the laws of the Commonwealth of Pennsylvania. This Note replaces
and supersedes (but does not extinguish any unpaid Obligations evidenced by or
constitute a novation of) that certain Tenth Replacement Revolving Loan Note
dated November 21, 1995 in the principal sum of Forty-Three Million
($43,000,000.00) Dollars executed and delivered by Borrower to Bank (under its
former name). The parties agree to the jurisdiction of the federal and state
courts located in Pennsylvania in connection with any matter arising hereunder,
including the collection and enforcement hereof. Borrower has duly executed this
Note the day and year first above written and has hereunto set Borrower's hand
and seal.
ATTEST: PIERCING PAGODA, INC.
By: /s/ Brandon R. Lehman By:/s/ John F. Eureyecko
- --------------------------------- ----------------------------------
Name: Brandon R. Lehman Name: John F. Eureyecko
Title: Treasurer Title: President
[Affix Corporate Seal]
22
FOURTH AMENDMENT TO THIRD AMENDED
AND RESTATED LOAN AGREEMENT
This Fourth Amendment to Third Amended and Restated Loan Agreement ("Fourth
Amendment") is made this 18th day of October, 1996 by and between Piercing
Pagoda, Inc. ("Borrower"), a Delaware corporation having its chief executive
office at 3910 Adler Place, Bethlehem, Pennsylvania 18017, and Summit Bank,
successor-in-interest to First Valley Bank ("Bank"), a Pennsylvania bank having
offices at One Bethlehem Plaza, Bethlehem, Pennsylvania 18018.
BACKGROUND
A. Pursuant to the terms and subject to the conditions set forth in that
certain Third Amended and Restated Loan Agreement dated February 13, 1995 by and
between Borrower and Bank (under its former name), as amended pursuant to a
letter agreement dated April 21, 1995 between Borrower and Bank (under its
former name), that certain Amendment to Third Amended and Restated Loan
Agreement dated August 4, 1995 between Borrower and Bank (under its former
name), as amended by that certain Second Amendment to Third Amended and Restated
Loan Agreement dated November 21, 1995 between Borrower and Bank (under its
former name), and as amended by that certain Third Amendment to Third Amended
and Restated Loan Agreement dated September 5, 1996 between Borrower and Bank
(as amended, the "Loan Agreement") and related instruments, agreements and
documents (collectively, along with the Loan Agreement, the "Financing
Agreements"), Borrower is currently indebted to Bank for repayment of various
loans, advances and extensions of credit made by Bank from time to time to or
for the benefit of Borrower under a certain revolving credit facility in the sum
of up to Fifty Million ($50,000,000.00) Dollars (the "Revolving Loan"), which
indebtedness is evidenced by that certain Eleventh Replacement Revolving Loan
Note dated September 5, 1996 in the principal sum of Fifty Million
($50,000,000.00) Dollars executed and delivered by Borrower to Bank (under its
former name) (the "Eleventh Replacement Revolving Loan Note").
B. Borrower has requested that Bank (a) increase the amount of the
Revolving Loan, (b) extend the maturity date of the Revolving Loan and (c)
otherwise amend and modify certain of the other terms and conditions set forth
in the Loan Agreement and the other Financing Agreements, and Bank is willing to
do so under the terms and subject to the conditions set forth in this Amendment
and in the instruments, agreements and documents to be executed and/or delivered
pursuant to this Fourth Amendment.
NOW, THEREFORE, with the foregoing Background deemed incorporated
hereinafter by this reference and hereby made a part hereof, the parties hereto,
intending to be legally bound, hereby further covenant and agree as follows:
SECTION 1. DEFINITIONS.
1.01 Capitalized Terms. All capitalized terms not otherwise defined in this
Amendment shall have the meanings ascribed to such terms in the Loan Agreement.
SECTION 2. CONFIRMATION OF EXISTING INDEBTEDNESS AND RATIFICATION OF
FINANCING AGREEMENTS.
2.01 Confirmation of Existing Indebtedness. Borrower hereby unconditionally
acknowledges and confirms that: the outstanding principal balance of Borrower to
Bank evidenced by the Eleventh Replacement Revolving Loan Note is, as of the
date hereof, Twenty-Two Million Three Hundred Twenty-Four Thousand Seven Hundred
Seven and 42/100 ($22,324,707.42) Dollars; the aggregate face amount of Letters
of Credit issued by Bank or
23
<PAGE>
CoreStates Bank, N.A., successor-in-interest to Meridian Bank for the account of
Borrower under the Revolving Loan is, as of the date hereof, Twenty-Five Million
Two Hundred Sixty-Two Thousand Four Hundred Four and 43/100($25,262,404.43)
Dollars; interest on the Obligations has been paid through October 15, 1996; and
the foregoing indebtedness, together with continually accruing interest and
related costs, fees and expenses is, as of the date hereof, owing without claim,
counterclaim, right of recoupment, defense or set-off of any kind or of any
nature whatsoever.
2.02 Ratification of Financing Agreements.
(A) Borrower hereby unconditionally ratifies and confirms and
reaffirms in all respects and without condition, all of the terms, covenants and
conditions set forth in the Financing Agreements, and agrees that it remains
unconditionally liable to Bank in accordance with the respective terms,
covenants and conditions of such instruments, agreements and documents.
(B) Without limiting the generality of the immediately preceding
Subparagraph 2.02(A), the Borrower hereby unconditionally ratifies and confirms
and reaffirms in all respects and without condition, the provisions of the
Financing Agreements permitting Bank to Confess Judgment against the Borrower.
SECTION 3. AMENDMENTS TO FINANCING AGREEMENTS.
(A) The text of Paragraph 1.2.1 of the Loan Agreement is deleted in
its entirety and replaced with the following:
"Revolving Loan Termination Date" means December 31, 1996, unless such
date is extended by Bank and evidenced by a confirming written notice
to Borrower.
3.01 The Revolving Loan.
(A) For the period from the date of this Fourth Amendment through
Revolving Loan Termination Date, the Line Limit shall be Sixty Million
($60,000,000.00) Dollars and the Cash Advance Sublimit shall be Thirty-Six
Million ($36,000,000.00) Dollars.
3.02 The Twelfth Replacement Revolving Loan Note. Contemporaneously
herewith, Borrower shall execute and deliver to Bank its note in the principal
sum of Sixty Million ($60,000,000.00) Dollars (the "Twelfth Replacement
Revolving Loan Note") to evidence Borrower's Obligations to repay Bank, on the
Revolving Loan Termination Date, with interest at the applicable Rate set forth
at Paragraph 2.08 of the Loan Agreement, for all loans, advances and extensions
of credit made or to be made by Bank to or for the benefit of Borrower under the
Revolving Loan, all as more fully described in the Twelfth Replacement Revolving
Loan Note, the terms, covenants and conditions of which are hereby deemed
incorporated herein by this reference and made a part hereof. The term "Note" is
hereby amended to mean and include the Twelfth Replacement Revolving Loan Note.
SECTION 4. WARRANTIES AND REPRESENTATIONS.
4.01 Reaffirmation of Warranties and Representations. All warranties and
representations set forth in the Loan Agreement and the other Financing
Agreements are hereby reasserted and restated by Borrower as of the date hereof
as if set forth at length herein, except as modified by information previously
provided, in writing, to Bank or acknowledged, in writing, by Bank. Borrower
hereby acknowledges that such warranties and representations, and the warranties
and representations set forth below, are being specifically relied upon by Bank
as a material inducement to Bank to enter into this Fourth Amendment and
increase the amount of the Revolving Loan.
24
<PAGE>
4.02 Additional Warranties and Representations. To induce Bank to enter
into this Fourth Amendment, Borrower represents and warrants to Bank that:
(A) Borrower has the power, authority and capacity to enter into and
perform this Fourth Amendment, the Twelfth Replacement Revolving Loan Note and
all related instruments, agreements and documents, and to incur the Obligations
herein and therein provided for, and Borrower has taken all proper and necessary
corporate action to authorize the execution, delivery and performance of this
Fourth Amendment, the Twelfth Replacement Revolving Loan Note and related
instruments, agreements and documents;
(B) This Fourth Amendment is, and the Twelfth Replacement Revolving
Loan Note when delivered will be, valid, binding and enforceable against
Borrower in accordance with their respective terms; and
(C) No consent, approval or authorization of, or filing, registration
or qualification with, any Person is required to be obtained by Borrower in
connection with the execution and delivery of this Fourth Amendment, the Twelfth
Replacement Revolving Loan Note or any related instrument, agreement or
document, or undertaking or performance of any Obligation hereunder or
thereunder.
SECTION 5. CONDITIONS PRECEDENT.
This Fourth Amendment is subject to the following conditions precedent (all
instruments, agreements and documents to be in form and substance satisfactory
to Bank and its counsel):
5.01 Documents Required for Closing. Borrower shall have duly executed
and/or delivered (or caused to be duly executed and/or delivered) to Bank the
following:
(A) The Twelfth Replacement Revolving Loan Note and each other
instrument, agreement and document to be executed and/or delivered pursuant to
this Amendment and/or the instruments, agreements and documents referred to in
this Amendment;
(B) A certified (as of the date of this Fourth Amendment) copy of
resolutions of Borrower's Board of Directors authorizing the execution, delivery
and performance of this Fourth Amendment, the Twelfth Replacement Revolving Loan
Note and each other document to be executed and/or delivered pursuant hereto and
any other instrument, agreement or document referred to herein;
(C) A certification that Borrower's certificate of incorporation and
by-laws remain unchanged from Closing;
(D) A certificate (dated the date of this Fourth Amendment) of
Borrower's corporate secretary as to the incumbency and specimen signatures of
the officers of Borrower executing this Fourth Amendment, the Twelfth
Replacement Revolving Loan Note and each other document to be executed and/or
delivered pursuant hereto or thereto; and
(E) Such other instruments, agreements and documents as may be
required by Bank and/or its counsel.
SECTION 6. MISCELLANEOUS.
6.01 Integrated Agreement. This Fourth Amendment and all of the
instruments, agreements and documents executed and/or delivered in conjunction
with this Fourth Amendment
25
<PAGE>
shall be effective upon the date of execution hereof and thereof by all parties
hereto and thereto, and shall be deemed incorporated into and made a part of the
Loan Agreement and the other Financing Agreements. All such instruments,
agreements and documents, and this Fourth Amendment, shall be construed as
integrated and complementary of each other, and as augmenting and not
restricting Bank's rights, remedies, benefits and security. If, after applying
the foregoing, an inconsistency still exists, the provisions of this Fourth
Amendment shall constitute an amendment thereto and shall govern and control.
6.02 Expenses of Bank. Borrower will pay, on demand, all reasonable
out-of-pocket expenses, including the reasonable fees and expenses of legal
counsel for Bank, incurred in connection with this Fourth Amendment and all
instruments, agreements and documents executed and/or delivered in connection
with this Fourth Amendment. Subject to Paragraph 2.07 of the Loan Agreement,
Bank may charge any deposit account of Borrower maintained at Bank for all or
any part of any amount due hereunder.
IN WITNESS WHEREOF, the parties hereto have caused this Fourth Amendment to
Third Amended and Restated Loan Agreement to be duly executed and exchanged as
of the day and year first above written.
PIERCING PAGODA, INC.,
a Delaware corporation
By:/s/ John F. Eureyecko
-----------------------------------
Name: John F. Eureyecko
Title: President,
Attest: /s/ Brandon R. Lehman
-----------------------------------
Name: Brandon R. Lehman
Title: Treasurer
(Corporate Seal)
SUMMIT BANK
By: /s/ Ammon J. Baus
-----------------------------------
Name: Ammon J. Baus
Title: Vice President
26
$60,000,000.00 October 18, 1996
TWELFTH REPLACEMENT REVOLVING LOAN NOTE
FOR VALUE RECEIVED, PIERCING PAGODA, INC. ("Borrower"), a Delaware
corporation having its chief executive office at 3910 Adler Place, Bethlehem,
Pennsylvania 18016, promises to pay to the order of SUMMIT BANK,
successor-in-interest to First Valley Bank ("Bank"), its successors and assigns,
at the office of Bank located at One Bethlehem Plaza, Bethlehem, Pennsylvania
18018 or at such other location as designated by Bank from time to time, on or
before December 31, 1996, the principal sum of Sixty Million ($60,000,000.00)
Dollars or, if less, the unpaid principal amount of all loans and advances made
by Bank to or for the benefit of Borrower under and as part of the Revolving
Loan described in that certain Third Amended and Restated Loan Agreement dated
February 13, 1995 between Borrower and Bank (under its former name), as amended
by that certain letter agreement dated April 21, 1995 between Borrower and Bank
(under its former name), that certain Amendment to Third Amended and Restated
Loan Agreement dated August 4, 1995 between Borrower and Bank (under its former
name), that certain Second Amendment to Third Amended and Restated Loan
Agreement dated November 21, 1995 between Borrower and Bank (under its former
name), that certain Third Amendment to Third Amended and Restated Loan Agreement
dated September 5, 1996, and that certain Fourth Amendment to Third Amended and
Restated Loan and Security Agreement of even date herewith (the "Fourth
Amendment") between Borrower and Bank (as amended, the "Loan Agreement"),
together with interest thereon as specified herein.
This Note is that certain Twelfth Replacement Revolving Loan Note issued in
accordance with the terms and subject to the conditions of, and referred to in,
the Fourth Amendment and the Loan Agreement and all related instruments,
agreements and documents. All capitalized terms not otherwise defined in this
Note shall have the meanings ascribed to such terms in the Loan Agreement. The
outstanding principal balance of all loans made hereunder pursuant to the Loan
Agreement at any time shall be evidenced by Bank's books and records, which
shall be deemed to be conclusive and irrefutable evidence of the correctness
thereof unless Borrower objects thereto within thirty (30) days of receiving
notice thereof.
Notwithstanding the face amount of this Note the Line Limit shall be Sixty
Million ($60,000,000.00) Dollars and the Cash Advance Sublimit shall be
Thirty-Six Million ($36,000,000.00) Dollars.
Interest on the outstanding principal balance of the Revolving Loan shall
accrue and be payable at a per annum rate equal to the Prime Rate in effect from
time to time minus three-quarters (3/4%) percent (the "Variable Revolving Loan
Rate"). Each time the Prime Rate shall change, the Variable Revolving Loan Rate
shall change contemporaneously with such change in the Prime Rate.
Interest on all Loans shall be calculated on the basis of a year of 360
days for the actual number of days elapsed, and shall be due and payable
monthly, in arrears, on the fifteenth day of each month, commencing November 15,
1996.
Except as hereinafter provided, interest shall continue to accrue and be
payable on the unpaid principal balance of this Note at the aforesaid rate of
interest notwithstanding any demand for payment, acceleration and/or entry of
judgment for such sums. If any scheduled payment of principal or interest is not
made within five (5) days after Bank mails notice of non-payment to Borrower,
there shall become immediately due and payable, and Borrower shall pay to Bank,
an additional sum equal to five (5%) percent of the amount of such payment.
27
<PAGE>
Each installment shall be applied on account of the interest,
principal, late charges, or other sums payable hereunder in such order as the
Bank may, in its sole discretion, determine.
DISBURSEMENT OF PROCEEDS - Borrower hereby represents and warrants to Bank that
the principal of this Note will be used solely for business and/or commercial
purposes.
RIGHT TO COMPLETE NOTE - Bank may at any time from time to time, without notice
to any obligor for the Obligations: (1) date this Note as of the date when the
loan evidenced hereby was made; (2) complete any blank spaces according to the
terms upon which Bank has granted such loan; and (3) cause the signature of one
or more Persons to be added as additional borrowers without in any way affecting
or limiting the liability of the existing obligors for the Obligations to Bank.
EVENTS OF DEFAULT - Each of the following shall be an "Event of Default"
hereunder: (1) Borrower shall fail to pay when due any installment of principal
or interest payable hereunder or any Obligations and such failure shall continue
for a period of five (5) Business Days after the mailing of notice of such
default by Bank; (2) Borrower shall fail to observe or perform any other
Obligation to be observed or performed by them hereunder, under the Loan
Agreement or under any other agreement between Borrower and Bank.
BANK'S RIGHTS UPON DEFAULT - Upon the occurrence of an Event of Default, Bank
shall have all rights and remedies set forth in the Loan Agreement including,
but not limited to:
(1) the right to accelerate the maturity of this Note and demand
immediate payment of all outstanding principal and accrued interest thereon;
(2) the right to exercise its right of set-off and all of the rights,
privileges and remedies under the Pennsylvania Uniform Commercial Code and all
of its rights and remedies under the Loan Agreement, this Note or any other
note, or other agreement, instrument or document issued in connection with or
arising out of any of the Obligations, or at law or in equity, all of which
remedies shall be cumulative and not alternative. Borrower and each other
obligor for the Obligations waives and releases any right to require Bank to
collect any of the Obligations from any other collateral under any theory of
marshalling of assets or otherwise, and specifically authorizes Bank to apply
any collateral in which any such obligor has any right, title or interest
against any of the Obligations in any manner that Bank may determine; and
(3) the right upon five (5) days written notice to Borrower forwarded
to the address of Borrower on the books of Bank, to begin accruing interest, in
addition to the interest provided for above, at a rate not to exceed five
percent (5%) per annum on the unpaid principal balance of this Note; provided,
however, that no interest shall accrue hereunder in excess of the maximum amount
of interest then allowed by law. Such interest shall accrue notwithstanding the
entry or obtaining of any judgment and shall be added to and become part of the
Obligations. Borrower agrees to pay such accrued interest upon demand. The
waiver of any Event of Default shall not be a waiver of any subsequent Event of
Default.
WARRANT OF ATTORNEY - Borrower hereby irrevocably authorizes and empowers any
Attorney or any Clerk of any court of record upon or after the occurrence of any
Event of Default to appear for and CONFESS JUDGMENT against Borrower, (A) for
such sums as are due and/or may become due on the Obligations, and/or (B) in any
action of replevin instituted by Bank to obtain possession on any collateral
securing this Note or securing any of the Obligations, in either case with or
without declaration, with costs of suit, without stay of execution and with an
amount not to exceed five (5%) percent of the unpaid principal amount of the
Obligations, but not less than Five Thousand ($5,000.00) Dollars, added for
attorney's collection fees. Borrower: (1) waives the right of inquisition on any
real estate levied on, voluntarily condemns the same, authorizes the
Prothonotary or Clerk to enter upon the Writ of Execution said voluntary
condemnation and agrees that said real estate may be sold on a Writ of
Execution; (2) to the extent permitted by law, waives and releases all relief
from all redemption, appraisement, stay,
28
<PAGE>
exemption or appeal laws of any state now in force or hereafter enacted; and (3)
releases all errors in such proceedings. If a copy of this Note, verified by
affidavit by or on behalf of Bank shall have been filed in such action, it shall
not be necessary to file the original Note as a Warrant of Attorney. The
authority and power to appear for and enter judgment against Borrower shall not
be exhausted by the initial exercise thereof, and the same may be exercised,
from time to time, as often as Bank shall deem necessary and desirable, and this
Note shall be a sufficient Warrant therefore. Bank may enter one or more
judgments in the same or different counties for all or part of the Obligations,
without regard to whether judgment has been entered on more than one occasion
for the same Obligations. In the event any judgment entered against Borrower
hereunder is stricken or opened upon application by or on Borrower's behalf for
any reason whatsoever, Bank is hereby authorized and empowered to again appear
for and Confess Judgment against Borrower; subject, however, to the limitation
that such subsequent entry or entries of judgment by Bank may only be done to
cure any errors in prior proceedings, only and to the extent that such errors
are subject to cure in the later proceedings.
MISCELLANEOUS - Borrower hereby waives protest, notice of protest, presentment,
dishonor, notice of dishonor and demand. Borrower agrees to reimburse Bank for
all costs, including court costs (whether incurred in any bankruptcy,
insolvency, appellate or other proceeding) and reasonable attorneys' fees,
incurred by Bank in connection with the collection and enforcement hereof.
Interest shall be calculated hereunder for the actual number of days that the
principal is outstanding, based on a year of three hundred sixty (360) days.
Changes in the rate of interest hereon shall become effective on the days on
which Bank announces changes in its Prime Rate. The rights and privileges of
Bank under this Note shall inure to the benefit of its successors and assigns.
All representations, warranties and agreements of Borrower and each obligor for
the Obligations made in connection with this Note shall bind Borrower's and such
obligor's personal representatives, heirs, successors and assigns. If any
provision of this Note shall for any reason be held to be invalid or
unenforceable, such invalidity or unenforceability shall not affect any other
provision hereof, but this Note shall be construed as if such invalid or
unenforceable provision had never been contained herein. The waiver of any Event
of Default or the failure of Bank to exercise any right or remedy to which it
may be entitled shall not be deemed a waiver of any subsequent Event of Default
or of Bank's right to exercise that or any other right or remedy to which Bank
is entitled. This Note has been delivered to and accepted by Bank in, and shall
be governed by, the laws of the Commonwealth of Pennsylvania. This Note replaces
and supersedes (but does not extinguish any unpaid Obligations evidenced by or
constitute a novation of) that certain Eleventh Replacement Revolving Loan Note
dated September 5, 1996 in the principal sum of Sixty Million ($60,000,000.00)
Dollars executed and delivered by Borrower to Bank. The parties agree to the
jurisdiction of the federal and state courts located in Pennsylvania in
connection with any matter arising hereunder, including the collection and
enforcement hereof.
Borrower has duly executed this Note the day and year first above
written and has hereunto set Borrower's hand and seal.
ATTEST: PIERCING PAGODA, INC.
By: /s/ Brandon R. Lehman By:/s/ John F. Eureyecko
- ------------------------------ ---------------------------------
Name: Brandon R. Lehman Name: John F. Eureyecko
Title: Treasurer Title: President
[Affix Corporate Seal]
29
Exhibit 11 - Statement regarding computation of net income per common
share and common share equivalent.
<TABLE>
<CAPTION>
(In thousands, except per share data) Three months ended Six months ended
September, 30 September, 30
1996 1996
<S> <C> <C>
Average shares outstanding 5,252 5,249
Net effect of dilutive stock options, based
on the treasury stock method 118 120
======= =======
Total shares used in computation 5,370 5,369
======= =======
Net loss ($ 105) ($ 70)
======= =======
Net loss per common share and
common share equivalent ($ 0.02) ($ 0.01)
======= =======
</TABLE>
30
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000925544
<NAME> PIERCING PAGODA, INC.
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> SEP-30-1996
<CASH> 2,276,000
<SECURITIES> 0
<RECEIVABLES> 877,000
<ALLOWANCES> 0
<INVENTORY> 37,383,000
<CURRENT-ASSETS> 46,096,000
<PP&E> 30,268,000
<DEPRECIATION> 11,045,000
<TOTAL-ASSETS> 66,983,000
<CURRENT-LIABILITIES> 33,067,000
<BONDS> 2,707,000
0
0
<COMMON> 53,000
<OTHER-SE> 15,081,000
<TOTAL-LIABILITY-AND-EQUITY> 66,983,000
<SALES> 62,683,000
<TOTAL-REVENUES> 62,683,000
<CGS> 36,186,000
<TOTAL-COSTS> 36,186,000
<OTHER-EXPENSES> 25,898,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 848,000
<INCOME-PRETAX> (115,000)
<INCOME-TAX> (45,000)
<INCOME-CONTINUING> (70,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (70,000)
<EPS-PRIMARY> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
