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 December 31, 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
5,269,898 (as of February 12, 1997)
<PAGE>
PIERCING PAGODA, INC.
INDEX
PAGE
PART I - FINANCIAL INFORMATION NUMBER
Item 1. Financial Statements
Consolidated balance sheets as of
December 31, 1996 and March 31, 1996 3
Consolidated statements of operations for the three
months
ended December 31, 1996 and 1995 and nine months 4
ended
December 31, 1996 and 1995
Consolidated statements of cash flows for the nine
months ended December 31, 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 1. Legal Proceedings 12
Item 2. Changes in Securities 12
Item 3. Defaults Upon Senior Securities 12
Item 4. Submission of matters to a vote of security holders 12
Item 5. Other Information 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>
December March 31,
31, 1996
1996
------------ ------------
Assets (Unaudited)
<S> <C> <C>
Current assets:
Cash .............................................. $ 4,082 $ 1,864
Accounts receivable ............................... 1,003 794
Inventory ......................................... 41,527 25,390
Deposits for inventory purchases .................. 560 361
Prepaid expenses and other current assets ......... 313 468
Prepaid income taxes .............................. -- 883
Deferred tax assets ............................... 1,090 693
---------- ----------
Total current assets ................................. 48,575 30,453
Property, fixtures and equipment, net ................ 20,774 15,806
Other assets ......................................... 2,731 1,647
========== ==========
$ 72,080 $ 47,906
========== ==========
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable .................................. $ 12,952 $ 1,811
Current installments of long-term debt and ........ 1,646 5,910
revolving line of credit
Accrued expenses and taxes withheld ............... 11,493 6,784
Income taxes payable .............................. 3,619 --
---------- ----------
Total current liabilities ............................ 29,710 14,505
Long-term debt, less current installments ............ 2,697 2,350
Deferred tax liabilities ............................. 1,703 1,259
Unbilled rent ........................................ 306 213
---------- ----------
Total liabilities .................................... 34,416 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 5,266,798 shares and
5,240,29 at December 31, 1996 and March 31, 1996,
respectively ................................... 53 53
Additional paid-in capital ........................ 22,514 22,183
Retained earnings ................................. 15,097 7,343
---------- ----------
Total stockholders' equity ........................... 37,664 29,579
---------- ----------
$ 72,080 $ 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 Nine months ended
December 31, December 31,
--------------------- -------------------
1996 1995 1996 1995
---------- --------- -------- ---------
<S> <C> <C> <C> <C>
Net sales .......................... $ 66,339 $ 49,141 $129,022 $ 94,528
Cost of goods sold and occupancy
expenses,(excluding depreciation on
kiosks) ............................ 34,459 25,897 70,645 52,119
-------- -------- -------- --------
Gross profit ....................... 31,880 23,244 58,377 42,409
Selling, general and administrative
expenses,(including depreciation on
kiosks) 18,477 13,491 44,375 31,946
-------- -------- -------- --------
Income from operations ............. 13,403 9,753 14,002 10,463
Interest and other income .......... 110 66 244 174
Interest expense ................... 747 535 1,595 986
-------- -------- -------- --------
Earnings before income taxes ....... 12,766 9,284 12,651 9,651
Income tax expense ................. 4,942 3,584 4,897 3,744
======== ======== ======== ========
Net income ......................... $ 7,824 $ 5,700 $ 7,754 $ 5,907
======== ======== ======== ========
Earnings per share ................. $ 1.45 $ 1.07 $ 1.44 $ 1.11
======== ======== ======== ========
Weighted average common shares and
common share equivalents ....... 5,413 5,350 5,381 5,319
======== ======== ======== ========
</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>
Nine months ended
December 31,
-------------------------
1996 1995
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net income ........................................... $ 7,754 $ 5,907
Adjustments to reconcile net income to net cash
provided
by operating activities:
Depreciation and amortization ..................... 2,580 1,913
Loss on disposal of property, fixtures and
equipment ......................................... 62 30
Other changes in other assets ..................... (122) (161)
Deferred income taxes ............................. 47 (110)
Decrease (increase) in assets:
Accounts receivable .............................. (209) 166
Inventory ........................................ (16,137) (13,519)
Deposits for inventory purchases ................. (199) (682)
Prepaid expenses and other current assets ........ 155 (155)
Prepaid income taxes ............................. 883 --
Increase (decrease) in liabilities:
Accounts payable ................................. 11,141 6,831
Accrued expenses and taxes withheld .............. 4,709 4,128
Tax indemnification payable ...................... -- (1,216)
Income taxes payable ............................. 3,619 1,835
Unbilled rent .................................... 93 12
-------- --------
Net cash provided by operating activities .............. 14,376 4,979
Cash flows from investing activities:
Additions to property, fixtures and equipment ........ (7,546) (5,551)
Payments for purchase of business .................... -- (610)
Proceeds from disposal of property, fixtures and
equipment ............................................ 19 --
Noncurrent deposits, net ............................. (1,045) (111)
-------- --------
Net cash used in investing activities .................. (8,572) (6,272)
Cash flows from financing activities:
Repayments of long-term debt ......................... (18) --
Revolving line of credit, net ........................ (4,299) --
Proceeds from issuance of long-term debt ............. 400 2,540
Cash dividends paid .................................. -- (45)
Proceeds from issuance of common stock ............... 331 --
-------- --------
Net cash provided by (used in) financing activities .... (3,586) 2,495
-------- --------
Net increase in cash ................................... 2,218 1,202
Cash at beginning of period ............................ 1,864 2,320
======== ========
Cash at end of period .................................. $ 4,082 $ 3,522
======== ========
</TABLE>
5
<PAGE>
PIERCING PAGODA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
December 31,
-------------------------
1996 1995
------------ -----------
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest ................................. $1,464 $ 912
====== ======
Income taxes, net ........................ $ 62 $2,019
====== ======
</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 consolidated 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 nine-month periods ended December
31, 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>
December 31, March 31,
1996 1996
------- -------
<S> <C> <C>
Land ................................................... $ 688 $ 688
Furniture and fixtures ................................. 2,588 2,077
Kiosks ................................................. 18,417 13,908
Building and improvements .............................. 4,018 3,822
Computer equipment, software and .................... 6,943 5,130
other equipment
------- -------
32,654 25,625
Less accumulated depreciation and .................... 11,880 9,819
amortization
======= =======
$20,774 $15,806
======= =======
</TABLE>
Note 3 Purchase of Business
In December 1996, the Company entered into an agreement to acquire
substantially all the operations of Gemstone Jewelry and Weaver's Gems and
Minerals ("Gemstone"), an independent kiosk retailer. Gemstone had operated
approximately 100 kiosk locations as Gemstone's Jewelers, Gold-N-Gifts and
Facets of Nature. The purchase agreement provides for the payment of $2.0
million for the kiosk locations, leases and store fixtures. The Company
will also acquire all of Gemstone's inventory, the cost of which is to be
determined based upon a physical inventory. The cost of the inventory is
estimated to be approximately $6.0 million. In addition, the Company will
pay $60,000 annually for five years to the owner of Gemstone under a
non-competition agreement. A $1.0 million deposit payment towards the
purchase of Gemstone is included in other assets at December 31, 1996. The
Company completed the purchase on January 29, 1997.
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 December 31, 1996 and 1995
Consolidated net sales increased $17.2 million, or 35%, from $49.1 million
for the three months ended December 31, 1995 to $66.3 million for the three
months ended December 31, 1996. This increase was primarily due to an
increase in the average number of stores open for the three months ended
December 31, 1996 as compared to the three months ended December 31, 1995
and a $3.9 million, or 9%, increase in comparable store net sales. There
were a total of 585 stores open at December 31, 1996 compared to 463 at
December 31, 1995, an increase of 26%. The average jewelry units sold per
store increased 13% to 4,500 for the three months ended December 31, 1996
compared to 4,000 at December 31, 1995. The average price per jewelry unit
sold was relatively unchanged at $25.71 for the three months ended December
31, 1996 compared to $26.02 for the three months ended December 31, 1995.
Gross profit increased $8.7 million, or 38%, from $23.2 million for the
three months ended December 31, 1995 to $31.9 million for the three months
ended December 31, 1996. The Company's gross profit margin increased from
47.3% for the three months ended December 31, 1995 to 48.1% for the three
months ended December 31, 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 higher gross profit on
merchandise sold combined with decreases in rent and occupancy expenses as
a percentage of net sales. The increase in merchandise gross profit is the
result of lower merchandise costs to the Company, while at the same time,
the Company maintained consistent list prices charged to consumers. 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.
8
<PAGE>
Selling, general and administrative expenses increased $5.0 million, or
37%, from $13.5 million for the three months ended December 31, 1995 to
$18.5 million for the three months ended December 31, 1996. As a percentage
of net sales, selling, general and administrative expenses increased from
27.5% for the three months ended December 31, 1995 to 27.9% for the three
months ended December 31, 1996. The increase in dollars was attributable
primarily to the increase in the number of stores and 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 a store management bonus program implemented
during the current fiscal year and higher administrative expenses
associated with new store openings. Depreciation and amortization expense
increased 51% from $622,000 for the three months ended December 31, 1995 to
$941,000 for the three months ended December 31, 1996 due primarily to
capital expenditures for new stores and the upgrading of kiosks in existing
locations.
Interest expense increased $212,000, or 40%, from $535,000 for the three
months ended December 31, 1995 to $747,000 for the three months ended
December 31, 1996, but was relatively unchanged as a percentage of net
sales. 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 and higher gold consignment rates.
As a result of the foregoing, the Company's net income increased from $5.7
million for the three months ended December 31, 1995 to $7.8 million for
the three months ended December 31, 1996.
Nine months ended December 31, 1996 and 1995
Consolidated net sales increased $34.5 million, or 37%, from $94.5 million
for the nine months ended December 31, 1995 to $129.0 million for the nine
months ended December 31, 1996. This increase was primarily due to an
increase in the average number of stores open for the nine months ended
December 31, 1996 as compared to the nine months ended December 31, 1995
and a $6.3 million, or 8%, increase in comparable store net sales. There
were a total of 585 stores open at December 31, 1996 compared to 463 at
December 31, 1995, an increase of 26%. The average jewelry units sold per
store increased 9% to 9,500 for the nine months ended December 31, 1996
compared to 8,700 for the nine months ended December 31, 1995. The average
price per jewelry unit sold was relatively unchanged at $24.63 for the nine
months ended December 31, 1996 compared to $24.81 for the nine months ended
December 31, 1995.
Gross profit increased $16.0 million, or 38%, from $42.4 million for the
nine months ended December 31, 1995 to $58.4 million for the nine months
ended December 31, 1996. The Company's gross profit margin increased
slightly from 44.9% for the nine months ended December 31, 1995 to 45.3%
for the nine months ended December 31, 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 reduction in
rent and occupancy as a percentage of sales and lower sales to the Florida
9
<PAGE>
licensee relative to the total sales of the Company. The decrease in rent
and occupancy expenses as a percentage of net sales resulted from the fact
that, despite the increase in net sales, many stores' net sales were still
below the points at which percentage rents would have been required.
Additionally, relatively fixed common area maintenance, mall advertising
and other occupancy charges were spread over the higher net sales level.
The decrease in sales to the Florida licensee had a positive impact on the
Company's gross margin as these sales contribute a lower gross margin than
the Company's own retail sales.
Selling, general and administrative expenses increased $12.5 million, or
39%, from $31.9 million for the nine months ended December 31, 1995 to
$44.4 million for the nine months ended December 31, 1996. As a percentage
of net sales, selling, general and administrative expenses increased from
33.8% for the nine months ended December 31, 1995 to 34.4% for the nine
months ended December 31, 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 openings and a store management
bonus program implemented during the current fiscal year. Depreciation and
amortization expense increased 37% from $1.9 million for the nine months
ended December 31, 1995 to $2.6 million for the nine months ended December
31, 1996 due primarily to capital expenditures for new stores and the
upgrading of kiosks in existing locations.
Interest expense increased $609,000, or 62%, from $986,000 for the nine
months ended December 31, 1995 to $1,595,000 for the nine months ended
December 31, 1996, and as a percentage of net sales increased from 1.0% for
the nine months ended December 31, 1995 to 1.2% for the nine months ended
December 31, 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 and higher gold
consignment rates.
As a result of the foregoing, the Company's net income increased $1.9
million, or 32%, from $5.9 million for the nine months ended December 31,
1995 to $7.8 million for the nine months ended December 31, 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 December
31, 1996, the Company had outstanding borrowings of $1.4 million under its
revolving
10
<PAGE>
line of credit and $2.7 million of long-term debt outstanding, excluding
$225,000 classified as a current liability. In addition, the Company had
consigned 82,000 ounces of gold under its gold consignment program valued
at approximately $30.3 million.
Net cash provided by operating activities was $14.4 million for the nine
months ended December 31, 1996 compared to $5.0 million for the same period
in the prior year. Net cash provided by operating activities primarily
reflects the results of the year-end holiday shopping season, non-cash
charges for depreciation and amortization as well as increases in current
liabilities. These were partially offset by increases in inventory to
support newly opened stores and future scheduled store openings. A portion
of the increase in inventory was in anticipation of the purchase of
approximately 100 locations from Gemstone. The Company entered into an
agreement to acquire these locations during the quarter ended December 31,
1996. The Company completed the purchase on January 29, 1997.
Net cash used in investing activities was $8.6 million during the nine
months ended December 31, 1996 compared to $6.3 million during the nine
months ended December 31, 1995. Net cash used in investing activities
primarily reflects the addition of property, fixtures and equipment in
connection with the opening of new stores and an increase in deposits,
primarily a $1.0 million deposit towards with the purchase of Gemstone.
Net cash used in financing activities was $3.6 million for the nine months
ended December 31, 1996 versus $2.5 million provided by financing
activities during the nine months ended December 31, 1995. Cash used in
financing activities during the nine months ended December 31, 1996
primarily reflects a reduction in borrowings under the Company's revolving
line of credit partially offset by an additional $400,000 long term loan in
connection with the expansion of the Company's corporate headquarters and
distribution facility and $331,000 provided by transactions under the
Company's employee stock option and employee stock purchase plans.
The Company's revolving credit provides for maximum borrowings of $60.0
million with a cash advance sub-limit of $36.0 million. This credit
facility was amended on December 17, 1996 to extend the term of the
agreement to February 28, 1997. At December 31, 1996, the Company had $27.8
million available to be borrowed under its then existing revolving credit
facility and was in compliance with covenants contained in the agreement.
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.
11
<PAGE>
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.
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 1. LEGAL PROCEEDINGS
There are no material legal proceedings against the Company
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
12
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
10.1 Fifth Amendment to Third Amended and Restated Loan
Agreement and Twelfth Replacement Revolving Credit
Note dated December 17, 1996 between the Registrant
and Summit Bank.
10.2 Sixth Amendment And Agreement To Consignment Agreement dated
October 31, 1996 between the Registrant and Fleet Precious
Metals Inc.
10.3 Third Amendment to Amended and Restated Consignment Agreement
dated July 26, 1994, dated December 26, 1996 between the
Registrant and Rhode Island Hospital Trust National Bank.
10.4 Asset Purchase Agreement dated January 29, 1997
Between Piercing Pagoda, Inc., EARS, Inc., Weaver's
Gems and Minerals, Inc. and Gemstone Jewelry, Inc.
11 Statement regarding computation of net income per common share
and common share equivalent.
27 Financial Data Schedule.
b) Reports on Form 8-K
During the quarter ended December 31, 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: February 12, 1997 /s/ John F. Eureyecko
John F. Eureyecko
President,
Chief Operating Officer
(Principal Financial Officer)
Date: February 12, 1997 /s/ Brandon R. Lehman
Brandon R. Lehman
Treasurer
(Principal Accounting Officer)
14
<PAGE>
INDEX TO EXHIBITS
Sequentially
Exhibit Numbered
Number Page
10.1 Fifth Amendment to Third Amended and Restated Loan
Agreement and Twelfth Replacement Revolving Credit
Note dated December 17, 1996 between the Registrant 16
and Summit Bank.
10.2 Sixth Amendment And Agreement To Consignment
Agreement dated October 31, 1996 between the
Registrant and Fleet Precious Metals Inc. 19
10.3 Third Amendment To Amended And Restated Consignment
Agreement Dated July 26, 1994 dated December 26,
1996 between the Registrant and Rhode Island
Hospital Trust National Bank 21
10.4 Asset Purchase Agreement dated January 29, 1997
Between Piercing Pagoda, Inc., EARS, Inc., Weaver's
Gems and Minerals, Inc. and Gemstone Jewelry, Inc. 22
11 Statement regarding computation of net income per
common share and common share equivalent 35
27 Financial Data Schedule 36
15
FIFTH AMENDMENT TO THIRD AMENDED AND RESTATED LOAN
AGREEMENT AND TWELFTH REPLACEMENT REVOLVING CREDIT NOTE
This Fifth Amendment to Third Amended and Restated Loan Agreement and
Twelfth Replacement Revolving Credit Note ("Fifth Amendment") is made this 17th
day of December, 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), 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 between Borrower and Bank, and that certain Fourth
Amendment to Third Amended and Restated Loan Agreement dated October 18, 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 Sixty Million ($60,000,000.00) Dollars (the
"Revolving Loan"), which indebtedness is evidenced by that certain Twelfth
Replacement Revolving Loan Note dated October 18, 1996 in the principal sum of
Sixty Million ($60,000,000.00) Dollars executed and delivered by Borrower to
Bank (the "Twelfth Replacement Revolving Loan Note").
B. Borrower has requested that Bank extend the maturity date of the
Revolving Loan, 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 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 Twelfth Replacement Revolving Loan
Note is, as of the date hereof, Twenty-Seven Million Five Hundred Forty Nine
Thousand Eight Hundred Seventeen and 05/100 ($27,549,817.05) 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-Seven Million Three Hundred
Sixty Two Thousand Four Hundred Four and 43/100 ($27,362,404.43) Dollars;
interest on the Obligations has been paid through November 30, 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.
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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.
3.01 The Revolving Loan.
(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 February 28, 1997, unless such
date is extended by Bank and evidenced by a confirming written notice to
Borrower.
3.02 The Twelfth Replacement Revolving Loan Note. The Twelfth Replacement
Revolving Loan Note is hereby amended to provide for the indebtedness evidenced
thereby to be due and payable, without further notice to Borrower, on February
28, 1997, unless such date is extended by Bank and evidenced by a confirming
written notice to Borrower.
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 Fifth Amendment and extend
the maturity of the Revolving Loan.
4.02 Additional Warranties and Representations. To induce Bank to
enter into this Fifth Amendment, Borrower represents and warrants to Bank
that:
(A) Borrower has the power, authority and capacity to enter into and
perform this Fifth Amendment 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 and related
instruments, agreements and documents;
(B) This Fifth Amendment is valid, binding and enforceable against
Borrower in accordance with its 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 Fifth Amendment
or any related instrument, agreement or document, or undertaking or performance
of any Obligation hereunder or thereunder.
SECTION 5. CONDITIONS PRECEDENT.
This Fifth 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):
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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) This Amendment 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 Fifth Amendment) copy of
resolutions of Borrower's Board of Directors authorizing the execution, delivery
and performance of this Fifth Amendment 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 Fifth Amendment) of Borrower's
corporate secretary as to the incumbency and specimen signatures of the officers
of Borrower executing this Fifth Amendment and each other document to be
executed and/or delivered pursuant hereto; 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 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_____
Ammon J. Baus,
Vice President
18
SIXTH AMENDMENT AND AGREEMENT
TO
CONSIGNMENT AGREEMENT
THIS SIXTH AMENDMENT AND AGREEMENT TO CONSIGNMENT AGREEMENT is made as of
the 31st day of October, 1996, by and between FLEET PRECIOUS METALS INC., a
Rhode Island corporation with its principal offices at 111 Westminster Street,
Providence, Rhode Island 02903 (the "Consignor"), and PIERCING PAGODA, INC., a
Delaware corporation, with its principal office at 3910 Adler Place, Bethlehem,
Pennsylvania 18017 and with a mailing address of P.O. Box 25007, Lehigh Valley,
Pennsylvania 18002-5007 (the "Customer").
WITNESSETH THAT:
WHEREAS, the Consignor and the Customer are parties to a certain
Consignment Agreement dated as of November 30, 1990, as previously amended (as
amended, the "Consignment Agreement") pursuant to which the Consignor agreed to
consign precious metals to the Customer for use in its operations;
WHEREAS, the Consignor and the Customer desire to amend the Consignment
Agreement on the terms and conditions hereinafter contained;
NOW, THEREFORE, for value received, and for other good and valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the
parties hereto hereby agree as follows:
All capitalized terms used herein without definition shall have the
meanings assigned by the Consignment Agreement.
Effective the date hereof, the third sentence of Section 1(b) of
the Consignment Agreement is amended to read in its entirety as follows:
"It is understood that at no time shall the value of commodities on
consignment to the Customer exceed:
(i) the least of:
(x) Twenty Million Two Hundred Fifty Thousand
Dollars ($20,250,000); or
(y) the value (as determined pursuant to
Paragraph 2 hereof) of up to Forty-Five
Thousand (45,000) troy ounces of gold; or
(z) an amount equal to one hundred percent
(100%) of the stated amount of the
irrevocable standby letter of credit (the "Letter of
Credit") described in Section 12 hereof; or
(ii) such limit as the Consignor and the Customer may agree
upon from time to time as evidenced by an amendment in substantially
the form of Exhibit B attached hereto and made a part hereof or in
such other form as the Consignor shall require (collectively, the
"Consignment Limit")."
All references to the "Consignment Agreement" in any documents or
agreements by and between the parties hereto, shall from and after the effective
date hereof refer to the Consignment Agreement, as amended hereby, and all
obligations of the Customer under the Consignment Agreement, as amended hereby,
shall be secured by and entitled to the benefits of the Letter of Credit
hereinabove referred to.
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Except as amended hereby, the Consignment Agreement
shall remain in full force and effect and is in all respects hereby ratified
and affirmed.
The Customer covenants and agrees to pay all out-of-pocket expenses,
fees and charges incurred by the Consignor (including reasonable fees and
disbursements of outside counsel) in connection with the preparation and
implementation of this Sixth Amendment and Agreement to Consignment Agreement.
IN WITNESS WHEREOF, the undersigned parties have caused this Amendment to
be executed by their duly authorized officers as of the date first above
written.
WITNESS: PIERCING PAGODA, INC.
By: /s/ John F. Eureyecko
John Eureyecko
President
/s/ Jeanette M. Fritz By: /s/ Brandon R.Lehman
(as to both) Brandon Lehman
Treasurer
FLEET PRECIOUS METALS INC.
By: /s/ Eleanor M. Vander Mel
Title: Vice President
/s/ Gail L. Burns_ By:_ /s/Irene A.Ogarek
(as to both) Title Vice President
20
THIRD AMENDMENT TO
AMENDED AND RESTATED CONSIGNMENT AGREEMENT
DATED JULY 26, 1994
THIS THIRD AMENDMENT is made as of the 26th day of December, 1996, between
RHODE ISLAND HOSPITAL TRUST NATIONAL BANK, a national banking association with
its principal office at One Hospital Trust Plaza, Providence, Rhode Island 02903
("Bank"), and PIERCING PAGODA, INC., a Delaware corporation with its address at
3910 Adler Place, P.O. Box 25007, Lehigh Valley, Pennsylvania 18002-5007
("Buyer").
W I T N E S S E T H T H A T :
WHEREAS, Bank and Buyer are parties to a certain Amended and Restated
Consignment Agreement dated July 26, 1994 (hereinafter, as amended by a certain
First Amendment dated December 22, 1994 and Second Amendment dated as of
September 11, 1995 and as otherwise amended or modified from time to time,
called the "Consignment Agreement"), relating to the consignment by Bank to
Buyer of Precious Metal (as defined therein); and
WHEREAS, Bank and Buyer desire to further amend and modify the
Consignment Agreement in certain respects;
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree as follows:
1. The definition of "Consignment Limit" in Section 1 of the Consignment
Agreement is hereby amended in its entirety to read as follows:
" `Consignment Limit' shall mean Consigned Precious Metal with a Fair
Market Value (or unpaid Purchase Price in the case of Consigned Precious
Metal for which the Purchase Price has been agreed but payment has not
been received by Bank) equal to $25,000,000."
2. Buyer and Bank each agree that, except as expressly provided herein,
the terms and provisions of the Consignment Agreement remain unchanged and the
Consignment Agreement remains in full force and effect in accordance with its
terms. The term "Agreement" as used in the Consignment Agreement and all
references to the Consignment Agreement in any other documents or agreements
between any of the parties hereto which relate to Buyer shall refer, from and
after the date hereof, to the Consignment Agreement as amended and supplemented
by this Third Amendment.
3. Buyer hereby ratifies and reaffirms that (i) the representations and
warranties contained in the Consignment Agreement, as amended by the terms
hereof, are true and correct as of the date hereof, except that references to
financial statements shall refer to the latest financial statements furnished
pursuant to the Consignment Agreement and (ii) no Default or Event of Default
(as defined in the Consignment Agreement) exists as of the date hereof.
IN WITNESS WHEREOF, each of the parties hereto has caused this instrument to
be executed in several counterparts, each of which shall be deemed to be an
original as of the day and year first above written.
RHODE ISLAND HOSPITAL TRUST
NATIONAL BANK
By: /s/ Michael E. Smith
Title: First Vice President
PIERCING PAGODA, INC.
By: /s/ John F. Eureyecko
Title: President
21
ASSET PURCHASE AGREEMENT
Asset Purchase Agreement, made this 29th day of January 1997, by and
among PIERCING PAGODA, INC., a Delaware corporation ("PPI"); EARS, Inc., a
Delaware corporation ("EARS" and, collectively with PPI, "Buyers"); WEAVER'S
GEMS AND MINERALS, INC., a Pennsylvania corporation ("WGM"); and GEMSTONE
JEWELRY, INC., a Pennsylvania corporation ("Gemstone" and, collectively with
WGM, "Sellers").
BACKGROUND
Sellers operate retail kiosk stores under the names Gemstone
Jewelry, Gold-N-Gifts and Facets of Nature which sell gold and non-gold jewelry,
pewter figurines and giftware (the "Business").
Pursuant to a Letter Agreement dated November 14, 1996 between PPI
and Sellers (the "Letter Agreement"), PPI has agreed to acquire substantially
all of the assets of the Business and Sellers have agreed to sell such assets to
PPI. EARS is a subsidiary of PPI that will acquire certain of Sellers' assets as
provided in Section 6 below. Buyers and Sellers desire to restate the Letter
Agreement in a more formal agreement to memorialize the transaction provided for
in the Letter Agreement.
NOW, THEREFORE, in consideration of the mutual covenants hereinafter
set forth, the parties, intending to be legally bound hereby, agree as follows:
Sale and Purchase of Assets. On the Closing Date (as hereinafter
defined) and subject to the terms and conditions contained in this Agreement,
Sellers shall sell, transfer, assign and deliver to Buyers, and Buyers shall
purchase, assume and accept from Sellers, free and clear of all liens and
encumbrances, all right, title and interest in and to all of the assets of the
Business (the "Assets"), including, but not limited to the following:
The existing leases for Sellers' kiosk stores
operated under the names Gemstone(s), Gemstone Jewelry, Gold-N-Gifts and Facets
of Nature (the "Stores").
Any and all leasehold improvements, fixtures,
benches, leased point-of-sale registers, stools, safes, security panels and
existing security systems at the Stores.
All Sellers' inventory of the Business which
is in good salable condition normally sold in the Stores, including red dot
inventory, but excluding broken or damaged goods (collectively, the "Inventory")
and the supplies of the Business, including all Inventory of the Business
delivered up to the Closing Date.
All trademarks, service marks, trade names
including without limitation the trade names Gemstone(s), Gemstone Jewelry,
Gold-N-Gifts and Facets of Nature, logos and other intellectual property of the
Business, books and records relating solely to the Assets, but including without
limitation, inventory reports, sales records and operating reports for the
Business for the last two (2) years to the extent reasonably available, manuals,
price lists, customer lists, supplies and other related assets of the Business
as a going concern, excluding the name Weaver's Gems and Minerals, Inc.
Excluded Assets. The Assets do not include cash,
receivables, prepaid rents (including, but not limited to, security deposits and
construction deposits under the Stores' leases), equipment not listed in Section
1(b), vehicles owned by Seller, general intangibles not listed in Section 1(d),
the AS-400 computer system, software and printers, the cash register software
and polling node used for Time for You locations, any Assets (including, but not
limited to, patents, trademarks, service marks, trade names, logos or other
intellectual property or other real or personal property) of Sellers not related
to the Business and any books and records of Sellers not related to the Assets.
Such excluded assets specifically include assets associated with Sellers'
operations conducted under the names "Time for You," "Sun Touch Shirts," "Civil
War Photo Prints," "Precision Movements," "Shoe Charmers" and "Woodworks."
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Assumption of Certain Liabilities. Subject to the
terms and conditions of this Agreement, Buyers shall assume and perform and pay
those liabilities and obligations of Sellers (i) accruing or arising on and
after February 1, 1997 (A) with respect to the Stores' utilities and merchant
association dues and expenses, (B) under the Stores' leases and the leases for
the computerized point-of-sale registers leased from LDI Corporation for the
Business and (C) under service agreements relating to the Stores and the
computerized point-of-sale registers leased from LDI Corporation for the
Business which are transferred to Buyers, and (ii) accruing or arising prior to
or on the Closing Date under any obligations of Sellers to customers of the
Business under Sellers' Club Program . With the exception of the liabilities and
obligations to be assumed by Buyers pursuant to the preceding sentence and the
other provisions of this Agreement, Buyers shall not assume and shall in no
event be liable for any other debts, liabilities or obligations of Sellers,
whether fixed or contingent, known or unknown, liquidated or unliquidated,
secured or unsecured, or otherwise and regardless of when they arose or arise.
The obligations of Buyers pursuant to this Section 3 shall be evidenced by an
assumption agreement setting forth such obligations, in the form attached hereto
as Exhibit "A" (the "Assumption Agreement"). All liabilities and obligations of
Sellers not assumed by Buyers pursuant to this Section 3 shall hereinafter be
referred to as the "Retained Liabilities."
Purchase Price.
The consideration paid or payable to Sellers by
Buyers in exchange for the sale, transfer, assignment and delivery of the
Assets, subject to adjustments pursuant to Section 5 (the "Purchase Price"),
shall consist of the following:
The amount of Six Million Dollars ($6,000,000)
for Sellers' Inventory and supplies of the Business (the "Estimated Inventory
Value").
Plus
The amount of Two Million Dollars ($2,000,000) for
the assignment of the Stores' leases and the Assets other than Sellers'
Inventory and supplies of the Business, of which One Million Dollars
($1,000,000) was paid by PPI to Sellers pursuant to the Letter Agreement upon
execution thereof.
Purchaser shall deliver to Sellers on the Closing
Date Three Million Five Hundred Thousand Dollars ($3,500,000) of the Purchase
Price, at Sellers' option, by wire transfer to an account designated by Sellers
or certified check drawn to the order of Sellers jointly; and the remaining
Three Million Five Hundred Thousand Dollars ($3,500,000) of the Purchase Price
shall be deposited by Buyers on the Closing Date into an interest-bearing escrow
account with CoreStates Bank, N.A. (the "Escrow Agent") pursuant to the terms of
an escrow agreement, in the form attached hereto as Exhibit "B" (the "Escrow
Agreement").
On each Gold Inventory Release Date (as defined in
Section 15(b)), Sellers and Buyers shall issue joint instructions to the Escrow
Agent to release to Sellers an amount equal to ninety-three percent (93%) of the
estimated value of the Gold Inventory (as defined below) specified in the
relevant Weaver's Grams On Hand With Cost Report (as defined in Section 15(b))
from the funds in the escrow account established pursuant to the Escrow
Agreement (the "Escrow Account").
On each Non-Gold Inventory Release Date (as defined
in Section 15(b)), Sellers and Buyers shall issue joint instructions to the
Escrow Agent to release to Sellers an amount equal to ninety-three percent (93%)
of the extended estimated cost of the Non-Gold Inventory (as defined below)
specified in the relevant Non-Gold To Be Produced With Extended Cost Report (as
defined in Section 15(b)) from the funds in the Escrow Account.
On the Final Inventory Release Date, Sellers and
Buyers shall issue joint instructions to the Escrow Agent to release to Buyers
the amount of Twenty Five Thousand Dollars ($25,000) in consideration of Buyers'
giving the credit to certain of the employees of Sellers who are employed at the
Stores (the "Employees") as provided in Section 15(d).
Adjustments to Purchase Price. The Purchase Price
shall be increased or decreased on a dollar-for-dollar basis for each dollar
that the Adjusted Inventory Value (as hereinafter defined) as of the Closing
Date exceeds or is less than the Estimated Inventory Value. "Adjusted Inventory
Value" shall mean Sellers' average cost, calculated on a "first in - first out"
basis, as of the Closing Date for Sellers' (i) Inventory of
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the Business and (ii) usable and non-usable supplies of the Business
located at Sellers' headquarters location and usable supplies of the Business
located at the Stores (up to an aggregate cost of $112,000), plus the associated
overhead costs equal to five percent (5%) of Sellers' cost for the Gold
Inventory and twenty-two percent (22%) of Sellers' cost for the Non-Gold
inventory. Sellers shall use their reasonable best efforts to furnish to Buyers
on or before March 31, 1997 the Sellers' calculation of the Adjusted Inventory
Value and any required adjustment to the Purchase Price, together with
reasonable documentation supporting such calculation. Sellers shall give Buyers
reasonable access to relevant books and records to verify such calculation. If
Buyers have no objection to Sellers' calculation of the Adjusted Inventory Value
and if such Adjusted Inventory Value is less than the Estimated Inventory Value,
Sellers and Buyers shall issue joint instructions to the Escrow Agent to release
the difference between the Estimated Inventory Value and the Adjusted Inventory
Value to Buyers. If the funds in the Escrow Account, excluding interest earned
thereon (the "Escrow Funds") exceed such difference, the joint instructions to
the Escrow Agent shall direct the Escrow Agent to release the balance of the
Escrow Funds to Sellers, and if the Funds are insufficient to cover such
difference, Sellers shall pay the amount of such deficiency to Buyers at the
same time. If the Buyers have no objection to the calculation of Adjusted
Inventory Value and if the Adjusted Inventory Value is greater than the
Estimated Inventory Value, Sellers and Buyers shall issue joint instructions to
the Escrow Agent to release the Escrow Funds to Sellers, and Buyers shall pay
the difference between the Adjusted Inventory Value and the Estimated Inventory
Value to Sellers at the same time. Interest earned on the Escrow Funds in
accordance with the Escrow Agreement shall be divided equally among Buyers and
Sellers as set forth in the Escrow Agreement.
In the event Buyers dispute the calculation of the Adjusted
Inventory Value set forth in Sellers' calculation, Buyers shall notify Sellers
in writing of such dispute and the basis therefor within thirty (30) days of
Buyer's receipt of Sellers' calculation and the parties shall attempt to resolve
such dispute. In the event the parties are unable to resolve such dispute within
thirty (30) days, they shall reduce to writing those points on which they agree
and those points on which they disagree and shall (i) retain as arbitrator the
Philadelphia, Pennsylvania office of Arthur Andersen LLP or, failing their
agreement to act as arbitrator, such other independent accounting firm as may be
mutually agreed upon by the parties to review such matters as to which the
parties have not agreed in writing and (ii) request such arbitrator to act as
promptly as practicable in accordance with its own rules to resolve all such
disputed matters within thirty (30) days after being retained by the parties.
The decision of the arbitrator shall be in writing and shall be final,
non-appealable and binding on Sellers and Buyers, and the fees and expenses, if
any, of such arbitrator shall be paid one-half by Sellers and one-half by
Buyers. If the arbitrator determines that the Adjusted Inventory Value is
different than the Estimated Inventory Value, Sellers and Buyers shall issue
joint instructions to the Escrow Agent as set forth in the preceding paragraph
of this Section 5.
Allocation of Assets, Liabilities and Purchase Price. The
Assets and any assumed liabilities shall be allocated between PPI and EARS as
Buyers shall determine, provided that PPI shall guarantee any liabilities
assumed by EARS. The Purchase Price shall be allocated among the Assets as
Buyers shall reasonably determine. Such allocations shall be binding on the
parties and all income tax or other information returns, including IRS Form 8594
("Asset Acquisition Statement Under Section 1060"), shall be filed in a manner
consistent with such allocations.
Closing. The consummation and closing of the
transaction provided for herein ("Closing") shall take place on January 29, 1997
(the "Closing Date").
Activities and Agreements Prior to Closing
Between the date of this Agreement and the Closing
Date, Sellers shall:
continue to operate the Business at the Stores
and use the Assets in the ordinary and usual course of business and consistent
with past practice, including, but not limited to, only making inventory
purchases in the ordinary course of business; provided, however, that Sellers
shall be permitted to remove the inventory and supplies of the Business for
purposes of performing the physical inventory referred to in Section 15(b) and
PPI shall operate the Stores for PPI's account as of the opening of business on
January 27, 1997.
comply with all material provisions of the
leases for the Stores and applicable laws, rules and regulations.
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promptly notify PPI if Sellers shall learn of
any event, matter or condition which has come to their attention which would
constitute at the Closing Date a breach of any representation, warranty or
covenant made by Sellers in this Agreement or in any other agreement, document
or instrument delivered in connection herewith or which would otherwise give
rise to a claim of indemnification by Buyers against Sellers.
forward to PPI a copy of: (A) any notice of
default received or issued by the Sellers under the leases for the Stores and
(B) any written notice of violation of any law, rule or regulation received by
Sellers with respect to the Stores or the Assets.
notify PPI of any material adverse change to
any of the Stores or Assets.
permit PPI and its representatives full access
to the Stores and Assets and all records relating to them.
permit PPI to operate the Stores for PPI's
account as of the opening of business on January 27, 1997, provided that PPI
shall pay the direct salary and compensation expense of Sellers' Store employees
directly to such employees from 12:01 a.m., January 27, 1997 through Closing as
required under Section 8(c).
Between the date of this Agreement and the
Closing Date, Sellers shall not, without the consent of PPI:
except for assigning the leases for the Stores
to PPI, amend, modify, supplement, extend or terminate any of the Stores' leases
or waive any rights thereunder.
make any material change in compensation or
benefits of the employees of the Business.
enter into any contract, commitment or other
transaction affecting the Assets or Stores other than in furtherance of the
transaction contemplated in this Agreement or in the ordinary and usual course
of business and consistent with past practice.
PPI shall pay the direct salary and compensation
expense of Sellers' Store employees directly to such employees from 12:01 a.m.,
January 27, 1997 through Closing.
Non-Competition Agreement. In consideration for
Ronald Weaver ("Weaver") executing a non-competition agreement, in the form
attached hereto as Exhibit "C", prohibiting Weaver from competing with the
Business for a period of five (5) years, the Buyers will pay Weaver $60,000 per
year for a period of five (5) years.
Representations and Warranties of Sellers. As
material inducement to Buyers to enter into this Agreement and to close
hereunder, each of Sellers jointly and severally make the following
representations and warranties to Buyers:
Corporate Status; Authority. Sellers are
corporations duly organized, validly existing and in good standing under the
laws of the jurisdictions of their respective incorporations. Each of Sellers
has the corporate power and authority to own its properties and to carry on the
Business as it is now being conducted. Each of Sellers has the full power and
authority to execute and deliver this Agreement and any and all other documents
or instruments to be executed and/or delivered by Sellers in connection
herewith, including, but not limited to the assignments of the Stores' leases,
(collectively, the "Purchase Documents") and to perform its respective
obligations hereunder and thereunder.
Due Authorization; Validity of Agreement. The
execution, delivery and performance of this Agreement and the Purchase Documents
by Sellers have been duly authorized and approved by all necessary corporate
action on the part of Sellers. This Agreement has been duly executed and
delivered by Sellers and, assuming the due execution and delivery of this
Agreement by Buyers, constitutes the valid and binding obligation of Sellers,
enforceable against each of them in accordance with its terms. Assuming due
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execution and delivery by Buyers, the Purchase Documents will
constitute the valid and binding obligations of Sellers, enforceable against
each of them in accordance with their respective terms.
Title to Assets. Sellers have good title to
all the Assets, which at the time of transfer will be free and clear of all
liens, mortgages, pledges, security interests, restrictions on transfer, prior
assignments, encumbrances and claims except for the restrictions on transfer and
assignment contained in the Stores' leases which have not been waived. None of
the Assets are held by Sellers on consignment.
Leases. All of the leases for the Stores are
valid, binding and enforceable against Sellers in accordance with their
respective terms except as such enforceability may be limited by the effect of
bankruptcy, insolvency or similar laws affecting creditors' rights generally or
by general principles of equity. Sellers and, to Sellers' knowledge, all other
parties to any of the Stores' leases have performed all obligations required to
be performed to date under such leases and neither Sellers nor, to Sellers'
knowledge, any such other party is in default or in arrears under the terms
thereof. Sellers have delivered to Buyers true and correct copies of all the
Stores' leases.
Litigation. Neither Seller is a party to or,
to Sellers' knowledge, threatened with any suit, action, arbitration,
administrative or other proceeding or any governmental investigation with
respect to the Assets, the Stores or any Employees or which may prevent the
consummation of the transaction contemplated hereby.
Agreement Not in Breach of Other Instruments
Affecting Sellers. The execution and delivery of this Agreement, the
consummation of the transactions provided for herein and the fulfillment of the
terms hereof by Sellers, will not result in the breach of any of the terms and
provisions of, or constitute a default under, or conflict with, or cause any
acceleration of any obligation of Sellers under, any agreement, indenture or
other instrument to which either Seller is bound, any judgment, decree, order or
award of any court, governmental body or arbitrator or any applicable law, rule
or regulation.
Brokerage Commissions. There is no
corporation, firm or person entitled to receive from Sellers any brokerage
commission or finder's fee in connection with this Agreement or the transaction
provided for herein.
Representations, Warranties and Agreements of
Buyers. As material inducement to Sellers to enter into this Agreement and to
close hereunder, Buyers jointly and severally make the following
representations, warranties, and agreements to and with Sellers:
Corporate Status; Authority. Each Buyer is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware, and has the corporate power to acquire the Assets to
be acquired hereunder. Each Buyer has the full power and authority to execute
and deliver this Agreement and the Purchase Documents and perform its
obligations hereunder and thereunder.
Due Authorization; Validity of Agreement. The
execution, delivery and performance of this Agreement and the Purchase Documents
have been duly authorized and approved by all necessary corporate action on the
part of Buyers. This Agreement has been duly executed and delivered by Buyers
and, assuming the due execution and delivery of this Agreement by Sellers,
constitutes the valid and binding obligation of Buyers, enforceable in
accordance with its terms. Assuming due execution and delivery by Sellers, the
Purchase Documents will constitute the valid and binding obligations of Buyers,
enforceable against each of them in accordance with their respective terms.
Agreement Not in Breach of Other Instruments.
The execution and delivery of this Agreement, the consummation of the
transactions provided for herein and the fulfillment of the terms hereof by
Buyers, will not result in the breach of any of the terms and provisions of, or
constitute a default under, or conflict with, or cause any acceleration of any
obligation of Buyers under, any agreement, indenture or other instrument to
which either Buyer is bound, any judgment, decree, order or award of any court,
governmental body or arbitrator or any applicable law, rule or regulation.
26
<PAGE>
Brokerage Commissions. There is
no corporation, firm or person entitled to receive from Buyers any brokerage
commission or finder's fee in connection with this Agreement or the transaction
provided for herein.
Survival of Representations and Warranties. All
representations and warranties of the parties hereto in this Agreement shall
survive Closing until July 28, 1997.
Closing Deliveries by Sellers. On the Closing
Date, Sellers shall deliver or cause to be delivered to Buyers the following:
Escrow Agreement. An Escrow Agreement, in the
form of Exhibit "B", executed by Sellers.
Non-Competition Agreement. A Non-Competition
Agreement in the form of Exhibit "C", executed by Weaver.
Bill of Sale and General Assignment. A Bill
of Sale and General Assignment, in the form of Exhibit "D", executed by Sellers,
transferring to Buyers good title to all of the personal property included in
the Assets.
Store Lease Assignment. A General Lease
Assignment for each Store lease (except those Store leases identified on
Schedule 13), in the form of Exhibit "E", executed by Sellers and a specific
Assignment with Lessor Consent Agreement for each Store lease received by
Sellers on or before the Closing Date which is executed by the landlord.
Computerized Point-of-Sale Cash Register
System Lease Assignment With Lessor Consent. A Transfer Agreement for the
computerized point-of-sale registers leased from LDI Corporation for the
Business, in the form of Exhibit "F", executed by Sellers.
Payoff Letter from Secured Lender. A payoff
letter from any secured lender holding a security interest in any of the Assets
releasing such security interest and agreeing to execute Uniform Commercial Code
UCC-3 termination statements and other documents as may be required to evidence
the release of such security interest of record.
Certified Corporate Resolutions. Corporate
resolutions adopted by the boards of directors of Sellers and, if required by
law, by the shareholders of Sellers, certified by Sellers' Corporate
Secretaries, approving this Agreement and authorizing the consummation of the
transactions contemplated hereby.
Schedule of Security Deposits. A schedule of
all security and construction deposits held by any landlords under the Store
leases.
Schedule of Insurance. A schedule of existing
workers compensation insurance coverages for Employees and of liability policies
covering the Business with evidence that Sellers shall continue to be covered
with respect to personal liability for events occurring prior to the Closing
Date.
Assets. All of the Assets capable of being
delivered in physical form shall be delivered to Buyers.
Closing Deliveries by Buyers. On the Closing
Date, Buyers shall deliver or cause to be delivered to Sellers the following:
Assumption Agreement. An Assumption
Agreement, in the form of Exhibit "A", executed by Buyers.
Escrow Agreement. An Escrow Agreement, in the
form of Exhibit "B", executed by Buyers.
27
<PAGE>
Non-Competition Agreement. A Non-Competition
Agreement, in the form of Exhibit "C", executed by Buyers.
Store Lease Assignment. A General Lease
Assignment for each Store lease (except those Store leases identified on
Schedule 13), in the form of Exhibit "E", executed by PPI and a specific
Assignment with Lessor Consent Agreement for each Store lease received by
Sellers or PPI on or before the Closing Date which is executed by the landlord.
Computerized Point-of-Sale Cash Register
System Lease Assignment With Lessor Consent. A Transfer Agreement for the
computerized point-of-sale registers leased from LDI Corporation for the
Business, in the form of Exhibit "F", executed by PPI.
Certificates Confirming Approval of this
Agreement. Officer's Certificates of Buyers, certifying that all necessary
corporate action by Buyers has been taken to approve this Agreement and
authorize the consummation of the transactions contemplated hereby.
Purchase Price. That portion of the Purchase
Price payable on the Closing Date.
Covenants Extending Beyond Closing.
Further Assurances. Sellers agree to execute
and deliver all such other instruments and take all such other action as Buyers
may reasonably request from time to time, before or after the Closing Date and
without payment of further consideration, in order to effectuate the transaction
provided for herein, including, without limitation, the execution and delivery
by Sellers of such further instruments of conveyance and transfer as may be
necessary to convey and transfer more completely to the Buyers the Assets being
purchased hereunder; and the obtaining and filing of properly executed
termination statements in each applicable jurisdiction as to any security
interests that are currently of record. The parties shall cooperate fully with
each other and with their respective counsel in connection with any steps
required to be taken as part of their respective obligations under this
Agreement.
Access to Inventory and Assets. From the
Closing Date until final delivery of all Inventory and supplies to Buyers,
Sellers will afford Buyers and their authorized representatives access to the
Inventory and supplies transferred to Buyers and being held at Sellers'
warehouse at Sellers' headquarters location. Until the final Adjusted Inventory
Value shall have been determined and agreed to by Buyers and Sellers, Buyers
will afford Sellers and their authorized representatives access to the Inventory
and supplies of the Business and the books and records relating to the Assets
(as such books and records existed as of the Closing Date), for the purpose of
performing a physical inventory and calculating the Adjusted Inventory Value as
set forth in Section 5. Buyers shall permit Sellers to retain in Sellers'
warehouse at Sellers' headquarters location the gold and non-gold Inventory of
the Business, removed from the Stores by Sellers prior to Closing pursuant to
Section 8(a)(i), following Closing until such Inventory is delivered to Buyers
as provided in this Section 15(b).
Sellers shall perform a physical
inventory of the gold Inventory of the Business (the "Gold Inventory") which
may, at Sellers' option, be performed in stages. At the conclusion of such
physical inventory and any stage thereof, Sellers shall provide Buyers with a
written report specifying the following with respect to the Gold Inventory to
which the report pertains: (A) the quantity count, (B) the extended estimated
cost, (C) the SKU/BIN Number or other location description and (D) the vendor of
the Gold Inventory (each a "Weaver's Grams On Hand With Cost Report"). Buyers
may, at Buyers' expense, inspect at Sellers' warehouse the Gold Inventory with
respect to which any Weaver's Grams On Hand With Cost Report pertains, for
purposes of verifying the quantity count of such Gold Inventory, and shall use
their reasonable best efforts to complete such verification within five (5) days
after Buyers' receipt of each such Report. On the first day following the
completion of Buyers' verification of the quantity count of the Gold Inventory
specified in any Weaver's Grams On Hand Cost Report (each a "Gold Inventory
Release Date"), Sellers shall release the Gold Inventory specified in the
relevant Weaver's Grams On Hand With Cost Report to Buyers.
Sellers shall perform a physical
inventory of the non-gold Inventory of the Business (the "Non-Gold Inventory")
which may, at Sellers' option, be performed in stages. At the conclusion of such
physical inventory and any stage thereof, Sellers shall provide Buyers with a
written report
28
<PAGE>
specifying the following with respect to the
Non-Gold Inventory to which the report pertains: (A) the quantity count, (B) the
extended estimated cost, (C) the SKU/BIN Number or other location description
and (D) the vendor of the Non-Gold Inventory (each a "Non-Gold To Be Produced
With Extended Cost Report"). Buyers may, at Buyers' expense, inspect at Sellers'
warehouse the Non-Gold Inventory with respect to which any Non-Gold To Be
Produced With Extended Cost Report pertains, for purposes of verifying the
quantity count of such Non-Gold Inventory, and shall use their reasonable best
efforts to complete such verification with five (5) days after Buyers' receipt
of each such Report. On the first day following the completion of Buyers'
verification of the quantity count of the Non-Gold Inventory specified in any
Non-Gold To Be Produced With Extended Cost Report (each a "Non-Gold Inventory
Release Date"), Sellers shall release the Non-Gold Inventory specified in the
relevant Non-Gold To Be Produced With Extended Cost Report to Buyers.
Sellers' physical inventory shall
concentrate on the Gold Inventory first, and Sellers shall use their reasonable
best efforts to provide the first Weaver's Grams On Hand With Cost Report to
Buyers on or before February 7, 1997. Sellers also shall use their reasonable
best efforts to complete their physical inventory of the Gold Inventory and the
Non-Gold Inventory (and provide to Buyers a final Weaver's Grams On Hand With
Cost Report and Non-Gold To Be Produced With Extended Cost Report, respectively)
on or before February 24, 1997. Buyers shall use their reasonable best efforts
to verify the quantity count of the Gold Inventory specified in the first
Weaver's Grams On Hand With Cost Report by February 10, 1997, and to verify the
quantity count of the Gold Inventory and the Non-Gold Inventory specified in the
final Weaver's Grams On Hand With Cost Report and the Non-Gold To Be Produced
With Extended Cost Report, respectively, on or before March 3, 1997. The date on
which Buyers complete their verification of all Gold Inventory and Non-Gold
Inventory shall be referred to in this Agreement as the "Final Inventory Release
Date". If any Weaver's Grams On Hand With Cost Report or Non-Gold To Be Produced
With Extended Cost Report is submitted during the period from February 10, 1997
until February 24, 1997, the period of time within which Buyers shall be
required to use their reasonable best efforts to verify the quantity counts
specified therein shall not begin until February 25, 1997.
Any dispute as to the quantity count of
the Gold Inventory or the Non-Gold Inventory specified in any Weaver's Grams On
Hand Cost Report or Non-Gold To Be Produced With Extended Cost Report,
respectively, shall be reconciled by Sellers and Buyers.
Sellers shall be responsible for all
shipping costs and insurance for the Gold Inventory and the Non-Gold Inventory
prior to Closing, and Buyers shall be responsible for all shipping costs and
insurance for the Gold Inventory and the Non-Gold Inventory following Closing.
WARN Act Liability; Employees. PPI
intends, but shall have no obligation, to hire most of the Employees of the
Business other than those at Sellers' headquarters office. PPI shall indemnify
Sellers for any WARN Act liability if more than the number of Employees
(excluding Employees at Sellers' headquarters office) that would trigger such
Act (i) are not offered employment by PPI or (ii) are offered employment by PPI
and are terminated by it within sixty (60) days after the Closing Date. Within
ten (10) days after the Closing Date, Sellers shall provide Buyers with a list
of all Employees which identifies their respective employment status (full-time,
part-time, leave of absence, etc.), and their respective gross rate of
compensation, title, original date of hire and accrued unused vacation time.
Employee Benefits. PPI agrees to identify
to Sellers all Employees of the Business which it will hire following the
Closing Date. PPI agrees to grant credit for time subsequent to the last
anniversary date with Sellers for all full-time Employees hired by Buyers under
Buyers' vacation policy. With respect to Employees hired by Buyers who had, on
or immediately prior to the Closing Date, been receiving health or dental
coverage with respect to themselves, their spouses and/or dependents under an
employee welfare benefit plan maintained by Sellers, PPI agrees to cover, or
make coverage available to, such Employees, spouses and/or dependents under
Buyers' existing health and dental benefit arrangements, under the same terms as
available to Buyers' other employees; provided, however, that such individuals
shall not be subjected to any waiting period or preexisting condition,
limitation or exclusion. Sellers shall have no responsibilities for any claims
incurred under or premium payments with respect to such plans or arrangements.
Gift Certificates. For a period of one
(1) year following the Closing Date, Sellers shall reimburse Buyers for the
amounts of any gift certificates issued by Sellers conducted under the name
Gemstone prior to Closing which gift certificates were issued not more than one
year prior to the date of honor
29
<PAGE>
and which have been honored by Buyers, within ten (10) days
after Buyers have submitted proof that such gift certificates were issued within
one (1) year prior to the date of honor and have been honored.
Lay-Away and Store Deposits; Store
Credits. For a period of ninety (90) days following the Closing date, Sellers
shall reimburse Buyers for any verifiable lay-away deposits, special order
deposits or store credits accepted or issued prior to Closing by any of the
Stores which are honored by Buyers during such period, within ten (10) days of
Sellers' receipt of proof from Buyers that such lay-away deposits, special order
deposits or store credits have been honored by Buyers.
Security Deposits. Sellers shall use
reasonable efforts to obtain reimbursement from the landlords of the Stores of
the security deposits and construction deposits made pursuant to the leases for
such Stores and listed on the schedule delivered on the Closing Date; however,
if Sellers are unable to obtain such reimbursement, but the landlord
acknowledges in writing that Buyers will receive credit for such deposits,
Buyers shall pay the amount of such security deposits and construction deposits
to Sellers.
Store Leases. PPI shall assume the
obligations and liabilities of Sellers under those Store leases identified on
Schedule 13, notwithstanding that the landlord parties to such leases have not
consented to the assignment of such leases to PPI as of the Closing Date.
Sellers shall pay all amounts owed to landlords under the Store leases through
January 31, 1997. PPI and Sellers shall use their best efforts to obtain
landlord consents from the remaining landlords within sixty (60) days following
the Closing Date.
Corporate Name Change. As soon as
practicable following Closing, Gemstone agrees to change its corporate name to a
name that does not include "Gemstone" or any similar name, and provide evidence
of such name change to Buyers.
Indemnification by Sellers and Buyers.
Indemnification by Sellers. Sellers shall
defend, indemnify and hold Buyers and their officers, directors and shareholders
harmless from and against any damage, claim, liability, loss, expense, cost or
deficiency, including reasonable attorneys' fees and costs ("Damages") resulting
from (i) any breach of any representation or warranty made by Sellers in Section
10, (ii) any claims incurred or benefits accrued on or prior to the Closing Date
with respect to employee benefits and employee benefit plans under ERISA (the
"Benefit Plans") maintained, sponsored or contributed to by Sellers, any
premiums or contributions due with respect to the Benefit Plans based on service
on or prior to the Closing Date or the requirement to provide or make available
to any employee who is terminated on or prior to the Closing Date any benefits
under the Benefit Plans, including COBRA continuation coverage required under
Section 4980B of the Internal Revenue Code of 1986 and (iii) the Retained
Liabilities..
Indemnification by Buyers. Buyers shall
defend, indemnify and hold Sellers and their officers, directors and
shareholders harmless from and against any Damages resulting from (i) any breach
of any representation or warranty made by Buyers in Section 11, (ii) any WARN
Act liability if more than the number of Employees (excluding Employees at
Sellers' headquarters office) that would trigger such Act either are not offered
employment by PPI or are offered employment by PPI and are terminated by PPI
within sixty (60) days after the Closing Date, (iii) the liabilities assumed
pursuant to Section 3 and (iv) the operation of the Business, the Assets and the
Stores after Closing (each an "Indemnity Claim").
Notice to Indemnifying Party. Promptly
after the assertion of any claim by any governmental authority or other third
party ("Third Party Claim") or the occurrence of any event which may arise to a
claim for indemnification under this Section 16, the indemnified party shall
give the indemnifying party written notice of such event or Third Party Claim,
including copies of any summons, complaint or other pleading which may have been
served on the indemnified party and any written claim, demand, invoice, billing
or other document evidencing or asserting a Third Party Claim.
Third Party Claims. The rights of
indemnification under this Section 16 with respect to any Third Party Claim
shall be subject to the following terms and conditions:
The indemnifying party, at its expense,
shall have the sole and exclusive right to pay, compromise, settle or
otherwise dispose of any Third Party Claim. Unless the indemnified party
30
<PAGE>
otherwise agrees, however, no such settlement shall
limit, restrict or otherwise adversely affect the right of the indemnified party
to carry on or conduct its business (then or in the future), or require any
payment to be made by the indemnified party (except as may be paid or reimbursed
by the indemnifying party). In addition, no settlement shall be entered into
which does not include the delivery by the Third Party of a full and final
release of the indemnified party from all liability in respect of such Third
Party Claim.
The indemnifying party, at its expense,
shall be entitled to participate in and to the extent it wishes, to direct the
defense, including the selection of counsel reasonably satisfactory to the
indemnified party, of any such Third Party Claim. The indemnified party shall
cooperate in all reasonable respects with the indemnifying party and such
counsel in the investigation, discovery and pre-trial phases, trial and appeal
of such Third Party Claim. The indemnified party shall at all times have the
right to participate in the defense of any Third Party Claim and to employ its
own counsel, but the fees and expenses of such counsel shall be the indemnified
party's own expense unless the employment of such counsel shall have been
authorized by the indemnifying party in connection with the defense of any such
Third Party Claim, or unless and so long as the indemnifying party shall not
have employed counsel to have charge of the defense of any such Third Party
Claim within a reasonable period after notice thereof, in neither of which
events such fees and expenses shall be borne by the indemnifying party.
Notwithstanding anything in this Section
16(d) to the contrary, if there is a reasonable probability that any Third Party
Claim may materially and adversely affect the indemnified party, other than as a
result of money damages or other money payments, the indemnified party shall
have the right, at its own cost and expense, to defend, compromise or settle
such Third Party Claim; provided, that the indemnifying party shall not be
liable for any payment in settlement of any Third Party Claim without its prior
consent, which shall not be unreasonably withheld.
Limitations on Liability. The liability
of the parties hereto under this Section 16 shall be subject to the following
limitations:
The indemnifying party shall not be
obligated to indemnify the indemnified party under this Section 16 for Damages
resulting from a breach or alleged breach of a representation or warranty in
this Agreement if the indemnified party has not given the indemnifying party
notice of such Damages prior to the expiration of the survival period for such
representation or warranty as stated in Section 12.
The indemnifying party shall not be
obligated to indemnify the indemnified party under this Section 16 for any
Damages resulting from a breach or alleged breach of a representation or
warranty in this Agreement unless the aggregate amount of payments owed by the
indemnifying party hereunder equals or exceeds Ten Thousand Dollars ($10,000),
whereupon only the aggregate payments in excess of Ten Thousand Dollars
($10,000) shall be made.
The aggregate liability of Sellers under
this Section 16 for breaches of representations shall not exceed One Million
Dollars ($1,000,000).
No liability shall be enforced against the
indemnifying party to the extent of any insurance proceeds that the indemnified
party receives with respect to any Damages.
Sole Remedy. The sole remedy of Buyers,
on the one hand, and Sellers, on the other hand, for any and all claims of a
nature described in Section 16(a) and Section 16(b), respectively, shall be the
indemnity set forth therein as limited by the provisions set forth elsewhere in
this Section 16.
Miscellaneous.
Indulgences, Etc. Neither the failure nor
any delay on the part of any party to exercise any right under this Agreement
shall operate as a waiver thereof, nor shall any single or partial exercise of
any right preclude any other or further exercise of the same or of any other
right nor shall any waiver of any right with respect to any occurrence be
construed as a waiver of such right with respect to any other occurrence. No
waiver shall be effective unless it is in writing and is signed by the party
asserted to have granted such waiver.
31
<PAGE>
Controlling Law. This Agreement and all
questions relating to its validity, interpretation, performance and enforcement,
shall be governed by and construed in accordance with the laws of the
Commonwealth of Pennsylvania (notwithstanding any conflict-of-law doctrines of
any state to the contrary) and without the aid of any canon, custom or rule of
law requiring construction against the draftsman.
Waiver. Any failure of Sellers or Buyer
to comply with any obligation, covenant, agreement or condition contained
herein may be expressly waived in writing by Buyers in the case of any such
failure by Sellers or by Sellers in the case of any such failure by Buyers, but
such waiver or failure to insist upon strict compliance shall not operate as a
waiver of, or estoppel with respect to, any subsequent or other failure.
Whenever this Agreement requires or permits consent by or on behalf of any party
hereto, such consent shall be given in writing in a manner consistent with the
requirements for a waiver of compliance as set forth in this Section 17(c).
Notices. All notices, requests, demands
and other communications required or permitted under this Agreement shall be in
writing and shall be deemed to have been duly given, made and received only when
delivered (personally, by courier service such as Federal Express, or by other
messenger) or four (4) business days following the day when deposited in the
United States mails, registered or certified mail, postage prepaid, return
receipt requested, addressed as set forth below:
(i) If to Sellers:
Weaver's Gems and Minerals, Inc.
4251 Chestnut Street, Route 29
Emmaus, PA 18049
Attention: Ronald Weaver, President
With a Copy to:
Ballard Spahr Andrews & Ingersoll
1735 Market Street
51st Floor
Philadelphia, PA 19103-7599
Attention: E. Carolan Berkley, Esq.
(ii) If to PPI:
Piercing Pagoda, Inc.
3910 Adler Place
Bethlehem, PA 18002
Attention: Richard H. Penske, Chief
Executive
Officer
With a Copy to:
Wolf, Block, Schorr and Solis-Cohen
Twelfth Floor Packard Building
S.E. Corner 15th and Chestnut Streets
Philadelphia, PA 19102-2678
Attention: Jason M. Shargel, Esq.
(iii) If to EARS:
EARS, Inc.
900 Market Street
Suite 200
Wilmington, DE
Attention: Richard H. Penske, President
32
<PAGE>
Any party may alter the address to which communications or copies are to
be sent by giving notice of such change of address in conformity with the
provisions of this paragraph for the giving of notice.
Exhibits and Schedules. All Exhibits and
Schedules attached hereto are hereby incorporated by reference into, and made a
part of, this Agreement.
Binding Nature of Agreement. This
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective heirs, personal representatives, successors and permitted
assigns. Sellers may not assign any of their rights or obligations hereunder.
Buyers may assign any or all of their rights hereunder to any affiliate of
Buyers; provided, however, that Buyers shall remain responsible for the
performance of all of their obligations under this Agreement notwithstanding any
such assignment.
Execution in Counterparts. This Agreement
may be executed in any number of counterparts, each of which shall be deemed to
be an original as against any party whose signature appears thereon, and all of
which shall together constitute one and the same instrument. This Agreement
shall become binding when one or more counterparts hereof, individually or taken
together, shall bear the signatures of all of the parties reflected hereon as
the signatories.
Provisions Separable. The provisions of
this Agreement are independent of and separable from each other, and no
provision shall be affected or rendered invalid or unenforceable by virtue of
the fact that for any reason any other or others of them may be invalid or
unenforceable in whole or in part.
Number of Days. In computing the number
of days for purposes of this Agreement, all days shall be counted, including
Saturdays, Sundays and holidays; provided, however, that if the final day of any
time period falls on a Saturday, Sunday or holiday on which federal banks are or
may elect to be closed, then the final day shall be deemed to be the next day
which is not a Saturday, Sunday or such holiday.
Entire Agreement. This Agreement
(including the Exhibits and Schedules hereto) contains the entire understanding
among the parties hereto with respect to the subject matter hereof, and
supersedes all prior and contemporaneous agreements and understandings,
inducements or conditions, express or implied, oral or written, except as herein
contained. The express terms hereof control and supersede any course of
performance and/or usage of the trade inconsistent with any of the terms hereof.
This Agreement may not be modified or amended other than by an agreement in
writing.
Paragraph Headings. The paragraph
headings in this Agreement are for convenience only; they form no part of this
Agreement and shall not affect its interpretation.
No Third Party Beneficiaries. This
Agreement shall inure to the benefit of the parties to this Agreement only and
not to the benefit of any third party, including Sellers' employees.
Publicity. Without Buyers' written
consent, neither Sellers, nor any person acting on their behalf shall issue a
press release or otherwise publicize the execution of this Agreement or the
consummation of the transaction contemplated hereby. The parties shall mutually
agree on the form and content of any press release or other public announcement
regarding the execution of this Agreement or the consummation of the transaction
contemplated hereby.
Expenses. The parties hereto shall each
pay the expenses incurred by them in connection with the origin, negotiation and
performance of this Agreement and the agreements contemplated hereby; provided,
however, that Buyers are responsible for the administrative fees, if any, to be
paid to landlords of the Stores in connection with the assignment of the Stores'
leases.
[Signature Page Follows]
33
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and delivered as of the date first above written.
PIERCING PAGODA, INC.
By:/s/John F. Eureyecko
John F. Eureyecko, President
EARS, INC.
By:/s/ John F. Eureyecko
John F.Eureyecko,Executive Vice President
WEAVER'S GEMS AND MINERALS, INC.
By:/s/Ronald Weaver
Ronald Weaver, President
GEMSTONE JEWELRY, INC.
By:/s/Ronald Weaver
Ronald Weaver, President
34
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 Nine months
ended ended
December 31, December 31,
1996 1996
-------------- --------------
<S> <C> <C>
Average shares outstanding ........................... 5,261 5,253
Net effect of dilutive stock options, based
on the treasury stock method ...................... 152 128
====== ======
Total shares used in computation ..................... 5,413 5,381
====== ======
Net income ........................................... $7,824 $7,754
====== ======
Net income per common share and
common share equivalent ........................... $ 1.45 $ 1.44
====== ======
</TABLE>
35
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000925544
<NAME> PIERCING PAGODA, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> DEC-31-1996
<CASH> 4,082
<SECURITIES> 0
<RECEIVABLES> 1,003
<ALLOWANCES> 0
<INVENTORY> 41,527
<CURRENT-ASSETS> 48,575
<PP&E> 32,654
<DEPRECIATION> 11,880
<TOTAL-ASSETS> 72,080
<CURRENT-LIABILITIES> 29,710
<BONDS> 0
0
0
<COMMON> 53
<OTHER-SE> 37,611
<TOTAL-LIABILITY-AND-EQUITY> 72,080
<SALES> 129,022
<TOTAL-REVENUES> 129,022
<CGS> 70,645
<TOTAL-COSTS> 70,645
<OTHER-EXPENSES> 44,375
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,595
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<INCOME-TAX> 4,897
<INCOME-CONTINUING> 7,754
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<NET-INCOME> 7,754
<EPS-PRIMARY> 1.44
<EPS-DILUTED> 1.44
</TABLE>
