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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 15, 1997
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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PIERCING PAGODA, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 5944 23-1894725
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
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3910 ADLER PLACE, BETHLEHEM, PA 18017, (610) 691-0437
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
JOHN F. EUREYECKO
PRESIDENT AND CHIEF OPERATING OFFICER
PIERCING PAGODA, INC.
3910 ADLER PLACE
BETHLEHEM, PA 18017
(610) 691-0437
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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COPY TO:
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JASON M. SHARGEL, ESQUIRE LARRY A. BARDEN, ESQUIRE
WOLF, BLOCK, SCHORR AND SOLIS-COHEN SIDLEY & AUSTIN
TWELFTH FLOOR PACKARD BUILDING ONE FIRST NATIONAL PLAZA
S.E. CORNER 15TH & CHESTNUT STREETS CHICAGO, IL 60603-2279
PHILADELPHIA, PA 19102-2678 (312) 853-7000
(215) 977-2000
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As promptly as practicable after the effective date of this Registration
Statement.
If the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] __________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] __________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM
PROPOSED MAXIMUM AGGREGATE
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER SHARE(1) PRICE(1) REGISTRATION FEE
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Common Stock, $.01 par value........... 1,782,500(2) $26.3125 $46,902,031.25 $14,212.74
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457 under the Securities Act based upon the average of the
high and low sale prices of the Common Stock on May 9, 1997.
(2) Includes 232,500 shares which the Underwriters have a right to purchase to
cover over-allotments, if any.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED MAY 15, 1997
[PIERCING PAGODA, INC. LOGO]
1,550,000 SHARES
COMMON STOCK
Of the 1,550,000 shares of Common Stock offered hereby, 650,000 are being
offered by Piercing Pagoda, Inc. ("Piercing Pagoda" or the "Company") and
900,000 shares are being offered by the Selling Stockholders. See "Principal and
Selling Stockholders." The Company will not receive any of the proceeds from the
sale of shares by the Selling Stockholders. As of May 14, 1997, the last sale
price of the Common Stock as reported on the Nasdaq National Market was $28.00
per share. The Common Stock is traded under the Nasdaq symbol "PGDA."
Upon consummation of this offering, Richard H. Penske, the Company's Chief
Executive Officer and Chairman of the Board, will own approximately 39.2%
(approximately 38.6% if the Underwriters' over-allotment option is exercised in
full) of the outstanding shares of Common Stock. As a result, Mr. Penske is
likely to continue to have effective control over the outcome of substantially
all issues submitted to the Company's stockholders, including the election of
all of the Company's directors. See "Principal and Selling Stockholders."
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THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS COMPANY(1) STOCKHOLDERS
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Per Share............................ $ $ $ $
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Total(2)............................. $ $ $ $
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(1) Before deducting estimated offering expenses of $325,000, all of which are
payable by the Company.
(2) The Company and the Selling Stockholders have granted the Underwriters a
30-day option to purchase an additional 232,500 shares of Common Stock
solely to cover over-allotments, if any. If such over-allotment option is
exercised in full, the total Price to Public, Underwriting Discounts and
Commissions, Proceeds to Company and Proceeds to Selling Stockholders will
be $ , $ , $ and $ , respectively. See
"Underwriting."
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The Common Stock is offered by the Underwriters as stated herein, subject
to receipt and acceptance by them and subject to their right to reject any order
in whole or in part. It is expected that delivery of such shares will be made
through the offices of Robertson, Stephens & Company LLC ("Robertson, Stephens &
Company"), in San Francisco, California, on or about , 1997.
ROBERTSON, STEPHENS & COMPANY
WHEAT FIRST BUTCHER SINGER
FURMAN SELZ
PARKER/HUNTER
INCORPORATED
The date of this Prospectus is , 1997
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[PIERCING PAGODA, INC. LOGO]
STORE LOCATIONS
[THE INSIDE FRONT COVER GATEFOLD WILL INCLUDE PICTURES OF THE COMPANY'S KIOSKS
AND A MAP OF THE UNITED STATES INDICATING THE LOCATIONS OF THE COMPANY'S
STORES.]
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LOCATIONS AS OF MAY 7, 1997
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Piercing Pagoda................................. 567
Plumb Gold...................................... 131
Silver & Gold Connection........................ 34
Other........................................... 2
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734
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2
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NO DEALER, SALES REPRESENTATIVE OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY, BY ANY SELLING STOCKHOLDER OR BY ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER
TO BUY, ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES
OR AN OFFER TO, OR A SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH
AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO THE DATE HEREOF.
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TABLE OF CONTENTS
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PAGE
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Summary............................................................................... 4
Risk Factors.......................................................................... 6
Use of Proceeds....................................................................... 12
Dividend Policy....................................................................... 12
Price Range of Common Stock........................................................... 13
Capitalization........................................................................ 14
Selected Financial and Operating Data................................................. 15
Management's Discussion and Analysis of Financial Condition and Results of
Operations.......................................................................... 17
Business.............................................................................. 25
Management............................................................................ 34
Certain Transactions.................................................................. 41
Principal and Selling Stockholders.................................................... 42
Description of Capital Stock.......................................................... 43
Shares Eligible for Future Sale....................................................... 45
Underwriting.......................................................................... 46
Legal Matters......................................................................... 47
Experts............................................................................... 47
Additional Information................................................................ 47
Index to Consolidated Financial Statements............................................ F-1
</TABLE>
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CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING BY ENTERING STABILIZING BIDS OR EFFECTING SYNDICATE COVERING
TRANSACTIONS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET
MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ STOCK MARKET IN ACCORDANCE
WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING."
3
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SUMMARY
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," "Business" and elsewhere in this Prospectus are not
limited to historical or current facts and deal with potential future
circumstances and developments. Prospective investors are cautioned that such
forward-looking statements, which may be identified by words such as
"anticipate," "believe," "expect," "estimate," "intend," "plan," and similar
expressions, are only predictions and that actual events or results may differ
materially. Unless otherwise indicated, all information in this Prospectus
assumes no exercise of the Underwriters' over-allotment option. References to
fiscal years of the Company are to the twelve month period ended March 31 of the
applicable year.
THE COMPANY
Piercing Pagoda is the largest retailer of gold jewelry through kiosk
stores in the United States. At May 7, 1997, the Company operated 734 stores in
43 states and Puerto Rico, including 710 kiosk stores and 24 in-line stores. The
Company offers an extensive selection of popular-priced 14 karat and 10 karat
gold chains, bracelets, earrings, charms and rings, as well as a selection of
silver jewelry, all in basic styles at everyday low prices. The Company's stores
are generally located in high traffic concourses of regional shopping malls and
are primarily operated under the names Piercing Pagoda, Plumb Gold and Silver &
Gold Connection. The Company's kiosk stores average approximately 165 square
feet in size, typically carry approximately 3,300 stock keeping units ("SKUs"),
require a low initial investment, can be opened quickly and are easily
accessible and visible within malls. During fiscal 1997, the average price of a
jewelry item sold by the Company was approximately $24, and average comparable
store net sales per square foot were $1,848.
The Company's freestanding kiosk stores provide an easy-to-shop environment
for both destination customers and impulse shoppers. Merchandise is prominently
displayed with clearly visible price tags on specially designed pads in glass
showcases that facilitate browsing and comparison shopping, and maximize the
number of items shown. The Company maintains everyday low prices in its stores
and its goal is to be the value leader in the popular-priced gold jewelry
business in the markets that it serves. Additionally, the Company emphasizes
customer service and offers complimentary ear piercing with the purchase of
earrings, provides a lifetime guarantee for its merchandise and maintains a
"buy-five-get-one-free" jewelry club. The Company is also committed to
maintaining sophisticated management information systems. The Company believes
that these operating strategies, along with its low price points and focused
merchandise selection, enhance the Company's ability to generate a significant
level of repeat business and to attract new customers, and differentiate it from
other mall-based jewelry retailers.
The Company's net sales have grown at a 41.8% compound annual rate from
$58.7 million in fiscal 1993 to $166.9 million in fiscal 1997 and average net
sales per comparable store have grown at a 9.9% compound annual rate from
$208,000 in fiscal 1993 to $303,000 in fiscal 1997. The Company operated 734
stores at May 7, 1997, a 43% increase from the 513 open at March 31, 1996. This
increase was achieved through the acquisition of 141 stores and the opening of
80 net new stores. In January 1997 and April 1997, the Company solidified its
position as the largest operator of gold jewelry kiosk stores by acquiring 93
and 43 kiosk stores, respectively, from the companies that had been the second
and third largest gold jewelry kiosk operators. The Company intends to focus in
fiscal 1998 on the assimilation of these recently acquired stores, as well as on
increasing the productivity of the newly opened stores. The Company plans to
open approximately 60 to 70 new stores in fiscal 1998 and approximately 70 to 90
new stores in fiscal 1999 (excluding any acquisitions), and to close an
aggregate of approximately 20 stores during that two-year period.
The Company was organized under the laws of the State of Delaware in 1973
and succeeded to the business of a Pennsylvania corporation formed in 1970. The
Company's principal executive offices are located at 3910 Adler Place,
Bethlehem, Pennsylvania 18017. Its telephone number is (610) 691-0437.
THE OFFERING
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Common Stock Offered by the Company.......... 650,000 shares
Common Stock Offered by the Selling
Stockholders............................... 900,000 shares
Common Stock Outstanding after the Offering.. 5,927,094 shares (1)
Use of Proceeds.............................. To repay certain indebtedness. See "Use of Proceeds."
Nasdaq National Market Symbol................ PGDA
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(1) Excludes 395,150 shares of Common Stock issuable upon exercise of
outstanding options, 150,550 of which are currently exercisable. See
"Management -- 1994 Stock Option Plan."
4
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SUMMARY FINANCIAL AND OPERATING DATA
(In thousands, except per share and selected operating data)
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FISCAL YEAR ENDED MARCH 31,
----------------------------------------------------
1993 1994 1995 1996 1997
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INCOME STATEMENT DATA:
Net sales................................................... $ 58,725 $ 68,922 $ 86,076 $121,581 $166,885
Gross profit(1)............................................. 26,959 30,961 38,007 54,141 74,577
Selling, general and administrative expenses (including
depreciation on kiosks)................................... 22,706 25,122 30,007 43,887 60,845
Income from operations...................................... 4,253 5,449 8,000 10,254 13,732
Net income(2)............................................... 2,871 4,234 3,528 5,677 7,538
Earnings per share.......................................... $ 1.07 $ 1.40
Weighted average shares outstanding......................... 5,325 5,389
PRO FORMA DATA:
Pro forma net income(2)..................................... 2,624 4,156
Pro forma net income per share(2)(3)........................ $ 0.67 $ 0.91
Pro forma weighted average shares outstanding(3)............ 3,895 4,558
SELECTED OPERATING DATA:
Number of stores at beginning of period..................... 285 279 295 366 513
Stores added (net of closures and sales).................... (6) 16 71 147 169
-------- -------- -------- -------- --------
Stores at end of period..................................... 279 295 366 513 682
========= ========= ========= ========= =========
Average jewelry units sold per comparable store
(rounded)(4).............................................. 8,300 9,500 10,800 11,600 12,000
Average net sales per comparable store(5)................... $208,000 $240,000 $266,000 $295,000 $303,000
Average comparable store net sales per square foot(6)....... $ 1,333 $ 1,544 $ 1,652 $ 1,821 $ 1,848
Average comparable store square footage(6).................. 153 153 161 162 164
Percentage increase in comparable store net sales(7)........ 14.2% 13.8% 9.8% 12.4% 7.6%
</TABLE>
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MARCH 31, 1997
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ACTUAL AS ADJUSTED(8)
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BALANCE SHEET DATA:
Working capital...................................................................... $40,649 $ 40,649
Inventory............................................................................ 43,109 43,109
Total assets......................................................................... 79,741 79,741
Total long-term debt................................................................. 26,924 10,050
Stockholders' equity................................................................. 37,522 54,396
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(1) Gross profit excludes depreciation on kiosks. Depreciation on kiosks is
included in selling, general and administrative expenses. See Note 1 of
Notes to Consolidated Financial Statements.
(2) Prior to the initial public offering of the Company's Common Stock in
October 1994, the Company was an "S" corporation for federal and certain
state income tax purposes and, accordingly, was subject to only limited
corporate income taxes. All pro forma information has been computed as if
the Company were subject to federal and applicable state corporate income
taxes for all periods presented, based upon the tax laws in effect during
the respective periods, in accordance with Financial Accounting Standards
Board Statement No. 109, which the Company adopted in 1994. Income tax
expense in fiscal 1995 includes certain amounts relating to the Company's
conversion from an "S" corporation to a "C" corporation. See Notes to
Consolidated Financial Statements. In fiscal 1996 and fiscal 1997, the
Company was taxed as a "C" corporation in all jurisdictions.
(3) Pro forma net income per share has been computed by dividing pro forma net
income by the weighted average number of common shares and common share
equivalents outstanding during fiscal 1994 and fiscal 1995, as adjusted to
give effect at all times to the sale or other issuance of shares during
March and June of fiscal 1994. See Note 1 of Notes to Consolidated Financial
Statements.
(4) Fiscal 1995, fiscal 1996 and fiscal 1997 reflect average jewelry units sold
per comparable store based on 260, 283 and 355 comparable stores,
respectively, which represent the number of all stores open at the end of
such fiscal year which were also open as of the beginning of the preceding
year. Average jewelry units sold per store in fiscal 1993 and fiscal 1994 is
calculated by dividing the total jewelry units sold by all of the Company's
stores during the period by the average of the total beginning and ending
number of stores and is rounded to the nearest hundred. Due to the
significant number of new store openings in the last three fiscal years, the
Company believes comparable store data is a more meaningful measure of the
growth in unit sales at its stores than total store data.
(5) Average net sales per comparable store is calculated based on the net sales
of all stores open as of the beginning of the preceding fiscal year divided
by the number of such stores.
(6) Fiscal 1995, fiscal 1996 and fiscal 1997 reflect average net sales per
square foot for comparable stores (those stores open at the end of the
respective fiscal year which were also open as of the beginning of the
preceding fiscal year) based on the approximate average square footage per
comparable store of 161, 162 and 164 square feet, respectively. Average net
sales per square foot in fiscal 1993 and fiscal 1994 is based on the average
net sales per store divided by 153, the approximate average square footage
for all stores during both periods. Average net sales per store in fiscal
1993 and fiscal 1994 is based on net sales, less wholesale sales, divided by
the average of the total beginning and ending number of stores per period.
Due to the significant number of new store openings in the latest three
fiscal years, the Company believes comparable store data is a more
meaningful measure of the growth in sales per square foot at its stores than
total store data.
(7) Comparable store net sales data are calculated based on the change in net
sales of all stores open as of the beginning of the preceding fiscal year.
(8) As adjusted to reflect the receipt of the estimated net proceeds from the
issuance and sale of the 650,000 shares of Common Stock offered by the
Company hereby at an assumed public offering price of $28.00 per share and
the application of the net proceeds therefrom as described under "Use of
Proceeds."
5
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RISK FACTORS
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," in the "Business" section and elsewhere in this
Prospectus are not limited to historical or current facts and deal with
potential future circumstances and developments. Prospective investors are
cautioned that such forward-looking statements, which may be identified by words
such as "anticipate," "believe," "expect," "estimate," "intend," "plan," and
similar expressions, are only predictions and that actual events or results may
differ materially. Forward-looking statements include those relating to: the
ability of the Company to successfully assimilate and increase the net sales
volume and profitability of recently acquired and newly opened stores,
anticipated store openings and closings, estimated capital expenditures, and the
absence of material adverse impact expected from the possible loss of any
current supplier, the possible termination of any current consignment
arrangement, the possible enactment of new legislation, the possible purchase of
the Company's stores in Florida by a licensee of the Company and legal
proceedings. 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, including those set forth in the following risk
factors and elsewhere in this Prospectus. The following risk factors should be
considered carefully in evaluating the Company and its business before
purchasing the Common Stock.
RISKS RELATING TO EXPANSION
A significant portion of the Company's growth in recent years has resulted
from, and will continue to be dependent principally upon, the acquisition and
opening of new stores and increased net sales volume and profitability from the
Company's existing stores. From the beginning of fiscal 1997 through May 7,
1997, the Company added 221 net new stores, including a total of 136 stores
acquired in January and April 1997. Because recent acquisitions by the Company
included the two largest gold jewelry kiosk store operators other than the
Company and the Company is not aware of any other operators that own more than
20 gold jewelry kiosks, the Company does not expect to maintain the rate of
recent store acquisitions. Accordingly, the rate of the Company's net sales
growth is likely to moderate beginning in fiscal 1998 and moderate further in
fiscal 1999. In fiscal 1996 and fiscal 1997, the Company opened an aggregate of
167 new stores, excluding acquisitions. The Company plans to open approximately
60 to 70 new stores in fiscal 1998 and approximately 70 to 90 new stores in
fiscal 1999 (excluding any acquisitions), and to close an aggregate of
approximately 20 stores during that two-year period. However, the rate of new
store openings and the ability to operate these stores profitably is subject to
various contingencies, many of which are beyond the Company's control. These
contingencies include the Company's ability to secure suitable store sites on a
timely basis and on satisfactory terms, the Company's ability to hire, train and
retain qualified personnel, the availability of adequate capital resources and
the successful integration of new stores into existing operations. In addition,
there is a limited number of malls in the United States in which the Company's
stores can be located and the rate of construction of new malls has
significantly slowed in recent years. There is no assurance that suitable sites
will be available for new stores or that the new stores will be successfully
opened and integrated. The rate of the Company's expansion and net sales growth
may also be adversely affected to the extent that an independent store operator
that is a licensee of the Company exercises its right to purchase any or all of
the Company's stores in Florida. In fiscal 1997, the Company's stores in Florida
generated aggregate net sales of $12.5 million. See "Business -- Properties" and
Note 14 of Notes to Consolidated Financial Statements.
Moreover, the stores recently acquired or newly opened by the Company have
generally not generated net sales or store contribution at the levels generated
by the Company's other stores. The Company expects that a significant amount of
its growth will be generated by increasing the net sales volume and store
contribution of the recently acquired and newly opened stores. There is no
assurance that the Company will be able to enhance the net sales levels and
store contribution of the recently acquired or newly opened stores. The costs
associated with acquiring, assimilating and
6
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opening new stores have in the past and may in the future adversely affect the
Company's profitability. Additionally, acquiring or opening new stores in malls
or markets where the Company has existing stores may have the effect of
cannibalizing sales from those existing stores. Because the large number of
recently acquired and newly opened stores, which generally have lower net sales
volumes than the Company's other stores, will be entering into the base for the
computation of comparable store information during the current and future fiscal
years, average net sales per comparable store and average comparable store net
sales per square foot may decrease in the future, even if the Company
experiences increases in total and comparable store net sales. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business -- Expansion Strategy."
ABILITY TO MANAGE GROWTH
The Company's significant recent growth and the expected future growth have
resulted in new and increased responsibilities for management personnel, have
placed and continue to place a significant demand upon the Company's management,
operating and financial systems and resources, and have increased the Company's
inventory levels. In order to compete effectively and manage this growth, the
Company will be required to continue to implement and improve management
information systems, procedures and controls on a timely basis and in such a
manner as is necessary to accommodate the increased number of transactions and
customers and the increased size of the Company's operations. In this regard,
there is no assurance that the Company will be able to implement successfully
its planned new management information systems or to otherwise successfully
manage the increased size of its operations. In particular, as a result of its
recent growth, the Company's operational capacity will be strained in its third
fiscal quarter which includes the holiday selling season. See
"Business -- Management Information Systems." Management of growth will also
require that the Company continuously expand, train, motivate and manage its
work force. These demands will require the addition of new management personnel.
Competition for qualified personnel is intense and employee turnover in the
retail industry has generally been high. Accordingly, there is no assurance that
the Company will be successful in attracting and retaining such personnel.
Furthermore, there is no assurance that the Company's personnel, systems,
procedures and controls will be adequate to support the Company's existing and
future operations. Any failure to implement successfully and improve the
Company's operating, financial and management systems or to expand, train,
motivate or manage employees could have a material adverse effect on the
Company's results of operations and financial condition. See "Business."
SEASONALITY AND EXPECTED QUARTERLY LOSSES
The Company's business is highly seasonal. The Company has generally
experienced relatively lower net sales and lower net income or net losses in
each of the first, second and fourth quarters of each fiscal year, and the
Company expects this trend to continue for the foreseeable future. During the
last two fiscal years, the Company's third quarter (ending December 31) has, on
average, accounted for 40% of the Company's annual net sales, 97% of its annual
income from operations and 102% of its annual net income. During the last two
fiscal years, the month of December, on average, has accounted for approximately
26% of the Company's annual net sales and 103% of its annual income from
operations. Any substantial decrease in third fiscal quarter net sales, and, in
particular, December sales, would have a material adverse effect on the
Company's profitability for the entire fiscal year. The Company's quarterly
results of operations may also fluctuate significantly as a result of a variety
of factors, including the amount and timing of acquisitions and new store
openings, the integration of recently acquired and newly opened stores into the
operations of the Company, the timing of promotions, fluctuations in the price
of gold, and changes in national and regional economic conditions. For example,
earnings from operations in the first, second and fourth quarters of fiscal 1997
were adversely affected by the integration and assimilation of 331 stores opened
or acquired during fiscal 1996 and fiscal 1997. This was due primarily to the
relatively fixed nature of rent and other occupancy costs and selling, general
and administrative costs associated with the recently acquired and newly opened
stores, which had a significant adverse impact on these lower net sales volume
quarters.
7
<PAGE> 9
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Seasonality" and "-- Quarterly Data."
GOLD PRICES
The Company and the gold jewelry industry in general are affected by
fluctuations in the price of gold. The Company sets retail prices for its gold
merchandise based on the price the Company paid suppliers for the merchandise,
and generally does not reprice items based on normal fluctuations in the price
of gold. As a result, there may be an adverse effect on the Company's gross
profit margin if the price of gold either increases or decreases. For example,
gross profit margins may narrow if the price of gold increases after the retail
price of merchandise is established, as the Company's cost of goods would
increase; conversely, gross profit margins may also narrow if the price of gold
decreases substantially, as the Company may have to reduce retail prices after
the merchandise is purchased from suppliers, in order for its merchandise to
remain competitively priced. In addition, the Company's results of operations
may be adversely affected during periods of extreme volatility in the price of
gold since some customers may elect to defer purchases until the price of gold
has become relatively stable. Consequently, the Company's results of operations
could be adversely affected by significant increases, decreases or volatility in
the price of gold. The Company does not engage, and currently has no plans to
engage, in hedging transactions to protect against fluctuations in the market
value of the gold or to lock in prices for future purchases.
During the last two fiscal years, on average approximately 27% of the gold
content of the Company's merchandise was owned by the Company. The gold content
of merchandise owned by the Company is carried on its balance sheet at the lower
of cost or market, on a first-in, first-out basis. A decrease in the market
price of gold below the Company's cost would require the Company to reduce the
carrying value of the gold owned by it and recognize a charge against earnings
in the period in which the change in market price occurs.
The remaining approximately 73% of the gold content of the Company's
merchandise is generally subject to gold consignment arrangements, the principal
benefit of which is to allow the Company to finance its gold merchandise at
rates that are less than its traditional bank borrowing rates. The consigned
gold is not included in inventory on the Company's balance sheet, and there is
no related liability recorded. Under the consignment arrangements, the Company
sells to a consignor the gold content of merchandise that the Company owns and
simultaneously has the gold consigned to the Company. Title to consigned gold,
which is contained in the gold jewelry, remains with the consignor until the
Company repurchases the gold or substitutes other gold for it. The jewelry
containing the consigned gold is commingled with the gold jewelry owned by the
Company and the risk of loss or damage to the gold is borne by the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
The Company's obligation to the consignors is denominated in gold ounces
and is based on the price of gold at the time of the sale of consigned gold
contained in merchandise sold to the Company's customers. As a result, a change
in the price of gold will affect the dollar value of the Company's obligation to
the consignors. From time to time, the Company changes the number and percentage
of gold ounces which it consigns as part of its regular cash management program.
If the Company reduces the number of gold ounces which it has consigned, it may
decrease the Company's gross profit margin if the price of gold decreases below
the price of gold at the time of consignment. If the Company increases the
number of gold ounces which it has consigned, it may decrease the Company's
gross profit margin if the price of gold increases above the price of gold at
the time of consignment. Additionally, as gold prices change, assuming the
number of ounces consigned remains constant, fees payable by the Company for the
consignment arrangements will change in proportion to the change in the market
value of gold, as the fees are based on the dollar value of the gold consigned.
Therefore, if the price of gold increases, the Company's interest expense per
ounce of consigned gold would increase. In addition, the Company may have to
increase the amount of letters of credit that secure its obligations to the gold
consignors, thereby reducing the amount available under its line of credit with
its primary lender. The Company currently maintains consignment agreements with
two consignors.
8
<PAGE> 10
One such agreement can be terminated by either party upon 30 days notice and the
other can be terminated by either party upon 45 days notice. There is no
assurance that, if the Company's present consignment arrangements were
terminated, the Company could enter into suitable consignment arrangements. A
failure by the Company to maintain its present consignment arrangements or enter
into suitable consignment arrangements with other parties could have a material
adverse effect on the Company's results of operations and financial condition.
COMPETITION
The retail jewelry business is highly competitive. The Company competes
with national and regional jewelry chains, department stores, local
independently owned jewelry stores and chains, catalog showrooms, discounters,
direct mail suppliers and televised home shopping networks. Certain of the
Company's competitors have significantly greater financial and other resources
than the Company. The retailing business is affected by changes in consumer
taste, demographic trends and the type, number and location of competing stores.
The Company also believes that it competes for store locations and for
consumers' discretionary spending dollars with retailers that offer merchandise
other than jewelry. The foregoing competitive conditions may adversely affect
the Company's results of operations and financial condition. See
"Business -- Competition."
SENSITIVITY TO GENERAL ECONOMIC CONDITIONS; IMPACT OF CONSUMER SPENDING
Jewelry purchases are discretionary for consumers and, as a result, are
likely to be particularly affected by adverse trends in the national economy or
in one or more regional economies. The success of the Company's operations
depends to a significant extent upon a number of factors relating to
discretionary consumer spending, including economic conditions affecting
disposable consumer income, such as employment, business conditions, interest
rates and taxation, as well as trends with respect to mall shopping generally
and the ability of mall anchor tenants and other attractions to generate
customer traffic in the vicinity of the Company's stores. There is no assurance
that consumer spending will not be adversely affected by national and regional
economic conditions, thereby negatively impacting the Company's results of
operations and financial condition.
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant extent upon the performance
of its senior management team, including Richard H. Penske, the Company's Chief
Executive Officer and Chairman of the Board, and John F. Eureyecko, the
Company's President and Chief Operating Officer. The loss of any of the
Company's existing key personnel or the inability to attract and retain such key
employees in the future could have a material adverse effect on the Company's
results of operations and financial condition. See "Management."
CONTROL OF COMPANY; ANTI-TAKEOVER PROVISIONS
After this offering, Mr. Penske is expected to own approximately 39.2% of
the outstanding Common Stock and all Named Officers (as defined below under
"Management -- Executive Compensation") and directors as a group are expected to
own approximately 43.4% of the outstanding Common Stock. As a result, Mr. Penske
is likely to continue to have effective control over the outcome of
substantially all issues submitted to the Company's stockholders, including the
election of all of the Company's directors. See "Principal and Selling
Stockholders" and "Shares Eligible for Future Sale." The Company is subject to
the anti-takeover provisions of Section 203 of the Delaware General Corporation
Law, which prohibit the Company from engaging in a "business combination" with
an "interested stockholder" for a period of three years following the time that
such person became an "interested stockholder" unless the business combination
is approved in a prescribed manner and in certain other specified circumstances.
These provisions, together with other provisions in the Company's Amended and
Restated Certificate of Incorporation (the "Certificate of Incorporation") and
the Company's Amended and Restated By-laws (the "By-laws") described below, may
have the effect of discouraging acquisition bids for the Company by persons
unrelated to certain existing stockholders. The effect of Mr. Penske's stock
ownership and these provisions may be to limit the price
9
<PAGE> 11
that investors might be willing to pay in the future for shares of the Common
Stock or prevent or delay a merger, takeover, or other change in control of the
Company and thus discourage attempts to acquire the Company. The Company's Board
of Directors has the authority to issue up to 3,000,000 shares of Preferred
Stock and to determine the designations, preferences, and relative,
participating, optional and other special rights, or qualifications, limitations
or restrictions of those shares without any future vote or action by the
stockholders. The rights of the holders of Common Stock will be subject to, and
may be adversely affected by, the rights of the holders of any Preferred Stock
that may be issued in the future. The issuance of Preferred Stock could have the
effect of making it more difficult for a third party to acquire a majority of
the outstanding voting stock of the Company. The Company has no present plan to
issue any shares of Preferred Stock. The Certificate of Incorporation and
By-laws contain other provisions, such as provisions dividing the Board of
Directors into three classes serving staggered three-year terms, provisions
permitting only the Company's Chief Executive Officer or Board of Directors to
call special meetings of stockholders and notice requirements for stockholder
proposals and director nominations, all of which may have the further effect of
making it more difficult for a third party to gain control of or to acquire the
Company. See "Description of Capital Stock -- Delaware Law and Certain Charter
and By-Law Provisions."
GOVERNMENT REGULATION
To the Company's knowledge, no jurisdiction in which the Company operates
or in which it currently anticipates operating, other than the State of Oregon,
regulates ear piercing services. The legislation enacted in Oregon, in which the
Company operates one store, requires the Company, and any of its employees
administering ear piercing services in stores in Oregon, to be licensed by the
State. The Oregon legislation also deems piercing of the ear through anywhere
but the lobe to be body piercing, which is subject to additional restrictions,
including that it must be performed in a separate room. Accordingly, the Company
limits its ear piercing to the ear lobe in Oregon. The Company is aware of
legislation to regulate ear piercing establishments pending in approximately 31
jurisdictions, including legislation in the States of Maryland and Massachusetts
where the Company currently has 32 stores and 29 stores, respectively. The
proposed Maryland legislation would subject ear piercing through other than the
lobe to restrictions similar to those imposed by the Oregon legislation. The
proposed Massachusetts legislation directs regulators to develop procedures
applicable to body piercing, which the proposed legislation currently defines to
exclude the ear lobe, but to include all other parts of the ear. Generally,
however, pending legislation proposes requiring the consent of a parent or
guardian in order to pierce the ears of a minor (which the Company requires even
in the absence of legislation), the posting of certain notices, and the
obtaining of certain registrations and licenses, but does not require special
procedures for piercing portions of the ear other than the lobe. There is no
assurance that existing or pending legislation will not be modified in such a
manner as to restrict or prohibit the Company's ear piercing activities or that
other governmental bodies will not enact legislation that would adversely affect
the Company's ear piercing or other activities. See "Business -- Government
Regulation."
POSSIBLE VOLATILITY OF STOCK PRICE
The stock market has, from time to time, experienced extreme price and
volume fluctuations which could adversely affect the market price of the Common
Stock without regard to the operating performance of the Company. The price of
the Company's Common Stock has in the past and may in the future fluctuate
substantially in response to quarterly variations in the Company's operating
results, announcements by the Company, the failure of the Company's results of
operations to meet the estimates published by securities analysts, or other
developments affecting the Company, as well as in response to developments
relating to its competitors, the jewelry business and retailing generally and to
general economic and other external factors.
10
<PAGE> 12
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of Common Stock in the public
market following this offering could adversely affect the market price for the
Common Stock. Upon completion of this offering, the Company will have 5,927,094
shares of Common Stock outstanding (6,024,594 shares if the Underwriters'
over-allotment option is exercised in full), assuming no exercise of options
after the date of this Prospectus. Substantially all of these shares will be
freely tradeable without restriction under the Securities Act of 1933, as
amended (the "Securities Act"), or may currently be sold in accordance with Rule
144 under the Securities Act ("Rule 144"). In addition, the Company has
registered or intends to register on registration statements on Form S-8 a total
of 920,330 shares of Common Stock reserved for issuance under the Company's 1994
Stock Option Plan, the Company's 1994 Restricted Stock Plan and the Company's
1995 Employee Stock Purchase Plan, of which an aggregate of 260,020 shares had
been issued as of the date of this Prospectus. The remaining 660,310 shares,
when and if issued, would be freely tradeable (unless acquired by an affiliate
of the Company, in which case they would be subject to volume and other
limitations under Rule 144). The Company and each of the Company's executive
officers, directors and key personnel listed under "Management -- Executive
Officers, Directors and Key Employees" have entered into lock-up agreements with
the Underwriters pursuant to which they have agreed, subject to an exception for
the sale of up to an aggregate of 30,000 shares and certain other limited
exceptions, not to sell, contract to sell, offer to sell or otherwise dispose of
any shares of Common Stock owned or controlled by them for a period of 180 days
after the date of this Prospectus without the prior written consent of
Robertson, Stephens & Company. However, Robertson, Stephens & Company may, in
its sole discretion and at any time without notice, release all or any portion
of the securities subject to lock-up agreements. Upon expiration or early
termination of the lock-up period, these shares will be eligible for immediate
sale, subject, in the case of affiliates, to volume and other limitations under
Rule 144. See "Shares Eligible for Future Sale" and "Underwriting."
11
<PAGE> 13
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 650,000 shares of
Common Stock offered by the Company hereby are estimated to be $16.9 million
($19.5 million if the Underwriters' over-allotment option is exercised in full)
assuming a public offering price of $28.00 per share, after deducting estimated
underwriting discounts and commissions and offering expenses payable by the
Company. The Company expects to use the net proceeds to the Company to repay
indebtedness outstanding ($33.4 million as of April 30, 1997) under its
revolving credit facility obtained in March 1997. Amounts borrowed under the
facility generally accrue interest at the higher of (i) the prime rate of the
Company's primary lender minus 100 basis points (7.5% at March 31, 1997) or (ii)
a rate based on overnight federal funds transactions with Federal Reserve System
members plus 50 basis points (5.9% at March 31, 1997); however, the Company may
elect to have all or any portion of the outstanding balance under the facility
accrue interest at a rate based on one, two, three or six month LIBOR plus 110
basis points (6.79% at March 31, 1997 for a one month maturity), subject to
certain restrictions. The facility matures on July 31, 2000. Approximately $16.0
million of the indebtedness to be retired was incurred to finance acquisitions
by the Company and the remainder was incurred primarily to fund internal
expansion. To the extent that the proceeds of this offering are used to reduce
indebtedness under the facility, the amount available for borrowing under the
facility will be increased. Future borrowings may be made under the facility for
working capital and to finance expansion through new store openings and
acquisitions, although the Company is not currently in negotiations with respect
to any such acquisition. The Company will not receive any of the proceeds from
the sale of shares by the Selling Stockholders. See "Principal and Selling
Stockholders."
DIVIDEND POLICY
The Company currently intends to retain any future earnings to fund
operations and continued development of its business and, therefore, does not
anticipate paying cash dividends on the Common Stock for the foreseeable future.
The payment of dividends is at the discretion of the Company's Board of
Directors and will be based upon the earnings, capital requirements and the
operating and financial condition of the Company, among other factors, at the
time such dividends are considered. There are currently no restrictions on the
use of retained earnings for the distribution of dividends, as long as the
Company is not, or the making of such distribution would not cause the Company
to be, in default under its existing credit facility. The Company has not paid
any dividends since the beginning of fiscal 1996.
12
<PAGE> 14
PRICE RANGE OF COMMON STOCK
The Common Stock is traded on the Nasdaq National Market under the symbol
"PGDA." The following table sets forth, for the fiscal quarters indicated, the
high and low sales prices per share for the Common Stock, as reported by Nasdaq
for fiscal 1996, fiscal 1997 and fiscal 1998 (through May 14, 1997):
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
FISCAL 1996
First Quarter...................................................... $10.63 $ 7.63
Second Quarter..................................................... 14.88 10.25
Third Quarter...................................................... 18.50 13.75
Fourth Quarter..................................................... 18.50 12.75
FISCAL 1997
First Quarter...................................................... $18.75 $13.25
Second Quarter..................................................... 22.25 17.00
Third Quarter...................................................... 24.25 20.00
Fourth Quarter..................................................... 26.63 21.00
FISCAL 1998
First Quarter (through May 14, 1997)............................... $28.00 $24.00
</TABLE>
As of May 14, 1997, the last reported sale price of the Common Stock as
reported by the Nasdaq National Market was $28.00 per share. As of such date,
there were approximately 128 holders of record of the Common Stock, and the
Company believes that there were in excess of 1,600 beneficial holders of the
Common Stock.
13
<PAGE> 15
CAPITALIZATION
The following table sets forth the actual capitalization of Piercing Pagoda
as of March 31, 1997 and as adjusted to reflect the receipt of the estimated net
proceeds from the issuance and sale of the 650,000 shares of Common Stock
offered by the Company hereby at an assumed public offering price of $28.00 per
share and the application of the net proceeds therefrom as described under "Use
of Proceeds."
<TABLE>
<CAPTION>
AS OF MARCH 31, 1997
---------------------
ACTUAL AS ADJUSTED
------- -----------
(In thousands)
<S> <C> <C>
Long-term debt, less current installments (1)........................... $26,690 $ 9,816
Stockholders' equity:
Preferred stock, $.01 par value, 3,000,000 shares authorized; none
issued and outstanding............................................. -- --
Common stock, $.01 par value, 15,000,000 shares authorized; 5,273,994
shares issued and outstanding; 5,923,994 shares issued and
outstanding as adjusted(2)......................................... 53 60
Additional paid-in capital............................................ 22,588 39,455
Retained earnings..................................................... 14,881 14,881
------- -----------
Total stockholders' equity.................................... 37,522 54,396
------- -----------
Total capitalization..................................... $64,212 $ 64,212
======= ==========
</TABLE>
- ------------
(1) See Note 7 of Notes to Consolidated Financial Statements.
(2) Excludes 394,750 shares issuable pursuant to options to purchase Common
Stock which were outstanding as of March 31, 1997. See "Management -- 1994
Stock Option Plan."
14
<PAGE> 16
SELECTED FINANCIAL AND OPERATING DATA
The selected financial data for the five years ended March 31, 1997 (except
for the selected operating data and pro forma data) were derived from
Consolidated Financial Statements that have been audited by KPMG Peat Marwick
LLP, independent certified public accountants. The information set forth below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations," the Consolidated Financial
Statements and Notes thereto and other financial information included elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
--------------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
(In thousands, except per share and selected operating
data)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales....................................... $ 58,725 $ 68,922 $ 86,076 $121,581 $166,885
Cost of goods sold and occupancy expenses
(excluding depreciation on kiosks)............ 31,766 37,961 48,069 67,440 92,308
-------- -------- -------- -------- --------
Gross profit.................................... 26,959 30,961 38,007 54,141 74,577
Selling, general and administrative expenses
(including depreciation on kiosks)............ 22,706 25,122 30,007 43,887 60,845
Restricted stock compensation bonus(1).......... -- 390 -- -- --
-------- -------- -------- -------- --------
Income from operations.......................... 4,253 5,449 8,000 10,254 13,732
Interest and other income....................... 228 370 307 282 386
Interest expense................................ 1,498 1,464 1,427 1,306 2,208
-------- -------- -------- -------- --------
Earnings before income taxes.................... 2,983 4,355 6,880 9,230 11,910
Income tax expense(2)........................... 112 121 3,352 3,553 4,372
-------- -------- -------- -------- --------
Net income(2)................................... 2,871 4,234 3,528 5,677 7,538
========= ========= ========= ========= =========
Earnings per share.............................. $ 1.07 $ 1.40
Weighted average shares outstanding............. 5,325 5,389
PRO FORMA DATA:
Pro forma net income(2)......................... 2,624 4,156
Pro forma net income per share(2)(3)............ $ 0.67 $ 0.91
Pro forma weighted average shares
outstanding(3)................................ 3,895 4,558
SELECTED OPERATING DATA:
Number of stores at beginning of period......... 285 279 295 366 513
Stores added (net of closures and sales)........ (6) 16 71 147 169
-------- -------- -------- -------- --------
Stores at end of period......................... 279 295 366 513 682
========= ========= ========= ========= =========
Average jewelry units sold per comparable store
(rounded)(4).................................. 8,300 9,500 10,800 11,600 12,000
Average net sales per comparable store(5)....... $208,000 $240,000 $266,000 $295,000 $303,000
Average comparable store net sales per square
foot(6)....................................... $ 1,333 $ 1,544 $ 1,652 $ 1,821 $ 1,848
Average comparable store square footage(6)...... 153 153 161 162 164
Percentage increase in comparable store net
sales(7)...................................... 14.2% 13.8% 9.8% 12.4% 7.6%
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
--------------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital................................. $ 2,908 $ 3,464 $ 13,556 $ 15,948 $ 40,649
Inventory....................................... 11,378 12,413 15,128 25,390 43,109
Total assets.................................... 24,062 26,749 32,122 47,906 79,741
Current installments of long-term debt.......... 6,216 5,693 -- 5,910 234
Long-term debt, less current installments....... 6,104 10,628 -- 2,350 26,690
Stockholders' equity............................ 6,636 2,335 23,862 29,579 37,522
</TABLE>
15
<PAGE> 17
- ------------
(1) The restricted stock compensation bonus in fiscal 1994 was due to the
Company granting a bonus to seven employees and directors equal to
approximately $1.78 for each share purchased by such employees and directors
under the Company's 1994 Restricted Stock Plan. The bonuses were used by the
recipients to pay a portion of the purchase price for the shares purchased.
The Company has not since and does not anticipate granting similar bonuses
in the future.
(2) For fiscal years 1993 and 1994 the Company was an "S" corporation for
federal and certain state income tax purposes and, accordingly, was subject
only to limited corporate income taxes. For fiscal 1995, income tax expense
includes the state tax expense for certain states in which the Company did
not elect "S" corporation status prior to the initial public offering in
October 1994, a one-time deferred tax charge for conversion from "S"
corporation to "C" corporation status for federal and certain state
purposes, and the current and deferred taxes applicable to the Company's
income as a "C" corporation for the period after the initial public
offering. Due to the allocation method utilized for tax return purposes, tax
expense for the post offering period includes taxes payable to taxing
authorities and payments to certain of the Company's stockholders pursuant
to a tax indemnification agreement between the Company and such
stockholders. See Notes to Consolidated Financial Statements.
(3) Pro forma net income per share has been computed by dividing pro forma net
income by the weighted average number of common shares and common share
equivalents outstanding during fiscal 1994 and fiscal 1995, as adjusted to
give effect at all times to the sale or other issuance of shares during
March and June of fiscal 1994. See Note 1 of Notes to Consolidated Financial
Statements.
(4) Fiscal 1995, fiscal 1996 and fiscal 1997 reflect average jewelry units sold
per comparable store based on 260, 283 and 355 comparable stores,
respectively, which represent the number of all stores open at the end of
such fiscal year which were also open as of the beginning of the preceding
year. Average jewelry units sold per store in fiscal 1993 and fiscal 1994 is
calculated by dividing the total jewelry units sold by the Company's stores
during the period by the average of the total beginning and ending number of
stores and is rounded to the nearest hundred. Due to the significant number
of new store openings in the last three fiscal years, the Company believes
comparable store data is a more meaningful measure of the growth in unit
sales at its stores than total store data.
(5) Average net sales per comparable store is calculated based on the net sales
of all stores open as of the beginning of the preceding fiscal year divided
by the number of such stores.
(6) Fiscal 1995, fiscal 1996 and fiscal 1997 reflect average net sales per
square foot for comparable stores (those stores open at the end of the
respective fiscal year which were also open as of the beginning of the
preceding fiscal year) based on the approximate average square footage per
comparable store of 161, 162 and 164 square feet, respectively. Average net
sales per square foot in fiscal 1993 and fiscal 1994 is based on the average
net sales per store divided by 153, the approximate average square footage
for all stores during both periods. Average net sales per store in fiscal
1993 and fiscal 1994 is based on the net sales, less wholesale sales,
divided by the average of the total beginning and ending number of stores
per period. Due to the significant number of larger, new store openings in
the latest three fiscal years, the Company believes comparable store data is
a more meaningful measure of the growth in sales per square foot at its
stores than total store data.
(7) Comparable store net sales data are calculated based on the change in net
sales of all stores open as of the beginning of the preceding fiscal year.
16
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 the following "Management's Discussion and Analysis of Financial
Condition and Results of Operations," in the "Business" section and elsewhere in
this Prospectus are not limited to historical or current facts and deal with
potential future circumstances and developments. Prospective investors are
cautioned that such forward-looking statements, which may be identified by words
such as "anticipate," "believe," "expect," "estimate," "intend," "plan," and
similar expressions, are only predictions and that actual events or results may
differ materially.
OVERVIEW
Founded in 1973 as a successor to a company that opened its first store in
1972, Piercing Pagoda operated 710 kiosk stores and 24 in-line stores in
regional malls in 43 states and Puerto Rico as of May 7, 1997. Prior to fiscal
1996, the Company expanded primarily through new store openings. Since the
beginning of fiscal 1996 through May 7, 1997, the Company has acquired an
aggregate of 204 stores. In fiscal 1996, the Company acquired 51 kiosks and 17
in-line stores previously operated by Earring Tree, Inc., which was then in
bankruptcy (the "Earring Tree Acquisition"). In January 1997 and April 1997, the
Company solidified its position as the largest operator of gold jewelry kiosk
stores by acquiring 93 and 43 kiosk stores, respectively, from the companies
that had been the second and third largest gold jewelry kiosk operators. The
stores purchased in both of these acquisitions were generally comparable in size
to the Company's other stores and sold similar merchandise. These acquisitions
included the leases, kiosks, fixtures and inventory of the acquired stores. The
purchase prices paid in connection with the January 1997 acquisition from
Gemstone Jewelry, Inc., and a related company (the "Gemstone Acquisition"), and
the April 1997 acquisition from The Silver & Gold Trading Company, Inc. (the
"Silver & Gold Acquisition"), were approximately $8.0 million and $8.2 million,
respectively (subject to certain post-closing adjustments relating primarily to
the cost of inventory), of which $6.0 million and $3.3 million, respectively,
was paid for inventory at the respective sellers' cost. In addition, the Company
agreed to pay $60,000 per year for five years to induce the principal
stockholder of each seller to enter into a non-competition agreement. Because
these acquisitions included the two largest gold jewelry kiosk store operators
other than the Company, the Company does not expect to maintain the rate of
recent store acquisitions. Accordingly, the rate of the Company's net sales
growth is likely to moderate beginning in fiscal 1998 and moderate further in
fiscal 1999.
The Company plans to increase the net sales and store contribution of the
acquired stores to more closely approximate the productivity of the Company's
average comparable store ($303,000 in net sales in fiscal 1997) by revising and
managing the product mix of the acquired stores to reflect the Company's
merchandising strategy, and by retraining sales associates and store management
personnel to provide the level of customer service emphasized in the Company's
other stores and to improve operational efficiencies. The Company also believes
that these acquisitions have the potential over the longer term to increase the
Company's profitability by spreading overhead over a significantly larger store
base.
Based on information provided by the respective sellers, the average net
sales of the stores acquired in the Gemstone Acquisition for the twelve months
ended December 31, 1996 were approximately $205,000, and the average net sales
of the stores acquired in the Silver & Gold Acquisition for the twelve months
ended January 31, 1997 were approximately $272,000. The Company believes that
the Gemstone Acquisition and the Silver & Gold Acquisition provide the Company
with many attractive store locations and that the Company's plan to convert the
acquired stores to the Company's format and to implement the Company's
merchandising strategies will result in increased net sales and profitability in
the acquired stores. The Company believes that its substantial experience in
opening new stores and recent experience in integrating the stores acquired in
the Earring Tree Acquisition will facilitate the integration of the acquired
stores. However, there is no assurance that
17
<PAGE> 19
the Company will successfully integrate the acquired stores and failure to do so
could have a material adverse effect on the Company's results of operations and
financial condition. Because a large number of recently acquired and newly
opened stores, which generally have lower net sales volumes than the Company's
other stores, will be entering into the base for the computation of comparable
store information during the current and future fiscal years, average net sales
per comparable store and average comparable store net sales per square foot may
decrease in the future, even if the Company experiences increases in total and
comparable store net sales.
The rate of the Company's expansion and net sales growth may also be
adversely affected to the extent that an independent store operator that is a
licensee of the Company (the "Florida Licensee") exercises its right to purchase
any or all of the Company's stores in Florida. See "Business -- Properties" and
Note 14 of Notes to Consolidated Financial Statements. Because the Company sells
merchandise to the Florida Licensee and receives a royalty from it, the Company
does not believe that its net income is likely to be materially adversely
affected by any such purchases.
As part of its ongoing operations, the Company continually evaluates the
performance of its stores and the malls in which they are located. Since kiosks
require a relatively low investment to open and can be moved relatively easily,
the Company's expansion philosophy includes closing stores where appropriate and
using the kiosks, when possible, to open stores in new locations. During the
past three fiscal years, the Company has closed 21 stores and expects to close
an aggregate of approximately 20 stores during fiscal 1998 and fiscal 1999.
Net sales are comprised primarily of sales generated by stores and, to a
much lesser extent, wholesale sales (primarily to the Florida Licensee). See
"Business -- Properties." Cost of goods sold and occupancy expenses include the
cost of merchandise, rent and other occupancy expenses 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 on kiosks.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain selected
income statement data expressed as a percentage of net sales:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
MARCH 31,
---------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Net sales............................................................... 100.0% 100.0% 100.0%
Cost of goods sold and occupancy expenses (excluding depreciation on
kiosks)............................................................... 55.8 55.5 55.3
----- ----- -----
Gross profit............................................................ 44.2 44.5 44.7
Selling, general and administrative expenses (including depreciation on
kiosks)............................................................... 34.9 36.1 36.5
----- ----- -----
Income from operations.................................................. 9.3 8.4 8.2
Interest and other income............................................... 0.4 0.2 0.2
Interest expense........................................................ 1.7 1.1 1.3
----- ----- -----
Earnings before income taxes............................................ 8.0 7.6 7.1
Income taxes............................................................ 3.9 2.9 2.6
----- ----- -----
Net income.............................................................. 4.1% 4.7% 4.5%
===== ===== =====
Pro forma net income (1)................................................ 4.8%
=====
</TABLE>
- ------------
(1) Income tax expense in fiscal 1995 includes certain amounts relating to the
Company's conversion from an "S" corporation to a "C" corporation. See Notes
to Consolidated Financial Statements. In fiscal 1996 and fiscal 1997, the
Company was taxed as a "C" corporation in all jurisdictions. Pro forma net
income is computed as if the Company were subject to federal and all
applicable state corporate income taxes.
18
<PAGE> 20
COMPARISON OF FISCAL 1997 AND FISCAL 1996
Net Sales
Net sales increased $45.3 million, or 37.3%, to $166.9 million in fiscal
1997 from $121.6 million in fiscal 1996. This increase was due primarily to net
sales generated by new stores opened or acquired by the Company and to a $7.6
million, or 7.6%, increase in comparable store net sales. At March 31, 1997, the
Company operated 682 stores compared to 513 stores at March 31, 1996. The
average jewelry units sold per comparable store increased 3.5%, to 12,000 in
fiscal 1997 from 11,600 in fiscal 1996 partially due to an increase in the
number of promotional events at the Company's stores versus the prior year. The
average price per jewelry unit sold for all the Company's stores also increased
modestly by $0.33, or 1.4%, to $24.48 in fiscal 1997 from $24.15 in fiscal 1996.
Wholesale sales (primarily to the Florida Licensee) increased 42.1% to $2.7
million in fiscal 1997 from $1.9 million in fiscal 1996 to support the increased
retail sales of the Florida Licensee including sales at one additional location
purchased from the Company during fiscal 1997.
Gross Profit
Gross profit increased $20.5 million, or 37.9%, to $74.6 million in fiscal
1997 from $54.1 million in fiscal 1996 while gross profit margin increased
slightly to 44.7% in fiscal 1997 from 44.5% in fiscal 1996. Gross profit margin
increased due to higher mark-ups associated with lower costs of merchandise
during the period, offset by an increase in promotional events held by the
Company during fiscal 1997 versus fiscal 1996. The remaining improvement in
gross margin primarily reflects an improvement in rent and other occupancy
expenses as a percentage of net sales, reflecting the leverage of a larger sales
base.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $17.0 million, or
38.7%, to $60.9 million in fiscal 1997 from $43.9 million in fiscal 1996. As a
percentage of net sales, selling, general and administrative expenses increased
to 36.5% in fiscal 1997 from 36.1% in fiscal 1996. The increase in selling,
general and administrative expense as a percentage of net sales primarily
reflects higher expenses associated with new stores opened and acquired by the
Company. Depreciation and amortization expense increased 38.5% to $3.6 million
in fiscal 1997 from $2.6 million in fiscal 1996 due primarily to capital
expenditures for new stores and the upgrading of kiosks in existing locations.
Interest Expense
Interest expense increased $902,000, or 69.4%, to $2.2 million in fiscal
1997 from $1.3 million in fiscal 1996, and as a percentage of net sales,
increased to 1.3% in fiscal 1997 from 1.1% in fiscal 1996. The increase in
interest expense, which includes interest paid on bank borrowings, fees paid for
letters of credit as part of the Company's gold consignment program and gold
consignment fees, primarily reflects an increase in the Company's total average
borrowings under the Company's revolving line of credit and an increase in the
number of ounces consigned under the Company's gold consignment program. In
addition, $2.9 million of long-term debt related to the Company's fiscal 1996
expansion of its corporate headquarters and distribution center was outstanding
for substantially all of fiscal 1997.
Income Tax Expense
Income tax expense increased $819,000 to $4.4 million in fiscal 1997 from
$3.6 million in fiscal 1996. As a percentage of earnings before income taxes,
income tax expense decreased to 36.7% in fiscal 1997 from 38.5% in fiscal 1996.
The increase in income tax expense is due to the increase in the Company's
earnings before income taxes. The decrease in income taxes as a percentage of
earnings before income taxes reflects the full year effect of certain tax
planning strategies implemented during fiscal 1996.
19
<PAGE> 21
Net Income
As a result of the foregoing, the Company's net income increased $1.8
million, or 31.6%, to $7.5 million in fiscal 1997 from $5.7 million in fiscal
1996.
COMPARISON OF FISCAL 1996 AND FISCAL 1995
Net Sales
Net sales increased $35.5 million, or 41.2%, to $121.6 million in fiscal
1996 from $86.1 million in fiscal 1995. This increase was due primarily to an
increase in the number of stores open in fiscal 1996 as compared to fiscal 1995
and to a $9.2 million, or 12.4%, increase in comparable store net sales. At
March 31, 1996, the Company was operating 513 stores versus 366 at the end of
the prior fiscal year. The average jewelry units sold per comparable store
increased 7.4%, to 11,600 in fiscal 1996 from 10,800 in fiscal 1995. The average
price per jewelry unit sold for all of the Company's stores increased modestly
by $0.85, or 3.6%, to $24.15 in fiscal 1996 from $23.30 in fiscal 1995.
Wholesale sales (primarily to the Florida Licensee) increased 26.7% to $1.9
million in fiscal 1996 from $1.5 million in fiscal 1995 to support the increased
retail sales of the Florida Licensee, including sales at one additional location
purchased from the Company in the fourth quarter of fiscal 1995.
Gross Profit
Gross profit increased $16.1 million, or 42.4%, to $54.1 million in fiscal
1996 from $38.0 million in fiscal 1995, while gross profit margin increased
slightly to 44.5% in fiscal 1996 from 44.2% in fiscal 1995. The gross profit
margin increase primarily reflects a slight improvement in rent expense as a
percentage of net sales, reflecting the leverage of a larger sales base. Also
contributing to the increase in gross margin was a reduction in wholesale sales
as a percentage of total net sales of the Company. Wholesale sales provide a
lower gross margin than the Company's own retail net sales.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $13.9 million, or
46.3%, to $43.9 million in fiscal 1996 from $30.0 million in fiscal 1995. As a
percentage of net sales, selling, general and administrative expenses increased
from 34.9% in fiscal 1995 to 36.1% in fiscal 1996. The increase in selling,
general and administrative expense as a percentage of net sales primarily
reflects higher expenses associated with new store growth, an increase in
staffing hours at the Company's stores and an improved incentive package for
store personnel implemented in the third quarter of fiscal 1996. Depreciation
and amortization expense increased 44.4% to $2.6 million in fiscal 1996 from
$1.8 million in fiscal 1995 due primarily to capital expenditures for new stores
and the upgrading of kiosks in existing locations.
Interest Expense
Interest expense decreased $121,000, or 8.6%, to $1.3 million in fiscal
1996 from $1.4 million in fiscal 1995, and as a percentage of net sales,
decreased to 1.1% in fiscal 1996 from 1.7% in fiscal 1995. The decline in
interest expense, which includes interest paid on bank borrowings, fees paid for
letters of credit as part of the Company's gold consignment program and gold
consignment rates, was due primarily to a decrease in the Company's total
average borrowings, including a $7.0 million stockholder note payable which was
outstanding only during fiscal 1995, and a reduction in the average interest
rate charged on the Company's revolving line of credit. These decreases were
partially offset by an increase in number of ounces consigned under the
Company's gold consignment program.
Income Tax Expense
Income tax expense increased $201,000 to $3.6 million in fiscal 1996 from
$3.4 million in fiscal 1995. As a percentage of earnings before income taxes,
income tax expense decreased to 38.5% in fiscal 1996
20
<PAGE> 22
from 48.7% in fiscal 1995. The increase in income tax expense is due to the
increase in the Company's earnings before income taxes. The decrease in income
taxes as a percentage of earnings before income taxes reflects a change in the
Company's taxable status which occurred during fiscal 1995. See Note 10 of Notes
to Consolidated Financial Statements.
Net Income
As a result of the foregoing, the Company's net income increased $2.2
million or 62.9% to $5.7 million in fiscal 1996 from $3.5 million in fiscal
1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary ongoing short-term capital requirements have been to
fund an increase in inventory and to fund capital expenditures and working
capital (mostly inventory) for new and acquired stores. The Company's long-term
liquidity requirements relate principally to the maturity of its long-term debt
in July of 2000, operating lease commitments and store expansion. The Company's
primary sources of liquidity have been funds provided from operations, a gold
consignment program and bank borrowings. The Company had working capital of
$40.6 million and $15.9 million at the end of fiscal 1997 and fiscal 1996,
respectively. See "-- Seasonality."
Net cash provided by operating activities was $460,000 in fiscal 1997,
while net cash used in operating activities amounted to $850,000 in fiscal 1996.
Net cash provided by operating activities in fiscal 1997 primarily reflects net
earnings plus depreciation, partially offset by increases in working capital
requirements, including increases in inventory to support new and acquired store
growth. Net cash used in operating activities in fiscal 1996 primarily reflects
increases in inventory to support growth in new and acquired stores, partially
offset by increases in net earnings and depreciation.
Net cash used in investing activities was $17.1 million and $7.7 million in
fiscal 1997 and fiscal 1996, respectively. These amounts reflect $9.7 million
and $7.2 million of capital expenditures related to new and acquired store
expansion and the Company's investment in management information systems in
fiscal 1997 and fiscal 1996, respectively. Additionally, in fiscal 1997, the
Company paid $8.0 million for the acquisition of 93 locations in the Gemstone
Acquisition. In fiscal 1996, the Company acquired 68 store locations in the
Earring Tree Acquisition for approximately $1.2 million.
Net cash provided by financing activities was $18.9 million in fiscal 1997
and $8.1 million in fiscal 1996. Net cash provided by financing activities in
fiscal 1997 primarily reflects an increase of $18.5 million under the Company's
revolving line of credit and $400,000 of long-term industrial development
authority financing. Net cash provided by financing activities in fiscal 1996
reflects an increase of $5.7 million in borrowings under the Company's revolving
line of credit and $2.5 million of long-term industrial development authority
financing.
During fiscal 1997, the Company renegotiated its existing unsecured
revolving line of credit with its primary lender acting as agent for a syndicate
of banks. The new facility, which expires July 31, 2000, provides for maximum
borrowings of $75 million through a combination of cash advances (which may not
exceed $45 million) and letters of credit (which may not exceed $55 million) to
support the Company's gold consignment financing program. Amounts borrowed under
the facility generally accrue interest at the higher of (i) the prime rate of
the Company's primary lender minus 100 basis points (7.5% at March 31, 1997) or
(ii) a rate based on overnight federal funds transactions with Federal Reserve
System members plus 50 basis points (5.9% at March 31, 1997); however, the
Company may elect to have all or any portion of the outstanding balance under
the facility accrue interest at a rate based on one, two, three or six month
LIBOR plus 110 basis points (6.79% at March 31, 1997 for a one month maturity),
subject to certain restrictions. Fees are paid on letters of credit based on
amounts outstanding at an annual rate of 0.75%. At March 31, 1997, the Company
had $19.0 million available for cash borrowings under this revolving credit
facility. Letters of credit in the amounts of approximately $31.8 million and
approximately $22.0 million were issued at March 31, 1997 and 1996,
respectively.
21
<PAGE> 23
The loan agreement contains various covenants which, among other things,
limit certain corporate acts of the Company such as mergers and acquisitions;
require the Company to maintain minimum ratios of indebtedness to equity,
current assets to current liabilities and cash flow (as defined) to debt
service; place limitations on the Company's ability to incur additional debt or
grant security interests in its assets; and restrict the redemption, purchase or
retirement of its capital stock.
The Company utilizes gold consignment arrangements which allow the Company
to finance its gold merchandise at rates which are less than its traditional
bank borrowing rates. Under the consignment arrangements, the Company generally
sells to a consignor the gold content of the merchandise which it owns and
simultaneously has the gold consigned back to the Company. The jewelry
containing the consigned gold is commingled with the gold jewelry owned by the
Company. The Company's obligation to the consignors is based upon the price of
gold at the time of the sale by the Company of the consigned gold and,
therefore, is subject to fluctuation based on changes in the market value of
gold. If the gold ounces in merchandise held for sale by the Company is about to
be reduced below the amount of gold consigned, the Company either repurchases
the gold from a consignor or purchases additional gold jewelry from suppliers to
support the amount of consigned gold. In the event the price of gold at the time
of such repurchases or purchases is greater than the price at the time the gold
was originally sold to the consignor, the Company's gross profit margin will be
decreased. The Company does not engage, and currently has no plans to engage, in
hedging transactions to protect against fluctuations in the market value of gold
or to lock in prices for future purchases. The Company does, however, manage the
amount of gold consigned in relation to its total merchandise available for sale
in order to provide the Company with the flexibility to consign or repurchase
gold according to seasonal fluctuations in merchandise levels and sales.
During fiscal 1997 and fiscal 1996, average financing costs under the
consignment agreements were approximately 2.45% and 2.31% per annum,
respectively, of the market value of the gold held under consignment.
Additionally, the current consignment agreements require a letter of credit to
support the market value of the gold consigned to the Company. The financing
cost to the Company of the consignment program is substantially less than the
cost that would have been incurred if the Company financed the purchase of all
of its gold requirements with borrowings under its revolving credit facility.
The Company's current gold consignment arrangements are terminable by either
party upon either 30 or 45 days notice, depending on the consignor. Gold
consignment programs are common in the gold jewelry industry and the Company
believes that, if the institutions with which it currently has gold consignment
agreements were to terminate such agreements, it would have a number of
opportunities to establish gold consignment programs with terms similar to its
current arrangements.
During the last two fiscal years, the Company has financed an average of
approximately 73% of the gold content of its merchandise under the consignment
program. As of March 31, 1997, the amount of gold consigned was 88,300 ounces
with a value of $30.7 million versus 54,500 ounces with a value of $21.6 million
at March 31, 1996. The consigned gold is not included in inventory on the
Company's balance sheet and, therefore, there is no related liability recorded.
If the market value of gold increases, assuming the number of ounces consigned
remain constant, the financing costs incurred by the Company which are included
in interest expense, and the repayment obligations to the consignors under the
consignment arrangements, will increase in proportion to the increase in the
market value of gold. Additionally, the amount of the letters of credit would
need to be increased to support the increased market value of the consigned
gold, thereby reducing the amount which might otherwise be available for cash
borrowings under the Company's revolving credit facility.
The Company anticipates capital expenditures in fiscal 1998 to total
approximately $8.0 million, of which approximately $3.0 million is related
primarily to the construction of new stores and the renovation of existing
stores, and approximately $5.0 million is related to the construction of a new
warehouse and distribution facility, the implementation of new inventory
management and replenishment software, additional computer hardware associated
with this software and the upgrading of its financial and accounting systems.
The Company currently anticipates opening approximately 60 to 70 new stores in
fiscal 1998, excluding any potential acquisitions. Opening a new store generally
requires a
22
<PAGE> 24
total investment of approximately $107,000, including approximately $70,000 of
inventory (a portion of which is generally financed through consignment
arrangements), $30,000 for construction of the kiosk, fixtures, point-of-sale
register and other equipment and supplies and $7,000 for pre-opening expenses
which are expensed when incurred. The Company believes that the expected net
cash provided by operating activities, its gold consignment program, bank
borrowings under its revolving line of credit facility and the net proceeds of
this offering 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 holiday
shopping season, the Company experiences a substantial portion of its total net
sales and profitability in its third fiscal quarter (ending December 31st), and
during the last two fiscal years, the month of December, on average, has
accounted for approximately 26% of the Company's annual net sales and 103% of
its annual income from operations. The Company has generally experienced lower
net sales in each of the first, second and fourth quarters of each fiscal year,
and lower net income or net losses in each of those quarters.
QUARTERLY DATA
Set forth below is certain summary information with respect to the
Company's operations for the most recent eight fiscal quarters:
<TABLE>
<CAPTION>
FISCAL 1996 FISCAL 1997
----------------------------------------- -----------------------------------------
1ST 2ND 3RD 4TH 1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- -------- -------- -------- -------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales........................ $22,375 $23,012 $49,141 $27,053 $30,244 $32,439 $66,339 $37,863
Gross profit(1).................. 9,295 9,870 23,244 11,732 12,781 13,716 31,880 16,200
Selling, general and
administrative expenses(1)..... 8,927 9,528 13,491 11,941 12,421 13,477 18,477 16,470
Income (loss) from operations.... 368 342 9,753 (209) 360 239 13,403 (270)
Net income (loss)................ 162 45 5,700 (230) 35 (105) 7,824 (216)
Earnings (loss) per share........ $ 0.03 $ 0.01 $ 1.07 $ (0.04) $ 0.01 $ (0.02) $ 1.45 $ (0.04)
COMPARABLE STORE NET SALES
INCREASE......................... 18.0% 13.7% 7.4% 16.7% 5.5% 9.3% 9.2% 7.4%
AS A PERCENTAGE OF NET SALES:
Gross profit(1).................. 41.5% 42.9% 47.3% 43.4% 42.3% 42.3% 48.1% 42.8%
Selling, general and
administrative expenses(1)..... 39.9 41.4 27.5 44.1 41.1 41.5 27.9 43.5
Income (loss) from operations.... 1.6 1.5 19.8 (0.8) 1.2 0.7 20.2 (0.7)
Net income (loss)................ 0.7 0.2 11.6 (0.9) 0.1 (0.3) 11.8 (0.6)
</TABLE>
- ------------
(1) Gross profit excludes depreciation on kiosks. Depreciation on kiosks is
included in selling, general and administrative expenses. See Note 1 of
Notes to Consolidated Financial Statements.
If for any reason the Company's net sales were below those normally
expected for the third fiscal quarter, and, in particular, the month of
December, the Company's annual financial results would be materially adversely
affected. The seasonality of the Company's business puts a significant demand on
working capital resources to provide for a build-up of merchandise for the
holiday season. Historically, the Company's working capital requirement is at
its lowest level in January, increases steadily through the end of November,
when it reaches its highest level, and declines rapidly through the holiday
season.
23
<PAGE> 25
The Company's results of operations may fluctuate significantly from
quarter to quarter as a result of a variety of factors, including fluctuations
in the price of gold, the amount and timing of acquisitions and new store
openings, the integration of recently acquired and newly opened stores into the
operations of the Company, the timing of promotions, fluctuations in the price
of gold, and changes in national and regional economic conditions. For example,
earnings from operations in the first, second and fourth quarters of fiscal 1997
were adversely affected by the integration and assimilation of 331 stores opened
or acquired during fiscal 1996 and fiscal 1997. This was due primarily to the
relatively fixed nature of rent and other occupancy costs and selling, general
and administrative costs associated with the recently acquired and newly opened
stores, which had a significant adverse impact on these lower net sales volume
quarters.
INFLATION
The impact of inflation on the Company's operating results has been
moderate in recent years, reflecting the relatively moderate levels of inflation
which have been experienced in the United States. The Company's leases for
stores typically provide for a percentage rent based on store sales and,
therefore, to the extent retail prices increase, there may be an increase in
occupancy costs. Generally, the Company prices its gold merchandise based on the
price it paid suppliers for the merchandise and does not reprice the items based
upon normal fluctuations in the price of gold. While inflation has not had a
material impact upon operating results, there can be no assurance that the
Company's business will not be affected by inflation in the future.
IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
In February, 1997, the Financial Accounting Standards Board issued SFAS No.
128, Earnings per Share ("SFAS No. 128"). This statement establishes standards
for computing and presenting earnings per share ("EPS") and simplifies the
standards for computing EPS previously found in APB Opinion No. 15, Earnings per
Share. It replaces the presentation of primary earnings per share with the
presentation of basic EPS. It also requires dual presentation of basic and
diluted EPS on the face of the income statement for all entities with complex
capital structures. The Company is required to adopt SFAS No. 128 during the
quarter ended December 31, 1997. The Company has not completed its evaluation of
the potential impact of the new standard on EPS. However, based on equity
instruments currently outstanding under existing stock compensations plans, the
new standard is not expected to have a material impact on the Company's EPS.
24
<PAGE> 26
BUSINESS
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," in the following "Business" section and elsewhere in
this Prospectus are not limited to historical or current facts and deal with
potential future circumstances and developments. Prospective investors are
cautioned that such forward-looking statements, which may be identified by words
such as "anticipate," "believe," "expect," "estimate," "intend," "plan," and
similar expressions, are only predictions and that actual events or results may
differ materially.
GENERAL
Piercing Pagoda is the largest retailer of gold jewelry through kiosk
stores in the United States. At May 7, 1997, the Company operated 734 stores in
43 states and Puerto Rico, including 710 kiosk stores and 24 in-line stores. The
Company offers an extensive selection of popular-priced 14 karat and 10 karat
gold chains, bracelets, earrings, charms and rings, as well as a selection of
silver jewelry, all in basic styles at everyday low prices. The Company's stores
are generally located in high traffic concourses of regional shopping malls and
are primarily operated under the names Piercing Pagoda, Plumb Gold and Silver &
Gold Connection. The Company's kiosk stores average approximately 165 square
feet in size, typically carry approximately 3,300 SKUs, require a low initial
investment, can be opened quickly and are easily accessible and visible within
malls. During fiscal 1997, the average price of a jewelry item sold by the
Company was approximately $24 and average comparable store net sales per square
foot were approximately $1,848. The Company believes that its low price points
and focused merchandise selection differentiate it from other mall-based jewelry
retailers.
INDUSTRY OVERVIEW
Jewelry is mainly distributed through chain stores, independent jewelry
stores, department stores, catalog showrooms and discount stores, as well as
through non-store retailers, such as those utilizing direct mail and television
home shopping. Traditional jewelry retailers, including mall-based retailers and
departments within discount and department stores, generally offer a wide array
of jewelry and gift items, such as diamonds and other precious and semi-precious
stones, precious metals, watches and giftware. According to data from the World
Gold Council's 1996 Annual Report, total retail sales for gold jewelry in the
United States in 1996 were approximately $12.3 billion, representing a compound
annual growth rate of approximately 5.0% from 1993 to 1996. Unit sales of gold
jewelry were approximately 144.8 million in 1996 and have grown at a compound
annual rate of 6.5% during the same period. The average price per unit for gold
jewelry in 1996 was $85 with a range of $35 per unit for sales through discount
stores to $135 per unit for sales through independent jewelers. The fastest
growing segment of the gold jewelry industry has been at lower price points. For
example, in 1996, discount jewelers, with a 30% share of total industry unit
sales at an average price point of $35, have steadily been gaining market share
in each of the last seven years, with a 10% increase in dollar sales and a 9%
increase in unit sales from 1995. This represented growth rates that were three
times higher than those of traditional chain jewelers in 1996, which had a 19%
share of total industry unit sales at an average price point of $118.
OPERATING STRATEGIES
Piercing Pagoda's objective is to maintain its leadership of the gold
jewelry kiosk market and increase its penetration in malls throughout the United
States while enhancing the profitability of its overall operations. Principal
elements of the Company's strategy to achieve this objective are as follows:
Focused Merchandise Selection. The Company differentiates its merchandise
selection from other jewelry retailers by focusing on basic styles of
lower-priced 14 karat and 10 karat gold jewelry, comprised primarily of chains,
bracelets, earrings, charms and rings. The Company offers an extensive selection
within each merchandise category, and its stores typically carry approximately
3,300 SKUs. The average price of a jewelry item sold by the Company in fiscal
1997 was approximately $24.
25
<PAGE> 27
Approximately 73% of a typical store's merchandise is common to all stores, and
the remaining products are selected based upon the characteristics and local
preferences of the particular store's customer base.
Easy-to-Shop Environment. The Company seeks to locate its kiosk stores in
high traffic areas of regional malls and emphasizes strong visual presentations
of its stores and its merchandise to appeal to both destination customers and
impulse shoppers. Each item has a clearly visible price tag that facilitates
browsing and comparison shopping while minimizing the need for sales support.
The merchandise is displayed on specially designed pads in glass showcases which
maximize the number of items shown.
Competitive Everyday Low Pricing. Piercing Pagoda's pricing policy is to
maintain everyday low prices complemented by selective promotions. The Company's
goal is to be the value leader in the popular-priced gold jewelry business in
the markets that it serves. The Company regularly monitors price levels at its
competitors in order to ensure that its prices are competitive and the Company
believes that its volume purchasing and established relationships with suppliers
contribute to its ability to remain competitive.
Customer Service. The Company emphasizes providing knowledgeable and
responsive customer service to distinguish Piercing Pagoda from its competition
and to create customer loyalty. Accordingly, the Company has developed and
implemented extensive employee training and incentive programs. The Company
believes that its commitment to customer service, along with a lifetime
guarantee for its merchandise, its complimentary ear piercing service with the
purchase of earrings and its "buy-five-get-one-free" jewelry club, enhance the
Company's ability to generate repeat business and to attract new customers.
Sophisticated Management Information Systems. The Company is committed to
maintaining sophisticated management information systems. Currently, the Company
utilizes a customized management information system that incorporates
point-of-sale computers in its stores with an inventory management and
replenishment system. These proprietary systems allow the Company to monitor and
control effectively the merchandise at its stores and enable the Company to
identify and react promptly to sales trends. Based on the sales data, the
Company tailors individual stores' merchandise levels, plans its purchasing in
order to benefit from volume purchasing discounts from its suppliers and
prioritizes the in-house preparation of merchandise. The Company is presently in
the process of upgrading its inventory management and financial and accounting
systems to accommodate its growth. The new inventory management software system
will utilize Windows NT-based client/server technology and will be modified to
replicate certain custom elements of the Company's current system. The new
financial and accounting and inventory management systems are expected to be
operational in the third quarter of fiscal 1998 and in early fiscal 1999,
respectively.
EXPANSION STRATEGY
Prior to fiscal 1996, the Company expanded primarily through new store
openings. The Company solidified its position as the largest operator of gold
jewelry kiosk stores in the United States by acquiring 93 stores in January 1997
and 43 stores in April 1997 from companies that had been the second and third
largest gold jewelry kiosk store operators. The Company believes that the
Gemstone Acquisition and the Silver & Gold Acquisition provide the Company with
many attractive store locations and that the Company's plan to convert the
acquired stores to the Company's format and to implement the Company's
merchandising strategies will result in increased net sales and profitability in
the acquired stores. The Company plans to achieve these results by revising and
managing the product mix of the acquired stores to reflect the Company's
merchandising strategy, and by retraining sales associates and store management
personnel to provide the level of customer service emphasized in the Company's
other stores and to improve operational efficiencies. Based on information
provided by the respective sellers, the average net sales of the stores acquired
in the Gemstone Acquisition for the twelve months ended December 31, 1996 were
approximately $205,000, and the average net sales of the stores acquired in the
Silver & Gold Acquisition for the twelve months ended January 31, 1997
26
<PAGE> 28
were approximately $272,000. For fiscal 1997, the Company's average net sales
per comparable store was $303,000. The Company believes that its substantial
experience in opening new stores and recent experience in integrating the stores
acquired in the Earring Tree Acquisition will facilitate the integration of the
acquired stores. However, there is no assurance that the Company will
successfully integrate the acquired stores and failure to do so could have a
material adverse effect on the Company's results of operations and financial
condition.
With a total of 734 stores in operation as of May 7, 1997, the Company
intends to focus its attention in fiscal 1998 on the assimilation of these
recently acquired stores, as well as on increasing the productivity of the 80
net new stores it has opened since the beginning of fiscal 1997. The Company
believes that, because the net sales volume and store contribution of the newly
acquired stores are generally below those in the Company's comparable store base
(currently, stores in operation since April 1995), the Company has an
opportunity to increase the net sales volume and store contribution of these
stores, as well as to better leverage central infrastructure costs (as adjusted
for increases resulting from the acquisitions). However, as the newly acquired
stores enter the Company's comparable store base (beginning after fiscal 1999 as
to the Gemstone Acquisition and fiscal 2000 as to the Silver & Gold
Acquisition), they are likely to have a negative initial impact on comparable
store productivity, even if the Company registers an increase in total and
comparable store net sales.
Because the recent acquisitions included the two largest gold jewelry kiosk
operators other than the Company, the Company does not expect to maintain the
rate of recent store acquisitions. Accordingly, the Company intends to return to
its core strategy of expanding primarily through opening new stores. The Company
plans to open approximately 60 to 70 new stores in fiscal 1998 and approximately
70 to 90 new stores in fiscal 1999 (excluding any acquisitions), and to close an
aggregate of approximately 20 existing stores during that two-year period. At
May 7, 1997, the Company had signed lease commitments for 25 new stores (none of
which is in Florida), substantially all of which it plans to open during fiscal
1998. Of these, 19 are in malls which are new to the Company.
In selecting sites for new stores, the Company generally seeks malls that
have at least 500,000 square feet, a high volume of shopping traffic, strong
anchor tenants and sites available in the higher traffic areas of the mall.
Opening a new store generally requires a total investment of approximately
$107,000, including approximately $70,000 of inventory (a portion of which is
generally financed through consignment arrangements), $30,000 for construction
of the kiosk, fixtures, point-of-sale register and other equipment and supplies
and $7,000 for pre-opening expenses which are expensed when incurred. New stores
can typically be opened within eight weeks after obtaining a lease commitment.
In addition to evaluating malls in which it does not operate stores, the Company
continually evaluates malls where its stores are located to determine whether
net sales volumes warrant another kiosk in such malls. The Company believes that
Piercing Pagoda's strong national retailing reputation, along with the
flexibility of its kiosk store format, make its stores attractive to mall
developers and managers.
As part of its ongoing operations, the Company continually evaluates the
performance of its stores and the malls in which they are located. Since kiosks
require a relatively low investment to open and can be moved relatively easily,
the Company's expansion strategy includes closing kiosks when appropriate and
relocating the kiosks to new locations. During the past three fiscal years, the
Company has closed 21 stores.
The Company's expansion may also include retail concepts and locations
other than the Company's standard kiosks in regional malls. As of May 7, 1997,
the Company operated 24 in-line stores, most of which were acquired as part of
the Earring Tree Acquisition, and expects to open less than five in-line stores
in fiscal 1998 as it evaluates whether to expand its in-line store operations.
The in-line store format may allow the Company to expand into malls where kiosks
are not utilized, as well as to increase its presence in malls where it already
operates kiosks; to offer a larger selection of merchandise, including higher
price points; and to take advantage of certain favorable lease opportuni-
27
<PAGE> 29
ties if and when they are presented. During the 1996 holiday season, the Company
operated 50 seasonal retail mall carts, selling primarily silver jewelry under
the name Silver Station. In addition, the Company may consider limited expansion
into outlet malls or less traditional retail locations such as airport
terminals. In appropriate situations, the Company will continue to evaluate
potential acquisitions of existing stores or store sites from third parties.
MERCHANDISING AND MARKETING
Merchandising
The Company offers an extensive selection of popular-priced 14 karat and 10
karat gold chains, bracelets, earrings, charms and rings, as well as a selection
of silver jewelry. The Company focuses its merchandise selection, approximately
95% of which is gold jewelry, on basic styles at everyday low prices. The
Company believes that, by offering a broad assortment of basic styles, it
provides its customers with a wide variety of choices while limiting
merchandising risks associated with fashion trends. The Company maintains a
balance between new merchandise and proven successful styles. Prior to
introducing new items in all of its stores, the Company usually tests the items
in approximately 50 of its highest volume stores. The Company's stores typically
carry approximately 3,300 SKUs, approximately 82% of which have list prices
between $10 and $80, and during fiscal 1997 generated an average jewelry item
selling price of approximately $24. The Company also offers a selection of non-
jewelry items such as ear care products and jewelry cleaners. Approximately 73%
of a typical store's merchandise is common to all stores, and the remaining
products are selected based upon the characteristics and local preferences of
the particular store's customer base.
During fiscal 1997, the Company's store net sales by merchandise category
as a percentage of total store net sales were as follows:
<TABLE>
<CAPTION>
PERCENT OF TOTAL
MERCHANDISE CATEGORY STORE NET SALES(1)
------------------------------------------------------------------- ------------------
<S> <C>
Gold:
Chains and bracelets............................................. 35%
Charms and rings................................................. 27
Earrings......................................................... 25
Miscellaneous items.............................................. 1
---
Total gold............................................... 88
Silver jewelry and other items..................................... 12
---
Total store net sales.................................... 100%
===
</TABLE>
- ------------
(1) Excludes $2.7 million of wholesale sales to the Florida Licensee. See
"-- Properties."
Marketing
Piercing Pagoda's pricing policy is to maintain everyday low prices
complemented by selective promotions. The Company seeks to be the value leader
for popular-priced gold jewelry in the malls in which its stores are located.
The Company's stores display merchandise on pads in glass enclosed showcases
with clearly visible price tags that facilitate browsing and comparison
shopping, while minimizing the need for sales support. The modular merchandise
display trays in which the merchandise pads fit are configured so as to maximize
the number of items displayed and to minimize unused space in the showcases.
Generally, gold merchandise is priced based on the price the Company paid its
suppliers for such merchandise, and the items are not repriced based on normal
fluctuations in the price of gold. The Company regularly monitors price levels
at its competitors in order to ensure that its prices are competitive, and the
Company believes that its volume purchasing and established supplier
relationships contribute to its ability to remain competitive. In addition to
everyday low prices, the Company has a "buy-five-get-one-free" jewelry club. In
fiscal 1997, the Company increased its promotional events, such as events
featuring "Your Choice $19" and "Buy One, Get One at 1/2 Off," as well as
occasional clearance sales. The Company intends to continue to emphasize these
promotions and to monitor them in order to assess their relative success.
28
<PAGE> 30
In addition to emphasizing lower prices, extensive selection, 734
nationwide locations as of May 7, 1997 and over 20 years of retail experience,
the Company promotes the following:
- Complimentary ear piercing. With the purchase of earrings, the Company
offers complimentary ear piercing and a free check-up after four weeks.
The Company utilizes a state-of-the-art ear piercing system and requires
all employees performing ear piercing services to be trained and
recertified by the Company annually. The Company limits its ear piercing
service to the ear and will not pierce any other part of the body. During
fiscal 1997, approximately 11% of the Company's net sales were derived
from the sale of earrings in connection with complimentary ear piercing.
- Lifetime guarantee on all jewelry items. The Company will repair or
replace, at no cost, all merchandise with manufacturing defects.
- Membership in the "buy-five-get-one-free" jewelry club. The Company
offers a customer incentive program pursuant to which, after five
purchases, a customer is entitled to a credit on the next purchase equal
to the average price paid for the five purchased items. During fiscal
1997, customers applied approximately $3.8 million of credits received
under the jewelry club to purchases.
- Free layaway. The Company will hold items for up to 90 days, with a
deposit, for customers until the full purchase price is paid.
Piercing Pagoda relies primarily on highly visible store locations,
attractive store designs and an inviting visual presentation of merchandise to
attract prospective customers. In addition, it occasionally utilizes fliers,
brochures and other point-of-sale materials to educate potential consumers about
the features and benefits of shopping at the Company's stores.
The Company generally does not advertise independently, but does
participate in programs sponsored by the malls in which the Company operates,
including local and regional newspaper advertising, advertising circulars,
seasonal full-color catalogues and radio and television commercials. In almost
all of the Company's locations, the Company is obligated by the terms of its
lease to contribute to the cost of the mall's advertising. The Company also
participates in national discount coupon book programs, mall-sponsored
promotions and a variety of public relations activities.
Unlike many jewelry retailers, the Company does not extend credit to its
customers, thereby minimizing bad debt expense. Approximately 76% of all
purchases are cash transactions (including personal checks) with the remaining
purchases being credit card sales.
STORES
At May 7, 1997, the Company operated 734 stores in 43 states and Puerto
Rico, including 710 kiosk stores and 24 in-line stores, primarily under the
names Piercing Pagoda, Plumb Gold and Silver & Gold Connection. The Company's
kiosk stores average approximately 165 square feet, with approximately 37 linear
feet of display cases. The Company generally seeks to locate its kiosk stores in
high traffic areas of mall concourses, and has created several standard kiosk
store designs that can be adapted to a particular store's location or to the
design requirements of the mall. The kiosks are manufactured to the Company's
specifications by third party kiosk suppliers and typically can be completed so
that new stores can be opened within eight weeks after obtaining a lease
commitment. At May 7, 1997, the Company operated stores in 539 malls, and
operated more than one location in 163 of those malls. Of the stores operated,
24 were in-line stores, most of which were acquired as part of the Earring Tree
Acquisition.
In January 1997 and April 1997, the Company solidified its position as the
largest operator of gold jewelry kiosk stores by acquiring 93 and 43 kiosk
stores, respectively, from the companies that had been the second and third
largest gold jewelry kiosk operators. The stores purchased were generally
comparable in size to the Company's other stores and sold similar merchandise.
In addition, 113 of those stores are in malls where the Company is already
operating.
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<PAGE> 31
The following table sets forth the Company's store openings and closings
for the periods indicated:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
----------------------------------
1995 1996 1997 1998(1)
---- ---- ---- -------
<S> <C> <C> <C> <C>
Number of stores:
Beginning of period................................ 295 366 513 682
Opened/acquired:
Piercing Pagoda(2).............................. 63 121 108 18
Plumb Gold(3)................................... 14 34 66 2
Silver & Gold Connection(4)..................... -- -- -- 34
Other(5)........................................ -- -- 2 --
--- --- --- ---
Total opened(6)............................ 77 155 176 54
--- --- --- ---
Total closed(7)................................. 6 8 7 2
--- --- --- ---
Total at end of period.......................... 366 513 682 734
=== === === ===
</TABLE>
- ---------------
(1) Through May 7, 1997.
(2) Includes six stores in fiscal 1995, 42 stores in fiscal 1996, 41 stores in
fiscal 1997 and eight stores in fiscal 1998, respectively, that were
acquired and reopened under the Piercing Pagoda name. Includes stores
operated under the name Piercing Pagoda Too in malls where a store is
operated under the name Piercing Pagoda. Other than the acquisitions noted,
stores that change names are not included as new openings.
(3) Includes seven stores in fiscal 1995, 24 stores in fiscal 1996, 55 stores in
fiscal 1997 and two stores in fiscal 1998, respectively, that were acquired
and reopened under the Plumb Gold name. Other than the acquisitions noted,
stores that change names are not included as new openings.
(4) All of these stores were acquired in April 1997 and reopened in May 1997
under the same name.
(5) These stores are currently operated under the Gemstone name, although the
Company intends to change the name of these stores to one of its three
primary names.
(6) Includes one in-line store in fiscal 1995, 14 in-line stores in fiscal 1996
and seven in-line stores in fiscal 1997.
(7) Includes one store sold to the Florida Licensee in each of fiscal 1995 and
fiscal 1997, and two stores sold in fiscal 1998. Does not include three
stores that the Florida Licensee notified the Company in April 1997 it
intends to purchase. See "-- Properties."
STORE OPERATIONS
Store operations are divided into eight regions, each of which is
supervised by a regional manager. The regional managers supervise the Company's
district managers, each of whom is responsible for an average of approximately
ten stores within a specific geographic area. Each of the Company's stores has a
full-time manager and a full-time assistant manager in addition to hourly sales
associates, most of whom work part-time. The number of hourly sales associates
fluctuates greatly depending on seasonal needs.
The Company believes that providing knowledgeable and responsive customer
service is a crucial element to its success and, accordingly, has developed and
implemented extensive employee training and incentive programs. In addition to
training during the first few weeks of employment and frequent field training,
the Company produces training videos for sales associates. The Company monitors
its training program by having sales associates complete worksheets after
viewing each video. Additionally, every August, all sales personnel complete
"Piercing University" where they are retrained in the state-of-the-art, safe,
sterile ear piercing method utilized by the Company. Store managers, most of
whom are promoted from within the Company and over 34% of whom (excluding
personnel hired in connection with the January and April 1997 acquisitions) have
been with the Company longer than three years, also complete extensive training
programs during which they receive training in management skills and employee
relations as well as in sales and customer service. The Company regularly
monitors customer service at its stores by using "secret shoppers" who complete
evaluation forms after visiting stores as customers. Regional managers and
district managers, over 57% of whom have been with the Company over five years,
generally spend approximately one week, two to four times per year, in the
Company's corporate headquarters where they receive ongoing administrative and
operational training.
The Company seeks to instill enthusiasm and dedication in its store
management personnel and sales associates through incentive programs and
regularly solicits employee suggestions regarding store
30
<PAGE> 32
operations. Management believes that its employee-oriented culture creates a
sense of personal accountability among its employees, as well as pride in the
Company and its merchandise, resulting in a higher level of customer service.
Sales associates, as well as store management personnel, receive base
compensation plus incentive compensation and are entitled to discounts on
purchases. The Company seeks to motivate its store personnel to focus on team
success by having the incentive portion of their compensation related primarily
to store performance and to a lesser extent to individual performance. District
managers and their supervisors are eligible for stock options and stock
purchases on a discounted basis pursuant to the Company's 1995 Employee Stock
Purchase Plan, as well as for commissions and bonuses. The Company experiences a
significant amount of turnover among its personnel, especially among its sales
associates, that it believes is typical of its industry.
PURCHASING AND DISTRIBUTION
The Company's centralized purchasing department selects and test markets
its merchandise, develops relationships with suppliers and monitors the
merchandise levels at the Company's stores and corporate distribution center.
Target merchandise levels for each store are calculated according to the
individual store's sales volume of each item. Merchandise is delivered in bulk
to the Company's headquarters where the Company's in-house merchandise staff
prepares all items for display on merchandise pads, thereby eliminating supplier
display preparation charges. Items are tagged with a price and stickered with a
bar code label for tracking.
The Company utilizes approximately 150 vendors, primarily in the United
States, Italy and Asia, who supply various jewelry products. The Company's
purchase agreements with its suppliers are all denominated in U.S. dollars.
During fiscal 1997, the Company's five largest suppliers accounted for
approximately 43% of the merchandise purchased by the Company. Two of these
suppliers accounted for 11% and 10%, respectively, of the Company's purchases
during fiscal 1997. The Company does not believe that the loss of any current
supplier would adversely affect its operations. The Company has no long-term
contracts for the purchase of merchandise. Management believes that the
relationships the Company has established with its suppliers are good. The
Company has not experienced any difficulty in obtaining satisfactory sources of
supply and believes that adequate alternative sources of supply exist for
substantially all types of merchandise sold in its stores.
The Company maintains a quality control program, with all shipments from
suppliers being counted or weighed and visually inspected upon receipt at the
Company's offices. In addition, the Company regularly assays a portion of gold
merchandise shipments to assure that the merchandise is of the karat represented
by the supplier.
MANAGEMENT INFORMATION SYSTEMS
The Company currently uses a proprietary, customized UNIX-based system for
both its financial and accounting and inventory management systems. Through
nightly polling of in-store registers, the Company monitors sell-through
information and inventory levels, enhancing the Company's ability to control
effectively the merchandise at its stores and to identify and react promptly to
sales trends. Based on the sales data, the Company tailors individual stores'
merchandise levels, plans its purchasing in order to benefit from volume
purchasing discounts from its suppliers and prioritizes the in-house preparation
of merchandise.
In order to accommodate recent growth, the Company plans to implement new
inventory management and replenishment software that is currently used by
certain other major retailers, and to upgrade its financial and accounting
software. It is expected that the new inventory management software will be
modified to replicate certain custom elements of the Company's existing system.
Both the inventory management software and the financial and accounting software
that the Company plans to install utilize the SQL relational database and a
Windows NT-based client/server architecture. The Company believes that the
combination of the new software and client/server technology will provide the
Company with better analytical tools and enhance the information-sharing
capabilities of the Company's management information systems. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
31
<PAGE> 33
The Company anticipates that the new financial and accounting and inventory
management systems will be operational by the third quarter of fiscal 1998 and
the first quarter of fiscal 1999, respectively. It is expected that the new
systems will be run parallel with the existing systems until the quality of
performance of the new systems is confirmed. There is no assurance that the
Company will be able to successfully implement these new systems.
PROPERTIES
The Company leases all of its store locations, but owns the kiosks and
other fixtures. The Company's typical lease is for a period of five years and
includes a minimum base rent, a percentage rent based on store sales, a common
area maintenance charge and payments to a merchants' association. In addition,
substantially all of the Company's leases require the Company to contribute to
the cost of advertising for the mall in which the store subject to the lease is
located. The Company is generally required under the terms of its leases to
maintain and conform its stores to agreed upon standards. Of the Company's store
leases at March 31, 1997, approximately 128 expire before March 31, 1998. The
acquisitions of 93 stores in January 1997 and 43 stores in April 1997 were
completed without obtaining landlords' prior consent. Over 90% of the consents
have now been obtained with respect to the January 1997 acquisition. The Company
has recently begun pursuing consents in connection with the April 1997
acquisition and, as of May 14, 1997, had obtained four of such consents.
Although the Company believes that, as a result of its financial and operating
strength and its relationships with many major landlords, it will be able to
obtain substantially all the remaining consents on reasonable terms, there is no
assurance that its negotiations will be successful. Accordingly, there is a risk
that certain stores would have to be closed if consent is not obtained.
The Company also licenses the use of its store names and concept to an
independent store operator with 16 stores and one retail mall cart in Florida
(the "Florida Licensee"). In order to reach a negotiated resolution of rights of
the Florida Licensee who had been a franchisee of the Company, the Company
entered into an agreement with the Florida Licensee pursuant to which the
Florida Licensee generally has the right to acquire, at prices favorable to the
Florida Licensee, the Company's stores operating in the State of Florida and has
the right of first refusal with respect to new locations in that State. The
Florida Licensee purchases its inventory from the Company and pays the Company a
royalty on its net sales. In each of fiscal 1995 and fiscal 1997, the Florida
Licensee exercised its right to acquire one store from the Company. Since the
beginning of fiscal 1998, the Florida Licensee has delivered written notice to
the Company of its intention to acquire five additional stores, two of which the
Florida Licensee acquired in May 1997. In addition, the Florida Licensee has
recently expressed interest in acquiring another three stores from the Company.
Of the 38 stores which the Company currently operates in Florida, five were
acquired from the Florida Licensee. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Overview."
The Company owns a 73,000 square foot building in Bethlehem, Pennsylvania
which serves as its corporate headquarters and distribution center. As a result
of recent acquisitions, the Company's distribution facilities are near capacity.
Accordingly, it plans to begin construction during fiscal 1998 of an
approximately 50,000 square foot facility on approximately five acres of vacant
land it owns adjacent to the Bethlehem property. This new facility is planned to
be used primarily for additional distribution and warehousing functions.
COMPETITION
The retail jewelry business is highly competitive and the Company believes
that the primary elements of competition in the popular-priced jewelry business
are price, selection, customer service, quality and the appeal and convenience
of store locations. The Company competes with national and regional jewelry
chains, department stores, local independently owned jewelry stores and chains,
catalogue showrooms, discounters, direct mail suppliers and televised home
shopping networks. Certain of the Company's competitors have significantly
greater financial and other resources than the Company. The retailing business
is affected by changes in consumer taste, demographic trends and the type,
number and location of competing stores. The Company also believes that it
competes for store locations and for consumers' discretionary spending dollars
with retailers that offer merchandise other than jewelry.
32
<PAGE> 34
EMPLOYEES
As of March 31, 1997, the Company had approximately 1,672 full-time and
approximately 2,053 part-time employees. Of these, 255 were employed full-time
and 82 part-time at the Company's corporate offices and distribution facility
while the balance were employed as part of the Company's field sales force. The
number of employees fluctuates depending on seasonal needs. During the fiscal
1997 peak holiday season, the Company had 3,053 part-time employees. None of the
Company's employees is covered by a collective bargaining agreement, and the
Company considers relations with its employees to be good.
TRADEMARKS
The Company believes its registered trademarks "Piercing Pagoda and Design"
and "Silver Station," along with the Company logo and "Plumb Gold" name, are
important elements of the Company's marketing strategy. In addition, the Company
has a trademark application pending for "Piercing Pagoda the Gold Company," and
recently acquired rights to the name "Silver & Gold Connection," for which there
is also a trademark application pending. The Company is not otherwise dependent
on any patent, trademark, service mark or copyright.
GOVERNMENT REGULATION
The Company's ear piercing service is not regulated by federal statute.
Currently, Oregon is the only state in which the Company operates that regulates
ear piercing activities. Legislation in Oregon requires the Company, and any of
its employees administering ear piercing services in stores in Oregon, to be
licensed by the State. The legislation also deems ear piercing through anywhere
but the lobe of the ear to be body piercing, which is subject to additional
restrictions, including that it must be performed in a separate room.
Accordingly, the Company limits its ear piercing to the ear lobe in Oregon. The
Company is aware of approximately 31 jurisdictions in which legislation to
regulate ear piercing establishments is pending, including Maryland and
Massachusetts where the Company currently operates 32 stores and 29 stores,
respectively. The proposed Maryland legislation would subject ear piercing
through other than the lobe to restrictions similar to those imposed by the
Oregon legislation. The proposed Massachusetts legislation directs regulators to
develop procedures applicable to body piercing, which the proposed legislation
currently defines to exclude the ear lobe but to include all other parts of the
ear. Generally, however, pending legislation proposes requiring the consent of a
parent or guardian in order to pierce the ears of a minor (which the Company
requires even in the absence of legislation), the posting of certain notices and
the obtaining of certain registrations and licenses, but does not require
special procedures for piercing of portions of the ear other than the lobe.
Management believes that the Company complies in all material respects with
applicable legislation. While the Company does not expect existing or proposed
legislation to have a material adverse effect on the Company's business, there
is no assurance that governmental bodies will not modify existing legislation in
such a way, or enact new legislation, that would restrict or prohibit the
Company from providing ear piercing services in its stores or otherwise
continuing to conduct its business as presently operated.
In April 1993, after an investigation, the Occupational Safety and Health
Administration ("OSHA") issued an opinion that establishments which use an ear
piercing system such as the one utilized by the Company and which maintain an
ear piercing policy such as the Company's do not expose employees to blood and,
therefore, are not subject to OSHA regulations concerning employee exposure to
blood.
LEGAL PROCEEDINGS
Piercing Pagoda is not a party to any legal proceedings, other than certain
actions arising in the ordinary course of business. The Company does not believe
that any such claims and lawsuits, either individually or in the aggregate, will
have a material adverse effect on Piercing Pagoda's results of operations or
financial condition.
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<PAGE> 35
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The Company's executive officers, directors and key employees are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Richard H. Penske................ 54 Chairman of the Board and Chief Executive Officer
John F. Eureyecko................ 48 President, Chief Operating Officer, Secretary and
Director
Barry R. Clauser................. 43 Senior Vice President -- Merchandise Operations
Sharon J. Zondag................. 42 Senior Vice President -- Store Operations
Brandon R. Lehman................ 45 Treasurer
Alan R. Hoefer................... 63 Director*
Mark A. Randol................... 62 Director*
Lisa E. Sankovsky................ 36 Vice President -- Real Estate
Richard J. McKeon................ 39 Director of Management Information Systems
Christopher J. Barone............ 32 Corporate Controller
</TABLE>
- ------------
* Member of the Audit and Compensation Committees.
Richard H. Penske has served the Company and its predecessor in various
capacities for more than 25 years. Mr. Penske served as President of the Company
from 1980 to June 1996, and has served as the Chief Executive Officer since
1986. Mr. Penske has served as a director of the Company since 1978.
John F. Eureyecko joined the Company in October 1991 and has served as
President and Chief Operating Officer since June 1996. Mr. Eureyecko had
previously served as Executive Vice President from January 1992 to June 1996 and
as Chief Financial Officer from February 1994 to June 1996. Mr. Eureyecko was
elected as Secretary in January 1992 and as a director in March 1994. Mr.
Eureyecko joined the Company with 18 years experience at Triangle Building
Supplies and Lumber Co., a building materials retailer, where he last served as
Senior Vice President and General Manager.
Barry R. Clauser joined the Company in October 1976 as an assistant to the
Executive Vice President. He has served as the Company's Senior Vice
President -- Merchandise Operations since April 1988.
Sharon J. Zondag joined the Company in October 1976 as an Assistant Store
Manager. Ms. Zondag served as Vice President -- Store Operations from February
1986 to March 1988. Since March 1988, Ms. Zondag has served as Senior Vice
President -- Store Operations.
Brandon R. Lehman joined the Company in August 1991 as a staff accountant
and became the Corporate Controller in 1992. Mr. Lehman was elected Treasurer in
March 1994. Mr. Lehman joined the Company with 16 years of experience at Ice
City, Inc., a retailer of seasonal products, where he last served as Corporate
Treasurer.
Alan R. Hoefer has served as a director of the Company since March 1994.
Since August 1988, Mr. Hoefer has been the Managing General Partner of Alan
Hoefer & Co., a private investment banking firm. Mr. Hoefer also currently
serves as a director of Smith's Food & Drug Centers, Inc., which is a publicly
held corporation.
Mark A. Randol has served as a director of the Company since March 1994.
Since 1979, Mr. Randol has been the President of Forrest City Management, Inc.,
a real estate development company.
Lisa E. Sankovsky joined the Company in 1983 as an assistant to Mr. Penske,
focusing on lease administration. Ms. Sankovsky served as Director of Real
Estate from February 1994 to July 1995. Since July 1995, Ms. Sankovsky has
served as Vice President -- Real Estate.
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<PAGE> 36
Richard J. McKeon has served as Director of Management Information Systems
since he joined the Company in November 1990. From 1987 to 1990, Mr. McKeon was
a programmer trainer with Valley Computer Learning Center, a computer training
company.
Christopher J. Barone has served as the Corporate Controller since October
1994. Prior thereto, he served in various capacities with KPMG Peat Marwick LLP
from September 1989 to October 1994, most recently as Audit Manager.
The Board of Directors of the Company is divided into three classes with
staggered three-year terms. Currently, the Board of Directors consists of four
persons. Messrs. Penske and Hoefer serve as Class I directors whose terms expire
on the date of the annual meeting of stockholders next following the end of
fiscal 1997; Mr. Randol serves as a Class III director whose term expires on the
date of the annual meeting of stockholders next following the end of fiscal
1998; and Mr. Eureyecko serves as a Class II director whose term expires on the
date of the annual meeting of stockholders next following the end of fiscal
1999. The officers of the Company are elected at each annual meeting of the
Board of Directors and serve at the discretion of the Board of Directors.
The current committees of the Board of Directors are the Compensation
Committee and the Audit Committee. Messrs. Hoefer and Randol are members of both
committees. The Compensation Committee and Audit Committee each met twice during
fiscal 1997.
DIRECTOR COMPENSATION
Members of the Board of Directors who are not employees of the Company are
compensated at the annual rate of $8,000. Non-employee directors will also
receive $1,000 for each meeting of the Board of Directors which they attend and,
if not held in conjunction with a Board meeting, a fee of $1,000 for each
meeting of a committee of the Board of Directors which they attend. The Company
also reimburses all directors for their expenses in connection with their
activities as directors of the Company. Directors who are also employees of the
Company do not receive any compensation for serving on the Board of Directors.
Pursuant to the Company's 1994 Stock Option Plan, each director who is a member
of the Compensation Committee also receives an annual grant of ten year options
to purchase 2,000 shares of Common Stock at the fair market value on the date of
grant, becoming exercisable on the first anniversary of the date of grant.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Alan R. Hoefer and Mark A. Randol, the members of the Compensation
Committee of the Company's Board of Directors, are each parties to the Tax
Indemnification Agreement which was entered into between the Company and the
stockholders of the Company prior to its initial public offering in connection
with the Company's change in status, immediately prior to the initial public
offering, from an "S" corporation to a "C" corporation subject to corporate
income taxation. Pursuant to that Tax Indemnification Agreement, during fiscal
1996, Messrs. Hoefer and Randol received $18,462 and $7,898, respectively. See
"Certain Transactions."
35
<PAGE> 37
EXECUTIVE COMPENSATION
The following table sets forth certain summary information concerning
compensation paid or accrued by the Company for services rendered in all
capacities during fiscal 1995, fiscal 1996 and fiscal 1997 for the Chief
Executive Officer of the Company and the other officers of the Company whose
total annual salary and bonus for fiscal 1997 exceeded $100,000 (the "Named
Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION ------------------------
RESTRICTED SHARES
NAME AND PRINCIPAL -------------------- STOCK UNDERLYING ALL OTHER
POSITION FISCAL YEAR SALARY BONUS AWARDS(5) OPTIONS COMPENSATION
- ------------------------ ----------- -------- ------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Richard H. Penske....... 1997 $181,491 $90,000 -0- -0- $ 50,323(1)
Chief Executive 1996 157,308 60,000 -0- -0- 48,764(1)
Officer 1995 150,000 50,000 -0- -0- 47,072(1)
John F. Eureyecko....... 1997 169,774 88,000 $15,401(6) 50,000 5,139(2)
President 1996 153,933 55,000 4,259 -0- 4,995(2)
1995 136,154 36,500 -0- 25,000 5,164(3)
Sharon J. Zondag........ 1997 107,661 35,000 8,024(7) 10,000 4,070(2)
Senior Vice 1996 98,269 22,000 2,658 -0- 3,393(2)
President -- 1995 79,106 12,000 -0- 25,000 2,601(2)
Store Operations
Barry R. Clauser........ 1997 107,576 30,000 8,024(8) 10,000 3,907(2)
Senior Vice 1996 97,692 15,000 2,658 -0- 3,425(2)
President -- 1995 87,115 7,500 -0- 25,000 3,121(4)
Merchandise Operations
Susan S. Iseminger...... 1997 79,029 19,205 5,870(9) 4,000 2,737(2)
Vice President -- 1996 68,596 19,040 1,918 -0- 3,064(2)
Store Operations 1995 63,731 15,000 -0- 8,000 1,701(2)
</TABLE>
- ------------
(1) The compensation reported represents: (i) the Company's contributions and
matching payments under the Company's Retirement and Savings Plan in the
aggregate amounts of $5,013 in 1997, $4,590 in 1996 and $4,027 in fiscal
1995; (ii) the premiums on a life insurance policy on the life on Mr.
Penske, of which Mr. Penske's wife is the sole beneficiary, which were
$3,119 in fiscal 1997, $2,803 in fiscal 1996 and $1,570 in fiscal 1995; and
(iii) the amount, on a term loan approach, of the benefit of the whole-life
portion of the premiums for a split dollar life insurance policy paid by the
Company projected on an actuarial basis which was $42,191 in fiscal 1997,
$41,371 in fiscal 1996 and $41,475 in fiscal 1995.
(2) The compensation reported represents the Company's contribution and matching
payments under the Company's Retirement and Savings Plan.
(3) The compensation reported represents: (i) the Company's contribution and
matching payments under the Company's Retirement and Savings Plan in the
aggregate amount of $4,066; and (ii) $1,098 which is the value of an
interest-free loan made by the Company to Mr. Eureyecko.
(4) The compensation reported represents: (i) the Company's contribution and
matching payment under the Company's Retirement and Savings Plan in the
aggregate amount of $2,985 in fiscal 1995; and (ii) $136 in fiscal 1995
which equals one-half the premium on a term life insurance policy on the
life of Mr. Clauser of which Mr. Clauser's wife was a 50% beneficiary.
(5) At March 31, 1997: Mr. Eureyecko held an aggregate of 56,901 shares of
restricted stock, having a total value of $1,436,750; Ms. Zondag held an
aggregate of 18,481 shares of restricted stock, having a total value of
$466,645; Mr. Clauser held an aggregate of 28,481 shares of restricted
stock, having a total value of $719,145; and Ms. Iseminger held an aggregate
of 321 shares of restricted stock, having a total value of $8,105. All
restricted stock awards reported in the Summary Compensation Table vest in
whole in under three years from the date of grant. With respect to the
payment of dividends on the restricted stock reported in the Summary
Compensation Table, see "Dividend Policy."
36
<PAGE> 38
(6) The value of 112 shares of restricted stock for which salary was withheld in
the fourth quarter of fiscal 1997 has been determined based on the closing
market price of Common Stock on May 13, 1997, although as of such date such
shares had not been granted.
(7) The value of 70 shares of restricted stock for which salary was withheld in
the fourth quarter of fiscal 1997 has been determined based on the closing
market price of Common Stock on May 13, 1997, although as of such date such
shares had not been granted.
(8) See note 7.
(9) The value of 51 shares of restricted stock for which salary was withheld in
the fourth quarter of fiscal 1997 has been determined based on the closing
market price of Common Stock on May 13, 1997, although as of such date such
shares had not been granted
STOCK OPTIONS
The following table contains information concerning the stock option grants
made to each of the Named Officers in fiscal 1997:
OPTION GRANTS IN FISCAL 1997
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------------- POTENTIAL REALIZABLE
% OF TOTAL VALUE AT ASSUMED
NUMBER OF OPTIONS ANNUAL RATES OF STOCK
SECURITIES GRANTED TO PRICE APPRECIATION
UNDERLYING EMPLOYEES EXERCISE FOR OPTION TERM(2)
OPTIONS IN FISCAL PRICE PER EXPIRATION ---------------------
NAMED OFFICER GRANTED(1) 1997 SHARE DATE 5% 10%
- ------------------------- ---------- ---------- --------- ------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Richard H. Penske........ -- -- -- -- -- --
John F. Eureyecko........ 25,000(3) 13% $ 18.00 June 24, 2006 $ 283,000 $ 717,250
25,000(4) 13 22.00 March 6, 2007 346,000 876,500
Sharon J. Zondag......... 10,000(4) 5 22.00 March 6, 2007 138,400 350,600
Barry R. Clauser......... 10,000(4) 5 22.00 March 6, 2007 138,400 350,600
Susan S. Iseminger....... 4,000(4) 2 22.00 March 6, 2007 55,360 140,240
</TABLE>
- ------------
(1) Numbers shown represent options granted under the 1994 Stock Option Plan to
purchase Common Stock.
(2) Future value of current-year grants assuming appreciation in the market
value of the Common Stock of 5% and 10% per year over the ten-year option
period. The actual value realized may be greater than or less than potential
realizable values set forth in the table.
(3) One-fifth of these options were exercisable on June 24, 1996 and the
remaining four-fifths are exercisable in four equal installments on the
first four anniversaries of such date.
(4) One-fifth of these options were exercisable on March 6, 1997 and the
remaining four-fifths are exercisable in four equal installments on the
first four anniversaries of such date.
The following table provides information related to options exercised
during fiscal 1997 by each of the Named Officers and the number and value of
options held at March 31, 1997 by such individuals.
AGGREGATED OPTION EXERCISES IN FISCAL 1997
AND OPTION VALUES AT MARCH 31, 1997
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES MARCH 31, 1997 MARCH 31, 1997
ACQUIRED VALUE --------------------------- ---------------------------
NAMED OFFICER ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Richard H. Penske........... -- -- -- -- -- --
John F. Eureyecko........... -- -- 25,000 50,000 $ 311,250 $ 382,500
Sharon J. Zondag............ -- -- 17,000 18,000 265,250 198,500
Barry R. Clauser............ -- -- 17,000 18,000 265,250 198,500
Susan S. Iseminger.......... -- -- 5,600 6,400 85,400 65,600
</TABLE>
37
<PAGE> 39
1994 STOCK OPTION PLAN
On May 18, 1994, the Board of Directors adopted, and the Company's then
current stockholders approved, the Piercing Pagoda, Inc. 1994 Stock Option Plan
(the "1994 Stock Option Plan"), the purpose of which is to recognize the
contributions made to the Company by its employees and certain consultants or
advisors, to provide these individuals with additional incentives to devote
themselves to the Company's future success, and to improve the Company's ability
to attract, retain and motivate individuals upon whom the Company's sustained
growth and financial success depend. The 1994 Stock Option Plan is also intended
as an additional incentive to directors of the Company who are not employees of
the Company to serve on the Board of Directors and to devote themselves to the
future success of the Company. Awards under the 1994 Stock Option Plan may be
made to all employees, directors, consultants or advisors of the Company.
The 1994 Stock Option Plan is administered by the Compensation Committee.
The aggregate maximum number of shares of Common Stock available for awards
under the 1994 Stock Option Plan is 600,000 shares (subject to adjustments to
reflect changes in the Company's capitalization and subject to stockholder
approval of the increase from 450,000 shares to 600,000 shares in May 1997).
Options granted under the 1994 Stock Option Plan may be either incentive stock
options ("ISOs") or non-qualified stock options. ISOs are intended to qualify as
"incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code. Unless an option is specifically designated at the time of grant
as an ISO, options under the 1994 Stock Option Plan will be non-qualified
options.
The exercise price of the options will be determined by the Board of
Directors or the Compensation Committee, although the exercise price of an ISO
will be at least 100% of the fair market value of a share of Common Stock on the
date the option is granted, or at least 110% of the fair market value of a share
of Common Stock on the date the option is granted if the recipient owns,
directly or by attribution under Section 424(d) of the Internal Revenue Code,
shares possessing more than 10% of the total combined voting power of all
classes of stock of the Company. No awards can be made under the 1994 Stock
Option Plan after May 17, 2004. The maximum term of an ISO granted under the
1994 Stock Option Plan shall not exceed ten years from the date of grant or five
years from the date of grant if the recipient on the date of grant owns,
directly or by attribution under Section 424(d) of the Internal Revenue Code,
shares possessing more than 10% of the total combined voting power of all
classes of stock of the Company.
The 1994 Stock Option Plan provides that each current member of the
Compensation Committee, which administers the 1994 Stock Option Plan with
respect to Options granted to persons who are "officers" under Rule 16a-1(f) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), will be
granted, on the later of June 1, 1994 or the date such person becomes a member
of the Compensation Committee (the "Initial Grant Date") and on each anniversary
of such person's Initial Grant Date during the term of the 1994 Stock Option
Plan, provided such person continues to serve as a member of the Compensation
Committee, non-qualified stock options to purchase 2,000 shares of Common Stock.
Each such option will become exercisable on the first anniversary of the date of
grant. The options will have an exercise price equal to 100% of the fair market
value of the shares of Common Stock on the date the options are granted.
As of May 7, 1997, the Company had granted options to purchase 398,250
shares of Common Stock at exercise prices ranging from $8.00 per share to $24.63
per share under the 1994 Stock Option Plan, of which 395,150 remained
outstanding as of such date, 150,550 of which were then exercisable.
1994 RESTRICTED STOCK PLAN
On March 31, 1994, the Board of Directors of the Company adopted, and the
Company's stockholders approved, the Piercing Pagoda, Inc. 1994 Restricted Stock
Plan (the "1994 Restricted Stock Plan"). The 1994 Restricted Stock Plan is
intended to recognize the contributions made to the Company by key employees,
members of the Board of Directors, consultants and advisors of the Company, to
provide such persons with additional incentive to devote themselves to the
future success of the Company, and to improve the ability of the Company to
attract, retain and motivate individuals
38
<PAGE> 40
upon whom the Company's sustained growth and financial success depend, by
providing such persons with an opportunity to acquire or increase their
proprietary interest in the Company through the transfer or issuance of shares
of the Company's Common Stock. The 1994 Restricted Stock Plan is administered by
the Compensation Committee. The aggregate maximum number of shares of Common
Stock available for awards under the 1994 Restricted Stock Plan is 224,330
shares (subject to adjustments to reflect changes in the Company's
capitalization). Awards under the 1994 Restricted Stock Plan may be made to all
employees, directors, consultants or advisors of the Company.
No stock award may be granted under the 1994 Restricted Stock Plan after
March 31, 2004. The purchase price, if any, applicable to any stock award will
be determined at the discretion of the Committee and will be specified in the
documentation of the stock award. All stock awards will be evidenced by a
document containing provisions consistent with the 1994 Restricted Stock Plan
and such other provisions as the Compensation Committee deems appropriate.
Notwithstanding any other provision of the 1994 Restricted Stock Plan, in the
event of a "Change of Control" of the Company, as defined in the 1994 Restricted
Stock Plan, the Compensation Committee may take whatever action it deems
necessary or desirable with respect to the stock awards. The restrictions, if
any, on stock awarded to employees and directors pursuant to a stock award under
the 1994 Restricted Stock Plan will lapse on a Change of Control.
As of May 7, 1997, the Company had issued an aggregate of 218,713 shares
under the 1994 Restricted Stock Plan.
1995 EMPLOYEE STOCK PURCHASE PLAN
On October 12, 1995, the Board of Directors of the Company adopted, and the
Company's stockholders approved, the Piercing Pagoda, Inc. Employee Stock
Purchase Plan (the "1995 Employee Stock Purchase Plan"). The purpose of the 1995
Employee Stock Purchase Plan is to assist the Company in retaining the
employment of employees by offering them a greater stake in the Company's
success and a closer identity with it, and to aid in obtaining the services of
individuals whose employment would be helpful to the Company and would
contribute to its success. The 1995 Employee Stock Purchase Plan is administered
by the Compensation Committee and is intended to comply with the provisions of
Section 423 of the Internal Revenue Code. An aggregate maximum of 96,000 shares
of Common Stock (subject to adjustments to reflect changes in the Company's
capitalization) are available for issuance under the 1995 Employee Stock
Purchase Plan. In addition, an employee may not purchase more than $25,000 worth
of Common Stock, and no more than an aggregate of 24,000 shares may be issued,
in any year under the 1995 Employee Stock Purchase Plan. Generally, any employee
of the Company who has been employed for more than 12 months is eligible to
participate, subject to certain exceptions, including if the employee owns, or
the issuance of any additional shares to him or her will cause the employee to
own, shares of Common Stock such that the employee has the power to vote five
percent or more of the Common Stock.
Employees participate in the 1995 Employee Stock Purchase Plan by utilizing
payroll deductions to purchase shares of Common Stock at a price equal to the
lower of 85% of the fair market value thereof on the first or last day of the
quarter in which the shares are purchased. The purchase price may be increased
but shall not exceed 100% of fair market value. Shares purchased under the 1995
Employee Stock Purchase Plan are generally restricted for a period of one year,
subject to certain exceptions. If an employee whose shares remain restricted is
terminated for a reason other than death, disability or retirement, the Company
may purchase his or her shares for the lesser of the then fair market value or
the price at which they were purchased. The 1995 Employee Stock Purchase Plan
terminates on December 31, 1999, unless earlier terminated by the Board of
Directors of the Company.
As of May 7, 1997, an aggregate of 9,757 shares had been purchased under
the 1995 Employee Stock Purchase Plan.
39
<PAGE> 41
ANNUAL INCENTIVE PLAN
The Company maintains an Annual Incentive Plan (the "Incentive Plan") to
provide incentive compensation opportunities, at the discretion of the Board of
Directors of the Company, to employees who have been selected to participate in
the Incentive Plan. Awards under the Incentive Plan are based on performance
measures over which the participating employee has some level of influence, as
well as the discretion of the Board. Mr. Clauser and Ms. Zondag are participants
in the Incentive Plan.
LIMITATION OF DIRECTORS' LIABILITY; INDEMNIFICATION
The Certificate of Incorporation limits the liability of its directors to
the full extent permitted by Delaware law. Delaware law provides that, if so
provided in the applicable certificate of incorporation, the directors of a
company will not be personally liable to such company or its stockholders for
monetary damages for breach of their fiduciary duties as directors, except for
liability for: (a) any breach of loyalty to the Company or its stockholders; (b)
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law; (c) unlawful payments of dividends or unlawful stock
repurchases or redemptions as provided in Section 174 of the Delaware General
Corporation Law; or (d) any transaction from which the director derived an
improper personal benefit. The Certificate of Incorporation also provides that
the Company shall indemnify its directors and officers to the fullest extent
permitted by Delaware law.
40
<PAGE> 42
CERTAIN TRANSACTIONS
On March 30, 1994, the Company issued a subordinated note in the aggregate
principal amount of $7.0 million to its then current stockholders. Immediately
after the consummation of the Company's initial public offering in October 1994,
the $2.0 million principal amount of such notes plus accrued interest thereon of
approximately $313,000 was exchanged for 210,271 shares of Common Stock. $5.0
million of the net proceeds of the Company's initial public offering was used to
repay the remaining principal amount of such notes.
Prior to the Company's initial public offering, Mr. Penske had pledged the
shares of Common Stock he owned at that time to the Company's then primary
lender as security for the Company's obligations to such lender at such time.
The Company repaid a portion of the loans obtained from its then primary lender
from a portion of the net proceeds of its initial public offering, which
resulted in the release of the lender's security interest in the shares of the
Common Stock that Mr. Penske had pledged.
On March 31, 1994, pursuant to the 1994 Restricted Stock Plan, Messrs.
Eureyecko, Hoefer, Clauser, Randol and Ms. Zondag purchased 28,041, 16,824,
5,608, 5,608 and 13,459 shares of Common Stock, respectively, for $4.40 per
share and 56,081, 22,432, 22,432, 11,216 and 14,581 shares of Common Stock,
respectively, for $3.67 per share. All such shares were paid for by the
purchasers agreeing to pay the purchase price per share less approximately $1.78
per share on or before May 15, 1994 and by the application of a bonus payable by
the Company of approximately $1.78 per share. As of May 15, 1994 the purchasers
paid all amounts due. In connection with the bonuses paid by the Company and
applied to the purchase price for the shares purchased under the 1994 Restricted
Stock Plan, the Company loaned Messrs. Eureyecko, Clauser and Ms. Zondag
$50,100, $18,358 and $17,991, respectively, to pay their respective tax
withholding liabilities. All such loans were interest-free and were paid in full
on July 15, 1994.
Prior to the Company's initial public offering, the Company was an "S"
corporation for federal and certain state tax purposes. Historically, the
Company paid distributions to its stockholders to enable them to pay their
income tax liability as a result of the Company's status as an "S" corporation.
In connection with the Company's change in status, immediately prior to the
initial public offering, to a "C" corporation subject to corporate income
taxation, the Company entered into a Tax Indemnification Agreement (the "Tax
Indemnification Agreement") with the stockholders of the Company prior to its
initial public offering which provides for: (i) the distribution to Mr. Penske
of cash equal to the product of the Company's taxable income for fiscal 1994 and
the sum of the highest effective federal and state income tax rates applicable
to any current stockholder (or, in the case of stockholders that are trusts, any
beneficiary of such trust) (the "Applicable Tax Rate"), less any prior
distributions to him to pay taxes for such year end, plus the amount of Mr.
Penske's deferred taxes attributable to the Company's income for fiscal 1993
that were deferred pursuant to the Omnibus Budget Reconciliation Act of 1993;
(ii) the distribution to each stockholder of cash equal to the product of the
Company's taxable income allocable to the period from April 1, 1994 through
October 12, 1994 and the Applicable Tax Rate; and (iii) an indemnification of
such stockholders for any losses or liabilities with respect to any additional
taxes (including interest, penalties and legal fees) resulting from the
Company's operations during the period in which it was an "S" corporation. Mr.
Penske received $1,346,132 from the Company pursuant to the Tax Indemnification
Agreement during fiscal 1995, in addition to a distribution to him of $408,920
applicable to (i) above paid prior to the execution of such agreement. Messrs.
Penske, Eureyecko, Clauser and Ms. Zondag received $1,467,278, $39,464, $13,187
and $13,187, respectively, from the Company pursuant to the Tax Indemnification
Agreement during fiscal 1996. Messrs. Hoefer and Randol, the members of the
Compensation Committee of the Board of Directors, also received payments
pursuant to the Tax Indemnification Agreement in fiscal 1996. See
"Management -- Compensation Committee Interlocks and Insider Participation."
41
<PAGE> 43
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information known to the Company
regarding beneficial ownership of the Company's Common Stock as of April 30,
1997 and as adjusted to reflect the sale of the Common Stock offered hereby,
assuming no exercise of the Underwriters' over-allotment option, by (i) each
person known by the Company to be the beneficial owner of more than 5% of the
Company's outstanding Common Stock, (ii) Richard H. Penske, the Company's Chief
Executive Officer and Chairman of the Board, certain Penske family trusts, and a
charitable trust and foundation established by Mr. Penske (collectively, the
"Selling Stockholders"); (iii) each director of the Company, (iv) each Named
Officer and (v) all directors and Named Officers of the Company as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES TO BE
OWNED BENEFICIALLY
PRIOR TO OWNED AFTER
OFFERING(1) OFFERING(1)
------------------- -------------------
BENEFICIAL OWNER NUMBER PERCENT SHARES BEING OFFERED NUMBER PERCENT
- --------------------------------------- --------- ------- -------------------- --------- -------
<S> <C> <C> <C> <C> <C>
Richard H. Penske(2)................... 3,224,086 61.1% 900,000 2,324,086 39.2%
Piercing Pagoda, Inc.
3910 Adler Place
Bethlehem, PA 18017
Penske Family Trusts(3)................ 406,176 7.7 149,608 256,568 4.3
Richard H. Penske Charitable
Trust(4)............................. 25,000 * 25,000 -- *
Richard and Patricia Penske
Foundation(4)........................ 5,000 * 5,000 -- *
John F. Eureyecko...................... 81,901 1.6 -- 81,901 1.4
Barry R. Clauser(5).................... 45,681 * -- 45,681 *
Sharon J. Zondag....................... 35,481 * -- 35,481 *
Susan S. Iseminger..................... 5,921 * -- 5,921 *
Alan R. Hoefer(6)...................... 63,556 1.2 -- 63,556 1.1
Mark A. Randol......................... 20,824 * -- 20,824 *
All directors and Named Officers as a
group (7 persons)(2)(5)(6)........... 3,472,450 65.8 900,000 2,572,450 43.4
</TABLE>
- ------------
* Less than 1%.
(1) Each stockholder possesses sole voting and investment power with respect to
the shares listed, except as otherwise noted. Shares of Common Stock subject
to options that are exercisable within 60 days after the date of this
Prospectus are deemed beneficially owned by the person holding such options
for the purpose of computing the percentage of ownership of such person but
are not treated as outstanding for the purpose of computing the percentage
of any other person. Accordingly, the information in the above table
includes the following number of shares of Common Stock underlying options
held by the following individuals, and all directors and Named Officers as a
group, when computing the percentage ownership of such individual, director
or group: Mr. John F. Eureyecko, 25,000 shares; Mr. Barry R. Clauser and Ms.
Sharon J. Zondag, 17,000 shares each; Ms. Susan S. Iseminger, 5,600 shares;
Messrs. Alan R. Hoefer and Mark A. Randol, 4,000 shares each; and all
directors and Named Officers as a group, 72,600 shares.
(2) Includes an aggregate of 271,188 shares divided equally among four annuity
trusts (the "Annuity Trusts"). Mr. Penske is a beneficiary of two of the
Annuity Trusts and Mr. Penske's wife is a beneficiary of the other two.
Victoria L. Penske and Crislyn A. Penske, Mr. Penske's two oldest children,
are the trustees of the Annuity Trusts. 25,000 shares from each Annuity
Trust are being sold in this offering. Also includes an aggregate of 134,988
shares, divided equally among four trusts (the "Children's Trusts"), one for
the benefit of each of Mr. Penske's four children, of which Victoria L.
Penske and Crislyn A. Penske are the trustees. 12,402 shares from each of
the Children's Trusts are being sold in this offering. Also includes 25,000
shares and 5,000 shares held in the Richard H. Penske Charitable Trust and
the Richard and Patricia Penske Foundation, respectively. 25,000 shares from
the Richard H. Penske Charitable Trust, and 5,000 shares from the Richard
and Patricia Penske Foundation, are being sold in this offering. Mr. Penske
disclaims beneficial ownership as to all of such shares.
42
<PAGE> 44
(3) Includes the Annuity Trusts and the Children's Trusts. See note 2 above.
(4) See note 2 above.
(5) Includes 200 shares held by Mr. Clauser as custodian for his children, as to
which shares he disclaims beneficial ownership.
(6) Includes 4,000 shares held by a trust for the benefit of one of Mr. Hoefer's
children of which he is the trustee, 300 shares held by his wife and 11,000
shares held by a charitable foundation of which Mr. Hoefer is a trustee, as
to all of which shares he disclaims beneficial ownership.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 15,000,000 shares
of Common Stock, $.01 par value per share, and 3,000,000 shares of Preferred
Stock, $.01 par value per share.
The following summary description relating to the Company's capital stock
does not purport to be complete and is qualified in its entirety by reference to
the Certificate of Incorporation and By-laws, copies of which have been filed as
exhibits to the Registration Statement of which this Prospectus is a part.
COMMON STOCK
Holders of Common Stock are entitled to cast one vote for each share on all
matters on which stockholders may vote, including the election of directors. The
holders of Common Stock are entitled to participate in cash dividends, pro rata
based on the number of shares held, when, as and if declared by the Board of
Directors out of funds legally available therefor, subject to any dividend
preference which may be attributable to Preferred Stock which may be authorized.
Such holders do not have any preemptive or other rights to subscribe for
additional shares. Subject to the rights of holders of Preferred Stock, if any,
all holders of Common Stock are entitled to share ratably in any assets
available for distribution to stockholders upon the liquidation, dissolution or
winding up of the Company. There are no conversion, redemption or sinking fund
provisions applicable to the Common Stock. All outstanding shares of Common
Stock are fully paid and nonassessable and the shares of Common Stock offered
hereby, when issued and paid for in accordance with the Underwriting Agreement,
will be fully paid and nonassessable. The rights, preferences and privileges of
holders of Common Stock will be subject to the rights of the holders of shares
of Preferred Stock that the Company may issue in the future.
PREFERRED STOCK
The Board of Directors has the authority to issue up to 3,000,000 shares of
Preferred Stock in one or more classes or series and may fix and determine the
relative rights, preferences and limitations of each class or series so
authorized. No shares of Preferred Stock have been issued.
The ability of the Board of Directors to issue Preferred Stock, while
providing flexibility in connection with possible acquisitions and other
corporate purposes, could, among other things, adversely affect the voting power
of the holders of the Common Stock or could have the effect of discouraging or
making more difficult any attempt by a person or group to obtain control of the
Company.
The creation and issuance of any class or series of Preferred Stock, and
the relative rights and preferences of such class or series, if and when
established, will depend upon, among other things, the future capital needs of
the Company, then existing market conditions and other factors that, in the
judgment of the Board of Directors of the Company, might warrant the issuance of
Preferred Stock. As of the date of this Prospectus, there are no plans,
agreements or understandings for the issuance of any shares of Preferred Stock.
DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS
Certain provisions of the Delaware General Corporation Law and of the
Certificate of Incorporation and By-laws, summarized in the following
paragraphs, may be deemed to have an anti-takeover
43
<PAGE> 45
effect and may delay, deter or prevent a tender offer or takeover attempt that a
stockholder might consider in his or her best interest, including those attempts
that might result in a premium over the market price for the shares held by
stockholders.
Delaware Anti-Takeover Law. The Company, a Delaware corporation, is
subject to the provisions of the General Corporation Law of the State of
Delaware, including Section 203, an anti-takeover law. In general, this law
prohibits a public Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which such person became an interested
stockholder unless: (i) prior to such date, the board of directors approves the
business combination; or (ii) upon becoming an interested stockholder, the
stockholder then owns at least 85% of the voting stock, as defined in Section
203; or (iii) subsequent to such date, the business combination is approved by
both the board of directors and the stockholders. "Business combination" is
defined to include mergers, asset sales and other similar transactions with an
"interested stockholder." An "interested stockholder" is defined as a person
who, together with affiliates and associates, owns (or, within the prior three
years, did own) 15% or more of the corporation's voting stock. Although Section
203 permits the Company to elect not to be governed by its provisions, the
Company to date has not made this election.
Classified Board of Directors. The By-laws provide for the Board of
Directors to be divided into three classes of directors serving staggered
three-year terms. As a result, approximately one-third of the Board of Directors
will be elected each year. Moreover, under the Delaware General Corporation Law,
in the case of a corporation having a classified Board of Directors,
stockholders may remove a director only for cause. This provision, when coupled
with the provision of the By-laws authorizing only the Board of Directors to
fill vacant directorships, will preclude a stockholder from removing incumbent
directors without cause and simultaneously gaining control of the Board of
Directors by filling the vacancies created by such removal with its own
nominees.
Special Meetings of Stockholders. The By-laws provide that special
meetings of stockholders of the Company may be called only by the Chief
Executive Officer or the Board of Directors of the Company. This provision will
make it more difficult for stockholders to take action opposed by the Board of
Directors.
Advance Notice Requirements for Stockholder Proposals and Director
Nominations. The By-laws provide that stockholders seeking to bring business
before an annual meeting of stockholders, or to nominate candidates for election
as directors at an annual or a special meeting of stockholders, must provide
timely notice thereof in writing. To be timely, a stockholder's notice must be
delivered to, or mailed and received at, the principal executive offices of the
Company (i) in the case of an annual meeting that is called for a date that is
within 30 days before or after the anniversary date of the immediately preceding
annual meeting of stockholders, not less than 60 days nor more than 90 days
prior to such anniversary date, and (ii) in the case of an annual meeting that
is called for a date that is not within 30 days before or after the anniversary
date of the immediately preceding annual meeting, or in the case of a special
meeting of stockholders called for the purpose of electing directors, not later
than the close of business on the tenth day following the day on which notice of
the date of the meeting was mailed or public disclosure of the date of the
meeting was made, whichever occurs first. The By-laws also specify certain
requirements for a stockholder's notice to be in proper written form. These
provisions may preclude some stockholders from bringing matters before the
stockholders at an annual or special meeting or from making nominations for
directors at an annual or special meeting.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is American Stock
Transfer & Trust Company, New York, New York.
44
<PAGE> 46
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 5,927,094 shares of
Common Stock outstanding (or approximately 6,024,594 shares if the Underwriters'
over-allotment option is exercised in full), assuming no exercise of options
after the date of this Prospectus. Substantially all of these shares will be
freely transferable without restriction under the Securities Act or may
currently be sold in accordance with Rule 144 promulgated under the Securities
Act. In addition, the Company has registered or intends to register on
registration statements on Form S-8 a total of 920,330 shares of Common Stock
reserved for issuance under the 1994 Stock Option Plan, the 1994 Restricted
Stock Plan and the 1995 Employee Stock Purchase Plan, of which an aggregate of
260,020 shares had been issued as of the date of this Prospectus. The remaining
660,310 shares, when and if issued, would be freely tradeable (unless acquired
by an affiliate of the Company, in which case they would be subject to volume
and other limitations under Rule 144).
The Company and each of the Company's executive officers, directors and key
personnel listed under "Management -- Executive Officers, Directors and Key
Employees" have entered into agreements with the Underwriters pursuant to which
they have agreed not to sell, offer to sell, contract to sell or otherwise
dispose of any shares of Common Stock owned or controlled by them (except for
sales described in or contemplated by this Prospectus) for a period of 180 days
after the date of this Prospectus without the prior written consent of
Robertson, Stephens & Company, subject to an exception for the sale of up to an
aggregate of 30,000 shares and certain other limited exceptions. Upon expiration
of the lock-up period, these shares will be eligible for immediate sale,
subject, in the case of affiliates, to volume and other limitations under Rule
144. See "Underwriting."
Generally, shares of Common Stock that have not been registered under the
Securities Act or that are held by affiliates of the Company (whether or not
registered) are deemed "restricted" securities under Rule 144. In general, under
Rule 144 as currently in effect, a person (or persons whose shares are
aggregated) who has beneficially owned "restricted" shares for at least one
year, including a person who may be deemed an affiliate of the Company, is
entitled to sell within any three-month period a number of shares of Common
Stock that does not exceed the greater of one percent of the then outstanding
shares of Common Stock of the Company (approximately 59,271 shares after giving
effect to this offering) or the average weekly trading volume of the Common
Stock as reported through the Nasdaq National Market during the four calendar
weeks preceding such sale. Sales under Rule 144 are also subject to certain
restrictions relating to manner of sale, notice and the availability of current
public information about the Company. In addition, under Rule 144(k) of the
Securities Act, a person who is not an affiliate of the Company at any time
within 90 days preceding a sale, and who has beneficially owned shares for at
least two years, is entitled to sell such shares without regard to the volume
limitations, manner of sale provisions or notice or other requirements of Rule
144.
The effect, if any, that shares eligible for market sale will have on the
market price of Common Stock prevailing from time to time cannot be determined.
Nevertheless, sales of substantial amounts of shares of Common Stock in the
public market could adversely affect the market price of the Common Stock. See
"Risk Factors -- Shares Eligible for Future Sale."
45
<PAGE> 47
UNDERWRITING
The Underwriters named below acting through their representatives,
Robertson, Stephens & Company LLC, Wheat, First Securities, Inc., Furman Selz
LLC and Parker/Hunter Incorporated (the "Representatives"), have severally
agreed with the Company and the Selling Stockholders, subject to the terms and
conditions of the Underwriting Agreement, to purchase from the Company and the
Selling Stockholders the numbers of shares of Common Stock set forth opposite
their names below. The Underwriters are committed to purchase and pay for all of
such shares if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
------------------------------------------------------------------------- ---------
<S> <C>
Robertson, Stephens & Company LLC........................................
Wheat, First Securities, Inc.............................................
Furman Selz LLC..........................................................
Parker/Hunter Incorporated...............................................
---------
Total.......................................................... 1,550,000
=========
</TABLE>
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock to the public at the price set forth
on the cover page of this Prospectus and to certain dealers at such price less a
concession of not more than $ per share, of which $ may be
reallowed to other dealers. After the public offering, the public offering
price, concession and reallowance to dealers may be reduced by the
Representatives. No such reduction shall change the amount of proceeds to be
received by the Company as set forth on the cover page of the Prospectus.
The Company and the Selling Stockholders have granted to the Underwriters
an option, exercisable during the 30-day period after the date of this
Prospectus, to purchase up to 232,500 additional shares of Common Stock at the
same price per share as the Company and the Selling Stockholders will receive
for the 1,550,000 shares that the Underwriters have agreed to purchase. To the
extent that the Underwriters exercise such option, each of the Underwriters will
have a firm commitment to purchase approximately the same percentage of such
additional shares that the number of shares of Common Stock to be purchased by
it shown in the above table represents as a percentage of the 1,550,000 shares
offered hereby. If purchased, such additional shares will be sold by the
Underwriters on the same terms as those on which the 1,550,000 shares are being
sold.
The Underwriting Agreement contains covenants of indemnity among the
Underwriters, the Company and the Selling Stockholders against certain civil
liabilities, including liabilities under the Securities Act.
Each of the Company's executive officers, directors and key personnel
listed under "Management -- Executive Officers, Directors and Key Employees" has
agreed with the Representatives for a period of 180 days from the date of this
Prospectus (the "Lock-Up Period") not to offer to sell, contract to sell, or
otherwise sell, dispose of, loan, pledge or grant any rights with respect to any
shares of Common Stock, any options or warrants to purchase any shares of Common
Stock, or any securities convertible into or exchangeable for shares of Common
Stock, now owned or hereafter acquired directly by such holders or with respect
to which such holders have or hereinafter acquire the power of disposition
without the prior written consent of Robertson, Stephens & Company LLC, which
may, in its sole discretion and at any time or from time to time, without
notice, release all or any portion of the shares subject to the lock-up
agreements, subject to an exception for the sale of up to an aggregate of 30,000
shares and certain other limited exceptions. In addition, the Company has agreed
that during the Lock-Up Period, it will not, without the prior written consent
of Robertson, Stephens & Company LLC, issue, sell, contract to sell or otherwise
dispose of any shares of Common Stock, any options or warrants to purchase any
shares of Common Stock or any securities convertible into, exercisable for or
exchangeable for shares of Common Stock other than the issuance of Common Stock
upon the exercise of outstanding options and under the 1994 Restricted Stock
Plan, the 1995 Employee Stock Purchase Plan and the Company's issuance of
options under the 1994 Stock Option Plan.
46
<PAGE> 48
The offering price of the Common Stock will be determined by negotiations
among the Company and the Representatives, based largely upon the market price
for the Common Stock as reported on the Nasdaq National Market.
In connection with this offering, certain Underwriters and selling group
members (if any) who are qualified market makers on the Nasdaq Stock Market may
engage in passive market making transactions in the Common Stock on the Nasdaq
Stock Market in accordance with Rule 103 of Regulation M under the Exchange Act
during the business day prior to the pricing of the offering before the
commencement of offers or sales of the Common Stock. Passive market makers must
comply with applicable volume and price limitations and must be identified as
such. In general, a passive market maker must display its bid at a price not in
excess of the highest independent bid for such security; if all independent bids
are lowered below the passive market maker's bid, however, such bid must then be
lowered when certain purchase limits are exceeded.
Certain persons participating in this offering may overallot or effect
transactions which stabilize, maintain or otherwise affect the market price of
the Common Stock at levels above those which might otherwise prevail in the open
market, including by entering stabilizing bids or effecting syndicate covering
transactions. A stabilizing bid means the placing of any bid or effecting of any
purchase, for the purpose of pegging, fixing or maintaining the price of the
Common Stock. A syndicate covering transaction means the placing of any bid on
behalf of the underwriting syndicate or the effecting of any purchase to reduce
a short position created in connection with the offering. Such transactions may
be effected on the Nasdaq Stock Market, in the over-the-counter market, or
otherwise. Such stabilizing, if commenced, may be discontinued at any time.
LEGAL MATTERS
Wolf, Block, Schorr and Solis-Cohen, Philadelphia, Pennsylvania, counsel to
the Company, will render an opinion that the Common Stock offered by the Company
hereby, when issued and paid for pursuant to the terms of the Underwriting
Agreement, will be, and that the Common Stock offered by the Selling
Stockholders hereby, is, legally issued, fully paid and non-assessable. Certain
legal matters in connection with the offering will be passed upon for the
Underwriters by Sidley & Austin, Chicago, Illinois.
EXPERTS
The audited Consolidated Financial Statements for the Company as of March
31, 1996 and 1997, and for each of the years in the three-year period ended
March 31, 1997, have been included herein in reliance upon the report of KPMG
Peat Marwick LLP, independent certified public accountants, appearing elsewhere
herein and upon the authority of such firm as experts in accounting and
auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 under the Securities Act with
respect to the Common Stock offered hereby. This Prospectus does not contain all
of the information set forth in the Registration Statement, certain portions of
which have been omitted as permitted by the rules and regulations of the
Commission. For further information with respect to the Company and the Common
Stock, reference is made to the Registration Statement, including the exhibits
and schedules thereto. Statements contained in this Prospectus as to the
contents of any contract, agreement or any other document referred to herein are
not necessarily complete; with respect to each such contract, agreement or
document filed as an exhibit to the Registration Statement, reference is made to
such exhibit for a more complete description of the matters involved, and each
such statement shall be deemed qualified in its entirety by such reference. The
Registration Statement, including the exhibits and schedules thereto, may be
inspected and copied at prescribed rates at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the Commission's regional offices located
at Seven World Trade Center, 13th Floor, New York, New York 10048, and Citicorp
Center, 500 West Madison Street,
47
<PAGE> 49
Chicago, Illinois 60661. The Registration Statement, including the exhibits and
schedules thereto, is also available on the Commission's website at
http://www.sec.gov.
The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith files reports, proxy statements and other
information with the Commission. Such reports, proxy material and other
information concerning the Company can be inspected and copied at prescribed
rates at the public reference facilities maintained by the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
its regional offices at Citicorp Center, 500 West Madison Street, Chicago,
Illinois 60661 and Seven World Trade Center, Suite 1300, New York, New York
10048. Copies of reports, proxy and information statements and other information
are available on the Commission's website at http://www.sec.gov.
48
<PAGE> 50
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditor's Report.......................................................... F-2
Consolidated Balance Sheets at March 31, 1996 and 1997................................ F-3
Consolidated Statements of Income for the Years ended March 31, 1995, 1996 and 1997... F-4
Consolidated Statements of Changes in Stockholders' Equity for the Years ended March
31, 1995, 1996 and 1997............................................................. F-5
Consolidated Statements of Cash Flows for the Years ended March 31, 1995, 1996 and
1997................................................................................ F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE> 51
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Piercing Pagoda, Inc.:
We have audited the accompanying consolidated balance sheets of Piercing
Pagoda, Inc. and subsidiary as of March 31, 1996 and 1997 and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the years in the three-year period ended March 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Piercing
Pagoda, Inc. and subsidiary as of March 31, 1996 and 1997 and the results of
their operations and their cash flows for each of the years in the three-year
period ended March 31, 1997, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Allentown, Pennsylvania
May 5, 1997
F-2
<PAGE> 52
PIERCING PAGODA, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31,
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash..................................................................... $ 1,864 $ 4,119
Accounts receivable...................................................... 794 2,233
Inventory................................................................ 25,390 43,109
Deposits for inventory purchases......................................... 361 850
Prepaid expenses and other current assets................................ 468 757
Prepaid income taxes..................................................... 883 1,494
Deferred tax assets...................................................... 693 1,530
------- -------
Total current assets............................................. 30,453 54,092
------- -------
Property, fixtures and equipment, net...................................... 15,806 22,572
Other assets............................................................... 1,647 3,077
------- -------
Total assets..................................................... $47,906 $79,741
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable........................................................... $ 1,811 $ 3,668
Current installments of long-term debt and revolving line of credit........ 5,910 234
Accrued expenses and other current liabilities............................. 6,784 9,541
------- -------
Total current liabilities........................................ 14,505 13,443
------- -------
Long-term debt, less current installments.................................. 2,350 26,690
Deferred tax liabilities................................................... 1,259 1,550
Other liabilities.......................................................... 213 536
------- -------
Total liabilities................................................ 18,327 42,219
------- -------
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 5,240,293 and 5,273,994 shares at March 31, 1996 and 1997,
respectively.......................................................... 53 53
Additional paid-in capital............................................... 22,183 22,588
Retained earnings........................................................ 7,343 14,881
------- -------
Total stockholders' equity....................................... 29,579 37,522
------- -------
$47,906 $79,741
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 53
PIERCING PAGODA, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED MARCH 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1995 1996 1997
------- -------- --------
<S> <C> <C> <C>
Net sales....................................................... $86,076 $121,581 $166,885
Cost of goods sold and occupancy expenses (excluding
depreciation on kiosks)....................................... 48,069 67,440 92,308
------- -------- --------
Gross profit.................................................... 38,007 54,141 74,577
Selling, general and administrative expenses (including
depreciation on kiosks)....................................... 30,007 43,887 60,845
------- -------- --------
Income from operations.......................................... 8,000 10,254 13,732
Interest and other income....................................... 307 282 386
Interest expense................................................ 1,427 1,306 2,208
------- -------- --------
Earnings before income taxes.................................... 6,880 9,230 11,910
Income taxes.................................................... 3,352 3,553 4,372
------- -------- --------
Net income............................................ $ 3,528 $ 5,677 $ 7,538
======= ======== ========
Earnings per share.............................................. $ 1.07 $ 1.40
Weighted average common and equivalent shares outstanding....... 5,325 5,389
PRO FORMA DATA (UNAUDITED):
Earnings before income taxes, as reported..................... $ 6,880
Pro forma income taxes........................................ 2,724
-------
Pro forma net income.......................................... $ 4,156
=======
Pro forma net income per share................................ $ 0.91
Pro forma weighted average shares outstanding................. 4,558
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 54
PIERCING PAGODA, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 31,
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED
------------------ PAID-IN EARNINGS
SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
--------- ------ ---------- -------- -------
<S> <C> <C> <C> <C> <C>
Balance -- March 31, 1994.................... 3,420,516 $ 34 $ 4,118 ($1,817) $ 2,335
Issuance of restricted stock................. 5,000 -- 39 -- 39
Cash dividends declared...................... -- -- -- (45) (45)
Initial public offering...................... 1,810,271 19 17,984 -- 18,003
Share transactions under stock option plan... 300 -- 2 -- 2
Net income................................... -- -- -- 3,528 3,528
--------- ------ ---------- -------- -------
Balance -- March 31, 1995.................... 5,236,087 53 22,143 1,666 23,862
Share transactions under employee stock
plans...................................... 4,206 -- 40 -- 40
Net income................................... -- -- -- 5,677 5,677
--------- ------ ---------- -------- -------
Balance -- March 31, 1996.................... 5,240,293 53 22,183 7,343 29,579
Share transactions under employee stock
plans, including tax benefit............... 33,701 -- 405 -- 405
Net income................................... -- -- -- 7,538 7,538
--------- ------ ---------- -------- -------
Balance -- March 31, 1997.................... 5,273,994 $ 53 $ 22,588 $14,881 $37,522
======== ======= ========= ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 55
PIERCING PAGODA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31,
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1996 1997
------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.............................................................. $ 3,528 $ 5,677 $ 7,538
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization....................................... 1,770 2,639 3,636
Loss on disposal of property, fixtures and equipment................ 23 49 93
Addition to deferred tax liabilities upon conversion to "C"
corporation........................................................ 441 -- --
Common stock issued for interest expense on note to shareholders.... 312 -- --
Other changes in other assets....................................... 76 (61) (97)
Deferred income taxes............................................... (88) 168 335
Change in operating assets and liabilities, net of effects of
acquisitions:
Accounts receivable.............................................. (645) 329 (1,428)
Inventory........................................................ (2,715) (10,262) (12,951)
Deposits for inventory purchases................................. 638 (11) (489)
Prepaid expenses and other current assets........................ (90) (23) (289)
Prepaid income taxes............................................. -- (883) (514)
Accounts payable................................................. (922) 558 1,857
Accrued expenses and other current liabilities................... 321 2,488 2,697
Tax indemnification payable...................................... 1,530 (1,530) --
Other liabilities................................................ 80 12 72
------- -------- --------
Net cash provided by (used in) operating activities.............. 4,259 (850) 460
------- -------- --------
Cash flows from investing activities:
Additions to property, fixtures and equipment........................... (3,469) (7,175) (9,724)
Payments for purchase of businesses..................................... (652) (1,150) (8,010)
Proceeds from disposal of property, fixtures and equipment.............. 59 -- 22
Return of (addition to) deposit with Internal Revenue Service........... (434) 797 --
Noncurrent deposits, net................................................ 17 (251) 319
Collection of notes receivable from stockholders........................ 472 -- --
Collection of notes receivable from licensee............................ 78 75 255
------- -------- --------
Net cash used in investing activities............................ (3,929) (7,704) (17,138)
------- -------- --------
Cash flows from financing activities:
Repayments of long-term debt............................................ (6,104) -- (216)
Revolving line of credit, net........................................... (3,217) 5,720 18,480
Proceeds from issuance of long-term debt................................ -- 2,540 400
Debt issuance fees paid................................................. -- (157) (39)
Proceeds from issuance of common stock, net............................. 15,723 -- --
Payment of stockholders' note payable................................... (5,000) -- --
Net proceeds from the issuance of stock under employee share plans...... -- 40 308
Cash dividends paid..................................................... (1,755) (45) --
------- -------- --------
Net cash provided by (used in) financing activities.............. (353) 8,098 18,933
------- -------- --------
Net increase (decrease) in cash.................................. (23) (456) 2,255
Cash at beginning of period............................................... 2,343 2,320 1,864
------- -------- --------
Cash at end of period..................................................... $ 2,320 $ 1,864 $ 4,119
======= ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest......................................................... $ 1,427 $ 1,220 $ 2,100
======= ======== ========
Income taxes, net................................................ $ 1,404 $ 5,818 $ 4,551
======= ======== ========
</TABLE>
Supplemental disclosure of non-cash financing and investing activities:
During the year ended March 31, 1995, the Company exchanged of 210,271
shares of common stock in partial satisfaction of obligations under a $7,000,000
note payable to stockholders.
During the year ended March 31, 1997, the Company entered into a
noncompetition agreement for $300,000.
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 56
PIERCING PAGODA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1995, 1996 AND 1997
(1) STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary. Significant intercompany accounts and
transactions have been eliminated in consolidation.
Operations
The Company is a national retailer of gold jewelry primarily through kiosk
stores in enclosed shopping malls. The Company operates stores primarily under
the names Piercing Pagoda and Plumb Gold. At March 31, 1997, the Company
operated 682 stores, including 24 in-line stores. The Company's home office
provides centralized administrative and warehousing services and assembles some
of the products sold at its stores.
In addition to its own retail units, the Company has licensed operations at
16 stores and one retail cart location in Florida. The Company provides the
licensee with merchandise and promotional and administrative services. Income
from licensee operations is based on a percentage of the licensee's sales and
earnings from the sale of merchandise to the licensee. See Note 13.
Sales
Sales consist primarily of net sales to the Company's retail customers at
its kiosk and in-line stores. Also included in sales are wholesale sales to the
Company's licensee. At the time of each retail sale, the Company accrues the
estimated costs of its "buy-five-get-one-free" jewelry club promotional program.
The Company also accrues the estimated costs associated with its "lifetime
guarantee" program for subsequent customer returns due to manufacturer's defects
in the jewelry. All other returns have an immaterial effect on the consolidated
financial statements.
Accounts Receivable
The Company's accounts receivable consist principally of receivables from
credit card companies, merchandise credits receivable from vendors, and certain
receivables from its licensee.
Inventory and Cost of Goods Sold
Inventories are stated at the lower of cost or market. Cost is determined
by the first-in, first-out (FIFO) method. The Company purchases gold merchandise
and sells the gold content of a portion of such merchandise to financial
institutions ("consignors") that simultaneously consign the gold back to the
Company. In accordance with the terms of the agreements, the Company has the
option of repaying the consignors in an equivalent number of ounces of gold or
cash based upon the then quoted market price of gold.
The Company has excluded the consigned gold content of merchandise in its
possession from its inventory because it does not yet have title to the gold
which it holds under its consignment arrangements. This gold has been
manufactured into merchandise for sale and the costs associated with this
manufacturing process are included in inventory.
Cost of goods sold and occupancy expenses include the cost of merchandise,
rent and occupancy expenses and the cost of preparing merchandise for sale. A
major component of the cost of merchandise includes the previously consigned
gold after it has been repurchased by the Company from the consignors.
F-7
<PAGE> 57
PIERCING PAGODA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In fiscal 1995, one vendor accounted for approximately 14% of total
merchandise purchased by the Company. No vendors supplied more than 10% of
purchases in fiscal 1996. In fiscal 1997, two vendors accounted for
approximately 11% and 10%, respectively, of total merchandise purchased by the
Company.
Property, Fixtures and Equipment
Property, fixtures and equipment are stated at cost. Depreciation is
computed over the estimated useful lives of the related assets using the
straight-line method.
<TABLE>
<S> <C>
Depreciable lives are as follows:
Furniture and fixtures.................................................. 3-10 years
Building and improvements............................................... 10-39 years
Kiosks.................................................................. 8-10 years
Computer equipment, software and other equipment........................ 5-7 years
</TABLE>
Substantially all depreciation expense, including depreciation on kiosks,
is included in selling, general and administrative expense rather than occupancy
expense, since the Company believes that the primary function of its kiosks is
to display merchandise for sale. Depreciation expense for kiosks was $994,000,
$1,338,000 and $1,890,000 in fiscal 1995, fiscal 1996 and fiscal 1997,
respectively.
Maintenance and repairs are expensed as incurred. Expenditures for
renovations are capitalized. Upon the sale, replacement or retirement of
property, fixtures and equipment, the cost and accumulated depreciation thereon
are removed from the accounts. Gain or loss on sale, retirement or other
disposition of property, fixtures and equipment is reflected in earnings.
Goodwill
Costs in excess of fair value of net assets acquired are being amortized on
a straight-line basis over periods of up to fifteen years. The Company assesses
the recoverability of goodwill by determining whether the remaining balance can
be recovered through projected future cash flows.
Leasing Expenses
The Company recognizes lease expense on a straight-line basis over the term
of the lease when lease agreements provide for increasing fixed rentals. The
difference between lease expense recognized and actual payments made is included
in other liabilities on the consolidated balance sheets.
Preopening Costs and Advertising Expense
Preopening and start-up costs for new stores are charged to operations as
incurred. Costs of advertising and sales promotion programs are charged to
operations in the year incurred.
Income Taxes
The Company records income taxes according to the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes,
which requires the use of the liability method of accounting for deferred income
taxes. The provision for income taxes includes federal, state, and local income
taxes currently payable and those deferred because of temporary differences
between the financial statement and tax basis of assets and liabilities.
Deferred income taxes are recorded at the enacted rates expected to apply to
taxable income in the periods in which the
F-8
<PAGE> 58
PIERCING PAGODA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
deferred tax liability or asset is expected to be settled or realized. The
effect of a change in tax rate is recognized as income or expense in the period
that includes the enactment date.
Prior to the completion of the Company's initial public offering in October
1994, the Company was taxed as an "S" corporation under the provisions of the
Internal Revenue Code. As such, the Company's taxable federal income was
included in the individual income tax returns of its stockholders. The Company
was also taxed as an "S" corporation in some states while remaining a taxable
corporation in others. Immediately prior to the consummation of the Company's
initial public offering, the Company's "S" corporation status terminated and the
Company became a "C" corporation subject to income taxes in all jurisdictions.
Pro forma income tax expense reflects the income tax expense the Company would
have recognized had it been taxed as a "C" corporation for all of fiscal year
1995.
Stock Option Plan
The Company accounts for its stock option plan in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations. As such, compensation
expense would have been recorded on the date of grant only if the market price
of the underlying stock exceeded its exercise price. On April 1, 1996, the
Company adopted SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS No.
123"). This statement encourages the fair value based method of accounting for
stock options and similar equity instruments granted to employees. This method
requires that the fair value of equity instruments granted to employees be
recorded as compensation expense. However, the statement allows companies to
continue to apply APB Opinion No. 25, with appropriate pro forma disclosure of
the fair value based method. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions
of SFAS No. 123.
Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these consolidated financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
Net Income Per Share
Net income per share has been computed by dividing net income by the
weighted average number of common shares and common share equivalents
outstanding using the treasury stock method.
Pro Forma Net Income Per Share (Unaudited)
Pro forma net income per share has been computed by dividing pro forma net
income by the weighted average number of common shares and common share
equivalents outstanding during the year ended March 31, 1995, as adjusted to
give effect to the sale of 218,713 shares of restricted stock in March 1994, the
sale of 5,000 shares of restricted stock in June of 1994, the issuance of
454,545 shares at the initial public offering price to repay $5,000,000 of a
$7,000,000 note to the Company's primary stockholder and trusts for the benefit
of his children, and the issuance in June of 1994 of options for 221,000 shares
of common stock, using the treasury stock method at the average market price
(after the initial public offering) and the initial public offering price per
share (prior to the initial public offering), respectively.
F-9
<PAGE> 59
PIERCING PAGODA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Recent Accounting Pronouncement
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, Earnings per Share ("SFAS No. 128"). This statement establishes standards
for computing and presenting earnings per share ("EPS") and simplifies the
standards for computing EPS previously found in APB Opinion No. 15, Earnings per
Share. It replaces the presentation of primary earnings per share with the
presentation of basic EPS. It also requires dual presentation of basic and
diluted EPS on the face of the income statement for all entities with complex
capital structures. The Company is required to adopt SFAS No. 128 during the
quarter ended December 31, 1997. The Company has not completed its evaluation of
the potential impact of the new standard on EPS. However, based on equity
instruments currently outstanding under existing stock compensations plans, the
new standard is not expected to have a material impact on the Company's EPS.
(2) INITIAL PUBLIC OFFERING
On October 20, 1994, the Company completed an initial public offering of
1,600,000 shares of its common stock. The transaction resulted in net proceeds
(after offering expenses) to the Company of approximately $15.7 million which
was used to repay certain indebtedness of the Company including a portion of a
note to certain stockholders representing undistributed "S" corporation
earnings.
(3) GOLD CONSIGNMENT AGREEMENTS
In connection with the acquisition of certain inventory, the Company
maintains gold consignment agreements. In accordance with these consignment
agreements, title to the gold remains with the gold consignors until purchased
by the Company. At March 31, 1995, 1996 and 1997, the Company had consigned
35,000, 54,500 and 88,300 ounces of gold, respectively, with values of
$13,720,000, $21,601,000 and $30,749,000, respectively. The purchase price per
ounce is based on the Second London Gold Fixing. This gold was generally in the
form of merchandise for sale held by the Company at its offices or in its
stores. Consigned gold is not included in inventory, and there is no related
liability recognized.
Included in interest expense for the years ended March 31, 1995, 1996 and
1997 are consignment fees of $261,000, $394,000 and $620,000, respectively,
based on approximately 2.28%, 2.31% and 2.45%, respectively, of the value of
consigned gold. The fee rates are adjusted periodically by the consignors upon
giving seven to thirty days advance notice to the Company. The gold financing
arrangements could be terminated by either the Company or the lender on 30 or 45
days notice, depending on the consignor.
(4) PROPERTY, FIXTURES AND EQUIPMENT
A summary of major classes of property, fixtures and equipment follows (in
thousands):
<TABLE>
<CAPTION>
MARCH 31,
-------------------
1996 1997
------- -------
<S> <C> <C>
Land............................................................. $ 688 $ 688
Furniture and fixtures........................................... 2,077 3,054
Kiosks........................................................... 13,908 19,832
Building and improvements........................................ 3,822 4,037
Computer equipment, software and other equipment................. 5,130 7,396
------- -------
25,625 35,007
Less accumulated depreciation and amortization................... 9,819 12,435
------- -------
$15,806 $22,572
======= =======
</TABLE>
F-10
<PAGE> 60
PIERCING PAGODA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(5) OTHER ASSETS
Other assets are summarized as follows (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
-----------------
1996 1997
------ ------
<S> <C> <C>
Notes receivable -- licensee....................................... $ 283 $ 28
Noncurrent deposits, principally for leases, property, fixtures and
equipment........................................................ 435 116
Goodwill (net of accumulated amortization of $130 and $237 at March
31, 1996 and 1997, respectively)................................. 314 1,907
Deferred expenses, principally long-term maintenance agreements.... 333 394
Cash surrender value of officers life insurance.................... 282 342
Non-compete agreement (net of accumulated amortization of $10)..... -- 290
------ ------
$1,647 $3,077
====== ======
</TABLE>
The Company's notes receivable from its licensee in Florida are summarized
as follows (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
-------------
1996 1997
---- ----
<S> <C> <C>
Note receivable, repaid in fiscal 1997................................ $263 $ --
Non-interest bearing royalty note receivable due in yearly
installments of $32................................................. 96 60
---- ----
359 60
Less current installments included in other current assets............ 76 32
---- ----
$283 $ 28
==== ====
</TABLE>
Included in accounts receivable at March 31, 1996 and 1997 are $337,000 and
$199,000, respectively, from the sale of merchandise and other supplies to the
licensee, and additionally, at March 31, 1997, $137,000 from the sale of one of
the Company's Florida locations to the licensee.
In January 1997, the Company purchased substantially all of the operations
of the companies operating retail kiosks under the names Gemstone Jewelry,
Gold-n-Gifts and Facets of Nature (collectively, "Gemstone"), which sold gold
and silver jewelry, pewter and other gift items, for approximately $8.0 million.
The acquisition was accounted for as a purchase and the assets acquired and
operations of these kiosks are included in the Company's consolidated financial
statements from the date of acquisition. The excess of the net assets acquired
over their fair value of approximately $1.7 million has been recorded as
goodwill and is being amortized over 15 years. In connection with the
acquisition, the Company entered into a noncompetition agreement with the
principal stockholder of Gemstone which provides for annual payments of $60,000
to be made over a five year period. The effect of this transaction was not
material to the results of operations of the Company.
During the year ended March 31, 1995, the Company acquired 13 kiosks and
related operating locations and assumed related leases in three separate
transactions with unrelated third parties for a total of $652,000. The excess of
the net assets acquired over their fair market values has been recorded as
goodwill.
F-11
<PAGE> 61
PIERCING PAGODA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(6) ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities are summarized as follow (in
thousands):
<TABLE>
<CAPTION>
MARCH 31,
---------------
1996 1997
------ ------
<S> <C> <C>
Accrued payroll, vacation and related taxes.......................... $3,011 $4,160
Sales tax payable.................................................... 543 704
Accrued rents payable................................................ 661 1,091
Liability under jewelry club program................................. 376 747
Liability under lifetime guarantee program........................... 671 1,211
Other accrued expenses............................................... 1,522 1,628
------ ------
$6,784 $9,541
====== ======
</TABLE>
(7) LONG-TERM DEBT AND REVOLVING LINE OF CREDIT
A summary of long-term debt and revolving line of credit follows (in
thousands):
<TABLE>
<CAPTION>
MARCH 31,
----------------
1996 1997
------ -------
<S> <C> <C>
Revolving line of credit............................................ $5,720 $24,200
Industrial development authority financing.......................... 2,540 2,724
------ -------
Total long-term debt................................................ 8,260 26,924
Less current installments........................................... 5,910 234
------ -------
$2,350 $26,690
====== =======
</TABLE>
During fiscal 1997, the Company renegotiated its existing unsecured
revolving line of credit with its primary lender acting as agent for a syndicate
of banks. The new facility, which expires July 31, 2000, provides for maximum
borrowings of $75 million through a combination of cash advances (which may not
exceed $45 million) or letters of credit (which may not exceed $55 million) to
support the Company's gold consignment financing program. Amounts borrowed under
the facility generally accrue interest at the higher of the rates designated by
the Company's primary lender at its prime rate minus 100 basis points (7.5% at
March 31, 1997) and a rate based on the rates charged on overnight federal funds
transactions with Federal Reserve System members plus 50 basis points (5.9% at
March 31, 1997). However, the Company may elect to have all or any portion of
the outstanding balance under the facility accrue interest at a rate based on
one, two, three or six month LIBOR plus 110 basis points (6.79% at March 31,
1997 for a one-month maturity), subject to certain restrictions. Outstanding
letters of credit incur a fee charged at an annual rate of 0.75%. At March 31,
1997, the Company had $19.0 million available for cash borrowings under this
revolving credit facility. Letters of credit in the amounts of $21,988,000 and
$31,762,000 were issued at March 31, 1996 and 1997, respectively.
The loan agreement contains various covenants which, among other things,
limit certain corporate acts of the Company such as mergers and acquisitions;
requires the Company to maintain minimum ratios of indebtedness to equity,
current assets to current liabilities and cash flow (as defined) to debt
service; places limitations on the Company's ability to incur additional debt or
grant security interests in its assets and restricts the redemption, purchase or
retirement of its capital stock. The Company was in compliance with these
covenants as of March 31, 1997.
F-12
<PAGE> 62
PIERCING PAGODA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Borrowings under the revolving line of credit are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
MARCH 31,
------------------------------
1995 1996 1997
------ ------- -------
<S> <C> <C> <C>
Borrowings at period end............................... $ -- $ 5,720 $24,200
Interest rate on borrowings at period end.............. 9.00% 7.50% 7.50%
Maximum amount of borrowings outstanding at any month
end.................................................. $9,143 $20,360 $28,789
Average aggregate borrowings during the period......... $4,367 $ 8,051 $14,823
Weighted average interest rate during the period....... 8.35% 7.99% 7.50%
</TABLE>
In October 1995, the Company obtained a $2,540,000, ten-year term loan
through an industrial development authority. The loan is collateralized by a
letter of credit totaling $2,637,000 which is supported by a lien on the
Company's corporate headquarters and distribution center which has a net
carrying value of approximately $3.1 million at March 31, 1997. The terms of the
loan require semiannual interest payments at varying interest rates averaging
6.8% over the life of the loan. Principal payments, in varying amounts, are
required annually.
In May 1996, the Company obtained an additional $400,000 loan in connection
with the expansion of the Company's corporate headquarters and distribution
facility in the prior fiscal year. This loan, through an industrial development
authority, requires monthly payments of principal and interest of approximately
$4,000 through May 2006 at an effective annual interest rate of 4.59%.
Maturities of the term loans are as follows at March 31, 1997 (in
thousands):
<TABLE>
<CAPTION>
AMOUNT
------
<S> <C>
1998....................................................................... $ 234
1999....................................................................... 250
2000....................................................................... 262
2001....................................................................... 278
2002....................................................................... 295
Subsequent to 2002......................................................... 1,405
------
Total payments................................................... $2,724
=======
</TABLE>
(8) LEASES
The Company leases space primarily in shopping malls under operating leases
expiring in various years through fiscal 2005. In the normal course of business,
operating leases are generally renewed or replaced by other leases; thus, it is
anticipated that future annual lease expense will not be less than the amount
shown below for fiscal 1997. Generally, the leases also contain provisions for
contingent rental payments of approximately 10% of gross sales in excess of
specified amounts.
F-13
<PAGE> 63
PIERCING PAGODA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Minimum future rental payments as of March 31, 1997 under non-cancelable
operating leases having original terms in excess of one year are as follows (in
thousands):
<TABLE>
<CAPTION>
AMOUNT
-------
<S> <C>
1998....................................................................... $17,343
1999....................................................................... 13,442
2000....................................................................... 10,408
2001....................................................................... 6,056
2002....................................................................... 2,138
Subsequent to 2002......................................................... 951
-------
Total rental payments............................................ $50,338
=======
</TABLE>
A summary of minimum rent and contingent rent expense under operating
leases is as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
--------------------------
1995 1996 1997
------ ------- -------
<S> <C> <C> <C>
Minimum rentals............................................ $9,201 $12,643 $17,292
Contingent rentals......................................... 763 1,191 1,498
------ ------- -------
Total rental expense............................. $9,964 $13,834 $18,790
====== ======= =======
</TABLE>
(9) EMPLOYEE BENEFIT PLANS
The Company has a defined contribution plan for Company employees who are
at least 21 years of age and have worked at least 1,000 hours in the past year.
The plan consists of a profit sharing fund and a 401(k) fund. Annual
contributions to the profit sharing fund are determined at the discretion of
management. Total contributions to this fund were $120,000, $220,000 and
$300,000 in fiscal 1995, fiscal 1996 and fiscal 1997, respectively.
The Company provides a matching contribution provision to the Company's
401(k) fund. The matching rate for Company contributions is $.50 per dollar
contributed by the employee up to 4% of the employee's income. The Company's
matching contributions totaled $42,000 in fiscal 1995, $107,000 in fiscal 1996,
and $181,000 in fiscal 1997. These matching contributions are 100% vested at the
time they are made.
See Note 12 for a description of the Company's employee stock purchase
plan.
(10) INCOME TAXES
For tax return purposes, taxable income for the year ended March 31, 1995
has been allocated to the periods the Company was either an "S" corporation or a
"C" corporation under the provisions of the Internal Revenue Code.
For financial statement purposes, income tax expense for the year ended
March 31, 1995 includes the state tax expense for certain states in which the
Company did not elect "S" corporation status prior to the initial public
offering, a one-time deferred tax charge for conversion from "S" corporation to
"C" corporation status for federal and certain state purposes (see below), and
the current and deferred taxes applicable to the Company's income for financial
reporting purposes for the period after the initial public offering. Due to the
allocation method utilized for tax return purposes, tax expense for the post "S"
corporation period includes taxes payable to taxing authorities and payments to
F-14
<PAGE> 64
PIERCING PAGODA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
certain of the Company's stockholders pursuant to a tax indemnification
agreement between the Company and such stockholders. See Note 13.
Income taxes in the consolidated statements of income consists of the
following components (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
------------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Current tax expense:
Payable to taxing authorities:
Federal................................................. $1,065 $2,877 $3,703
State................................................... 404 508 334
Payable under tax indemnification agreement................ 1,530 -- --
------ ------ ------
2,999 3,385 4,037
------ ------ ------
Deferred tax expense:
Conversion from "S" to "C" corporation..................... 441 -- --
Other:
Federal................................................. (55) 133 251
State................................................... (33) 35 84
------ ------ ------
353 168 335
------ ------ ------
$3,352 $3,553 $4,372
====== ====== ======
</TABLE>
As a result of the conversion from an "S" corporation to a "C" corporation,
the provision for income taxes for the year ended March 31, 1995 includes a
one-time charge totaling $441,000 for the addition to deferred tax liabilities
reflecting certain differences between book and tax accounting for depreciation,
inventory and certain accrued expenses.
The tax effect of temporary differences that give rise to deferred tax
assets and deferred tax liabilities are presented below (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
-----------------
1996 1997
------- -------
<S> <C> <C>
Deferred tax liabilities:
Excess of tax over book depreciation............................. $(1,378) $(1,754)
Inventory........................................................ (158) --
------- -------
Total gross deferred tax liabilities..................... (1,536) (1,754)
------- -------
Deferred tax assets:
Inventory........................................................ -- 129
Accrual for lifetime guarantee costs............................. 265 484
Accrued vacation expense......................................... 238 381
Accrual for jewelry club costs................................... 149 298
Other............................................................ 318 442
------- -------
Total gross deferred tax assets.......................... 970 1,734
Less valuation allowance........................................... -- --
------- -------
Net deferred tax assets............................................ 970 1,734
------- -------
Net deferred tax liability......................................... $ (566) $ (20)
======= =======
</TABLE>
Based upon the Company's current and historical taxable history and the
anticipated level of future taxable income, management of the Company believes
the existing deductible differences will,
F-15
<PAGE> 65
PIERCING PAGODA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
more likely than not, reverse in future periods in which the Company generates
net taxable income. Accordingly, the Company does not believe a valuation
allowance is necessary at March 31, 1997.
The following unaudited pro forma information reflects the income tax
expense that the Company would have incurred if it had been subject to federal
and state income taxes for the year ended March 31, 1995 (in thousands):
<TABLE>
<S> <C>
Current
Federal................................................................... $2,337
State..................................................................... 625
Deferred.................................................................... (238)
------
$2,724
======
</TABLE>
Income tax expense in 1997 and 1996 and pro forma income tax expense in
1995 differs from the amounts computed by applying the federal statutory rate of
34% to income before taxes as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
------------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Tax expense at statutory rates............................... $2,339 $3,138 $4,049
State income taxes, net of federal benefit................... 380 358 276
Other........................................................ 5 57 47
------ ------ ------
$2,724 $3,553 $4,372
====== ====== ======
</TABLE>
(11) TRANSACTIONS WITH RELATED PARTIES
The Company performs certain administrative functions for entities owned by
the Company's Chief Executive Officer and its President. The Company charged to
the entities $27,000, $14,000 and $10,000 in fiscal 1995, fiscal 1996, and
fiscal 1997, respectively, representing certain direct expenses and the
estimated fair value of providing administrative services, primarily allocations
of salary and overhead.
On March 30, 1994, the Company declared a dividend to its then current
stockholders in the form of a $7,000,000 note which bore interest at 8% per
annum. The note was payable in annual installments of $700,000 beginning March
1, 1995. Pursuant to an agreement between the Company and the stockholders, the
Company used a portion of the proceeds from the initial public offering to fund
$5,000,000 of this distribution. The remainder, plus accrued interest, was
exchanged for shares of common stock at the initial public offering price.
On March 31, 1994, the Company sold certain directors, officers and
employees 218,713 shares of its common stock for $862,000. The difference of
$390,000 between the cash price and the fair market value of the shares at the
date issued, as determined by an independent appraisal, was recognized as
restricted stock compensation bonus expense for the year ended March 31, 1994. A
receivable of $472,000 for the cash was subsequently collected in full by the
Company in May 1994.
(12) STOCKHOLDERS' EQUITY
The Company has a stock option plan which provides for the grant of common
stock options to eligible employees and others. The aggregate maximum number of
shares of common stock available for awards under the plan is 450,000. Stock
options granted may be the fair market value of the stock or at a price
determined by a committee of the Board of Directors. The options vest over a
four year period and are exercisable over a period determined by the committee,
but not longer than ten years.
F-16
<PAGE> 66
PIERCING PAGODA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company applies APB Opinion No. 25 in accounting for its plan and,
accordingly, no compensation cost has been recognized for its stock options in
the consolidated financial statements. Had the Company determined compensation
cost based on the fair market value at the grant date for its stock options
under SFAS No. 123, the Company's net income would have been reduced to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1997
------ ------
<S> <C> <C> <C>
Net income.............................................. As reported $5,677 $7,538
Pro forma $5,614 $7,089
Earnings per share...................................... As reported $ 1.07 $ 1.40
Pro forma $ 1.05 $ 1.32
</TABLE>
The per share weighted average fair value of stock options granted during
fiscal 1996 and fiscal 1997 was $10.50 and $13.84, respectively, on the date of
grant and were determined using the Black-Scholes option-pricing model based
upon the following weighted-average assumptions:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Expected dividend yield............................................... 0.0 % 0.0 %
Expected volatility................................................... 52.2 49.4
Risk-free interest rate............................................... 7.6 5.4
Expected life (in years).............................................. 9.5 9.6
</TABLE>
Pro forma net income reflects only options granted in fiscal 1996 and
fiscal 1997. Therefore, the full impact of calculating compensation cost for
stock options under SFAS No. 123 is not reflected in the pro forma net income
amounts presented above because compensation cost is reflected over the options
vesting period of four years and compensation cost for options granted prior to
April 1, 1995 is not considered.
Summarized stock option data is as follows:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE SHARES
EXERCISE PRICE UNDER OPTION
-------------- ------------
<S> <C> <C>
Outstanding at March 31, 1994............................ $ -- --
Granted................................................ 8.15 234,000
Exercised.............................................. 8.00 (300)
Canceled............................................... 8.00 (7,400)
------ -------
Outstanding at March 31, 1995............................ 8.15 226,300
Granted................................................ 14.62 40,000
Exercised.............................................. 8.00 (2,600)
Canceled............................................... 9.91 (14,100)
------ -------
Outstanding at March 31, 1996............................ 9.09 249,600
Granted................................................ 20.79 186,000
Exercised.............................................. 8.28 (25,550)
Canceled............................................... 13.58 (15,300)
------ -------
Outstanding at March 31, 1997............................ 14.48 394,750
------ -------
Exercisable.............................................. $11.67 152,950
====== =======
</TABLE>
F-17
<PAGE> 67
PIERCING PAGODA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information concerning currently outstanding
and exercisable options:
<TABLE>
<CAPTION>
EXERCISE PRICE
---------------------------------
$8.00 - $10.625 $18.00 - $24.50
--------------- ---------------
<S> <C> <C>
Options outstanding at March 31, 1997................... 195,450 199,300
Weighted average remaining contractual life (years)..... 7.27 9.56
Weighted average price.................................. $ 8.28 $ 20.56
Options exercisable at March 31, 1997................... 110,050 42,900
Weighted average price.................................. $ 8.26 $ 20.41
</TABLE>
On October 12, 1995, the Company created an Employee Stock Purchase Plan
under which the sale of 96,000 shares of its common stock has been authorized.
Generally, all employees who meet the requirements for participation in any of
the Company's other employee benefit plans are also eligible to participate in
this plan. Employees may designate up to the lesser of $25,000 or 5% of their
annual compensation for the purchase of common stock. The price for the shares
purchased under the plan is the lower of 85% of the fair market value on the
first or last day of the purchase period. Employees are not permitted to obtain
share certificates or sell or transfer any shares for one year from the last day
of the offering period in which the shares were purchased. During fiscal 1996
and fiscal 1997, 1,606 and 8,151 shares, respectively, were issued under this
plan.
On May 18, 1994, the Company's Board of Directors declared a stock split,
effective June 1, 1994, of 5,336 for 1 and a reduction in the par value of the
Company's stock from $.10 per share to $.01 per share. All references to common
shares have been adjusted to reflect this stock split and adjustment of par
value.
On June 9, 1994, the Company sold 5,000 shares of its common stock to the
owner of its licensee for $6.00 per share.
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash, Accounts Receivable, Accounts Payable and Gold Consignment Agreements
The carrying amount approximates fair value because of the short maturity
of these instruments.
Long-term Debt
The fair value of the Company's long-term debt approximates its cost based
on current rates offered to the Company for debt of similar remaining
maturities.
(14) COMMITMENTS AND CONTINGENCIES
The Company is periodically a defendant in certain legal actions and other
claims arising in the ordinary course of its business. In the opinion of
management, liabilities, if any, arising from the ultimate resolution of such
actions would not have a material adverse effect on the Company's financial
position, results of operations or liquidity.
At March 31, 1997, the Company had commitments outstanding of approximately
$1,425,000 to fund capital expenditures, primarily for the construction and
installation of new kiosks.
Pursuant to the agreement between the Company and its licensee, the
licensee has the right to acquire, under certain circumstances, the Company's
kiosk stores operating in the state of Florida (40 at March 31, 1997) and has
the right of first refusal with respect to new locations in the state. Upon 90
days notice, the licensee may purchase any or all locations in certain Florida
counties. Locations
F-18
<PAGE> 68
PIERCING PAGODA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
outside these counties may be purchased only during the first seven months of
any calendar year provided they have been open for two full calendar years. The
purchase price of a location is due within 30 days of closing and is determined
based upon the cost of assets acquired at the closing date. In each of fiscal
1995 and 1997, the Licensee exercised its right to acquire one store from the
Company, and as of March 31, 1997, has delivered written notice to the Company
of its intention to acquire five additional stores from the Company in fiscal
1998.
The Company entered into a tax indemnification agreement in June of 1994
with certain current stockholders which provides for distributions relating to
tax liabilities for allocable taxable income for fiscal 1994 and 1995 and an
indemnification of such stockholders for any losses or liabilities with respect
to any additional taxes resulting from the Company's operations during the
period in which it was an "S" corporation. Liabilities of $1,755,000 and
$1,530,000 were accrued at March 31, 1994 and 1995, respectively, relating to
the tax indemnification agreements.
(15) SUBSEQUENT EVENT
In April 1997, the Company purchased substantially all of the operations of
Silver and Gold Connection, a kiosk retailer of gold and silver jewelry, for
approximately $8.2 million, subject to certain post-closing adjustments related
primarily to the valuation of acquired inventory.
F-19
<PAGE> 69
[PICTURES OF THE COMPANY'S MERCHANDISE WILL APPEAR ON
THE INSIDE OF THE BACK COVER OF THE PROSPECTUS.]
<PAGE> 70
[PIERCING PAGODA, INC. LOGO]
<PAGE> 71
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth expenses in connection with the issuance and
distribution of the securities being registered, all of which are being borne by
the Registrant.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee....................... $ 14,213
National Association of Securities Dealers, Inc. fee...................... 5,190
Nasdaq Stock Market Inc./National Market listing fee...................... 15,000
Printing and engraving expenses........................................... 100,000
Accountants' fees and expenses............................................ 60,000
Legal fees and expenses................................................... 100,000
Blue Sky qualification fees and expenses.................................. 10,000
Miscellaneous............................................................. 20,597
--------
Total $325,000
========
</TABLE>
The foregoing, except for the Securities and Exchange Commission
registration fee, the National Association of Securities Dealers, Inc. fee, and
the Nasdaq Stock Market fee, are estimates.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under Section 145 of the General Corporation Law of the State of Delaware,
as amended, the Registrant has the power to indemnify directors and officers
under certain prescribed circumstances and subject to certain limitations
against certain costs and expenses, including attorneys' fees actually and
reasonably incurred in connection with any action, suit or proceeding, whether
civil, criminal, administrative or investigative, to which any of them is a
party by reason of his being a director or officer of the Registrant if it is
determined that he acted in accordance with the applicable standard of conduct
set forth in such statutory provision.
Article FIFTH of the Registrant's Certificate of Incorporation provides
indemnification to directors and officers of the Registrant against all
expenses, liability and loss incurred as a result of such person's being a party
to, or threatened to be made a party to, any action, suit or proceeding by
reason of the fact that he or she is or was a director or officer of the
Registrant or is or was serving at the request of the Registrant as a director,
officer, employee or agent of another enterprise, to the fullest extent
authorized by the General Corporation Law of the State of Delaware. Article
FIFTH further permits the Registrant to maintain insurance, at its expense, to
protect itself and any such director or officer of the Registrant or another
enterprise against any such expenses, liability or loss, whether or not the
Registrant would have the power to indemnify such person against such expense,
liability or loss under the General Corporation Law of the State of Delaware.
Article VII of the Registrant's By-laws, filed as Exhibit 3.2 hereto,
generally permits indemnification of directors and officers to the fullest
extent authorized by the General Corporation Law of the State of Delaware.
The Registrant maintains directors' and officers' liability insurance.
The Underwriting Agreement provides that the Underwriters are obligated,
under certain circumstances, to indemnify the Registrant, its directors,
officers and controlling persons against certain liabilities, including
liabilities under the Securities Act of 1933. Reference is made to the
Underwriting Agreement filed as Exhibit 1 hereto.
II-1
<PAGE> 72
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
None.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO.
- -------
<C> <C> <S>
1.1 -- Form of Underwriting Agreement.*
3.1 -- Restated Certificate of Incorporation of the Registrant (incorporated by reference
to Exhibit 3.1 to the Registrant's Registration Statement on Form S-1, File No.
33-80200, initially filed with the Securities and Exchange Commission on June 14,
1994).
3.2 -- Amended and Restated By-laws of the Registrant (incorporated by reference to
Exhibit 3.2 to the Registrant's Registration Statement on Form S-1, File No.
33-80200, initially filed with the Securities and Exchange Commission on June 14,
1994).
4 -- Specimen Common Stock Certificate (incorporated by reference to Exhibit 4 to the
Registrant's Registration Statement on Form S-1, File No. 33-80200, initially filed
with the Securities and Exchange Commission on June 14, 1994).
5 -- Opinion of Wolf, Block, Schorr and Solis-Cohen with respect to the legality of the
securities being offered.**
10.1 -- Third Amended and Restated Loan Agreement dated February 13, 1995 between the
Registrant and First Valley Bank ("First Valley") (incorporated by reference to
Exhibit 10.1 to the Registrant's Form 10-K filed with the Securities and Exchange
Commission on June 28, 1995).
10.2 -- Letter Amendment to Third Amended and Restated Loan Agreement dated April 28, 1995
between the Registrant and First Valley (incorporated by reference to Exhibit 10.2
to the Registrant's Form 10-K filed with the Securities and Exchange Commission on
June 28, 1995).
10.3 -- Amendment to Third Amended and Restated Loan Agreement dated November 21, 1995
between the Registrant and First Valley (incorporated by reference to Exhibit 10.11
to the Registrant's Form 10-Q filed with the Securities and Exchange Commission on
August 9, 1995).
10.4 -- Second Amendment to Third Amended and Restated Loan Agreement dated November 21,
1995 between the Registrant and First Valley (incorporated by reference to Exhibit
10.11 to the Registrant's Form 10-Q filed with the Securities and Exchange
Commission on February 14, 1996).
10.5 -- Tenth Replacement Revolving Loan Note dated November 21, 1995 between the
Registrant and First Valley (incorporated by reference to Exhibit 10.12 to the
Registrant's Form 10-Q filed with the Securities and Exchange Commission on
February 14, 1996).
10.6 -- Master Advance Note Extension And/Or Modification And/Or Renewal Agreement dated
November 21, 1995 between the Registrant and First Valley (incorporated by
reference to Exhibit 10.13 to the Registrant's Form 10-Q filed with the Securities
and Exchange Commission on February 14, 1996).
10.7 -- Letter of Amendment to Third Amended and Restated Loan Agreement dated December 18,
1995 between the Registrant and First Valley (incorporated by reference to Exhibit
10.15 to the Registrant's Form 10-Q filed with the Securities and Exchange
Commission on February 14, 1996).
10.8 -- Letter of Amendment to Third Amended and Restated Loan Agreement Between Piercing
Pagoda, Inc. and First Valley dated February 28, 1996 (incorporated by reference to
Exhibit 10.8 to the Registrant's Form 10-K filed with Securities and Exchange
Commission on June 25, 1996).
</TABLE>
II-2
<PAGE> 73
<TABLE>
<CAPTION>
EXHIBIT
NO.
- -------
<C> <C> <S>
10.9 -- Third Amendment to Third Amended and Restated Loan Agreement dated September 5,
1996 between the Registrant and Summit Bank (incorporated by reference to Exhibit
10.1 to the Registrant's Form 10-Q filed with the Securities and Exchange
Commission on November 13, 1996).
10.10 -- Eleventh Replacement Revolving Loan Note dated September 5, 1996 between the
Registrant and Summit Bank (incorporated by reference to Exhibit 10.2 to the
Registrant's Form 10-Q filed with the Securities and Exchange Commission on
November 13, 1996).
10.11 -- Fourth Amendment to Third Amended and Restated Loan Agreement dated October 18,
1996 between the Registrant and Summit Bank (incorporated by reference to Exhibit
10.3 to the Registrant's Form 10-Q filed with the Securities and Exchange
Commission on November 13, 1996).
10.12 -- Twelfth Replacement Revolving Loan Note dated October 18, 1996 between the
Registrant and Summit Bank (incorporated by reference to Exhibit 10.4 to the
Registrant's Form 10-Q filed with the Securities and Exchange Commission on
November 13, 1996).
10.13 -- 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 (incorporated by reference to Exhibit 10.1 of the Registrant's Form
10-Q filed with the Securities and Exchange Commission on February 13, 1997).
10.14 -- Bond Placement Agreement between Northampton County Industrial Development
Authority, Meridian Bank ("Meridian") and the Registrant dated October 12, 1995
(incorporated by reference to exhibit 10.3 to the Registrant's Form 10-Q filed with
the Securities and Exchange Commission on February 14, 1996).
10.15 -- Loan Agreement between Northampton County Industrial Development Authority and the
Registrant dated October 15, 1995 (incorporated by reference to Exhibit 10.4 to the
Registrant's Form 10-Q filed with the Securities and Exchange Commission on
February 14, 1996).
10.16 -- Reimbursement Agreement between the Registrant and Meridian dated October 15, 1995
(incorporated by reference to Exhibit 10.5 to the Registrant's Form 10-Q filed with
the Securities and Exchange Commission on February 14, 1996.
10.17 -- Continuing Disclosure Agreement between Dauphin Deposit Bank and Trust Company
("Dauphin") and the Registrant dated October 15, 1995 (incorporated by reference to
Exhibit 10.6 to the Registrant's Form 10-Q filed with the Securities and Exchange
Commission on February 14, 1996).
10.18 -- Continuing Letter of Credit Agreement between Meridian and the Registrant dated
October 19, 1995 (incorporated by reference to Exhibit 10.7 to the Registrant's
Form 10-Q filed with the Securities and Exchange Commission on February 14, 1996).
10.19 -- Promissory Note between Meridian and the Registrant dated October 19, 1995
(incorporated by reference to Exhibit 10.8 to the Registrant's Form 10-Q filed with
the Securities and Exchange Commission on February 14, 1996).
10.20 -- Open-End Mortgage and Security Agreement between Meridian and the Registrant dated
October 19, 1995 (incorporated by reference to Exhibit 10.9 to the Registrant's
Form 10-Q filed with the Securities and Exchange Commission on February 14, 1996).
10.21 -- Assignment of Lessor's Interest in Leases between Meridian and the Registrant dated
October 19, 1995 (incorporated by reference to Exhibit 10.10 to the Registrant's
Form 10-Q filed with the Securities and Exchange Commission on February 14, 1996).
10.22 -- Consignment Agreement dated November 30, 1990 between Fleet Precious Metals Inc.
("Fleet") and the Registrant (incorporated by reference to Exhibit 10.15 to the
Registrant's Registration Statement on Form S-1, File No. 33-80200, initially filed
with the Securities and Exchange Commission on June 14, 1994).
</TABLE>
II-3
<PAGE> 74
<TABLE>
<CAPTION>
EXHIBIT
NO.
- -------
<C> <C> <S>
10.23 -- First Amendment and Agreement to Consignment Agreement dated July 26, 1994 between
Fleet and the Registrant (incorporated by reference to Exhibit 10.17 to the
Registrant's Registration Statement on Form S-1, File No. 33-80200, initially filed
with the Securities and Exchange Commission on June 14, 1994).
10.24 -- Third Amendment and Agreement to Consignment Agreement dated September 19, 1995
between the Registrant and Fleet (incorporated by reference to Exhibit 10.2 to the
Registrant's Form 10-Q filed with the Securities and Exchange Commission on
February 14, 1996).
10.25 -- Fourth Amendment and Agreement to Consignment Agreement dated December 1, 1995
between the Registrant and Fleet (incorporated by reference to Exhibit 10.14 to the
Registrant's Form 10-Q filed with the Securities and Exchange Commission on
February 14, 1996).
10.26 -- Fifth Amendment and Agreement to Consignment Agreement dated December 21, 1995
between the Registrant and Fleet (incorporated by reference to Exhibit 10.16 to the
Registrant's Form 10-Q filed with the Securities and Exchange Commission on
February 14, 1996).
10.27 -- Sixth Amendment And Agreement To Consignment Agreement dated October 31, 1996
between the Registrant and Fleet Precious Metals Inc. (incorporated by reference to
Exhibit 10.2 of the Registrant's Form 10-Q filed with the Securities and Exchange
Commission on February 13, 1997).
10.28 -- Amended and Restated Consignment Agreement dated July 26, 1994 between Rhode Island
Hospital Trust National Bank and the Registrant (incorporated by reference to
Exhibit 10.16 to the Registrant's Registration Statement on Form S-1, File No.
33-80200, initially filed with the Securities and Exchange Commission on June 14,
1994).
10.29 -- Second Amendment to Amended and Restated Consignment Agreement, dated September 11,
1995 between the Registrant and Rhode Island Hospital Trust National Bank
(incorporated by reference to Exhibit 10.1 to the Registrant's Form 10-Q filed with
the Securities and Exchange Commission on February 14, 1996).
10.30 -- 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 (incorporated by reference to Exhibit 10.3 of the Registrant's Form
10-Q filed with the Securities and Exchange Commission on February 13, 1997).
10.31 -- Registrant's 1994 Stock Option Plan (incorporated by reference to Exhibit 10.7 to
the Registrant's Registration Statement on Form S-1, File No. 33-80200, initially
filed with the Securities and Exchange Commission on June 14, 1994).
10.32 -- Registrant's 1994 Restricted Stock Plan (incorporated by reference to Exhibit 10.8
to the Registrant's Registration Statement on Form S-1, File No. 33-80200,
initially filed with the Securities and Exchange Commission on June 14, 1994).
10.33 -- Registrant's Annual Incentive Plan (incorporated by reference to Exhibit 10.9 to
the Registrant's Registration Statement on form S-1, File No. 33-80200, initially
filed with the Securities and Exchange Commission on June 14, 1994).
10.34 -- Registrant's Retirement & Savings Plan (incorporated by reference to Exhibit 10.14
to the Registrant's Registration Statement on Form S-1, File No. 33-80200,
initially filed with the Securities and Exchange Commission on June 14, 1994).
10.35 -- Registrant's Employee Stock Purchase Plan (incorporated by reference to the
Registrant's Registration Statement on Form S-8, File No. 33-982288, initially
filed with the Securities and Exchange Commission on October 18, 1995).
10.36 -- Tax Indemnification Agreement dated June 10, 1994 (incorporated by reference to
Exhibit 10.10 to the Registrant's Registration Statement on Form S-1, File No.
33-80200, initially filed with the Securities and Exchange Commission on June 14,
1994).
</TABLE>
II-4
<PAGE> 75
<TABLE>
<CAPTION>
EXHIBIT
NO.
- -------
<C> <C> <S>
10.37 -- Amendment to Tax Indemnification Agreement dated August 30, 1994 (incorporated by
reference to Exhibit 10.19 to the Registrant's Registration Statement on Form S-1,
File No. 33-80200, initially filed with the Securities and Exchange Commission on
June 14, 1994).
10.38 -- Restatement and Modification of Licensing Agreement between the Registrant and
Piercing Pagoda of Florida, Inc., dated June 3, 1994 (incorporated by reference to
Exhibit 10.13 to the Registrant's Registration Statement on Form S-1, File No.
33-80200, initially filed with the Securities and Exchange Commission on June 14,
1994).
10.39 -- Agreement together with Addendum dated August 4, 1994 between the Registrant and
Lehigh Valley Industrial Park, Inc. (incorporated by reference to Exhibit 10.22 to
the Registrant's Registration Statement on Form S-1, File No. 33-80200, initially
field with the Securities and Exchange Commission on June 14, 1994).
10.40 -- Asset Purchase Agreement dated January 29, 1997 Between Piercing Pagoda, Inc.,
EARS, Inc., Weaver's Gems and Minerals, Inc. and Gemstone Jewelry, Inc.
(incorporated by reference to Exhibit 10.4 to the Registrant's Form 10-Q filed with
the Securities and Exchange Commission on February 13, 1997).
10.41 -- Asset Purchase Agreement dated April 25, 1997 Between Piercing Pagoda, Inc. and the
Silver & Gold Trading Company, Inc.*
10.42 -- Syndicated Loan Agreement dated March 27, 1997 by and among Piercing Pagoda, Inc.,
CoreStates Bank, N.A., Summit Bank and First Union National Bank.*
11 -- Statement regarding computation of earnings per share.*
21 -- Subsidiaries of the Registrant (incorporated by reference to Exhibit 21 to the
Registrant's Form 10-K filed with the Securities and Exchange Commission on June
25, 1996).
23.1 -- Consent of KPMG Peat Marwick LLP, independent certified public accountants.*
23.2 -- Consent of Wolf, Block, Schorr and Solis-Cohen (included as part of Exhibit 5).**
24 -- Power of Attorney (included on signature page of this Registration Statement).*
27 -- Financial Data Schedule*
</TABLE>
- ------------
* Filed herewith
** To be filed by amendment
(b) Financial Statement Schedules
All Financial Statement Schedules for which provision is made in the
applicable accounting regulations of the Securities and Exchange Commission
are either not applicable or not required under the related instructions or
the required information is given in the Consolidated Financial Statements
or Notes thereto, and therefore have been omitted.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to Item 14 above, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-5
<PAGE> 76
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-6
<PAGE> 77
SIGNATURES AND POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Bethlehem, Pennsylvania, on the day
of May 13, 1997.
PIERCING PAGODA, INC.
By: /s/ RICHARD H. PENSKE
------------------------------------
Richard H. Penske
Chairman and Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Richard H. Penske and John F. Eureyecko, and each
of them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments to this Registration
Statement, and to file the same, with all exhibits thereto, and other documents
in connection herewith, with authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or their substitutes, may
lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- -------------------------------- -------------
<C> <S> <C>
/s/ RICHARD H. PENSKE Chairman and Chief Executive May 13, 1997
- --------------------------------------------- Officer (principal executive
Richard H. Penske officer)
/s/ JOHN F. EUREYECKO Director, President and Chief May 13, 1997
- --------------------------------------------- Operating Officer (principal
John F. Eureyecko financial and accounting
officer)
Director May , 1997
- ---------------------------------------------
Alan R. Hoefer
/s/ MARK A. RANDOL Director May 13, 1997
- ---------------------------------------------
Mark A. Randol
</TABLE>
II-7
<PAGE> 78
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------------------------------------------------------------------------------
<C> <C> <S>
1.1 -- Form of Underwriting Agreement*
3.1 -- Restated Certificate of Incorporation of the Registrant (incorporated by reference
to Exhibit 3.1 to the Registrant's Registration Statement on Form S-1, File No.
33-80200, initially filed with the Securities and Exchange Commission on June 14,
1994)
3.2 -- Amended and Restated By-laws of the Registrant (incorporated by reference to
Exhibit 3.2 to the Registrant's Registration Statement on Form S-1, File No.
33-80200, initially filed with the Securities and Exchange Commission on June 14,
1994)
4 -- Specimen Common Stock Certificate (incorporated by reference to Exhibit 4 to the
Registrant's Registration Statement on Form S-1, File No. 33-80200, initially filed
with the Securities and Exchange Commission on June 14, 1994)
5 -- Opinion of Wolf, Block, Schorr and Solis-Cohen with respect to the legality of the
securities being offered**
10.1 -- Third Amended and Restated Loan Agreement dated February 13, 1995 between the
Registrant and First Valley Bank ("First Valley") (incorporated by reference to
Exhibit 10.1 to the Registrant's Form 10-K filed with the Securities and Exchange
Commission on June 28, 1995)
10.2 -- Letter Amendment to Third Amended and Restated Loan Agreement dated April 28, 1995
between the Registrant and First Valley (incorporated by reference to Exhibit 10.2
to the Registrant's Form 10-K filed with the Securities and Exchange Commission on
June 28, 1995)
10.3 -- Amendment to Third Amended and Restated Loan Agreement dated November 21, 1995
between the Registrant and First Valley (incorporated by reference to Exhibit 10.11
to the Registrant's Form 10-Q filed with the Securities and Exchange Commission on
August 9, 1995)
10.4 -- Second Amendment to Third Amended and Restated Loan Agreement dated November 21,
1995 between the Registrant and First Valley (incorporated by reference to Exhibit
10.11 to the Registrant's Form 10-Q filed with the Securities and Exchange
Commission on February 14, 1996)
10.5 -- Tenth Replacement Revolving Loan Note dated November 21, 1995 between the
Registrant and First Valley (incorporated by reference to Exhibit 10.12 to the
Registrant's Form 10-Q filed with the Securities and Exchange Commission on
February 14, 1996)
10.6 -- Master Advance Note Extension And/Or Modification And/Or Renewal Agreement dated
November 21, 1995 between the Registrant and First Valley (incorporated by
reference to Exhibit 10.13 to the Registrant's Form 10-Q filed with the Securities
and Exchange Commission on February 14, 1996)
10.7 -- Letter of Amendment to Third Amended and Restated Loan Agreement dated December 18,
1995 between the Registrant and First Valley (incorporated by reference to Exhibit
10.15 to the Registrant's Form 10-Q filed with the Securities and Exchange
Commission on February 14, 1996)
10.8 -- Letter of Amendment to Third Amended and Restated Loan Agreement Between Piercing
Pagoda, Inc. and First Valley dated February 28, 1996 (incorporated by reference to
Exhibit 10.8 to the Registrant's Form 10-K filed with Securities and Exchange
Commission on June 25, 1996)
10.9 -- Third Amendment to Third Amended and Restated Loan Agreement dated September 5,
1996 between the Registrant and Summit Bank (incorporated by reference to Exhibit
10.1 to the Registrant's Form 10-Q filed with the Securities and Exchange
Commission on November 13, 1996)
</TABLE>
II-8
<PAGE> 79
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------------------------------------------------------------------------------
<C> <C> <S>
10.10 -- Eleventh Replacement Revolving Loan Note dated September 5, 1996 between the
Registrant and Summit Bank (incorporated by reference to Exhibit 10.2 to the
Registrant's Form 10-Q filed with the Securities and Exchange Commission on
November 13, 1996)
10.11 -- Fourth Amendment to Third Amended and Restated Loan Agreement dated October 18,
1996 between the Registrant and Summit Bank (incorporated by reference to Exhibit
10.3 to the Registrant's Form 10-Q filed with the Securities and Exchange
Commission on November 13, 1996)
10.12 -- Twelfth Replacement Revolving Loan Note dated October 18, 1996 between the
Registrant and Summit Bank (incorporated by reference to Exhibit 10.4 to the
Registrant's Form 10-Q filed with the Securities and Exchange Commission on
November 13, 1996)
10.13 -- 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 (incorporated by reference to Exhibit 10.1 of the Registrant's Form
10-Q filed with the Securities and Exchange Commission on February 13, 1997)
10.14 -- Bond Placement Agreement between Northampton County Industrial Development
Authority, Meridian Bank ("Meridian") and the Registrant dated October 12, 1995
(incorporated by reference to exhibit 10.3 to the Registrant's Form 10-Q filed with
the Securities and Exchange Commission on February 14, 1996)
10.15 -- Loan Agreement between Northampton County Industrial Development Authority and the
Registrant dated October 15, 1995 (incorporated by reference to Exhibit 10.4 to the
Registrant's Form 10-Q filed with the Securities and Exchange Commission on
February 14, 1996)
10.16 -- Reimbursement Agreement between the Registrant and Meridian dated October 15, 1995
(incorporated by reference to Exhibit 10.5 to the Registrant's Form 10-Q filed with
the Securities and Exchange Commission on February 14, 1996
10.17 -- Continuing Disclosure Agreement between Dauphin Deposit Bank and Trust Company
("Dauphin") and the Registrant dated October 15, 1995 (incorporated by reference to
Exhibit 10.6 to the Registrant's Form 10-Q filed with the Securities and Exchange
Commission on February 14, 1996)
10.18 -- Continuing Letter of Credit Agreement between Meridian and the Registrant dated
October 19, 1995 (incorporated by reference to Exhibit 10.7 to the Registrant's
Form 10-Q filed with the Securities and Exchange Commission on February 14, 1996)
10.19 -- Promissory Note between Meridian and the Registrant dated October 19, 1995
(incorporated by reference to Exhibit 10.8 to the Registrant's Form 10-Q filed with
the Securities and Exchange Commission on February 14, 1996)
10.20 -- Open-End Mortgage and Security Agreement between Meridian and the Registrant dated
October 19, 1995 (incorporated by reference to Exhibit 10.9 to the Registrant's
Form 10-Q filed with the Securities and Exchange Commission on February 14, 1996)
10.21 -- Assignment of Lessor's Interest in Leases between Meridian and the Registrant dated
October 19, 1995 (incorporated by reference to Exhibit 10.10 to the Registrant's
Form 10-Q filed with the Securities and Exchange Commission on February 14, 1996)
10.22 -- Consignment Agreement dated November 30, 1990 between Fleet Precious Metals Inc.
("Fleet") and the Registrant (incorporated by reference to Exhibit 10.15 to the
Registrant's Registration Statement on Form S-1, File No. 33-80200, initially filed
with the Securities and Exchange Commission on June 14, 1994)
10.23 -- First Amendment and Agreement to Consignment Agreement dated July 26, 1994 between
Fleet and the Registrant (incorporated by reference to Exhibit 10.17 to the
Registrant's Registration Statement on Form S-1, File No. 33-80200, initially filed
with the Securities and Exchange Commission on June 14, 1994)
</TABLE>
II-9
<PAGE> 80
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------------------------------------------------------------------------------
<C> <C> <S>
10.24 -- Third Amendment and Agreement to Consignment Agreement dated September 19, 1995
between the Registrant and Fleet (incorporated by reference to Exhibit 10.2 to the
Registrant's Form 10-Q filed with the Securities and Exchange Commission on
February 14, 1996)
10.25 -- Fourth Amendment and Agreement to Consignment Agreement dated December 1, 1995
between the Registrant and Fleet (incorporated by reference to Exhibit 10.14 to the
Registrant's Form 10-Q filed with the Securities and Exchange Commission on
February 14, 1996)
10.26 -- Fifth Amendment and Agreement to Consignment Agreement dated December 21, 1995
between the Registrant and Fleet (incorporated by reference to Exhibit 10.16 to the
Registrant's Form 10-Q filed with the Securities and Exchange Commission on
February 14, 1996)
10.27 -- Sixth Amendment And Agreement To Consignment Agreement dated October 31, 1996
between the Registrant and Fleet Precious Metals Inc. (incorporated by reference to
Exhibit 10.2 of the Registrant's Form 10-Q filed with the Securities and Exchange
Commission on February 13, 1997)
10.28 -- Amended and Restated Consignment Agreement dated July 26, 1994 between Rhode Island
Hospital Trust National Bank and the Registrant (incorporated by reference to
Exhibit 10.16 to the Registrant's Registration Statement on Form S-1, File No.
33-80200, initially filed with the Securities and Exchange Commission on June 14,
1994)
10.29 -- Second Amendment to Amended and Restated Consignment Agreement, dated September 11,
1995 between the Registrant and Rhode Island Hospital Trust National Bank
(incorporated by reference to Exhibit 10.1 to the Registrant's Form 10-Q filed with
the Securities and Exchange Commission on February 14, 1996)
10.30 -- 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 (incorporated by reference to Exhibit 10.3 of the Registrant's Form
10-Q filed with the Securities and Exchange Commission on February 13, 1997)
10.31 -- Registrant's 1994 Stock Option Plan (incorporated by reference to Exhibit 10.7 to
the Registrant's Registration Statement on Form S-1, File No. 33-80200, initially
filed with the Securities and Exchange Commission on June 14, 1994)
10.32 -- Registrant's 1994 Restricted Stock Plan (incorporated by reference to Exhibit 10.8
to the Registrant's Registration Statement on Form S-1, File No. 33-80200,
initially filed with the Securities and Exchange Commission on June 14, 1994)
10.33 -- Registrant's Annual Incentive Plan (incorporated by reference to Exhibit 10.9 to
the Registrant's Registration Statement on Form S-1, File No. 33-80200, initially
filed with the Securities and Exchange Commission on June 14, 1994)
10.34 -- Registrant's Retirement & Savings Plan (incorporated by reference to Exhibit 10.14
to the Registrant's Registration Statement on Form S-1, File No. 33-80200,
initially filed with the Securities and Exchange Commission on June 14, 1994)
10.35 -- Registrant's Employee Stock Purchase Plan (incorporated by reference to the
Registrant's Registration Statement on Form S-8, File No. 33-982288, initially
filed with the Securities and Exchange Commission on October 18, 1995)
10.36 -- Tax Indemnification Agreement dated June 10, 1994 (incorporated by reference to
Exhibit 10.10 to the Registrant's Registration Statement on Form S-1, File No.
33-80200, initially filed with the Securities and Exchange Commission on June 14,
1994)
10.37 -- Amendment to Tax Indemnification Agreement dated August 30, 1994 (incorporated by
reference to Exhibit 10.19 to the Registrant's Registration Statement on Form S-1,
File No. 33-80200, initially filed with the Securities and Exchange Commission on
June 14, 1994)
</TABLE>
II-10
<PAGE> 81
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------------------------------------------------------------------------------
<C> <C> <S>
10.38 -- Restatement and Modification of Licensing Agreement between the Registrant and
Piercing Pagoda of Florida, Inc., dated June 3, 1994 (incorporated by reference to
Exhibit 10.13 to the Registrant's Registration Statement on Form S-1, File No.
33-80200, initially filed with the Securities and Exchange Commission on June 14,
1994)
10.39 -- Agreement together with Addendum dated August 4, 1994 between the Registrant and
Lehigh Valley Industrial Park, Inc. (incorporated by reference to Exhibit 10.22 to
the Registrant's Registration Statement on Form S-1, File No. 33-80200, initially
field with the Securities and Exchange Commission on June 14, 1994)
10.40 -- Asset Purchase Agreement dated January 29, 1997 Between Piercing Pagoda, Inc.,
EARS, Inc., Weaver's Gems and Minerals, Inc. and Gemstone Jewelry, Inc.
(incorporated by reference to Exhibit 10.4 to the Registrant's Form 10-Q filed with
the Securities and Exchange Commission on February 13, 1997)
10.41 -- Asset Purchase Agreement dated April 25, 1997 Between Piercing Pagoda, Inc. and the
Silver & Gold Trading Company, Inc.*
10.42 -- Syndicated Loan Agreement dated March 27, 1997 by and among Piercing Pagoda, Inc.,
CoreStates Bank, N.A., Summit Bank and First Union National Bank*
11 -- Statement regarding computation of earnings per share*
21 -- Subsidiaries of the Registrant (incorporated by reference to Exhibit 21 to the
Registrant's Form 10-K filed with the Securities and Exchange Commission on June
25, 1996)
23.1 -- Consent of KPMG Peat Marwick LLP, independent certified public accountants*
23.2 -- Consent of Wolf, Block, Schorr and Solis-Cohen (included as part of Exhibit 5)**
24 -- Power of Attorney (included on signature page of this Registration Statement)*
27 -- Financial Data Schedule*
</TABLE>
- ------------
* Filed herewith
** To be filed by amendment
II-11
<PAGE> 1
EXHIBIT 1.1
1,550,000 SHARES(1)
PIERCING PAGODA
COMMON STOCK
UNDERWRITING AGREEMENT
____________, 1997
ROBERTSON, STEPHENS & COMPANY LLC
Wheat, First Securities, Inc.
Furman Selz LLC
Parker/Hunter Incorporated
As Representatives of the several Underwriters
c/o Robertson, Stephens & Company LLC
555 California Street
Suite 2600
San Francisco, California 94104
Ladies/Gentlemen:
Piercing Pagoda, Inc., a Delaware corporation (the "Company"),
and certain shareholders of the Company named in Schedule B hereto
(hereafter called the "Selling Stockholders" address you as the
Representatives of each of the persons, firms and corporations listed in
Schedule A hereto (herein collectively called the "Underwriters") and
hereby confirm their respective agreements with the several Underwriters
as follows:
1. Description of Shares. The Company proposes to issue and sell
650,000 shares of its authorized and unissued Common Stock, par value
$.01 to the several Underwriters. The Selling Stockholders, acting
severally and not jointly, propose to sell an aggregate of 900,000
shares of the Company's authorized and outstanding Common Stock, par
value $.01, to the several Underwriters. The 650,000 shares of Common
Stock, par value $.01, of the Company to be sold by the Company are
hereinafter called the "Company Shares" and the 900,000 shares of Common
Stock, par value $.01, to be sold by the Selling Stockholders are
hereinafter called the "Selling Stockholder Shares." The Company Shares
and the Selling Stockholder Shares are hereinafter collectively referred
to as the "Firm Shares." The Company and the Selling Stockholders also
propose to grant, severally and not jointly, to the Underwriters an
option to purchase up to 232,500 additional shares of the Company's
Common Stock, par value $.01 (the "Option Shares"), as provided in
Section 7 hereof. As used in this Agreement, the term "Shares" shall
include the Firm Shares and the Option Shares. All shares of Common
Stock, par value $.01, of the Company to be outstanding after giving
effect to the sales contemplated hereby, including the Shares, are
hereinafter referred to as "Common Stock."
--------
(1) Plus an option to purchase up to 232,500 additional shares from
the Company and certain stockholders of the Company to cover
over-allotments.
<PAGE> 2
2. Representations, Warranties and Agreements of the Company and
the Selling Stockholders.
I. The Company represents and warrants to and agrees with each
Underwriter and each Selling Stockholder that:
(a) A registration statement on Form S-1 (File No.
333-_____) with respect to the Shares, including a prospectus subject to
completion, has been prepared by the Company in conformity with the
requirements of the Securities Act of 1933, as amended (the "Act"), and
the applicable rules and regulations (the "Rules and Regulations") of
the Securities and Exchange Commission (the "Commission") under the Act
and has been filed with the Commission; such amendments to such
registration statement, such amended prospectuses subject to completion
and such abbreviated registration statements pursuant to Rule 462(b) of
the Rules and Regulations as may have been required prior to the date
hereof have been similarly prepared and filed with the Commission; and
the Company will file such additional amendments to such registration
statement, such amended prospectuses subject to completion and such
abbreviated registration statements as may hereafter be required. Copies
of such registration statement and amendments, of each related
prospectus subject to completion (the "Preliminary Prospectuses"),
including all documents incorporated by reference therein, and of any
abbreviated registration statement pursuant to Rule 462(b) of the Rules
and Regulations have been delivered to you.
If the registration statement relating to the Shares has
been declared effective under the Act by the Commission, the Company
will prepare and promptly file with the Commission the information
omitted from the registration statement pursuant to Rule 430A(a) or, if
Robertson, Stephens & Company LLC, on behalf of the several
Underwriters, shall agree to the utilization of Rule 434 of the Rules
and Regulations, the information required to be included in any term
sheet filed pursuant to Rule 434(b) or (c), as applicable, of the Rules
and Regulations pursuant to subparagraph (1), (4) or (7) of Rule 424(b)
of the Rules and Regulations or as part of a post-effective amendment to
the registration statement (including a final form of prospectus). If
the registration statement relating to the Shares has not been declared
effective under the Act by the Commission, the Company will prepare and
promptly file an amendment to the registration statement, including a
final form of prospectus, or, if Robertson, Stephens & Company LLC, on
behalf of the several Underwriters, shall agree to the utilization of
Rule 434 of the Rules and Regulations, the information required to be
included in any term sheet filed pursuant to Rule 434(b) or (c), as
applicable, of the Rules and Regulations. The term "Registration
Statement" as used in this Agreement shall mean such registration
statement, including financial statements, schedules and exhibits, in
the form in which it became or becomes, as the case may be, effective
(including, if the Company omitted information from the registration
statement pursuant to Rule 430A(a) or files a term sheet pursuant to
Rule 434 of the Rules and Regulations, the information deemed to be a
part of the registration statement at the time it became effective
pursuant to Rule 430A(b) or Rule 434(d) of the Rules and Regulations)
and, in the event of any amendment thereto or the filing of any
abbreviated registration statement pursuant to Rule 462(b) of the Rules
and Regulations relating thereto after the effective date of such
registration statement, shall also mean (from and after the
effectiveness of such amendment or the filing of such abbreviated
registration statement) such registration statement as so amended,
together with any such abbreviated registration statement. The term
"Prospectus" as used in this Agreement shall mean the prospectus
relating to the Shares as included in such Registration Statement at the
time it becomes effective (including, if the Company omitted information
from the Registration Statement pursuant to Rule 430A(a) of the Rules
and Regulations, the information deemed to be a part of the Registration
Statement at the time it became effective pursuant to Rule 430A(b) of
the Rules and Regulations); provided, however, that if in reliance on
Rule 434 of the Rules and Regulations and with the consent of Robertson,
Stephens & Company LLC, on behalf of the several Underwriters, the
Company shall have provided to the Underwriters a term sheet pursuant to
Rule 434(b) or (c), as applicable, prior to the time that a confirmation
is sent or given for purposes of Section 2(10)(a) of the Act, the term
"Prospectus" shall mean the "prospectus subject to completion" (as
defined in Rule 434(g) of the Rules and Regulations) last provided to
the Underwriters by the Company and circulated by the Underwriters to
all prospective purchasers of the Shares (including the information
deemed to be a part of the Registration Statement at the time it became
effective pursuant to Rule 434(d) of the Rules and Regulations).
Notwithstanding the foregoing, if any revised prospectus shall be
provided to the Underwriters by the Company for use in connection with
the offering of the Shares that differs from the prospectus referred to
in the immediately preceding sentence (whether or not such revised
prospectus is required to be filed with the Commission pursuant to Rule
424(b) of the Rules and Regulations), the term "Prospectus" shall refer
to such revised prospectus from and after the time it is first provided
to the Underwriters for such use. If in reliance on Rule 434 of the
Rules and Regulations and
2
<PAGE> 3
with the consent of Robertson, Stephens & Company LLC, on behalf of the
several Underwriters, the Company shall have provided to the
Underwriters a term sheet pursuant to Rule 434(b) or (c), as applicable,
prior to the time that a confirmation is sent or given for purposes of
Section 2(10)(a) of the Act, the Prospectus and the term sheet,
together, will not be materially different from the prospectus in the
Registration Statement.
(b) The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus or instituted
proceedings for that purpose, and each such Preliminary Prospectus has
conformed in all material respects to the requirements of the Act and
the Rules and Regulations and, as of its date, has not included any
untrue statement of a material fact or omitted to state a material fact
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; and at the
time the Registration Statement became or becomes, as the case may be,
effective and at all times subsequent thereto up to and on the Closing
Date (hereinafter defined) and on any later date on which Option Shares
are to be purchased, (i) the Registration Statement and the Prospectus,
and any amendments or supplements thereto, contained and will contain
all material information required to be included therein by the Act and
the Rules and Regulations and will in all material respects conform to
the requirements of the Act and the Rules and Regulations, (ii) the
Registration Statement, and any amendments or supplements thereto, did
not and will not include any untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to
make the statements therein not misleading, and (iii) the Prospectus,
and any amendments or supplements thereto, did not and will not include
any untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided,
however, that none of the representations and warranties contained in
this subparagraph (b) shall apply to information contained in or omitted
from the Registration Statement or Prospectus, or any amendment or
supplement thereto, in reliance upon, and in conformity with, written
information relating to any Underwriter furnished to the Company by such
Underwriter specifically for use in the preparation thereof.
(c) Each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation with full power
and authority (corporate and other) to own, lease and operate its
properties and conduct its business as described in the Prospectus; the
Company owns all of the outstanding capital stock of its subsidiaries
free and clear of any pledge, lien, security interest, encumbrance,
claim or equitable interest; each of the Company and its subsidiaries is
duly qualified to do business as a foreign corporation and is in good
standing in each jurisdiction in which the ownership or leasing of its
properties or the conduct of its business requires such qualification,
except where the failure to be so qualified or be in good standing would
not have a material adverse effect on the condition (financial or
otherwise), earnings, operations, business or business prospects of the
Company and its subsidiaries considered as one enterprise; no proceeding
has been instituted in any such jurisdiction, revoking, limiting or
curtailing, or seeking to revoke, limit or curtail, such power and
authority or qualification; each of the Company and its subsidiaries is
in possession of and operating in compliance with all authorizations,
licenses, certificates, consents, orders and permits from state, federal
and other regulatory authorities which are material to the conduct of
its business, all of which are valid and in full force and effect;
neither the Company nor any of its subsidiaries is in violation of its
respective charter or bylaws or in default in the performance or
observance of any material obligation, agreement, covenant or condition
contained in any material bond, debenture, note or other evidence of
indebtedness, or in any material lease, contract, indenture, mortgage,
deed of trust, loan agreement, joint venture or other agreement or
instrument to which the Company or any of its subsidiaries is a party or
by which it or any of its subsidiaries or their respective properties
may be bound; and neither the Company nor any of its subsidiaries is in
material violation of any law, order, rule, regulation, writ,
injunction, judgment or decree of any court, government or governmental
agency or body, domestic or foreign, having jurisdiction over the
Company or any of its subsidiaries or over their respective properties
of which it has knowledge. The Company does not own or control, directly
or indirectly, any corporation, association or other entity other than
those subsidiaries listed in Exhibit 21 to the Company's Annual Report
on Form 10-K filed with the Commission and incorporated by reference
into the Registration Statement.
(d) The Company has full legal right, power and authority
to enter into this Agreement and perform the transactions contemplated
hereby. This Agreement has been duly authorized, executed and delivered
by the Company and is a valid and binding agreement on the part of the
Company, enforceable in accordance with its terms, except as rights to
indemnification hereunder may be limited by applicable law and except as
the enforcement hereof may be limited by
3
<PAGE> 4
applicable bankruptcy, insolvency, reorganization, moratorium or other
similar laws relating to or affecting creditors' rights generally or by
general equitable principles; the performance of this Agreement and the
consummation of the transactions herein contemplated will not result in
a material breach or violation of any of the terms and provisions of, or
constitute a default under, (i) any bond, debenture, note or other
evidence of indebtedness, or under any lease, contract, indenture,
mortgage, deed of trust, loan agreement, joint venture or other
agreement or instrument to which the Company or any of its subsidiaries
is a party or by which it or any of its subsidiaries or their respective
properties may be bound, (ii) the charter or bylaws of the Company or
any of its subsidiaries, or (iii) any law, order, rule, regulation,
writ, injunction, judgment or decree of any court, government or
governmental agency or body, domestic or foreign, having jurisdiction
over the Company or any of its subsidiaries or over their respective
properties. No consent, approval, authorization or order of or
qualification with any court, government or governmental agency or body,
domestic or foreign, having jurisdiction over the Company or any of its
subsidiaries or over their respective properties is required for the
execution and delivery of this Agreement and the consummation by the
Company or any of its subsidiaries of the transactions herein
contemplated, except such as may be required under the Act, the
Securities Exchange Act of 1934, as the Exchange Act (if applicable), or
under state or other securities or Blue Sky laws, all of which
requirements have been satisfied in all material respects.
(e) There is not any pending or, to the best of the
Company's knowledge, threatened action, suit, claim or proceeding
against the Company, any of its subsidiaries or any of their respective
officers or any of their respective properties, assets or rights before
any court, government or governmental agency or body, domestic or
foreign, having jurisdiction over the Company or any of its subsidiaries
or over their respective officers or properties or otherwise which (i)
might result in any material adverse change in the condition (financial
or otherwise), earnings, operations, business or business prospects of
the Company and its subsidiaries considered as one enterprise or might
materially and adversely affect their properties, assets or rights, (ii)
might prevent consummation of the transactions contemplated hereby or
(iii) is required to be disclosed in the Registration Statement or
Prospectus and is not so disclosed; and there are no agreements,
contracts, leases or documents of the Company or any of its subsidiaries
of a character required to be described or referred to in the
Registration Statement or Prospectus or to be filed as an exhibit to the
Registration Statement by the Act or the Rules and Regulations or by the
Exchange Act or the rules and regulations of the Commission thereunder
which have not been accurately described in all material respects in the
Registration Statement or Prospectus or filed as exhibits to the
Registration Statement.
(f) All outstanding shares of capital stock of the Company
(including the Selling Stockholder Shares) have been duly authorized and
validly issued and are fully paid and nonassessable, have been issued in
compliance with all federal and state securities laws, were not issued
in violation of or subject to any preemptive rights or other rights to
subscribe for or purchase securities, and the authorized and outstanding
capital stock of the Company is as set forth in the Prospectus under the
caption "Capitalization" and conforms in all material respects to the
statements relating thereto contained in the Registration Statement and
the Prospectus (and such statements correctly state the substance of the
instruments defining the capitalization of the Company); the Firm Shares
and the Option Shares to be purchased from the Company hereunder have
been duly authorized for issuance and sale to the Underwriters pursuant
to this Agreement and, when issued and delivered by the Company against
payment therefor in accordance with the terms of this Agreement, will be
duly and validly issued and fully paid and nonassessable, and will be
sold free and clear of any pledge, lien, security interest, encumbrance,
claim or equitable interest; and no preemptive right, co-sale right,
registration right, right of first refusal or other similar right of
shareholders exists with respect to any of the Firm Shares or Option
Shares to be purchased from the Company hereunder or the issuance and
sale thereof other than those that have been expressly waived prior to
the date hereof and those that will automatically expire upon and will
not apply to the consummation of the transactions contemplated on the
Closing Date. No further approval or authorization of any shareholder,
the Board of Directors of the Company or others is required for the
issuance and sale or transfer of the Shares except as may be required
under the Act, the Exchange Act or under state or other securities or
Blue Sky laws. All issued and outstanding shares of capital stock of
each subsidiary of the Company have been duly authorized and validly
issued and are fully paid and nonassessable, and were not issued in
violation of or subject to any preemptive right, or other rights to
subscribe for or purchase shares and are owned by the Company free and
clear of any pledge, lien, security interest, encumbrance, claim or
equitable interest. Except as disclosed in the Prospectus and the
financial statements of the Company, and the related notes thereto,
included or incorporated by reference in the Prospectus, neither the
Company nor any subsidiary has outstanding any options to purchase, or
any preemptive rights or other rights to subscribe for or to purchase,
any securities or obligations
4
<PAGE> 5
convertible into, or any contracts or commitments to issue or sell,
shares of its capital stock or any such options, rights, convertible
securities or obligations. The description of the Company's stock
option, stock bonus and other stock plans or arrangements, and the
options or other rights granted and exercised thereunder, set forth or
incorporated by reference in the Prospectus accurately and fairly
presents the information required to be shown with respect to such
plans, arrangements, options and rights.
(g) KPMG Peat Marwick LLP, which has examined the
consolidated financial statements of the Company, together with the
related schedules and notes, as of March 31, 1996 and 1997 and for each
of the years in the three (3) years ended March 31, 1997 filed with the
Commission as a part of or incorporated by reference into the
Registration Statement, which are included or incorporated by reference
in the Prospectus, are independent accountants within the meaning of the
Act and the Rules and Regulations; the audited consolidated financial
statements of the Company, together with the related schedules and
notes, and the unaudited consolidated financial information, forming
part of the Registration Statement and Prospectus, fairly present the
financial position and the results of operations of the Company and its
subsidiaries at the respective dates and for the respective periods to
which they apply; and all audited consolidated financial statements of
the Company, together with the related schedules and notes, and the
unaudited consolidated financial information, filed with the Commission
as part of or incorporated by reference into the Registration Statement,
have been prepared in accordance with generally accepted accounting
principles consistently applied throughout the periods involved except
as may be otherwise stated therein. The selected and summary financial
and statistical data included or incorporated by reference in the
Registration Statement present fairly the information shown therein and
have been compiled on a basis consistent with the audited financial
statements presented therein. No other financial statements or schedules
are required to be included or incorporated by reference in the
Registration Statement.
(h) Subsequent to the respective dates as of which
information is given in the Registration Statement and Prospectus, there
has not been (i) any material adverse change in the condition (financial
or otherwise), earnings, operations, business or business prospects of
the Company and its subsidiaries considered as one enterprise, (ii) any
transaction that is material to the Company and its subsidiaries
considered as one enterprise, except transactions entered into in the
ordinary course of business, (iii) any obligation, direct or contingent,
that is material to the Company and its subsidiaries considered as one
enterprise, incurred by the Company or its subsidiaries, except
obligations incurred in the ordinary course of business, (iv) any change
in the capital stock or outstanding indebtedness of the Company or any
of its subsidiaries that is material to the Company and its subsidiaries
considered as one enterprise, (v) any dividend or distribution of any
kind declared, paid or made on the capital stock of the Company or any
of its subsidiaries, or (vi) any loss or damage (whether or not insured)
to the property of the Company or any of its subsidiaries which has been
sustained or will have been sustained which has a material adverse
effect on the condition (financial or otherwise), earnings, operations,
business or business prospects of the Company and its subsidiaries
considered as one enterprise.
(i) Except as set forth in the Registration Statement and
Prospectus, (i) each of the Company and its subsidiaries has good and
marketable title to all properties and assets described in the
Registration Statement and Prospectus as owned by it, free and clear of
any pledge, lien, security interest, encumbrance, claim or equitable
interest, other than such as would not have a material adverse effect on
the condition (financial or otherwise), earnings, operations, business
or business prospects of the Company and its subsidiaries considered as
one enterprise, (ii) the agreements to which the Company or any of its
subsidiaries is a party described in the Registration Statement and
Prospectus are valid agreements, enforceable by the Company and its
subsidiaries (as applicable), except as the enforcement thereof may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium
or other similar laws relating to or affecting creditors' rights
generally or by general equitable principles and, to the best of the
Company's knowledge, the other contracting party or parties thereto are
not in material breach or material default under any of such agreements,
and (iii) each of the Company and its subsidiaries has valid and
enforceable leases for all properties described in the Registration
Statement and Prospectus as leased by it, except as the enforcement
thereof may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or
affecting creditors' rights generally or by general equitable
principles. Except as set forth in the Registration Statement and
Prospectus, the Company owns or leases all such properties as are
necessary to its operations as now conducted or as proposed to be
conducted.
5
<PAGE> 6
(j) The Company and its subsidiaries have timely filed all
necessary federal, state and foreign income and franchise tax returns
and have paid all taxes shown thereon as due, and there is no tax
deficiency that has been or, to the best of the Company's knowledge,
might be asserted against the Company or any of its subsidiaries that
might have a material adverse effect on the condition (financial or
otherwise), earnings, operations, business or business prospects of the
Company and its subsidiaries considered as one enterprise; and all tax
liabilities are adequately provided for on the books of the Company and
its subsidiaries.
(k) The Company and its subsidiaries maintain insurance
with insurers of recognized financial responsibility of the types and in
the amounts generally deemed adequate for their respective businesses
and consistent with insurance coverage maintained by similar companies
in similar businesses, including, but not limited to, insurance covering
real and personal property owned or leased by the Company or its
subsidiaries against theft, damage, destruction, acts of vandalism and
all other risks customarily insured against, all of which insurance is
in full force and effect; neither the Company nor any such subsidiary
has been refused any insurance coverage sought or applied for; and
neither the Company nor any such subsidiary has any reason to believe
that it will not be able to renew its existing insurance coverage as and
when such coverage expires or to obtain similar coverage from similar
insurers as may be necessary to continue its business at a cost that
would not materially and adversely affect the condition (financial or
otherwise), earnings, operations, business or business prospects of the
Company and its subsidiaries considered as one enterprise.
(l) To the best of Company's knowledge, no labor
disturbance by the employees of the Company or any of its subsidiaries
exists or is imminent; and the Company is not aware of any existing or
imminent labor disturbance by the employees of any of its principal
suppliers that might be expected to result in a material adverse change
in the condition (financial or otherwise), earnings, operations,
business or business prospects of the Company and its subsidiaries
considered as one enterprise. No collective bargaining agreement exists
with any of the Company's employees and, to the best of the Company's
knowledge, no such agreement is imminent.
(m) Each of the Company and its subsidiaries owns or
possesses adequate rights to use all patents, patent rights, inventions,
trade secrets, know-how, trademarks, service marks, trade names and
copyrights which are necessary to conduct its businesses as described in
the Registration Statement and Prospectus; the expiration of any
patents, patent rights, trade secrets, trademarks, service marks, trade
names or copyrights would not have a material adverse effect on the
condition (financial or otherwise), earnings, operations, business or
business prospects of the Company and its subsidiaries considered as one
enterprise; the Company has not received any notice of, and has no
knowledge of, any infringement of or conflict with asserted rights of
the Company by others with respect to any patent, patent rights,
inventions, trade secrets, know-how, trademarks, service marks, trade
names or copyrights; and the Company has not received any notice of, and
has no knowledge of, any infringement of or conflict with asserted
rights of others with respect to any patent, patent rights, inventions,
trade secrets, know-how, trademarks, service marks, trade names or
copyrights which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, might have a material adverse
effect on the condition (financial or otherwise), earnings, operations,
business or business prospects of the Company and its subsidiaries
considered as one enterprise.
(n) The Common Stock is registered pursuant to Section
12(g) of the Exchange Act and is listed on The Nasdaq National Market,
and the Company has taken no action designed to, or likely to have the
effect of, terminating the registration of the Common Stock under the
Exchange Act or delisting the Common Stock from The Nasdaq National
Market, nor has the Company received any notification that the
Commission or the National Association of Securities Dealers, Inc.
("NASD") is contemplating terminating such registration or listing.
(o) The Company has been advised concerning the Investment
Company Act of 1940, as amended (the "1940 Act"), and the rules and
regulations thereunder, and has in the past conducted, and intends in
the future to conduct, its affairs in such a manner as to ensure that it
will not become an "investment company" or a company "controlled" by an
"investment company" within the meaning of the 1940 Act and such rules
and regulations.
(p) The Company has not distributed and will not
distribute prior to the later of (i) the Closing Date, or any date on
which Option Shares are to be purchased, as the case may be, and (ii)
completion of the distribution of the
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<PAGE> 7
Shares, any offering material in connection with the offering and sale
of the Shares other than any Preliminary Prospectuses, the Prospectus,
the Registration Statement and other materials, if any, permitted by the
Act.
(q) Neither the Company nor any of its subsidiaries has at
any time during the last five (5) years (i) made any unlawful
contribution to any candidate for foreign office or failed to disclose
fully any contribution in violation of law, or (ii) made any payment to
any federal or state governmental officer or official, or other person
charged with similar public or quasi-public duties, other than payments
required or permitted by the laws of the United States or any
jurisdiction thereof.
(r) The Company has not taken and will not take, directly
or indirectly, any action designed to or that might reasonably be
expected to cause or result in stabilization or manipulation of the
price of the Common Stock to facilitate the sale or resale of the
Shares.
(s) Each executive officer and director of the Company and
each Selling Stockholder has agreed in writing that such person will
not, for a period of 180 days from the date that the Registration
Statement is declared effective by the Commission (the "Lock-up
Period"), offer to sell, contract to sell, or otherwise sell, dispose
of, loan, pledge or grant any rights with respect to (collectively, a
"Disposition") any shares of Common Stock, any options or warrants to
purchase any shares of Common Stock or any securities convertible into
or exchangeable for shares of Common Stock (collectively, "Securities")
now owned or hereafter acquired directly by such person or with respect
to which such person has or hereafter acquires the power of disposition,
otherwise than (i) as a bona fide gift or gifts, provided the donee or
donees thereof agree in writing to be bound by this restriction, (ii) as
a distribution to partners or shareholders of such person, provided that
the distributees thereof agree in writing to be bound by the terms of
this restriction, or (iii) with the prior written consent of Robertson,
Stephens & Company LLC. The foregoing restriction has been expressly
agreed to preclude the holder of the Securities from engaging in any
hedging or other transaction which is designed to or reasonably expected
to lead to or result in a Disposition of Securities during the Lock-up
Period, even if such Securities would be disposed of by someone other
than such holder. Such prohibited hedging or other transactions would
include, without limitation, any short sale (whether or not against the
box) or any purchase, sale or grant of any right (including, without
limitation, any put or call option) with respect to any Securities or
with respect to any security (other than a broad-based market basket or
index) that includes, relates to or derives any significant part of its
value from Securities. Furthermore, such person has also agreed and
consented to the entry of stop transfer instructions with the Company's
transfer agent against the transfer of the Securities held by such
person except in compliance with this restriction. The Company has
provided to counsel for the Underwriters a complete and accurate list of
all securityholders of the Company and the number and type of securities
held by each securityholder. The Company has provided to counsel for the
Underwriters true, accurate and complete copies of all of the agreements
pursuant to which its officers, directors and shareholders have agreed
to such or similar restrictions (the "Lock-up Agreements") presently in
effect or effected hereby. The Company hereby represents and warrants
that it will not release any of its officers, directors or other
shareholders from any Lock-up Agreements currently existing or hereafter
effected without the prior written consent of Robertson, Stephens &
Company LLC.
(t) Except as set forth in the Registration Statement and
Prospectus, (i) the Company is in compliance with all rules, laws and
regulations relating to the use, treatment, storage and disposal of
toxic substances and protection of health or the environment
("Environmental Laws") which are applicable to its business, (ii) the
Company has received no notice from any governmental authority or third
party of an asserted claim under Environmental Laws, which claim is
required to be disclosed in the Registration Statement and the
Prospectus, (iii) the Company will not be required to make future
material capital expenditures to comply with Environmental Laws and (iv)
no property which is owned, leased or occupied by the Company has been
designated as a Superfund site pursuant to the Comprehensive Response,
Compensation, and Liability Act of 1980, as amended (42 U.S.C. Section
9601, et seq.), or otherwise designated as a contaminated site under
applicable state or local law.
(u) The Company and each of its subsidiaries maintain a
system of internal accounting controls sufficient to provide reasonable
assurances that (i) transactions are executed in accordance with
management's general or specific authorizations, (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to maintain
accountability for assets, (iii) access to assets is permitted only in
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<PAGE> 8
accordance with management's general or specific authorization, and (iv)
the recorded accountability for assets is compared with existing assets
at reasonable intervals and appropriate action is taken with respect to
any differences.
(v) There are no outstanding loans, advances (except
normal advances for business expenses in the ordinary course of
business) or guarantees of indebtedness by the Company to or for the
benefit of any of the officers or directors of the Company or any of the
members of the families of any of them, except as disclosed in the
Registration Statement and the Prospectus.
II. Each Selling Stockholder, severally and not jointly,
represents and warrants to and agrees with each Underwriter and the
Company that:
(a) Such Selling Stockholder now has and on the Closing
Date, and on any later date on which Option Shares are purchased, will
have valid marketable title to the Shares to be sold by such Selling
Stockholder, free and clear of any pledge, lien, security interest,
encumbrance, claim or equitable interest other than pursuant to this
Agreement; and upon delivery of such Shares hereunder and payment of the
purchase price as herein contemplated, each of the Underwriters will
obtain valid marketable title to the Shares purchased by it from such
Selling Stockholder, free and clear of any pledge, lien, security
interest pertaining to such Selling Stockholder or such Selling
Shareholder's property, encumbrance, claim or equitable interest,
including any liability for estate or inheritance taxes, or any
liability to or claims of any creditor, devisee, legatee or beneficiary
of such Selling Stockholder.
(b) Such Selling Stockholder has duly authorized (if
applicable), executed and delivered, in the form heretofore furnished to
the Representatives, an irrevocable Power of Attorney (the "Power of
Attorney") appointing ___________ and ___________ as attorneys-in-fact
(collectively, the "Attorneys" and individually, an "Attorney") and a
Letter of Transmittal and Custody Agreement (the "Custody Agreement")
with ______________________________, as custodian (the "Custodian");
each of the Power of Attorney and the Custody Agreement constitutes a
valid and binding agreement on the part of such Selling Stockholder,
enforceable in accordance with its terms, except as the enforcement
thereof may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or
affecting creditors' rights generally or by general equitable
principles; and each of such Selling Shareholder's Attorneys, acting
alone, is authorized to execute and deliver this Agreement and the
certificate referred to in Section 6(h) hereof on behalf of such Selling
Stockholder, to determine the purchase price to be paid by the several
Underwriters to such Selling Stockholder as provided in Section 3
hereof, to authorize the delivery of the Selling Stockholder Shares and
the Option Shares to be sold by such Selling Stockholder under this
Agreement and to duly endorse (in blank or otherwise) the certificate or
certificates representing such Shares or a stock power or powers with
respect thereto, to accept payment therefor, and otherwise to act on
behalf of such Selling Stockholder in connection with this Agreement.
(c) All consents, approvals, authorizations and orders
required for the execution and delivery by such Selling Stockholder of
the Power of Attorney and the Custody Agreement, the execution and
delivery by or on behalf of such Selling Stockholder of this Agreement
and the sale and delivery of the Selling Stockholder Shares and the
Option Shares to be sold by such Selling Stockholder under this
Agreement (other than, at the time of the execution hereof (if the
Registration Statement has not yet been declared effective by the
Commission), the issuance of the order of the Commission declaring the
Registration Statement effective and such consents, approvals,
authorizations or orders as may be necessary under state or other
securities or Blue Sky laws) have been obtained and are in full force
and effect; such Selling Stockholder, if other than a natural person,
has been duly organized and is validly existing in good standing under
the laws of the jurisdiction of its organization as the type of entity
that it purports to be; and such Selling Stockholder has full legal
right, power and authority to enter into and perform its obligations
under this Agreement and such Power of Attorney and Custody Agreement,
and to sell, assign, transfer and deliver the Shares to be sold by such
Selling Stockholder under this Agreement.
(d) Such Selling Stockholder will not, during the Lock-up
Period, effect the Disposition of any Securities now owned or hereafter
acquired directly by such Selling Stockholder or with respect to which
such Selling Stockholder has or hereafter acquires the power of
disposition, otherwise than (i) as a bona fide gift or gifts, provided
the donee or donees thereof agree in writing to be bound by this
restriction, (ii) as a distribution to partners or shareholders of such
Selling Stockholder, provided that the distributees thereof agree in
writing to be bound by the terms of this restriction, or (iii) with the
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<PAGE> 9
prior written consent of Robertson, Stephens & Company LLC. The
foregoing restriction is expressly agreed to preclude the holder of the
Securities from engaging in any hedging or other transaction which is
designed to or reasonably expected to lead to or result in a Disposition
of Securities during the Lock-up Period, even if such Securities would
be disposed of by someone other than the Selling Stockholder. Such
prohibited hedging or other transactions would including, without
limitation, any short sale (whether or not against the box) or any
purchase, sale or grant of any right (including, without limitation, any
put or call option) with respect to any Securities or with respect to
any security (other than a broad-based market basket or index) that
includes, relates to or derives any significant part of its value from
Securities. Such Selling Stockholder also agrees and consents to the
entry of stop transfer instructions with the Company's transfer agent
against the transfer of the securities held by such Selling Stockholder
except in compliance with this restriction.
(e) Certificates in negotiable form for all Shares to be
sold by such Selling Stockholder under this Agreement, together with a
stock power or powers duly endorsed in blank by such Selling
Stockholder, have been placed in custody with the Custodian for the
purpose of effecting delivery hereunder.
(f) This Agreement has been duly authorized by each
Selling Stockholder that is not a natural person and has been duly
executed and delivered by or on behalf of such Selling Stockholder and
is a valid and binding agreement of such Selling Stockholder,
enforceable in accordance with its terms, except as rights to
indemnification hereunder may be limited by applicable law and except as
the enforcement hereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or
affecting creditors' rights generally or by general equitable
principles; and the performance of this Agreement and the consummation
of the transactions herein contemplated will not result in a breach or
violation of any of the terms and provisions of or constitute a default
under any bond, debenture, note or other evidence of indebtedness, or
under any lease, contract, indenture, mortgage, deed of trust, loan
agreement, joint venture or other agreement or instrument to which such
Selling Stockholder is a party or by which such Selling Stockholder, or
any Selling Stockholder Shares or any Option Shares to be sold by such
Selling Stockholder hereunder, may be bound or, to the best of such
Selling Stockholders' knowledge, result in any violation of any law,
order, rule, regulation, writ, injunction, judgment or decree of any
court, government or governmental agency or body, domestic or foreign,
having jurisdiction over such Selling Stockholder or over the properties
of such Selling Stockholder, or, if such Selling Stockholder is other
than a natural person, result in any violation of any provisions of the
charter, bylaws or other organizational documents of such Selling
Stockholder.
(g) Such Selling Stockholder has not taken and will not
take, directly or indirectly, any action designed to or that might
reasonably be expected to cause or result in stabilization or
manipulation of the price of the Common Stock to facilitate the sale or
resale of the Shares.
(h) Such Selling Stockholder has not distributed and will
not distribute any prospectus or other offering material in connection
with the offering and sale of the Shares.
(i) All information furnished by or on behalf of such
Selling Stockholder relating to such Selling Stockholder and the Selling
Stockholder Shares that is contained in the representations and
warranties of such Selling Stockholder in such Selling Shareholder's
Power of Attorney or set forth in the Registration Statement or the
Prospectus is, and at the time the Registration Statement became or
becomes, as the case may be, effective and at all times subsequent
thereto up to and on the Closing Date, and on any later date on which
Option Shares are to be purchased, was or will be, true, correct and
complete, and does not, and at the time the Registration Statement
became or becomes, as the case may be, effective and at all times
subsequent thereto up to and on the Closing Date (hereinafter defined),
and on any later date on which Option Shares are to be purchased, will
not, contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make such
information not misleading.
(j) Such Selling Stockholder will review the Prospectus
and will comply with all agreements and satisfy all conditions on its
part to be complied with or satisfied pursuant to this Agreement on or
prior to the Closing Date, or any later date on which Option Shares are
to be purchased, as the case may be, and will advise one of its
Attorneys and Robertson, Stephens & Company LLC prior to the Closing
Date or such later date on which Option Shares are to be purchased, as
the case may be, if any statement to be made on behalf of such Selling
Stockholder in the certificate
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<PAGE> 10
contemplated by Section 6(h) would be inaccurate if made as of the
Closing Date or such later date on which Option Shares are to be
purchased, as the case may be .
(k) Such Selling Stockholder does not have, or has waived
prior to the date hereof, any preemptive right, co-sale right or right
of first refusal or other similar right to purchase any of the Shares
that are to be sold by the Company or any of the other Selling
Stockholders to the Underwriters pursuant to this Agreement; such
Selling Stockholder does not have, or has waived prior to the date
hereof, any registration right or other similar right to participate in
the offering made by the Prospectus, other than such rights of
participation as have been satisfied by the participation of such
Selling Stockholder in the transactions to which this Agreement relates
in accordance with the terms of this Agreement; and such Selling
Stockholder does not own any warrants, options or similar rights to
acquire, and does not have any right or arrangement to acquire, any
capital stock, rights, warrants, options or other securities from the
Company, other than those described in the Registration Statement and
the Prospectus.
3. Purchase, Sale and Delivery of Shares. On the basis of the
representations, warranties and agreements herein contained, but subject
to the terms and conditions herein set forth, the Company and the
Selling Stockholders agree severally and not jointly, to sell to the
Underwriters, and each Underwriter agrees, severally and not jointly, to
purchase from the Company and the Selling Stockholders, respectively, at
a purchase price of $_____ per share, the respective number of Firm
Shares as hereinafter set forth and Selling Stockholder Shares set forth
opposite the names of the Company and the Selling Stockholders in
Schedule B hereto. The obligation of each Underwriter to the Company and
to each Selling Stockholder shall be to purchase from the Company or
such Selling Stockholder that number of Firm Shares or Selling
Stockholder Shares, as the case may be, which (as nearly as practicable,
as determined by you) is in the same proportion to the number of Company
Shares or Selling Stockholder Shares, as the case may be, set forth
opposite the name of the Company or such Selling Stockholder in Schedule
B hereto as the number of Firm Shares which is set forth opposite the
name of such Underwriter in Schedule A hereto (subject to adjustment as
provided in Section 10) is to the total number of Firm Shares to be
purchased by all the Underwriters under this Agreement.
The certificates in negotiable form for the Selling
Stockholder Shares have been placed in custody (for delivery under this
Agreement) under the Custody Agreement. Each Selling Stockholder agrees
that the certificates for the Selling Stockholder Shares of such Selling
Stockholder so held in custody are subject to the interests of the
Underwriters hereunder, that the arrangements made by such Selling
Stockholder for such custody, including the Power of Attorney is to that
extent irrevocable and that the obligations of such Selling Stockholder
hereunder shall not be terminated by the act of such Selling Stockholder
or by operation of law, whether by the death or incapacity of such
Selling Stockholder or the occurrence of any other event, except as
specifically provided herein or in the Custody Agreement. If any Selling
Stockholder should die or be incapacitated, or if any other such event
should occur, before the delivery of the certificates for the Selling
Stockholder Shares hereunder, the Selling Stockholder Shares to be sold
by such Selling Stockholder shall, except as specifically provided
herein or in the Custody Agreement, be delivered by the Custodian in
accordance with the terms and conditions of this Agreement as if such
death, incapacity or other event had not occurred, regardless of whether
the Custodian shall have received notice of such death or other event.
Delivery of definitive certificates for the Firm Shares to
be purchased by the Underwriters pursuant to this Section 3 shall be
made against payment of the purchase price therefor by the several
Underwriters by certified or official bank check or checks drawn in
next-day funds, payable to the order of the Company with regard to the
Shares being purchased from the Company, and to the order of the
Custodian for the respective accounts of the Selling Stockholders with
regard to the Shares being purchased from such Selling Stockholders (and
the Company and such Selling Stockholders agrees not to deposit and to
cause the Custodian not to deposit any such check in the bank on which
it is drawn, and not to take any other action with the purpose or effect
of receiving immediately available funds, until the business day
following the date of its delivery to the Company or the Custodian, as
the case may be, and, in the event of any breach of the foregoing, the
Company or the Selling Stockholders, as the case may be, shall reimburse
the Underwriters for the interest lost and any other expenses borne by
them by reason of such breach), at the offices of Wolf, Block, Schorr
and Solis-Cohen, Twelfth Floor Packard Building, S.E. Corner 15th &
Chestnut Streets, Philadelphia, Pennsylvania 19102 (or at such other
place as may be agreed upon among the Representatives and the Company
and the Attorneys), at 7:00 A.M., San Francisco time (a) on the third
(3rd) full business day following the first day that Shares are traded,
(b) if this Agreement is executed and delivered after
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<PAGE> 11
1:30 P.M., San Francisco time, the fourth (4th) full business day
following the day that this Agreement is executed and delivered or (c)
at such other time and date not later than seven (7) full business days
following the first day that Shares are traded as the Representatives
and the Company and the Attorneys may determine (or at such time and
date to which payment and delivery shall have been postponed pursuant to
Section 10 hereof), such time and date of payment and delivery being
herein called the "Closing Date;" provided, however, that if the Company
has not made available to the Representatives copies of the Prospectus
within the time provided in Section 4(d) hereof, the Representatives
may, in their sole discretion, postpone the Closing Date until no later
than two (2) full business days following delivery of copies of the
Prospectus to the Representatives. The certificates for the Firm Shares
to be so delivered will be made available to you at such office or such
other location including, without limitation, in New York City, as you
may reasonably request for checking at least one (1) full business day
prior to the Closing Date and will be in such names and denominations as
you may request, such request to be made at least two (2) full business
days prior to the Closing Date. If the Representatives so elect,
delivery of the Firm Shares may be made by credit through full fast
transfer to the accounts at The Depository Trust Company designated by
the Representatives.
It is understood that you, individually, and not as the
Representatives of the several Underwriters, may (but shall not be
obligated to) make payment of the purchase price on behalf of any
Underwriter or Underwriters whose check or checks shall not have been
received by you prior to the Closing Date for the Firm Shares to be
purchased by such Underwriter or Underwriters. Any such payment by you
shall not relieve any such Underwriter or Underwriters of any of its or
their obligations hereunder.
After the Registration Statement becomes effective, the
several Underwriters intend to make a public offering (as such term is
described in Section 11 hereof) of the Firm Shares at a public offering
price of $_____ per share. After the public offering, the several
Underwriters may, in their discretion, vary the public offering price.
The information set forth in the last paragraph on the
front cover page (insofar as such information relates to the
Underwriters), on the inside front cover concerning stabilization and
over-allotment by the Underwriters, and under the [__] and [__]
paragraphs under the caption "Underwriting" in any Preliminary
Prospectus and in the Prospectus constitutes the only information
furnished by the Underwriters to the Company for inclusion in any
Preliminary Prospectus, the Prospectus or the Registration Statement,
and you, on behalf of the respective Underwriters, represent and warrant
to the Company and the Selling Stockholders that the statements made
therein do not include any untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances under
which they were made, not misleading.
4. Further Agreements of the Company. The Company agrees
with the several Underwriters that:
(a) The Company will use its best efforts to cause the
Registration Statement and any amendment thereof, if not effective at
the time and date that this Agreement is executed and delivered by the
parties hereto, to become effective as promptly as possible; the Company
will use its best efforts to cause any abbreviated registration
statement pursuant to Rule 462(b) of the Rules and Regulations as may be
required subsequent to the date the Registration Statement is declared
effective to become effective as promptly as possible; the Company will
notify you, promptly after it shall receive notice thereof, of the time
when the Registration Statement, any subsequent amendment to the
Registration Statement or any abbreviated registration statement has
become effective or any supplement to the Prospectus has been filed; if
the Company omitted information from the Registration Statement at the
time it was originally declared effective in reliance upon Rule 430A(a)
of the Rules and Regulations, the Company will provide evidence
satisfactory to you that the Prospectus contains such information and
has been filed, within the time period prescribed, with the Commission
pursuant to subparagraph (1) or (4) of Rule 424(b) of the Rules and
Regulations or as part of a post-effective amendment to such
Registration Statement as originally declared effective which is
declared effective by the Commission; if the Company files a term sheet
pursuant to Rule 434 of the Rules and Regulations, the Company will
provide evidence satisfactory to you that the Prospectus and term sheet
meeting the requirements of Rule 434(b) or (c), as applicable, of the
Rules and Regulations, have been filed, within the time period
prescribed, with the Commission pursuant to subparagraph (7) of Rule
424(b) of the Rules and Regulations; if for any reason the filing of the
final form of Prospectus is required under Rule 424(b)(3) of the Rules
and Regulations, it will provide evidence satisfactory to you that the
Prospectus contains such information and has been
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<PAGE> 12
filed with the Commission within the time period prescribed; it will
notify you promptly of any request by the Commission for the amending or
supplementing of the Registration Statement or the Prospectus or for
additional information; promptly upon your request, it will prepare and
file with the Commission any amendments or supplements to the
Registration Statement or Prospectus which, in the opinion of counsel
for the several Underwriters ("Underwriters' Counsel"), may be necessary
or advisable in connection with the distribution of the Shares by the
Underwriters; it will promptly prepare and file with the Commission, and
promptly notify you of the filing of, any amendments or supplements to
the Registration Statement or Prospectus which may be necessary to
correct any statements or omissions, if, at any time when a prospectus
relating to the Shares is required to be delivered under the Act, any
event shall have occurred as a result of which the Prospectus or any
other prospectus relating to the Shares as then in effect would include
any untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; in case any
Underwriter is required to deliver a prospectus nine (9) months or more
after the effective date of the Registration Statement in connection
with the sale of the Shares, it will prepare promptly upon request, but
at the expense of such Underwriter, such amendment or amendments to the
Registration Statement and such prospectus or prospectuses as may be
necessary to permit compliance with the requirements of Section 10(a)(3)
of the Act; and it will file no amendment or supplement to the
Registration Statement or Prospectus, or, prior to the end of the period
of time in which a prospectus relating to the Shares is required to be
delivered under the Act, which shall not previously have been submitted
to you a reasonable time prior to the proposed filing thereof or to
which you shall reasonably object in writing, subject, however, to
compliance with the Act and the Rules and Regulations, the Exchange Act
and the rules and regulations of the Commission thereunder and the
provisions of this Agreement.
(b) The Company will advise you, promptly after it shall receive
notice or obtain knowledge, of the issuance of any stop order by the
Commission suspending the effectiveness of the Registration Statement or
of the initiation or threat of any proceeding for that purpose; and it
will promptly use its best efforts to prevent the issuance of any stop
order or to obtain its withdrawal at the earliest possible moment if
such stop order should be issued.
(c) The Company will use its best efforts to qualify the Shares
for offering and sale under the securities laws of such jurisdictions as
you may designate and to continue such qualifications in effect for so
long as may be required for purposes of the distribution of the Shares,
except that the Company shall not be required in connection therewith or
as a condition thereof to qualify as a foreign corporation or to execute
a general consent to service of process in any jurisdiction in which it
is not otherwise required to be so qualified or to so execute a general
consent to service of process. In each jurisdiction in which the Shares
shall have been qualified as above provided, the Company will make and
file such statements and reports in each year as are or may be required
by the laws of such jurisdiction.
(d) The Company will furnish to you, as soon as available, and,
in the case of the Prospectus and any term sheet or abbreviated term
sheet under Rule 434, in no event later than the first (1st) full
business day following the first day that Shares are traded, copies of
the Registration Statement (three of which will be signed and which will
include all exhibits), each Preliminary Prospectus, the Prospectus and
any amendments or supplements to such documents, including any
prospectus prepared to permit compliance with Section 10(a)(3) of the
Act, all in such quantities as you may from time to time reasonably
request. Notwithstanding the foregoing, if Robertson, Stephens & Company
LLC, on behalf of the several Underwriters, shall agree to the
utilization of Rule 434 of the Rules and Regulations, the Company shall
provide to you copies of a Preliminary Prospectus updated in all
respects through the date specified by you in such quantities as you may
from time to time reasonably request.
(e) The Company will make generally available to its
securityholders as soon as practicable, but in any event not later than
the forty-fifth (45th) day following the end of the fiscal quarter first
occurring after the first anniversary of the effective date of the
Registration Statement, an earnings statement (which will be in
reasonable detail but need not be audited) complying with the provisions
of Section 11(a) of the Act and covering a twelve (12) month period
beginning after the effective date of the Registration Statement.
(f) During a period of five (5) years after the date hereof, the
Company will furnish to its shareholders as soon as practicable after
the end of each respective period, annual reports (including financial
statements audited by independent certified public accountants) and
unaudited quarterly reports of operations for each of the first three
quarters of the fiscal year,
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and will furnish to you and the other several Underwriters hereunder,
upon request (i) concurrently with furnishing such reports to its
shareholders, statements of operations of the Company for each of the
first three (3) quarters in the form furnished to the Company's
shareholders, (ii) concurrently with furnishing to its shareholders, a
balance sheet of the Company as of the end of such fiscal year, together
with statements of operations, of shareholders' equity, and of cash
flows of the Company for such fiscal year, accompanied by a copy of the
certificate or report thereon of independent certified public
accountants, (iii) as soon as they are available, copies of all reports
(financial or other) mailed to shareholders, (iv) as soon as they are
available, copies of all reports and financial statements furnished to
or filed with the Commission, any securities exchange or the National
Association of Securities Dealers, Inc. ("NASD"), (v) every material
press release and every material news item or article in respect of the
Company or its affairs which was generally released to shareholders or
prepared by the Company or any of its subsidiaries, and (vi) any
additional information of a public nature concerning the Company or its
subsidiaries, or its business which you may reasonably request. During
such five (5) year period, if the Company shall have active
subsidiaries, the foregoing financial statements shall be on a
consolidated basis to the extent that the accounts of the Company and
its subsidiaries are consolidated, and shall be accompanied by similar
financial statements for any significant subsidiary which is not so
consolidated.
(g) The Company will apply the net proceeds from the sale of the
Shares being sold by it in the manner set forth under the caption "Use
of Proceeds" in the Prospectus.
(h) The Company will maintain a transfer agent and, if necessary
under the jurisdiction of incorporation of the Company, a registrar
(which may be the same entity as the transfer agent) for its Common
Stock.
(i) If the transactions contemplated hereby are not consummated
by reason of any failure, refusal or inability on the part of the
Company or any Selling Stockholder to perform any agreement on their
respective parts to be performed hereunder or to fulfill any condition
of the Underwriters' obligations hereunder, or if the Company shall
terminate this Agreement pursuant to Section 11(a) hereof, or if the
Underwriters shall terminate this Agreement pursuant to Section
11(b)(i), the Company will reimburse the several Underwriters for all
out-of-pocket expenses (including fees and disbursements of
Underwriters' Counsel) incurred by the Underwriters in investigating or
preparing to market or marketing the Shares.
(j) If at any time during the ninety (90) day period after the
Registration Statement becomes effective, any rumor, publication or
event relating to or affecting the Company shall occur as a result of
which in your opinion the market price of the Common Stock has been or
is likely to be materially affected (regardless of whether such rumor,
publication or event necessitates a supplement to or amendment of the
Prospectus), the Company will, after written notice from you advising
the Company to the effect set forth above, forthwith prepare, consult
with you concerning the substance of and disseminate a press release or
other public statement, reasonably satisfactory to you, responding to or
commenting on such rumor, publication or event.
(k) During the Lock-up Period, the Company will not, without the
prior written consent of Robertson Stephens & Company LLC, effect the
Disposition of, directly or indirectly, any Securities other than the
sale of the Firm Shares and the Option Shares to be sold by the
Company hereunder and the Company's issuance of options or Common Stock
under the Company's presently authorized ___________ (the "Option
Plan").
(l) During a period of ninety (90) days from the effective date
of the Registration Statement, the Company will not file a registration
statement registering shares under the Option Plan or other employee
benefit plan.
5. Expenses.
(a) The Company and the Selling Stockholders agree with
each Underwriter that:
The Company and the Selling Stockholders will pay and bear all
costs and expenses in connection with the preparation, printing and
filing of the Registration Statement (including financial statements,
schedules and exhibits),
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<PAGE> 14
Preliminary Prospectuses and the Prospectus and any amendments or
supplements thereto; the printing of this Agreement, the Agreement Among
Underwriters, the Selected Dealer Agreement, the Preliminary Blue Sky
Survey and any Supplemental Blue Sky Survey, the Underwriters'
Questionnaire and Power of Attorney, and any instruments related to any
of the foregoing; the issuance and delivery of the Shares hereunder to
the several Underwriters, including transfer taxes, if any, the cost of
all certificates representing the Shares and transfer agents' and
registrars' fees; the fees and disbursements of counsel for the Company;
all fees and other charges of the Company's independent certified public
accountants; the cost of furnishing to the several Underwriters copies
of the Registration Statement (including appropriate exhibits),
Preliminary Prospectus and the Prospectus, and any amendments or
supplements to any of the foregoing; NASD filing fees and the cost of
qualifying the Shares under the laws of such jurisdictions as you may
designate (including filing fees and fees and disbursements of
Underwriters' Counsel in connection with such NASD filings and Blue Sky
qualifications); and all other expenses directly incurred by the Company
and the Selling Stockholders in connection with the performance of their
obligations hereunder. Any additional expenses incurred as a result of
the sale of the Shares by the Selling Stockholders will be borne
collectively by the Company and the Selling Stockholders. The provisions
of this Section 5(a)(i) are intended to relieve the Underwriters from
the payment of the expenses and costs which the Selling Stockholders and
the Company hereby agree to pay, but shall not affect any agreement
which the Selling Stockholders and the Company may make, or may have
made, for the sharing of any of such expenses and costs. Such agreements
shall not impair the obligations of the Company and the Selling
Stockholders hereunder to the several Underwriters.
(b) In addition to its other obligations under Section
8(a) hereof, the Company agrees that, as an interim measure during the
pendency of any claim, action, investigation, inquiry or other
proceeding described in Section 8(a) hereof, it will reimburse the
Underwriters on a monthly basis for all reasonable legal or other
expenses incurred in connection with investigating or defending any such
claim, action, investigation, inquiry or other proceeding,
notwithstanding the absence of a judicial determination as to the
propriety and enforceability of the Company's obligation to reimburse
the Underwriters for such expenses and the possibility that such
payments might later be held to have been improper by a court of
competent jurisdiction. To the extent that any such interim
reimbursement payment is so held to have been improper, the Underwriters
shall promptly return such payment to the Company together with
interest, compounded daily, determined on the basis of the prime rate
(or other commercial lending rate for borrowers of the highest credit
standing) listed from time to time in The Wall Street Journal which
represents the base rate on corporate loans posted by a substantial
majority of the nation's thirty (30) largest banks (the "Prime Rate").
Any such interim reimbursement payments which are not made to the
Underwriters within thirty (30) days of a request for reimbursement
shall bear interest at the Prime Rate from the date of such request.
(c) In addition to their other obligations under Section
8(b) hereof, each Selling Stockholder agrees that, as an interim measure
during the pendency of any claim, action, investigation, inquiry or
other proceeding described in Section 8(b) hereof relating to such
Selling Stockholder, it will reimburse the Underwriters on a monthly
basis for all reasonable legal or other expenses incurred in connection
with investigating or defending any such claim, action, investigation,
inquiry or other proceeding, notwithstanding the absence of a judicial
determination as to the propriety and enforceability of such Selling
Shareholder's obligation to reimburse the Underwriters for such expenses
and the possibility that such payments might later be held to have been
improper by a court of competent jurisdiction. To the extent that any
such interim reimbursement payment is so held to have been improper, the
Underwriters shall promptly return such payment to the Selling
Stockholders, together with interest, compounded daily, determined on
the basis of the Prime Rate. Any such interim reimbursement payments
which are not made to the Underwriters within thirty (30) days of a
request for reimbursement shall bear interest at the Prime Rate from the
date of such request.
(d) In addition to their other obligations under Section
8(c) hereof, the Underwriters severally and not jointly agree that, as
an interim measure during the pendency of any claim, action,
investigation, inquiry or other proceeding described in Section 8(c)
hereof, they will reimburse the Company and each Selling Stockholder on
a monthly basis for all reasonable legal or other expenses incurred in
connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the absence
of a judicial determination as to the propriety and enforceability of
the Underwriters' obligation to reimburse the Company and each such
Selling Stockholder for such expenses and the possibility that such
payments might later be held to have been improper by a court of
competent jurisdiction. To the extent that any such interim
reimbursement payment is so held to have been improper, the Company and
each such Selling Stockholder shall promptly return such payment to the
Underwriters together with interest, compounded daily, determined on
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<PAGE> 15
the basis of the Prime Rate. Any such interim reimbursement payments
which are not made to the Company and each such Selling Stockholder
within thirty (30) days of a request for reimbursement shall bear
interest at the Prime Rate from the date of such request.
(e) It is agreed that any controversy arising out of the
operation of the interim reimbursement arrangements set forth in
Sections 5(a)(ii), 5(a)(iii) and 5(b) hereof, including the amounts of
any requested reimbursement payments, the method of determining such
amounts and the basis on which such amounts shall be apportioned among
the reimbursing parties, shall be settled by arbitration conducted under
the provisions of the Constitution and Rules of the Board of Governors
of the New York Stock Exchange, Inc. or pursuant to the Code of
Arbitration Procedure of the NASD. Any such arbitration must be
commenced by service of a written demand for arbitration or a written
notice of intention to arbitrate, therein electing the arbitration
tribunal. In the event the party demanding arbitration does not make
such designation of an arbitration tribunal in such demand or notice,
then the party responding to said demand or notice is authorized to do
so. Any such arbitration will be limited to the operation of the interim
reimbursement provisions contained in Sections 5(a)(ii), 5(a)(iii) and
5(b) hereof and will not resolve the ultimate propriety or
enforceability of the obligation to indemnify for expenses which is
created by the provisions of Sections 8(a), 8(b) and 8(c) hereof or the
obligation to contribute to expenses which is created by the provisions
of Section 8(e) hereof.
6. Conditions of Underwriters' Obligations. The obligations of
the several Underwriters to purchase and pay for the Shares as provided
herein shall be subject to the accuracy, as of the date hereof and the
Closing Date and any later date on which Option Shares are to be
purchased, as the case may be, of the representations and warranties of
the Company and the Selling Stockholders herein, to the performance by
the Company and the Selling Stockholders of their respective obligations
hereunder and to the following additional conditions:
(a) The Registration Statement shall have become effective
not later than 2:00 P.M., San Francisco time, on the date following the
date of this Agreement, or such later date as shall be consented to in
writing by you; and no stop order suspending the effectiveness thereof
shall have been issued and no proceedings for that purpose shall have
been initiated or, to the knowledge of the Company, any Selling
Stockholder or any Underwriter, threatened by the Commission, and any
request of the Commission for additional information (to be included in
the Registration Statement or the Prospectus or otherwise) shall have
been complied with to the satisfaction of Underwriters' Counsel.
(b) All corporate proceedings and other legal matters in
connection with this Agreement, the form of Registration Statement and
the Prospectus, and the registration, authorization, issue, sale and
delivery of the Shares, shall have been reasonably satisfactory to
Underwriters' Counsel, and such counsel shall have been furnished with
such papers and information as they may reasonably have requested to
enable them to pass upon the matters referred to in this Section.
(c) Subsequent to the execution and delivery of this
Agreement and prior to the Closing Date, or any later date on which
Option Shares are to be purchased, as the case may be, there shall not
have been any change in the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company and
its subsidiaries considered as one enterprise from that set forth in the
Registration Statement or Prospectus, which, in your sole judgment, is
material and adverse and that makes it, in your sole judgment,
impracticable or inadvisable to proceed with the public offering of the
Shares as contemplated by the Prospectus.
(d) You shall have received on the Closing Date and on any
later date on which Option Shares are to be purchased, as the case may
be, the following opinion of counsel for the Company and the Selling
Stockholders, dated the Closing Date or such later date on which Option
Shares are to be purchased addressed to the Underwriters and with
reproduced copies or signed counterparts thereof for each of the
Underwriters, to the effect that:
(i) The Company and each Significant Subsidiary (as
that term is defined in Regulation S-X of the Act) has
been duly incorporated and is validly existing as a
corporation in good standing under the laws of the
jurisdiction of its incorporation;
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<PAGE> 16
(ii) The Company and each Significant Subsidiary has
the corporate power and authority to own, lease and
operate its properties and to conduct its business as
described in the Prospectus;
(iii) The Company and each Significant Subsidiary is
duly qualified to do business as a foreign corporation and
is in good standing in each jurisdiction, if any, in which
the ownership or leasing of its properties or the conduct
of its business requires such qualification, except where
the failure to be so qualified or be in good standing
would not have a material adverse effect on the condition
(financial or otherwise), earnings, operations or business
of the Company and its subsidiaries considered as one
enterprise. To such counsel's knowledge, the Company does
not own or control, directly or indirectly, any
corporation, association or other entity other than EARS,
Inc.;
(iv) The authorized, issued and outstanding capital
stock of the Company is as set forth in the Prospectus
under the caption "Capitalization" as of the dates stated
therein, the issued and outstanding shares of capital
stock of the Company (including the Selling Stockholder
Shares) have been duly and validly issued and are fully
paid and nonassessable, and, to such counsel's knowledge,
will not have been issued in violation of or subject to
any preemptive right, co-sale right, registration right,
right of first refusal or other similar right;
(v) All issued and outstanding shares of capital
stock of each Significant Subsidiary of the Company have
been duly authorized and validly issued and are fully paid
and nonassessable, and, to such counsel's knowledge, have
not been issued in violation of or subject to any
preemptive right, co-sale right, registration right, right
of first refusal or other similar right and are owned by
the Company free and clear of any pledge, lien, security
interest, encumbrance, claim or equitable interest;
(vi) The Firm Shares or the Option Shares, as the
case may be, to be issued by the Company pursuant to the
terms of this Agreement have been duly authorized and,
upon issuance and delivery against payment therefor in
accordance with the terms hereof, will be duly and validly
issued and fully paid and nonassessable, and will not have
been issued in violation of or subject to any preemptive
right, co-sale right, registration right, right of first
refusal or other similar right.
(vii) The Company has the corporate power and
authority to enter into this Agreement and to issue, sell
and deliver to the Underwriters the Shares to be issued
and sold by it hereunder;
(viii) This Agreement has been duly authorized by
all necessary corporate action on the part of the Company
and has been duly executed and delivered by the Company
and, assuming due authorization, execution and delivery by
you, is a valid and binding agreement of the Company,
enforceable in accordance with its terms, except insofar
as indemnification provisions may be limited by applicable
law and except as enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium or
similar laws relating to or affecting creditors' rights
generally or by general equitable principles;
(ix) The Registration Statement has become effective
under the Act and, to such counsel's knowledge, no stop
order suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that
purpose have been instituted or are pending or threatened
under the Act;
(x) The Registration Statement and the Prospectus,
and each amendment or supplement thereto (other than the
financial statements (including supporting schedules) and
financial data derived therefrom as to which such counsel
need express no opinion), as of the effective date of the
Registration Statement, complied as to form in all
material respects with the requirements of the Act and the
applicable Rules and Regulations; and the financial data
derived therefrom as to which such counsel need express no
opinion) complied when filed pursuant to the Exchange Act
as to form in all material respects with the requirements
of the Act and the Rules and Regulations and the Exchange
Act and the applicable rules and regulations of the
Commission thereunder;
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(xi) The information in the Prospectus under the
caption "Description of Capital Stock," to the extent that
it constitutes matters of law or legal conclusions, has
been reviewed by such counsel and is a fair summary of
such matters and conclusions; and the forms of
certificates evidencing the Common Stock and filed as
exhibits to the Registration Statement comply with
Delaware law;
(xii) The description in the Registration Statement
and the Prospectus of the charter and bylaws of the
Company and of statutes are accurate and fairly present
the information required to be presented by the Act and
the applicable Rules and Regulations;
(xiii) To such counsel's knowledge, there are no
agreements, contracts, leases or documents to which the
Company is a party of a character required to be described
or referred to in the Registration Statement or Prospectus
or to be filed as an exhibit to the Registration Statement
which are not described or referred to therein or filed as
required;
(xiv) The performance of this Agreement and the
consummation of the transactions herein contemplated
(other than performance of the Company's indemnification
obligations hereunder, concerning which no opinion need be
expressed) will not (a) result in any violation of the
Company's charter or bylaws or (b) to such counsel's
knowledge, result in a material breach or violation of any
of the terms and provisions of, or constitute a default
under, any bond, debenture, note or other evidence of
indebtedness, or any lease, contract, indenture, mortgage,
deed of trust, loan agreement, joint venture or other
agreement or instrument known to such counsel to which the
Company is a party or by which its properties are bound,
or any applicable statute, rule or regulation known to
such counsel or, to such counsel's knowledge, any order,
writ or decree of any court, government or governmental
agency or body having jurisdiction over the Company or any
of its subsidiaries, or over any of their properties or
operations;
(xv) No consent, approval, authorization or order of
or qualification with any court, government or
governmental agency or body having jurisdiction over the
Company or any of its subsidiaries, or over any of their
properties or operations is necessary in connection with
the consummation by the Company of the transactions herein
contemplated, except such as have been obtained under the
Act or such as may be required under state or other
securities or Blue Sky laws in connection with the
purchase and the distribution of the Shares by the
Underwriters;
(xvi) To such counsel's knowledge, there are no
legal or governmental proceedings pending or threatened
against the Company or any of its subsidiaries of a
character required to be disclosed in the Registration
Statement or the Prospectus by the Act or the Rules and
Regulations, other than those described therein;
(xvii) To such counsel's knowledge, neither the
Company nor any of its subsidiaries is presently (a) in
material violation of its respective charter or bylaws, or
(b) in material breach of any applicable statute, rule or
regulation known to such counsel or, to such counsel's
knowledge, any order, writ or decree of any court or
governmental agency or body having jurisdiction over the
Company or any of its subsidiaries, or over any of their
properties or operations;
(xviii) To such counsel's knowledge, except as set
forth in the Registration Statement and Prospectus, no
holders of Common Stock or other securities of the Company
have registration rights with respect to securities of the
Company and, except as set forth in the Registration
Statement and Prospectus, all holders of securities of the
Company having rights known to such counsel to
registration of such shares of Common Stock or other
securities, because of the filing of the Registration
Statement by the Company have, with respect to the
offering contemplated thereby, waived such rights or such
rights have expired by reason of lapse of time following
notification of the Company's intent to file the
Registration Statement or have included securities in the
Registration Statement pursuant to the exercise of and in
full satisfaction of such rights;
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<PAGE> 18
(xix) Each Selling Stockholder which is not a
natural person has full right, power and authority to
enter into and to perform its obligations under the Power
of Attorney and Custody Agreement to be executed and
delivered by it in connection with the transactions
contemplated herein; the Power of Attorney and Custody
Agreement of each Selling Stockholder that is not a
natural person has been duly authorized by such Selling
Stockholder; the Power of Attorney and Custody Agreement
of each Selling Stockholder has been duly executed and
delivered by or on behalf of such Selling Stockholder; and
the Power of Attorney and Custody Agreement of each
Selling Stockholder constitutes the valid and binding
agreement of such Selling Stockholder, enforceable in
accordance with its terms, except as the enforcement
thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating
to or affecting creditors' rights generally or by general
equitable principles;
(xx) Each of the Selling Stockholders has full
right, power and authority to enter into and to perform
its obligations under this Agreement and to sell,
transfer, assign and deliver the Shares to be sold by such
Selling Stockholder hereunder;
(xxi) This Agreement has been duly authorized by
each Selling Stockholder that is not a natural person and
has been duly executed and delivered by or on behalf of
each Selling Stockholder; and
(xxii) Upon the delivery of and payment for the
Shares as contemplated in this Agreement, each of the
Underwriters will receive valid marketable title to the
Shares purchased by it from such Selling Stockholder, free
and clear of any pledge, lien, security interest,
encumbrance, claim or equitable interest. In rendering
such opinion, such counsel may assume that the
Underwriters are without notice of any defect in the title
of the Shares being purchased from the Selling
Stockholders.
In addition, such counsel shall state that such
counsel has participated in conferences with officials and other
representatives of the Company, the Representatives, Underwriters'
Counsel and the independent certified public accountants of the Company,
at which such conferences the contents of the Registration Statement and
Prospectus and related matters were discussed, and although they have
not verified the accuracy or completeness of the statements contained in
the Registration Statement or the Prospectus, nothing has come to the
attention of such counsel which leads them to believe that, at the time
the Registration Statement became effective and at all times subsequent
thereto up to and on the Closing Date and on any later date on which
Option Shares are to be purchased, the Registration Statement and any
amendment or supplement thereto, when such documents became effective or
were filed with the Commission (other than the financial statements
including supporting schedules and other financial and statistical
information derived therefrom, as to which such counsel need express no
comment) contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make
the statements therein not misleading, or at the Closing Date or any
later date on which the Option Shares are to be purchased, as the case
may be, the Registration Statement, the Prospectus and any amendment or
supplement thereto (except as aforesaid) contained any untrue statement
of a material fact or omitted to state a material fact necessary to make
the statements therein, in the light of the circumstances under which
they were made, not misleading.
Counsel rendering the foregoing opinion may rely as to
questions of law not involving the laws of the United States or the
State of Pennsylvania and Delaware upon opinions of local counsel, and
as to questions of fact upon representations or certificates of officers
of the Company, the Selling Stockholders or officers of the Selling
Stockholders (when the Selling Stockholder is not a natural person), and
of government officials, in which case their opinion is to state that
they are so relying and that they have no knowledge of any material
misstatement or inaccuracy in any such opinion, representation or
certificate. Copies of any opinion, representation or certificate so
relied upon shall be delivered to you, as Representatives of the
Underwriters, and to Underwriters' Counsel.
(e) You shall have received on the Closing Date and on any
later date on which Option Shares are to be purchased, as the case may
be, an opinion of Sidley & Austin, in form and substance satisfactory to
you, with respect to the sufficiency of all such corporate proceedings
and other legal matters relating to this Agreement and the transactions
contemplated hereby as you may reasonably require, and the Company shall
have furnished to such counsel such documents as they may have requested
for the purpose of enabling them to pass upon such matters.
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(f) You shall have received on the Closing Date and on any
later date on which Option Shares are to be purchased, as the case may
be, a letter from KPMG Peat Marwick LLP addressed to the Underwriters,
dated the Closing Date or such later date on which Option Shares are to
be purchased, as the case may be, confirming that they are independent
certified public accountants with respect to the Company within the
meaning of the Act and the applicable published Rules and Regulations
and based upon the procedures described in such letter delivered to you
concurrently with the execution of this Agreement (herein called the
"Original Letter"), but carried out to a date not more than five (5)
business days prior to the Closing Date or such later date on which
Option Shares are to be purchased, as the case may be, (i) confirming,
to the extent true, that the statements and conclusions set forth in the
Original Letter are accurate as of the Closing Date or such later date
on which Option Shares are to be purchased, as the case may be, and (ii)
setting forth any revisions and additions to the statements and
conclusions set forth in the Original Letter which are necessary to
reflect any changes in the facts described in the Original Letter since
the date of such letter, or to reflect the availability of more recent
financial statements, data or information. The letter shall not disclose
any change in the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company and its
subsidiaries considered as one enterprise from that set forth in the
Registration Statement or Prospectus, which, in your sole judgment, is
material and adverse and that makes it, in your sole judgment,
impracticable or inadvisable to proceed with the public offering of the
Shares as contemplated by the Prospectus. The Original Letter from KPMG
Peat Marwick LLP shall be addressed to or for the use of the
Underwriters in form and substance satisfactory to the Underwriters and
shall (i) represent, to the extent true, that they are independent
certified public accountants with respect to the Company within the
meaning of the Act and the applicable published Rules and Regulations,
(ii) set forth their opinion with respect to their examination of the
consolidated balance sheet of the Company as of March 31, 1996 and 1997
and related consolidated statements of income, changes in stockholders'
equity, and cash flows for the three-year period ended March 31, 1997,
and (iii) address other matters agreed upon by KPMG Peat Marwick LLP and
you. In addition, you shall have received from KPMG Peat Marwick LLP a
letter addressed to the Company and made available to you for the use of
the Underwriters stating that their review of the Company's system of
internal accounting controls, to the extent they deemed necessary in
establishing the scope of their examination of the Company's
consolidated financial statements as of March 31, 1997, did not disclose
any weaknesses in internal controls that they considered to be material
weaknesses.
(g) You shall have received on the Closing Date and on any
later date on which Option Shares are to be purchased, as the case may
be, a certificate of the Company, dated the Closing Date or such later
date on which Option Shares are to be purchased, as the case may be,
signed by the Chief Executive Officer and Chief Financial Officer of the
Company, to the effect that, and you shall be satisfied that:
(i) The representations and warranties of the
Company in this Agreement are true and correct, as if made
on and as of the Closing Date or any later date on which
Option Shares are to be purchased, as the case may be, and
the Company has complied with all the agreements and
satisfied all the conditions on its part to be performed
or satisfied at or prior to the Closing Date or any later
date on which Option Shares are to be purchased, as the
case may be;
(ii) No stop order suspending the effectiveness of
the Registration Statement has been issued and no
proceedings for that purpose have been instituted or are
pending or threatened under the Act;
(iii) When the Registration Statement became
effective and at all times subsequent thereto up to the
delivery of such certificate, the Registration Statement
and the Prospectus, and any amendments or supplements
thereto, contained all material information required to be
included therein by the Act and the Rules and Regulations
or the Exchange Act and the applicable rules and
regulations of the Commission thereunder, as the case may
be, and in all material respects conformed to the
requirements of the Act and the Rules and Regulations or
the Exchange Act and the applicable rules and regulations
of the Commission thereunder, as the case may be, the
Registration Statement, and any amendment or supplement
thereto, did not and does not include any untrue statement
of a material fact or omit to state a material fact
required to be stated therein or necessary to make the
statements therein not misleading, the Prospectus, and any
amendment or supplement thereto, did not and does not
include any untrue statement of a material fact or omit to
state a material fact necessary to make the statements
therein, in the light of the circumstances under
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<PAGE> 20
which they were made, not misleading, and, since the
effective date of the Registration Statement, there has
occurred no event required to be set forth in an amended
or supplemented Prospectus which has not been so set
forth; and
(iv) Subsequent to the respective dates as of which
information is given in the Registration Statement and
Prospectus, there has not been (a) any material adverse
change in the condition (financial or otherwise),
earnings, operations, business or business prospects of
the Company and its subsidiaries considered as one
enterprise, (b) any transaction that is material to the
Company and its subsidiaries considered as one enterprise,
except transactions entered into in the ordinary course of
business, (c) any obligation, direct or contingent, that
is material to the Company and its subsidiaries considered
as one enterprise, incurred by the Company or its
subsidiaries, except obligations incurred in the ordinary
course of business, (d) any change in the capital stock or
outstanding indebtedness of the Company or any of its
subsidiaries that is material to the Company and its
subsidiaries considered as one enterprise, (e) any
dividend or distribution of any kind declared, paid or
made on the capital stock of the Company or any of its
subsidiaries, or (f) any loss or damage (whether or not
insured) to the property of the Company or any of its
subsidiaries which has been sustained or will have been
sustained which has a material adverse effect on the
condition (financial or otherwise), earnings, operations,
business or business prospects of the Company and its
subsidiaries considered as one enterprise.
(h) You shall be satisfied that, and you shall have
received a certificate, dated the Closing Date, or any later date on
which Option Shares are to be purchased, as the case may be, from the
Attorneys for each Selling Stockholder to the effect that, as of the
Closing Date, or any later date on which Option Shares are to be
purchased, as the case may be, they have not been informed that:
(i) The representations and warranties made by such
Selling Stockholder herein are not true or correct in any
material respect on the Closing Date or on any later date
on which Option Shares are to be purchased, as the case
may be; or
(ii) Such Selling Stockholder has not complied with
any obligation or satisfied any condition which is
required to be performed or satisfied on the part of such
Selling Stockholder at or prior to the Closing Date or any
later date on which Option Shares are to be purchased, as
the case may be.
(i) The Company shall have obtained and delivered to you
an agreement from each executive officer and director of the Company and
each Selling Stockholder in writing prior to the date hereof that such
person will not, during the Lock-up Period, effect the Disposition of
any Securities now owned or hereafter acquired directly by such person
or with respect to which such person has or hereafter acquires the power
of disposition, otherwise than (i) as a bona fide gift or gifts,
provided the donee or donees thereof agree in writing to be bound by
this restriction, (ii) as a distribution to partners or shareholders of
such person, provided that the distributees thereof agree in writing to
be bound by the terms of this restriction, or (iii) with the prior
written consent of Robertson, Stephens & Company LLC. The foregoing
restriction shall have been expressly agreed to preclude the holder of
the Securities from engaging in any hedging or other transaction which
is designed to or reasonably expected to lead to or result in a
Disposition of Securities during the Lock-up Period, even if such
Securities would be disposed of by someone other than the such holder.
Such prohibited hedging or other transactions would including, without
limitation, any short sale (whether or not against the box) or any
purchase, sale or grant of any right (including, without limitation, any
put or call option) with respect to any Securities or with respect to
any security (other than a broad-based market basket or index) that
includes, relates to or derives any significant part of its value from
Securities. Furthermore, such person will have also agreed and consented
to the entry of stop transfer instructions with the Company's transfer
agent against the transfer of the Securities held by such person except
in compliance with this restriction.
(j) The Company and the Selling Stockholders shall have
furnished to you such further certificates and documents as you shall
reasonably request (including certificates of officers of the Company,
the Selling Stockholders or officers of the Selling Stockholders (when
the Selling Stockholder is not a natural person) as to the accuracy of
the representations and warranties of the Company and the Selling
Stockholders herein, as to the performance by the Company
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<PAGE> 21
and the Selling Stockholders of its their respective obligations
hereunder and as to the other conditions concurrent and precedent to the
obligations of the Underwriters hereunder.
All such opinions, certificates, letters and
documents will be in compliance with the provisions hereof only if they
are reasonably satisfactory to Underwriters' Counsel. The Company and
the Selling Stockholders will furnish you with such number of conformed
copies of such opinions, certificates, letters and documents as you
shall reasonably request.
7. Option Shares.
(a) On the basis of the representations, warranties and
agreements herein contained, but subject to the terms and conditions
herein set forth, the Company and the Selling Stockholders (the "Option
Sellers") hereby grant to the several Underwriters, for the purpose of
covering over-allotments in connection with the distribution and sale of
the Firm Shares only, a nontransferable option to purchase up to an
aggregate of 232,500 Option Shares at the purchase price per share for
the Firm Shares set forth in Section 3 hereof. Such option may be
exercised by the Representatives on behalf of the several Underwriters
on one (1) or more occasions in whole or in part during the period of
thirty (30) days after the date on which the Firm Shares are initially
offered to the public, by giving written notice to the Company. The
number of Option Shares to be purchased by each Underwriter upon the
exercise of such option shall be the same proportion of the total number
of Option Shares to be purchased by the several Underwriters pursuant to
the exercise of such option as the number of Firm Shares purchased by
such Underwriter (set forth in Schedule A hereto) bears to the total
number of Firm Shares purchased by the several Underwriters (set forth
in Schedule A hereto), adjusted by the Representatives in such manner as
to avoid fractional shares.
Delivery of definitive certificates for the Option
Shares to be purchased by the several Underwriters pursuant to the
exercise of the option granted by this Section 7 shall be made against
payment of the purchase price therefor by the several Underwriters by
certified or official bank check or checks drawn in next-day funds,
payable to each of the Option Sellers (and the Option Sellers agree not
to deposit any such check in the bank on which it is drawn, and not to
take any other action with the purpose or effect of receiving
immediately available funds, until the business day following the date
of its delivery to the Option Sellers). In the event of any breach of
the foregoing, the Option Sellers shall reimburse the Underwriters for
the interest lost and any other expenses borne by them by reason of such
breach. Such delivery and payment shall take place at the offices of
Wolf, Block, Schorr and Solis-Cohen, Twelfth Floor, Packard Building,
S.E. Corner 15th & Chestnut Streets, Philadelphia, Pennsylvania 19102 or
at such other place as may be agreed upon among the Representatives and
the Option Sellers (i) on the Closing Date, if written notice of the
exercise of such option is received by the Company at least two (2) full
business days prior to the Closing Date, or (ii) on a date which shall
not be later than the third (3rd) full business day following the date
the Company receives written notice of the exercise of such option, if
such notice is received by the Company less than two (2) full business
days prior to the Closing Date.
The certificates for the Option Shares to be so
delivered will be made available to you at such office or such other
location including, without limitation, in New York City, as you may
reasonably request for checking at least one (1) full business day prior
to the date of payment and delivery and will be in such names and
denominations as you may request, such request to be made at least two
(2) full business days prior to such date of payment and delivery. If
the Representatives so elect, delivery of the Option Shares may be made
by credit through full fast transfer to the accounts at The Depository
Trust Company designated by the Representatives.
It is understood that you, individually, and not as
the Representatives of the several Underwriters, may (but shall not be
obligated to) make payment of the purchase price on behalf of any
Underwriter or Underwriters whose check or checks shall not have been
received by you prior to the date of payment and delivery for the Option
Shares to be purchased by such Underwriter or Underwriters. Any such
payment by you shall not relieve any such Underwriter or Underwriters of
any of its or their obligations hereunder.
(b) Upon exercise of any option provided for in Section
7(a) hereof, the obligations of the several Underwriters to purchase
such Option Shares will be subject (as of the date hereof and as of the
date of payment and delivery for such Option Shares) to the accuracy of
and compliance with the representations, warranties and agreements of
the
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<PAGE> 22
Company and the Selling Stockholders herein, to the accuracy of the
statements of the Company, the Selling Stockholders and officers of the
Company made pursuant to the provisions hereof, to the performance by
the Company and the Selling Stockholders of its their respective
obligations hereunder, to the conditions set forth in Section 6 hereof,
and to the condition that all proceedings taken at or prior to the
payment date in connection with the sale and transfer of such Option
Shares shall be satisfactory in form and substance to you and to
Underwriters' Counsel, and you shall have been furnished with all such
documents, certificates and opinions as you may request in order to
evidence the accuracy and completeness of any of the representations,
warranties or statements, the performance of any of the covenants or
agreements of the Company and the Selling Stockholders or the
satisfaction of any of the conditions herein contained.
8. Indemnification and Contribution.
(a) The Company agrees to indemnify and hold harmless each
Underwriter against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject (including,
without limitation, in its capacity as an Underwriter or as a "qualified
independent underwriter" within the meaning of Schedule E of the Bylaws
of the NASD), under the Act, the Exchange Act or otherwise, specifically
including, but not limited to, losses, claims, damages or liabilities
(or actions in respect thereof) arising out of or based upon (i) any
breach of any representation, warranty, agreement or covenant of the
Company herein contained, (ii) any untrue statement or alleged untrue
statement of any material fact contained in the Registration Statement
or any amendment or supplement thereto, or the omission or alleged
omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, or (iii) any
untrue statement or alleged untrue statement of any material fact
contained in any Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto, or the omission or alleged omission to
state therein a material fact required to be stated therein or necessary
to make the statements therein, in the light of the circumstances under
which they were made, not misleading, and agrees to reimburse each
Underwriter for any legal or other expenses reasonably incurred by it in
connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the Company shall not be
liable in any such case to the extent that any such loss, claim, damage,
liability or action arises out of or is based upon an untrue statement
or alleged untrue statement or omission or alleged omission made in the
Registration Statement, such Preliminary Prospectus or the Prospectus,
or any such amendment or supplement thereto, in reliance upon, and in
conformity with, written information relating to any Underwriter
furnished to the Company by such Underwriter, directly or through you,
specifically for use in the preparation thereof and, provided further,
that the indemnity agreement provided in this Section 8(a) with respect
to any Preliminary Prospectus shall not inure to the benefit of any
Underwriter from whom the person asserting any losses, claims, damages,
liabilities or actions based upon any untrue statement or alleged untrue
statement of material fact or omission or alleged omission to state
therein a material fact purchased Shares, if a copy of the Prospectus in
which such untrue statement or alleged untrue statement or omission or
alleged omission was corrected had not been sent or given to such person
within the time required by the Act and the Rules and Regulations,
unless such failure is the result of noncompliance by the Company with
Section 4(d) hereof.
The indemnity agreement in this Section 8(a) shall
extend upon the same terms and conditions to, and shall inure to the
benefit of, each person, if any, who controls any Underwriter within the
meaning of the Act or the Exchange Act. This indemnity agreement shall
be in addition to any liabilities which the Company may otherwise have.
(b) Each Selling Stockholder, severally and not jointly,
agrees to indemnify and hold harmless each Underwriter against any
losses, claims, damages or liabilities, joint or several, to which such
Underwriter may become subject (including, without limitation, in its
capacity as an Underwriter or as a "qualified independent underwriter"
within the meaning of Schedule E or the Bylaws of the NASD) under the
Act, the Exchange Act or otherwise, specifically including, but not
limited to, losses, claims, damages or liabilities (or actions in
respect thereof) arising out of or based upon (i) any breach of any
representation, warranty, agreement or covenant of such Selling
Stockholder herein contained, (ii) any untrue statement or alleged
untrue statement of any material fact contained in the Registration
Statement or any amendment or supplement thereto, or the omission or
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, or
(iii) any untrue statement or alleged untrue statement of any material
fact contained in any Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto, or the omission or alleged omission to
state therein a material fact necessary to make the statements therein,
in the light of the circumstances under which they were made, not
misleading, in the case of subparagraphs (ii) and (iii) of this Section
8(b) to the extent, but only
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<PAGE> 23
to the extent, that such untrue statement or alleged untrue statement or
omission or alleged omission was made in reliance upon and in conformity
with written information furnished to the Company or such Underwriter by
such Selling Stockholder, directly or through such Selling Shareholder's
representatives, specifically for use in the preparation thereof, and
agrees to reimburse each Underwriter for any legal or other expenses
reasonably incurred by it in connection with investigating or defending
any such loss, claim, damage, liability or action; provided, however,
that the indemnity agreement provided in this Section 8(b) with respect
to any Preliminary Prospectus shall not inure to the benefit of any
Underwriter from whom the person asserting any losses, claims, damages,
liabilities or actions based upon any untrue statement or alleged untrue
statement of a material fact or omission or alleged omission to state
therein a material fact purchased Shares, if a copy of the Prospectus in
which such untrue statement or alleged untrue statement or omission or
alleged omission was corrected had not been sent or given to such person
within the time required by the Act and the Rules and Regulations,
unless such failure is the result of noncompliance by the Company with
Section 4(d) hereof.
The indemnity agreement in this Section 8(b) shall extend
upon the same terms and conditions to, and shall inure to the benefit
of, each person, if any, who controls any Underwriter within the meaning
of the Act or the Exchange Act. This indemnity agreement shall be in
addition to any liabilities which such Selling Stockholder may otherwise
have.
(b) Each Underwriter, severally and not jointly, agrees to
indemnify and hold harmless the Company and each Selling Stockholder
against any losses, claims, damages or liabilities, joint or several, to
which the Company or such Selling Stockholder may become subject under
the Act or otherwise, specifically including, but not limited to,
losses, claims, damages or liabilities (or actions in respect thereof)
arising out of or based upon (i) any breach of any representation,
warranty, agreement or covenant of such Underwriter herein contained,
(ii) any untrue statement or alleged untrue statement of any material
fact contained in the Registration Statement or any amendment or
supplement thereto, or the omission or alleged omission to state therein
a material fact required to be stated therein or necessary to make the
statements therein not misleading, or (iii) any untrue statement or
alleged untrue statement of any material fact contained in any
Preliminary Prospectus or the Prospectus or any amendment or supplement
thereto, or the omission or alleged omission to state therein a material
fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, in the case of
subparagraphs (ii) and (iii) of this Section 8(c) to the extent, but
only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in reliance upon and
in conformity with written information furnished to the Company by such
Underwriter, directly or through you, specifically for use in the
preparation thereof, and agrees to reimburse the Company and each such
Selling Stockholder for any legal or other expenses reasonably incurred
by the Company and each such Selling Stockholder in connection with
investigating or defending any such loss, claim, damage, liability or
action.
The indemnity agreement in this Section 8(c) shall extend
upon the same terms and conditions to, and shall inure to the benefit
of, each officer of the Company who signed the Registration Statement
and each director of the Company, each Selling Stockholder and each
person, if any, who controls the Company or any Selling Stockholder
within the meaning of the Act or the Exchange Act. This indemnity
agreement shall be in addition to any liabilities which each Underwriter
may otherwise have.
(c) Promptly after receipt by an indemnified party under
this Section 8 of notice of the commencement of any action, such
indemnified party shall, if a claim in respect thereof is to be made
against any indemnifying party under this Section 8, notify the
indemnifying party in writing of the commencement thereof but the
omission so to notify the indemnifying party will not relieve it from
any liability which it may have to any indemnified party otherwise than
under this Section 8. In case any such action is brought against any
indemnified party, and it notified the indemnifying party of the
commencement thereof, the indemnifying party will be entitled to
participate therein and, to the extent that it shall elect by written
notice delivered to the indemnified party promptly after receiving the
aforesaid notice from such indemnified party, to assume the defense
thereof, with counsel reasonably satisfactory to such indemnified party;
provided, however, that if the defendants in any such action include
both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded that there may be
legal defenses available to it and/or other indemnified parties which
are different from or additional to those available to the indemnifying
party, the indemnified party or parties shall have the right to select
separate counsel to assume such legal defenses and to otherwise
participate in the defense of such action on behalf of such indemnified
party or parties. Upon receipt of notice from the indemnifying party to
such indemnified party of the
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<PAGE> 24
indemnifying party's election so to assume the defense of such action
and approval by the indemnified party of counsel, the indemnifying party
will not be liable to such indemnified party under this Section 8 for
any legal or other expenses subsequently incurred by such indemnified
party in connection with the defense thereof unless (i) the indemnified
party shall have employed separate counsel in accordance with the
proviso to the next preceding sentence (it being understood, however,
that the indemnifying party shall not be liable for the expenses of more
than one separate counsel (together with appropriate local counsel)
approved by the indemnifying party representing all the indemnified
parties under Section 8(a), 8(b) or 8(c) hereof who are parties to such
action), (ii) the indemnifying party shall not have employed counsel
satisfactory to the indemnified party to represent the indemnified party
within a reasonable time after notice of commencement of the action or
(iii) the indemnifying party has authorized the employment of counsel
for the indemnified party at the expense of the indemnifying party. In
no event shall any indemnifying party be liable in respect of any
amounts paid in settlement of any action unless the indemnifying party
shall have approved the terms of such settlement; provided that such
consent shall not be unreasonably withheld. No indemnifying party shall,
without the prior written consent of the indemnified party, effect any
settlement of any pending or threatened proceeding in respect of which
any indemnified party is or could have been a party and indemnification
could have been sought hereunder by such indemnified party, unless such
settlement includes an unconditional release of such indemnified party
from all liability on all claims that are the subject matter of such
proceeding.
(d) In order to provide for just and equitable
contribution in any action in which a claim for indemnification is made
pursuant to this Section 8 but it is judicially determined (by the entry
of a final judgment or decree by a court of competent jurisdiction and
the expiration of time to appeal or the denial of the last right of
appeal) that such indemnification may not be enforced in such case
notwithstanding the fact that this Section 8 provides for
indemnification in such case, all the parties hereto shall contribute to
the aggregate losses, claims, damages or liabilities to which they may
be subject (after contribution from others) in such proportion so that,
except as set forth in Section 8(f) hereof, the Underwriters severally
and not jointly are responsible pro rata for the portion represented by
the percentage that the underwriting discount bears to the public
offering price, and the Company and the Selling Stockholders are
responsible for the remaining portion, provided, however, that (i) no
Underwriter shall be required to contribute any amount in excess of the
amount by which the underwriting discount applicable to the Shares
purchased by such Underwriter exceeds the amount of damages which such
Underwriter has otherwise required to pay and (ii) no person guilty of a
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Act) shall be entitled to contribution from any person who is not guilty
of such fraudulent misrepresentation. The contribution agreement in this
Section 8(e) shall extend upon the same terms and conditions to, and
shall inure to the benefit of, each person, if any, who controls any
Underwriter, the Company or any Selling Stockholder within the meaning
of the Act or the Exchange Act and each officer of the Company who
signed the Registration Statement and each director of the Company.
(e) The liability of each Selling Stockholder under the
representations, warranties and agreements contained herein and under
the indemnity agreements contained in the provisions of this Section 8
shall be limited to an amount equal to the public offering price of the
Selling Stockholder Shares sold by such Selling Stockholder to the
Underwriters minus the amount of the underwriting discount paid thereon
to the Underwriters by such Selling Stockholder. The Company and such
Selling Stockholders may agree, as among themselves and without limiting
the rights of the Underwriters under this Agreement, as to the
respective amounts of such liability for which they each shall be
responsible.
(f) The parties to this Agreement hereby acknowledge that
they are sophisticated business persons who were represented by counsel
during the negotiations regarding the provisions hereof including,
without limitation, the provisions of this Section 8, and are fully
informed regarding said provisions. They further acknowledge that the
provisions of this Section 8 fairly allocate the risks in light of the
ability of the parties to investigate the Company and its business in
order to assure that adequate disclosure is made in the Registration
Statement and Prospectus as required by the Act and the Exchange Act.
9. Representations, Warranties, Covenants and Agreements to
Survive Delivery. All representations, warranties, covenants and
agreements of the Company, the Selling Stockholders and the Underwriters
herein or in certificates delivered pursuant hereto, and the indemnity
and contribution agreements contained in Section 8 hereof shall remain
operative and in full force and effect regardless of any investigation
made by or on behalf of any Underwriter or any person controlling any
Underwriter within the meaning of the Act or the Exchange Act, or by or
on behalf of the Company
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<PAGE> 25
or any Selling Stockholder, or any of their officers, directors or
controlling persons within the meaning of the Act or the Exchange Act,
and shall survive the delivery of the Shares to the several Underwriters
hereunder or termination of this Agreement.
10. Substitution of Underwriters. If any Underwriter or
Underwriters shall fail to take up and pay for the number of Firm Shares
agreed by such Underwriter or Underwriters to be purchased hereunder
upon tender of such Firm Shares in accordance with the terms hereof, and
if the aggregate number of Firm Shares which such defaulting Underwriter
or Underwriters so agreed but failed to purchase does not exceed 10% of
the Firm Shares, the remaining Underwriters shall be obligated,
severally in proportion to their respective commitments hereunder, to
take up and pay for the Firm Shares of such defaulting Underwriter or
Underwriters.
If any Underwriter or Underwriters so defaults and the
aggregate number of Firm Shares which such defaulting Underwriter or
Underwriters agreed but failed to take up and pay for exceeds 10% of the
Firm Shares, the remaining Underwriters shall have the right, but shall
not be obligated, to take up and pay for (in such proportions as may be
agreed upon among them) the Firm Shares which the defaulting Underwriter
or Underwriters so agreed but failed to purchase. If such remaining
Underwriters do not, at the Closing Date, take up and pay for the Firm
Shares which the defaulting Underwriter or Underwriters so agreed but
failed to purchase, the Closing Date shall be postponed for twenty-four
(24) hours to allow the several Underwriters the privilege of
substituting within twenty-four (24) hours (including non-business
hours) another underwriter or underwriters (which may include any
nondefaulting Underwriter) satisfactory to the Company. If no such
underwriter or underwriters shall have been substituted as aforesaid by
such postponed Closing Date, the Closing Date may, at the option of the
Company, be postponed for a further twenty-four (24) hours, if
necessary, to allow the Company the privilege of finding another
underwriter or underwriters, satisfactory to you, to purchase the Firm
Shares which the defaulting Underwriter or Underwriters so agreed but
failed to purchase. If it shall be arranged for the remaining
Underwriters or substituted underwriter or underwriters to take up the
Firm Shares of the defaulting Underwriter or Underwriters as provided in
this Section 10, (i) the Company shall have the right to postpone the
time of delivery for a period of not more than seven (7) full business
days, in order to effect whatever changes may thereby be made necessary
in the Registration Statement or the Prospectus, or in any other
documents or arrangements, and the Company agrees promptly to file any
amendments to the Registration Statement, supplements to the Prospectus
or other such documents which may thereby be made necessary, and (ii)
the respective number of Firm Shares to be purchased by the remaining
Underwriters and substituted underwriter or underwriters shall be taken
as the basis of their underwriting obligation. If the remaining
Underwriters shall not take up and pay for all such Firm Shares so
agreed to be purchased by the defaulting Underwriter or Underwriters or
substitute another underwriter or underwriters as aforesaid and the
Company shall not find or shall not elect to seek another underwriter or
underwriters for such Firm Shares as aforesaid, then this Agreement
shall terminate.
In the event of any termination of this Agreement pursuant
to the preceding paragraph of this Section 10, neither the Company nor
any Selling Stockholder shall be liable to any Underwriter (except as
provided in Sections 5 and 8 hereof) nor shall any Underwriter (other
than an Underwriter who shall have failed, otherwise than for some
reason permitted under this Agreement, to purchase the number of Firm
Shares agreed by such Underwriter to be purchased hereunder, which
Underwriter shall remain liable to the Company, the Selling Stockholders
and the other Underwriters for damages, if any, resulting from such
default) be liable to the Company or any Selling Stockholder (except to
the extent provided in Sections 5 and 8 hereof).
The term "Underwriter" in this Agreement shall include any
person substituted for an Underwriter under this Section 10.
11. Effective Date of this Agreement and Termination.
(a) This Agreement shall become effective at the earlier
of (i) 6:30 A.M., San Francisco time, on the first full business day
following the effective date of the Registration Statement, or (ii) the
time of the public offering of any of the Shares by the Underwriters
after the Registration Statement becomes effective. The time of the
public offering shall mean the time of the release by you, for
publication, of the first newspaper advertisement relating to the
Shares, or the time at which the Shares are first generally offered by
the Underwriters to the public by letter, telephone, telegram or
telecopy, whichever
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shall first occur. By giving notice as set forth in Section 12 before
the time this Agreement becomes effective, you, as Representatives of
the several Underwriters, or the Company, may prevent this Agreement
from becoming effective without liability of any party to any other
party, except as provided in Sections 4(j), 5 and 8 hereof.
(b) You, as Representatives of the several Underwriters,
shall have the right to terminate this Agreement by giving notice as
hereinafter specified at any time on or prior to the Closing Date or on
or prior to any later date on which Option Shares are to be purchased,
as the case may be, (i) if the Company or any Selling Stockholder shall
have failed, refused or been unable to perform any agreement on its part
to be performed, or because any other condition of the Underwriters'
obligations hereunder required to be fulfilled is not fulfilled,
including, without limitation, any change in the condition (financial or
otherwise), earnings, operations, business or business prospects of the
Company and its subsidiaries considered as one enterprise from that set
forth in the Registration Statement or Prospectus, which, in your sole
judgment, is material and adverse, or (ii) if additional material
governmental restrictions, not in force and effect on the date hereof,
shall have been imposed upon trading in securities generally or minimum
or maximum prices shall have been generally established on the New York
Stock Exchange or on the American Stock Exchange or in the over the
counter market by the NASD, or trading in securities generally shall
have been suspended on either such exchange or in the over the counter
market by the NASD, or if a banking moratorium shall have been declared
by federal, New York or California authorities, or (iii) if the Company
shall have sustained a loss by strike, fire, flood, earthquake, accident
or other calamity of such character as to interfere materially with the
conduct of the business and operations of the Company regardless of
whether or not such loss shall have been insured, or (iv) if there shall
have been a material adverse change in the general political or economic
conditions or financial markets as in your reasonable judgment makes it
inadvisable or impracticable to proceed with the offering, sale and
delivery of the Shares, or (v) if there shall have been an outbreak or
escalation of hostilities or of any other insurrection or armed conflict
or the declaration by the United States of a national emergency which,
in the reasonable opinion of the Representatives, makes it impracticable
or inadvisable to proceed with the public offering of the Shares as
contemplated by the Prospectus. In the event of termination pursuant to
subparagraph (i) above, the Company shall remain obligated to pay costs
and expenses pursuant to Sections 4(j), 5 and 8 hereof. Any termination
pursuant to any of subparagraphs (ii) through (v) above shall be without
liability of any party to any other party except as provided in Sections
5 and 8 hereof.
If you elect to prevent this Agreement from becoming
effective or to terminate this Agreement as provided in this Section 11,
you shall promptly notify the Company by telephone, telecopy or
telegram, in each case confirmed by letter. If the Company shall elect
to prevent this Agreement from becoming effective, the Company shall
promptly notify you by telephone, telecopy or telegram, in each case,
confirmed by letter.
12. Notices. All notices or communications hereunder, except as
herein otherwise specifically provided, shall be in writing and if sent
to you shall be mailed, delivered, telegraphed (and confirmed by letter)
or telecopied (and confirmed by letter) to you c/o Robertson, Stephens &
Company LLC, 555 California Street, Suite 2600, San Francisco,
California 94104, telecopier number (415) 781-0278, Attention: General
Counsel; if sent to the Company, such notice shall be mailed, delivered,
telegraphed (and confirmed by letter) or telecopied (and confirmed by
letter) to 3910 Adler Place, Bethleham, Pennsylvania 18017, telecopier
number (610) 882-8343, Attention: Richard H. Penske, Chief Executive
Officer; if sent to one or more of the Selling Stockholders, such notice
shall be sent mailed, delivered, telegraphed (and confirmed by letter)
or telecopied (and confirmed by letter) to Wolf, Block, Schorr and
Salis-Cohen, as Attorney-in-Fact for the Selling Stockholders, at 3910
Adler Place, Bethlehem, Pennsylvania 18017, telecopier number (610)
882-8343.
13. Parties. This Agreement shall inure to the benefit of and be
binding upon the several Underwriters and the Company and the Selling
Stockholders and their respective executors, administrators, successors
and assigns. Nothing expressed or mentioned in this Agreement is
intended or shall be construed to give any person or entity, other than
the parties hereto and their respective executors, administrators,
successors and assigns, and the controlling persons within the meaning
of the Act or the Exchange Act, officers and directors referred to in
Section 8 hereof, any legal or equitable right, remedy or claim in
respect of this Agreement or any provisions herein contained, this
Agreement and all conditions and provisions hereof being intended to be
and being for the sole and exclusive benefit of the parties hereto and
their respective executors, administrators, successors and assigns and
said controlling persons and said officers and directors, and for the
benefit of no
26
<PAGE> 27
other person or entity. No purchaser of any of the Shares from any
Underwriter shall be construed a successor or assign by reason merely of
such purchase.
In all dealings with the Company and the Selling
Stockholders under this Agreement, you shall act on behalf of each of
the several Underwriters, and the Company and the Selling Stockholders
shall be entitled to act and rely upon any statement, request, notice or
agreement made or given by you jointly or by Robertson, Stephens &
Company LLC on behalf of you.
14. Applicable Law. This Agreement shall be governed by, and
construed in accordance with, the internal laws of the State of New
York.
15. Counterparts. This Agreement may be signed in several
counterparts, each of which will constitute an original.
27
<PAGE> 28
If the foregoing correctly sets forth the understanding
among the Company, the Selling Stockholders and the several
Underwriters, please so indicate in the space provided below for that
purpose, whereupon this letter shall constitute a binding agreement
among the Company, the Selling Stockholders and the several
Underwriters.
Very truly yours,
PIERCING PAGODA, INC.
By
-----------------------------------
SELLING SHAREHOLDERS
By
-----------------------------------
Attorney-in-Fact for the Selling Stockholders
named in Schedule B hereto
Accepted as of the date first above written:
ROBERTSON, STEPHENS & COMPANY LLC
WHEAT, FIRST SECURITIES, INC.
FURMAN SELZ LLC
PARKER/HUNTER INCORPORATED
On their behalf and on behalf of each of the
several Underwriters named in Schedule A hereto.
By ROBERTSON, STEPHENS & COMPANY LLC
By ROBERTSON, STEPHENS & COMPANY, INC.
By
---------------------------------------
Authorized Signatory
28
<PAGE> 29
SCHEDULE A
<TABLE>
<CAPTION>
Underwriters Number of
------------ Firm Shares
To Be
Purchased
---------
<S> <C>
Robertson, Stephens & Company LLC......................
Wheat, First Securities, Inc...........................
Furman Selz LLC........................................
Parker/Hunter Incorporated.............................
----------
Total.................................................. 1,550,000
==========
</TABLE>
(i)
<PAGE> 30
SCHEDULE B
<TABLE>
<CAPTION>
Company Number of
------- Firm Shares To
Be Sold
-------
<S> <C>
Piercing Pagoda, Inc................................. 650,000
Total...........................................
-------
650,000
=======
</TABLE>
<TABLE>
<CAPTION>
Name of Selling Stockholder Number of
--------------------------- Selling
Shareholder
Shares
To Be Sold
----------
<S> <C>
Richard H. Penske....................................
Penske Family Trusts.................................
Richard H. Penske Charitable Trust...................
Richard and Patricia Penske Foundation...............
----------
Total........................................... 900,000
==========
</TABLE>
(ii)
<PAGE> 31
SCHEDULE C
<TABLE>
<CAPTION>
Company Number of
------- Firm Shares To
Be Sold
-------
<S> <C>
Piercing Pagoda, Inc..................................
-----------
Total............................................
===========
</TABLE>
<TABLE>
<CAPTION>
Name of Selling Stockholder Number of
--------------------------- Selling
Shareholder
Shares
To Be Sold
----------
<S> <C>
Richard H. Penske.....................................
Penske Family Trusts..................................
Richard H. Penske Charitable Trust....................
Richard and Patricia Penske Foundation................
-----------
Total............................................
===========
</TABLE>
(iii)
<PAGE> 1
EXHIBIT 10.41
ASSET PURCHASE AGREEMENT
Asset Purchase Agreement, made this 10th day of April 1997, by and
among PIERCING PAGODA, INC., a Delaware corporation ("PPI"); EARS, Inc., a
Delaware corporation wholly-owned by PPI ("EARS" and, collectively with PPI,
"Buyers"); THE SILVER & GOLD TRADING COMPANY, INC., a Pennsylvania corporation
("Seller"); and William J. May ("WJM").
BACKGROUND
Seller operates retail kiosk stores under the name Silver & Gold
Connection which sell gold and silver jewelry (the "Business"). WJM owns a
majority of the outstanding capital stock of Seller.
Buyers desire to purchase, and Seller desires to sell, the Assets (as
defined below) on the terms set forth below.
NOW, THEREFORE, in consideration of the mutual covenants hereinafter
set forth, the parties, intending to be legally bound hereby, agree as follows:
1. Sale and Purchase of Assets. On the Closing Date (as hereinafter
defined) and subject to the terms and conditions contained in this Agreement,
Seller shall sell, transfer, assign and deliver to Buyers, and Buyers shall
purchase, assume and accept from Seller, free and clear of all liens and
encumbrances, all right, title and interest in and to all of the assets owned by
Seller (the "Assets"), including, but not limited to the following:
(a) Seller's interest in the forty-six (46) existing leases
for Seller's kiosk stores listed in Schedule 1(a) attached hereto, and any other
locations obtained, including Palisades and Brass Mill (with PPI's consent)
prior to the Closing Date (the "Stores").
(b) Any and all leasehold improvements, fixtures, benches,
point-of-sale registers, stools, safes, security panels and existing security
systems at the Stores.
(c) All Seller's inventory, including items in lay-away, which
is in good salable condition normally sold in the Stores, excluding broken or
damaged goods (collectively, the "Inventory") and the supplies of Seller,
including all Inventory of the Business delivered up to the Closing Date.
(d) All trademarks, service marks, trade names including
without limitation the trade name Silver & Gold Connection, logos and other
intellectual property of Seller, customer records relating solely to the Assets
(except for corporate records), but including
<PAGE> 2
without limitation, inventory reports, sales records and operating reports of
Seller 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 (including the SWP Boxes and Bags (as defined in Section 3
below) to be drop shipped to one site in accordance with PPI's instructions.
(e) All Store and home office computers, systems, software
equipment and other home office furniture, equipment, supplies and other assets
(to the extent not excluded pursuant to Section 2).
2. Excluded Assets. The Assets do not include cash, receivables, prepaid
rents, deposits (subject to Section 15(f) below) (including, but not limited to,
security deposits and construction deposits under the Stores' leases), vehicles
owned or leased by Seller, returned premiums on insurance, any home office
Assets that PPI notifies Seller in writing that Buyers do not desire to acquire,
those items listed on Schedule 2 attached hereto, and any other item mutually
agreed to in writing by PPI and Seller.
3. Assumption of Certain Liabilities. Subject to the terms and
conditions of this Agreement, Buyers shall assume and perform and pay: (i) those
liabilities and obligations of Seller accruing or arising on and after May 1,
1997 (A) with respect to the Stores' utilities and merchant association dues and
expenses, (B) under the Stores' leases, and (C) with respect to Seller's
purchase orders existing at the Closing (subject to Section 8(a)(i) below), and
(ii) to Seller at Closing (except as to the amount payable pursuant to (A)
immediately below, which shall be paid to Gilbert Hollander at Closing): (A) the
sum of One Hundred Sixty-Six Thousand Six Hundred Sixty-Seven Dollars ($166,667)
(or such lesser amount as the Company and Gilbert Hollander may agree, provided
that evidence of such agreement shall be provided by Buyers to Seller at
Closing) arising under Section 6(b) of the Employment Agreement dated September
6, 1995 between the Company and Gilbert Hollander (the "Hollander Agreement"),
it being understood that PPI may, but is not obligated to, hire Gilbert
Hollander on whatever terms they may mutually agree upon, (B) 50% of advertising
expenses for Mothers Day, estimated to total $4,900 (or $2,450 for 50%), (C) the
cost of boxes and bags with new logo ordered from S. Walter Packaging under a
purchase order dated March 14, 1997, estimated to be $88,130 (the "SWP Boxes and
Bags"), (D) all costs incurred by Seller through Closing for rebuilding the
Newport Store kiosk; (E) any other liability mutually agreed upon in writing
between Seller and Buyers. 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 Seller, 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
Seller not assumed by Buyers pursuant to this Section 3 shall hereinafter be
referred to as the "Retained Liabilities."
-2-
<PAGE> 3
4. Purchase Price.
(a) The consideration paid or payable to Seller 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:
(i) The amount of Three Million Three Hundred Thousand Dollars
($3,300,000) for the Inventory (the "Estimated Inventory Value").
Plus
(ii) The amount of Four Million Seven Hundred Thousand Dollars
($4,700,000) for the assignment of the Stores' leases and the Assets other than
the Inventory of which One Million Dollars ($1,000,000) is being paid by PPI
into escrow upon execution of this Agreement, which amount shall be applied
against the Purchase Price in accordance with Section 4(b) below if the Closing
(as defined below) occurs or returned to PPI if the Closing does not occur
unless the failure to close results from the breach of this Agreement by Buyers;
minus (i) any unpaid amounts due to landlords with respect to the leases of the
Stores arising prior to the Closing Date; (ii) Twenty-Five Thousand Dollars
($25,000) in the event that Seller does not provide a new kiosk at Seller's
Wheaton location; and (iii) Fifty Thousand Dollars ($50,000) per Store lease not
assigned to PPI by January 31, 1998 on commercially reasonable terms, provided
that no adjustment pursuant to this clause (iii) shall be made if at least
forty-six (46) leases are assigned on commercially reasonable terms by such date
(the adjustments pursuant to the immediately preceding clauses (i), (ii) and
(iii) are collectively referred to as the "Lease Assignment Adjustment").
(b) PPI shall deliver to Seller on the Closing Date Four Million Four
Hundred Fifty Thousand Dollars ($4,450,000) of the Purchase Price, at Seller's
option, by wire transfer to an account designated by Seller or certified check
drawn to the order of Seller; and the remaining Two Million Five Hundred Fifty
Thousand Dollars ($2,550,000) of the Purchase Price shall be deposited by Buyers
on the Closing Date into an interest-bearing escrow account (along with the One
Million Dollars ($1,000,000) placed into escrow pursuant to Section 4(a)(ii)
above), 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"). The total of Three Million Five Hundred Fifty Thousand ($3,550,000)
being placed into escrow consists of the Estimated Inventory Value plus Two
Hundred Fifty Thousand Dollars ($250,000) (together with interest thereon, the
"Lease Adjustment Portion") to secure Seller's obligations with respect to Lease
Assignment Adjustment; provided that, to the extent that the Lease Adjustment
Portion is insufficient to pay to Buyers any amount owing on account of the
Lease Assignment Adjustment, Seller shall remain liable for the payment of such
amount. Upon the earlier of the assignment of all Store Leases or February 1,
1998, Seller and Buyers shall issue joint instructions to the Escrow Agent to
release to Seller and/or Buyers, as applicable, the Lease Adjustment Portion. If
there is a dispute as to such instructions, such dispute shall be resolved in
accordance with the last paragraph of Section 5.
-3-
<PAGE> 4
(c) On each Gold Inventory Release Date (as defined in Section 15(b)),
Seller and Buyers shall issue joint instructions to the Escrow Agent to release
to Seller an amount equal to one hundred percent (100%) of the agreed upon cost
(calculated in accordance with Section 5 below) of the Gold Inventory (as
defined below) specified in the relevant Gold Inventory Cost Report (as defined
in Section 15(b)) from the funds in the escrow account established pursuant to
the Escrow Agreement (the "Escrow Account").
(d) On each Non-Gold Inventory Release Date (as defined in Section
15(b)), Seller and Buyers shall issue joint instructions to the Escrow Agent to
release to Seller an amount equal to one hundred percent (100%) of the agreed
upon cost (calculated in accordance with Section 5 below) of the Non-Gold
Inventory (as defined below) specified in the relevant Non-Gold Inventory Cost
Report (as defined in Section 15(b)) from the funds in the Escrow Account.
5. 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
Seller's average vendor invoice cost, calculated on a "first in - first out"
basis, as of the Closing Date for the Inventory; provided that, if the price of
gold (based on the second price fixed on the London Exchange on the trading day
immediately prior to the Closing Date (the "Closing Date Gold Price") is less
than Three Hundred Fifty Dollars ($350) per ounce (the "Base Price"), the
Adjusted Inventory Value for the Gold Inventory shall be reduced by the same
percentage as the percentage difference between the Closing Date Gold Price and
the Base Price. Seller and Buyers shall use their reasonable best efforts to
agree on or before May 30, 1997 as to the final calculation of the Adjusted
Inventory Value and any required adjustment to the Purchase Price, together with
reasonable documentation supporting such calculation. Seller shall give Buyers
reasonable access to relevant books and records to verify such calculation. If
there is no dispute as to the calculation of the Adjusted Inventory Value and if
such Adjusted Inventory Value is less than the Estimated Inventory Value, Seller
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 (other than the Lease
Adjustment Portion), 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 Seller, and if
the Escrow Funds are insufficient to cover such difference, Seller shall pay the
amount of such deficiency to Buyers at the same time. If there is no dispute as
to the calculation of Adjusted Inventory Value and if such Adjusted Inventory
Value is greater than the Estimated Inventory Value, Seller and Buyers shall
issue joint instructions to the Escrow Agent to release the Escrow Funds to
Seller, and Buyers shall pay the difference between the Adjusted Inventory Value
and the Estimated Inventory Value to Seller at the same time. Interest earned on
the Escrow Funds (and on the Lease Adjustment Portion) in accordance with the
Escrow Agreement shall be divided equally among Buyers and Seller as set forth
in the Escrow Agreement.
-4-
<PAGE> 5
In the event there is a dispute as to the calculation of the Adjusted
Inventory Value, the disputing party shall notify the other in writing of such
dispute and the basis therefor promptly 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 Seller and Buyers, and the fees and expenses, if
any, of such arbitrator shall be paid one-half by Seller and one-half by Buyers.
If the arbitrator determines that the Adjusted Inventory Value is different than
the Estimated Inventory Value, Seller and Buyers shall issue joint instructions
to the Escrow Agent as set forth in the preceding paragraph of this Section 5.
6. 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 determine
and Seller shall agree, provided that such agreement shall not be unreasonably
withheld or delayed. 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.
7. Closing. The consummation and closing of the transaction provided
for herein ("Closing") shall take place on April 25, 1997 (the "Closing Date").
8. Activities and Agreements Prior to Closing
(a) Between the date of this Agreement and the Closing Date, Seller
shall:
(i) 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.
(ii) comply with all material provisions of the leases for the
Stores and applicable laws, rules and regulations.
(iii) promptly notify PPI if Seller shall learn of any event,
matter or condition which has come to their attention which would constitute at
the Closing Date a material breach of any representation, warranty or covenant
made by Seller 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 Seller.
-5-
<PAGE> 6
(iv) forward to PPI a copy of: (A) any notice of default
received or issued by the Seller under the leases for the Stores and (B) any
written notice of violation of any law, rule or regulation received by Seller
with respect to the Stores or the Assets.
(v) notify PPI of any material adverse change to any of the
Stores or Assets.
(vi) permit PPI and its representatives full access to the
Stores and Assets and all records relating to them, during business hours and
upon reasonable prior written notice.
(b) Between the date of this Agreement and the Closing Date, Seller
shall not, without the consent of PPI:
(i) 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.
(ii) make any material change in compensation or benefits of
the employees of the Business.
(iii) 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.
9. Non-Competition Agreement. In consideration for WJM executing a
non-competition agreement, in the form attached hereto as Exhibit "C", the
Buyers will pay WJM $60,000 per year for a period of five (5) years.
10. Representations and Warranties of Seller. As material inducement to
Buyers to enter into this Agreement and to close hereunder, Seller makes the
following representations and warranties to Buyers:
(a) Corporate Status; Authority. Seller is a corporation duly
organized, validly existing and in good standing under the laws of the
Commonwealth of Pennsylvania. Seller has the corporate power and authority to
own its properties and to carry on the Business as it is now being conducted.
Seller 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 Seller in connection herewith, including, but not limited to the assignments
of the Stores' leases, subject to the landlords' consents, (collectively, the
"Purchase Documents") and to perform its obligations hereunder and thereunder.
(b) Due Authorization; Validity of Agreement. The execution,
delivery and performance of this Agreement and the Purchase Documents by Seller
have been duly authorized and approved by all necessary corporate action on the
part of Seller. This Agreement has been duly executed and delivered by Seller
and, assuming the due execution and delivery of this Agreement by Buyers,
constitutes the valid and binding obligation of Seller, enforceable against
-6-
<PAGE> 7
it in accordance with its 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. Assuming due execution and
delivery by Buyers, the Purchase Documents will constitute the valid and binding
obligations of Seller, enforceable against it in accordance with their
respective terms.
(c) Title to Assets. Seller has 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
is held by Seller on consignment.
(d) Leases. All of the leases for the Stores are valid,
binding and enforceable against Seller 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. Seller and, to Seller's 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 Seller nor, to Seller's
knowledge, any such other party is in default or in arrears under the terms
thereof. Seller has delivered to Buyers true and correct copies of all the
Stores' leases.
(e) Litigation. Except as set forth on Schedule 10(e), Seller
is not a party to or, to Seller's 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.
(f) Attached as Schedule 10(f) is a list of all Seller's Store
employees (the "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.
There are no employment agreements, consulting or services agreements or
severance agreements with respect to the Employees (other than the Hollander
Agreement, a copy of which has been provided to PPI) to which the Seller is a
party or by which it is bound that will survive the Closing. There are no
policies or understandings of the Seller rendering any of the Employees other
than at-will employees. To Seller's knowledge, Seller maintains a good working
relationship with the Employees. During the past 12 months there have been no,
and currently there are no, strikes, slow downs, work stoppages, grievance
proceedings, arbitrations or, to Seller's knowledge, material labor disputes
involving the Employees, pending or, to the knowledge of Seller, threatened
against or involving the Seller.
(g) Agreement Not in Breach of Other Instruments Affecting
Seller. The execution and delivery of this Agreement, the consummation of the
transactions provided for herein and the fulfillment of the terms hereof by
Seller, 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 Seller under, any agreement, indenture or other instrument to
which Seller is
-7-
<PAGE> 8
bound, any judgment, decree, order or award of any court, governmental body or
arbitrator or any applicable law, rule or regulation.
(h) Brokerage Commissions. There is no corporation, firm or
person entitled to receive from Seller any brokerage commission or finder's fee
in connection with this Agreement or the transactions provided for herein.
11. Representations, Warranties and Agreements of Buyers. As material
inducement to Seller to enter into this Agreement and to close hereunder, Buyers
jointly and severally make the following representations, warranties, and
agreements to and with Seller:
(a) 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.
(b) 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 Seller, constitutes
the valid and binding obligation of Buyers, enforceable in accordance with its
terms, except as such enforeability may be limited by the effect of bankruptcy,
insolvency or similar laws affecting creditor's rights generally or by general
principles of equity. Assuming due execution and delivery by Seller, the
Purchase Documents will constitute the valid and binding obligations of Buyers,
enforceable against each of them in accordance with their respective terms.
(c) 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.
(d) 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.
12. Survival of Representations and Warranties. All representations and
warranties of the parties hereto in this Agreement shall survive Closing until
January 31, 1998.
-8-
<PAGE> 9
13. Closing Deliveries by Seller. On the Closing Date, Seller shall
deliver or cause to be delivered to Buyers the following:
(a) Escrow Agreement. An Escrow Agreement, in the form of
Exhibit "B", executed by Seller.
(b) Non-Competition Agreement. A Non-Competition Agreement in
the form of Exhibit "C", executed by WJM.
(c) Bill of Sale and General Assignment. A Bill of Sale and
General Assignment, in the form of Exhibit "D", executed by Seller, transferring
to Buyers good title to all of the personal property included in the Assets.
(d) Store Lease Assignment. A General Lease Assignment for
each Store lease (except those Store leases identified on Schedule 14), in the
form of Exhibit "E", executed by Seller and a specific Assignment with Lessor
Consent Agreement for each Store lease received by Seller on or before the
Closing Date which is executed by the landlord.
(e) 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.
(f) Certified Corporate Resolutions. Corporate resolutions
adopted by the board of directors of Seller and, if required by law, by the
shareholders of Seller, certified by Seller's Corporate Secretary, approving
this Agreement and the Purchase Documents and authorizing the consummation of
the transactions contemplated hereby.
(g) Schedule of Security Deposits. A schedule of all security
and construction deposits held by any landlords under the Store leases.
(h) Schedule of Insurance. A schedule of existing workers
compensation insurance coverages for Employees and of liability policies
covering the Business with evidence that Seller shall continue to be covered
with respect to personal liability for events occurring prior to the Closing
Date.
(i) Assets. All of the Assets (other than the Inventory)
capable of being delivered in physical form shall be made available to Buyers at
Seller's locations. The Inventory shall be made available in accordance with
Section 15 below.
14. Closing Deliveries by Buyers. On the Closing Date, Buyers shall
deliver or cause to be delivered to Seller the following:
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<PAGE> 10
(a) Assumption Agreement. An Assumption Agreement, in the form
of Exhibit "A", executed by Buyers.
(b) Escrow Agreement. An Escrow Agreement, in the form of
Exhibit "B", executed by Buyers.
(c) Non-Competition Agreement. A Non-Competition Agreement, in
the form of Exhibit "C", executed by Buyers.
(d) Store Lease Assignment. A General Lease Assignment for
each Store lease (except those Store leases identified on Schedule 14), in the
form of Exhibit "E", executed by PPI and a specific Assignment with Lessor
Consent Agreement for each Store lease received by Seller or PPI on or before
the Closing Date which is executed by the landlord.
(e) 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.
(f) Purchase Price. That portion of the Purchase Price payable
on the Closing Date, plus the amounts of all liabilities payable to Seller or
Gilbert Hollander at Closing under Section 3.
15. Covenants Extending Beyond Closing.
(a) Further Assurances. Seller and WJM 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
transactions provided for herein, including, without limitation, the execution
and delivery by Seller 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.
(b) Access to Inventory and Assets. From the Closing Date
until final delivery of all Inventory to Buyers, Seller will afford Buyers and
their authorized representatives access to the Inventory being held at the
Inventory Site (as defined in subsection (b)(v) below). Until the final Adjusted
Inventory Value shall have been determined and agreed to by Buyers and Seller,
Seller will afford Buyers and its authorized representatives access to the
Inventory and the books and records relating to the Assets (as such books and
records existed as of the Closing Date), for the purpose of confirming the
physical inventory and calculating the Adjusted Inventory Value as set forth in
Section 5. On April 28, 1997, Seller shall remove the Inventory
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<PAGE> 11
from the Stores and ship all Inventory to the Inventory Site. Buyers shall
permit Seller to retain at the Inventory Site the Gold and Non-Gold Inventory of
the Business removed from the Stores by Seller until such Inventory is made
available to Buyers as provided in this Section 15(b).
(i) Seller shall perform a physical inventory of the
gold Inventory of the Business (the "Gold Inventory") which may, at Seller's
option, be performed in stages. At the conclusion of such physical inventory and
any stage thereof, Seller 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 cost (calculated in accordance with Section 5
above), with documentary evidence of such cost, (C) the SKU/BIN Number or other
location description and (D) the vendor of the Gold Inventory (each a "Gold
Inventory Cost Report"). Buyers may, at Buyers' expense, inspect at the
Inventory Site the Gold Inventory with respect to which any Gold Inventory Cost
Report pertains, for purposes of verifying 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 a Gold Inventory Cost Report (each a "Gold
Inventory Release Date"), Seller shall make available to Buyers the Gold
Inventory specified in the relevant Gold Inventory Cost Report.
(ii) Seller shall perform a physical inventory of the
silver and other non-gold Inventory of the Business (the "Non-Gold Inventory")
which may, at Seller's option, be performed in stages. At the conclusion of such
physical inventory and any stage thereof, Seller shall provide Buyers with a
written report specifying the following with respect to the Non-Gold Inventory
to which the report pertains: (A) the quantity count, (B) the cost (calculated
in accordance with Section 5 above), with documentary evidence of such cost, (C)
the SKU/BIN Number or other location description and (D) the vendor of the
Non-Gold Inventory (each a "Non-Gold Inventory Cost Report"). Buyers may, at
Buyers' expense, inspect at the Inventory Site the Non-Gold Inventory with
respect to which any Non-Gold Inventory Cost Report pertains, for purposes of
verifying such Non-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 a Non-Gold Inventory Cost Report (each a "Non-Gold Inventory Release Date"),
Seller shall make available to Buyers the Non-Gold Inventory specified in the
relevant Non-Gold Cost Report.
(iii) Seller's physical inventory shall concentrate
on the Gold Inventory first, and Seller shall use its reasonable best efforts to
provide the first Gold Inventory Cost Report to Buyers on or before May 15,
1997. Seller also shall use its reasonable best efforts to complete its physical
inventory of the Gold Inventory and the Non-Gold Inventory (and provide to
Buyers a final Gold Inventory Cost Report and Non-Gold Inventory Cost Report,
respectively) on or before May 30, 1997. The date on which Seller and 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."
(iv) Any dispute as to the quantity count of the Gold
Inventory or the Non-Gold Inventory specified in any Gold Inventory Cost Report
or Non-Gold Inventory Cost
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<PAGE> 12
Report, respectively, shall be reconciled by Seller and Buyers. If the parties
cannot reconcile their differences, the dispute shall be resolved in accordance
with the last paragraph of Section 5.
(v) Seller and Buyers shall each be responsible for
one-half of all shipping costs and insurance for the Gold Inventory and the
Non-Gold Inventory to Seller's headquarters location or such other location
specified by Seller and reasonably acceptable to Buyers (the "Inventory Site");
Seller shall be responsible for all occupancy costs with respect to the
Inventory Site; and Buyers shall be responsible for all shipping costs and
insurance for the applicable portions of the Gold Inventory and the Non-Gold
Inventory following the applicable Release Dates.
(c) WARN Act Liability; Employees. PPI intends, but shall have
no obligation, to hire most of Seller's Employees. PPI shall indemnify Seller
for any WARN Act liability if more than the number of Employees (excluding
Employees at Seller's 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.
(d) Employee Benefits. PPI agrees to identify to Seller all
Employees which it will hire following the Closing Date. Seller shall compensate
all Employees for vacations earned or accrued through the Closing Date in
accordance with Seller's policies. 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 Seller, 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. Seller shall have no responsibilities for
any claims incurred under or premium payments with respect to such plans or
arrangements.
(e) Gift Certificates. To the best of Seller's knowledge, it
has not issued any gift certificate that is currently outstanding. For a period
of one (1) year following the Closing Date, Seller shall reimburse Buyers for
the amounts of any gift certificates actually issued by Seller prior to Closing,
if any, which gift certificates were issued not more than one year prior to the
date of honor 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.
(f) Lay-Away and Store Deposits; Store Credits; Repairs. For a
period of ninety (90) days following the Closing Date, Seller 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 Seller's receipt
of proof from Buyers that such lay-away deposits, special order deposits or
store credits have been honored by Buyers. Seller shall use its best efforts to
complete repairs on or prior to
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<PAGE> 13
the Closing and shall be responsible for repairs submitted on or prior to the
Closing Date. Buyers shall be responsible for repairs submitted after the
Closing Date.
(g) Security Deposits. Seller 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 Seller is unable to
obtain such reimbursement, but the landlord acknowledges in writing that Buyers
will receive credit for such deposits, Buyers promptly shall pay the amount of
such security deposits and construction deposits to Seller.
(h) Store Leases. PPI shall assume the obligations and
liabilities of Seller under those Store leases identified on Schedule 14,
notwithstanding that the landlord parties to such leases have not consented to
the assignment of such leases to PPI as of the Closing Date. Seller shall pay
all amounts owed to landlords under the Store leases through April 30, 1997. PPI
and Seller shall use their best efforts to obtain landlord consents from the
remaining landlords on or before January 31, 1998.
(i) Corporate Name Change; Maintaining Corporate Existence. As
soon as practicable following Closing, Seller agrees to change its corporate
name to a name that does not include "Silver & Gold" or any similar name, and
provide evidence of such name change to Buyers. Seller shall maintain its
corporate existence for a period of eighteen months after the Closing Date.
16. Indemnification by Seller, WJM and Buyers.
(a) Indemnification by Seller. Seller and WJM shall jointly
and severally 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 Seller 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 Seller, 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; provided that (A) WJM's liability hereunder shall not
exceed any amounts paid as dividends or otherwise by Seller to its shareholders
or persons related to its shareholders on or after the Closing Date, and (B)
Seller and WJM shall have no liability related to the failure to have a Store
lease assigned in excess of the Lease Assignment Adjustment, provided that they
comply with Section 15(h).
(b) Indemnification by Buyers. Buyers shall defend, indemnify
and hold Seller and its officers, directors and shareholders harmless from and
against any Damages
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<PAGE> 14
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 Seller' 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 and the employment of the Employees after
Closing (each an "Indemnity Claim").
(c) 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.
(d) 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:
(i) 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 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.
(ii) 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.
(iii) 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
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<PAGE> 15
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.
(e) Limitations on Liability. The liability of the parties
hereto under this Section 16 shall be subject to the following limitations:
(i) 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.
(ii) 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 Forty Seven Thousand Dollars ($47,000), whereupon
only the aggregate payments in excess of Forty Seven Thousand Dollars ($47,000)
shall be made.
(iii) The aggregate liability of Seller under this
Section 16 for breaches of representations shall not exceed Four Million Seven
Hundred Thousand Dollars ($4,700,000).
(iv) 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.
(f) Sole Remedy. The sole remedy of Buyers, on the one hand,
and Seller, 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.
17. Miscellaneous.
(a) 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.
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<PAGE> 16
(b) 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.
(c) Waiver. Any failure of Seller or Buyers 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 Seller or by
Seller 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).
(d) 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 Seller or WJM:
The Silver & Gold Trading Company, Inc.
P.O. Box 157
Gibbsboro, NJ 08026
With a Copy to:
Pepper, Hamilton & Scheetz
1235 Westlakes Drive
Suite 400
Berwyn, PA 19312-2401
Attention: William A. Scari, Jr., Esq.
(ii) If to PPI:
Piercing Pagoda, Inc.
3910 Adler Place
Bethlehem, PA 18002
Attention: Richard H. Penske,
Chief Executive Officer
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<PAGE> 17
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
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.
(e) Exhibits and Schedules. All Exhibits and Schedules
attached hereto are hereby incorporated by reference into, and made a part of,
this Agreement.
(f) 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. Seller 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.
(g) 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.
(h) 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.
(i) 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,
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<PAGE> 18
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.
(j) 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.
(k) 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.
(l) 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 Seller's employees.
(m) Publicity. Without Buyers' written consent, neither
Seller, 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; provided that no such announcement shall be made prior to April 14,
1997.
(n) 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
Seller and Buyers shall each be responsible for one-half of the administrative
fees, only if any, to be paid to landlords of the Stores in connection with the
assignment of the Stores' leases.
[Signature Page Follows]
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<PAGE> 19
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
THE SILVER & GOLD TRADING COMPANY, INC.
By: /s/ William J. May
-------------------------------------
William J. May, President
By: /s/ William J. May
-------------------------------------
William J. May
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<PAGE> 1
Exhibit 10.42
SYNDICATED LOAN AGREEMENT
dated
MARCH 27, 1997
by and among
PIERCING PAGODA, INC., as Borrower
and
CORESTATES BANK, N.A., as Administrative Agent, Co-Agent and a Lender
and
SUMMIT BANK, as Co-Agent and a Lender
and
FIRST UNION NATIONAL BANK, as a Lender
<PAGE> 2
SYNDICATED
LOAN AGREEMENT
This Syndicated Loan Agreement ("AGREEMENT"), dated March 27, 1997, is
by and among PIERCING PAGODA, INC. ("BORROWER"), a Delaware corporation having
its chief executive office at 3910 Adler Place, Bethlehem, Pennsylvania 18016,
the financial institutions now or hereafter parties hereto and their respective
successors and assigns (each a "LENDER" and collectively, the "LENDERS"), SUMMIT
BANK ("SUMMIT"), a New Jersey bank having offices at One Bethlehem Plaza,
Bethlehem, Pennsylvania 18018, and CORESTATES BANK, N.A. ("CORESTATES"), a
national bank having offices at 600 Penn Street, FC6--94--3--140, P.O. Box 1102,
Reading, Pennsylvania 19603. Summit and CoreStates are co-agents for the Lenders
(in such capacity, each an "AGENT" and collectively, the "AGENTS"), and
CoreStates is administrative agent and issuing bank for the Lenders (in such
capacity, the "ADMINISTRATIVE AGENT").
BACKGROUND
Borrower has requested that Lenders make various loans, advances and
extensions of credit to or for the benefit of Borrower under a revolving credit
facility, and Lenders are willing to do so under the terms and subject to the
conditions set forth in this Agreement. The initial advance hereunder shall be
used, in part, to refinance the indebtedness of Borrower to Summit (in which
CoreStates is a participant) evidenced by that certain Twelfth Replacement
Revolving Credit Note dated October 18, 1996 in the principal sum of Sixty
Million ($60,000,000.00) Dollars executed and delivered by Borrower to Summit,
as amended.
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, covenant and agree as follows:
SECTION 1. DEFINITIONS.
As used herein:
1.1 "Accounts", "Cash Proceeds", "Chattel Paper", "Contracts",
"Documents", "Equipment", "Fixtures", "General Intangibles", "Goods",
"Instruments", "Inventory" "Noncash Proceeds" and "Proceeds" shall have the same
respective meanings as are ascribed to such terms in the Uniform Commercial Code
as enacted in the Commonwealth of Pennsylvania.
1.2 "Administrative Agent" has the meaning set forth in the Preamble
hereto.
1.3 "Advance Request Form" means an advance request form in the form of
Exhibit "A" attached hereto.
<PAGE> 3
1.4 "Affiliate" means, as to any Person, each other Person that
directly, or indirectly through one or more intermediaries, controls, or is
controlled by, or is under common control with, the Person in question. As used
herein, the term "control" means possession, directly or indirectly, of the
power to direct or cause the direction of the management or policies of a
Person, whether through the ownership of voting securities, by contract or
otherwise.
1.5 "Agents" has the meaning set forth in the Preamble hereto.
1.6 "Agreement" has the meaning set forth in the Preamble to this
Agreement.
1.7 "Assignment and Acceptance" means an Assignment and Acceptance
Agreement executed by a new lender in substantially the form of Exhibit "B"
attached hereto, pursuant to which such new lender shall join in this Agreement
and become a Lender hereunder.
1.8 "Average Four Quarter Maximum Funded Debt" means the average of the
highest outstanding amount of all Indebtedness (including, without limitation,
the Revolving Loan and Letters of Credit Exposure and capitalized lease
obligations) of Borrower during each of the four quarters of Borrower
immediately prior to the date of determination.
1.9 "Base Rate" means, for any day, the higher of (i) the Prime Rate in
effect for such day, minus one hundred (100) basis points, or (ii) the Federal
Funds Rate, plus fifty (50) basis points. The Base Rate shall be calculated on
the basis of the number of days elapsed in a year of three hundred sixty (360)
days.
1.10 "Base Rate Loan" means an Obligation accruing interest at a Rate
based on the Base Rate in accordance with this Agreement.
1.11 "Borrower" has the meaning set forth in the Preamble hereto.
1.12 "Business Day" means a day (other than Saturday or Sunday) when
Administrative Agent is open for business in Philadelphia, Pennsylvania and, if
the applicable day relates to a LIBO Rate Loan, or notice with respect to a LIBO
Rate Loan, a day in which dealings in Dollar deposits are also carried on in the
London Interbank market and banks are open for business in London ("London
Business Day").
1.13 "Capitalization" means, at any time, Funded Debt plus
Stockholders' Equity.
1.14 "Capital Expenditures" means any expenditure that would be
classified as a capital expenditure on a statement of cash flow of Borrower
prepared in accordance with GAAP.
1.15 "Cash Advance Sublimit" means Forty-Five Million ($45,000,000.00)
Dollars.
<PAGE> 4
1.16 "Closing" means the date of this Agreement.
1.17 "Commitment" means, at any time with respect to a Lender, the
principal amount set forth beside such Lender's name under the heading
"Commitment" on the signature pages of this Agreement or on the signature page
of the Assignment and Acceptance pursuant to which such lender became a Lender
under this Agreement in accordance with the provisions of Paragraph 7.16 hereof.
1.18 "Consignment Agreement" means an agreement or contract between
Borrower and a third Person or third Persons for the consignment of gold or
other precious metals.
1.19 "Controlled Group" means all members of a controlled group of
corporations and all members of a controlled group of trades or businesses
(whether or not incorporated) under common control which, together with the
Borrower, are treated as a single employer under Section 414 of the Internal
Revenue Code or Section 4001 of ERISA.
1.20 "Current Assets" and "Current Liabilities" mean, at any time, all
assets or liabilities, respectively, that, in accordance with GAAP should be
classified as current assets or current liabilities, respectively, on a
consolidated balance sheet of Borrower and its Subsidiaries; however, for the
purposes of determining compliance with the financial covenants set forth at
Paragraph 5.3 hereof, all Obligations in connection with the Revolving Loan
shall be deemed Current Liabilities.
1.21 "Current Ratio" means the ratio of Current Assets (including all
consigned gold and other precious metals) to Current Liabilities (including all
Letter of Credit Exposure and, without duplication, any Indebtedness under any
Consignment Agreement).
1.22 "Default" means any act, event, condition or occurrence which,
with notice or lapse of time, or both, would constitute an Event of Default.
1.23 "Default Rate" means a per annum rate of interest equal to three
(3%) in excess of the then-applicable Rate.
1.24 "EBIDTA" means Net Income before interest expense, gold
consignment fees, depreciation and amortization expense and other noncash
charges, and federal, state and local income taxes of Borrower and its
Subsidiaries, excluding (a) non-recurring items such as gains (or losses) on
sales of assets, (b) earnings from discontinued businesses, and (c) any noncash
gains (or losses) used in determining Net Income.
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1.25 "Employee Benefit Plan" means a "pension plan", as such term is
defined in Section 3(2) of ERISA or a "welfare plan", as such term is defined in
Section 3(1) of ERISA, for which Borrower or any member of the Controlled Group
may have liability.
1.26 "Environmental Laws" means all Laws relating to or pertaining to
the environment, human health or safety or public welfare, including, without
limitation, the Pennsylvania Hazardous Sites Cleanup Act (Pa. Stat. Ann. Tit. 35
Section 6070.101 et seq., as amended); the Pennsylvania Solid Waste Management
Act (Pa. Stat. Ann. Tit. 35 Section 6018.101 et seq., as amended); the
Pennsylvania Clean Streams Law (Pa. Stat. Ann. Tit. 35 Section 691.1 et seq., as
amended); the Pennsylvania Storage Tank and Spill Prevention Act (Pa. Stat. Ann.
Tit. 35 Section 6020.1 et seq.); the Hazardous and Solid Waste Amendments of
1984 Pub. L98-616 (42 U.S.C. Section 699 et seq., as amended); the Resource
Conservation and Recovery Act (42 U.S.C. Section 6901 et seq., as amended), the
Comprehensive Environmental Response, Compensation and Liability Act (42 U.S.C.
Section 9601 et seq., as amended), and any other applicable Laws including those
relating to the use of recyclable materials.
1.27 "ERISA" means the Employee Retirement Income Security Act of 1974,
as amended, and any successor statute of similar import, together with the
regulations thereunder, in each case as in effect from time to time.
1.28 "Event of Default" means an event specified in Paragraph 7.1
hereof.
1.29 "Federal Funds Rate" means, for any day, the per annum rate
(rounded upward, if necessary, to the nearest 1/100th of 1%) equal for each day
during such period to the weighted average of the rates charged on overnight
federal funds transactions with members of the Federal Reserve System arranged
by federal funds brokers on such day, as published for such day (or, if such day
is not a Business Day, for the next preceding Business Day) by the Federal
Reserve Bank of New York; provided that (i) if such day is not a Business Day,
the Federal Funds Rate for such day shall be a rate on such transactions on the
next preceding Business Day, and (ii) if no such rate is so published on the
next preceding Business Day, the Federal Funds Rate for such day shall be the
average rate quoted to the Administrative Agent on such day on such transactions
as determined by the Administrative Agent.
1.30 "Financial Statements" means the annual audited consolidated
balance sheets of Borrower and its Subsidiary as of March 31, 1996, and the
quarterly consolidated balance sheets of Borrower and its Subsidiary as of
December 31, 1996, and the consolidated statements of income and retained
earnings of Borrower and its Subsidiary for the year and quarter ended on such
dates.
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1.31 "Funded Debt" means, as to Borrower and its Subsidiary, the
aggregate of all outstanding Indebtedness under the Revolving Loan for cash
advances, all Letter of Credit Exposure and all other Indebtedness for borrowed
money.
1.32 "GAAP" generally accepted accounting principles, consistently
applied.
1.33 "Indebtedness" means all items of indebtedness, obligation or
liability, whether matured or unmatured, liquidated or unliquidated, direct or
contingent, joint or several.
1.34 "Interest Period" means, with respect to interest on the
Obligations accruing at the LIBO Rate, either one (1), two (2), three (3) or six
(6) months. All Interest Periods shall be subject to the following:
(A) Interest Periods shall commence on the conversion date
selected by Borrower in accordance with and subject to the provisions of
Paragraph 2.3(A) hereof;
(B) If an Interest Period would otherwise end on a day which
shall not be a Business Day, such Interest Period shall be extended to the next
succeeding Business Day, unless such Business Day falls in another calendar
month, in which case such Interest Period shall end on the next preceding
Business Day; provided that with respect to any Interest Period which begins on
the last Business Day of a calendar month (or a day for which there is no
numerically corresponding day in the calendar month at the end of such Interest
Period), the Interest Period shall end on the last Business Day of a calendar
month; and
(C) No Interest Period shall extend beyond the Revolving Loan
Termination Date.
1.35 "IRS" means the U.S. Internal Revenue Service.
1.36 "Laws" means all ordinances, statutes, rules, regulations, orders,
injunctions, writs or decrees of any government or political subdivision or
agency thereof or any court or similar entity established by and thereof.
1.37 "Letter of Credit Exposure" means the aggregate outstanding face
amount of all Letters of Credit, minus the aggregate amount of all drafts issued
under or purporting to have been issued under such Letters of Credit that have
been paid (with a corresponding reduction in the face amount of the Letter of
Credit under which such draft has been paid).
1.38 "Letter of Credit Sublimit" means Fifty-Five Million
($55,000,000.00) Dollars.
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1.39 "Letters of Credit" means the Letters of Credit issued pursuant to
Paragraph 2.3 hereof.
1.40 "Liabilities" means all Indebtedness that, in accordance with
GAAP, should be classified as liabilities on a consolidated balance sheet of
Borrower and its Subsidiaries.
1.41 "LIBO Rate Loan" means an Obligation accruing interest at a Rate
based on the LIBO Rate in accordance with the this Agreement.
1.42 "LIBO Rate" means for the applicable Interest Period, (i) the rate
(rounded upward, if necessary, to the nearest 1/100th of 1%) determined by the
Administrative Agent two (2) London Business Days prior to the date of the
corresponding LIBO Rate Loan, at which the Administrative Agent is offered
deposits in dollars at approximately 11:00 A.M., London time by leading banks in
the Interbank Eurodollar or Eurocurrency market for delivery on the date of such
Loan in an amount and for a period comparable to the amount and Interest Period
of such Loan and in like funds, divided by (ii) a number equal to one (1) minus
the LIBO Rate Reserve Percentage. The LIBO Rate shall be adjusted automatically
with respect to any LIBO Rate Loan outstanding on the effective date of any
change in the LIBO Rate Reserve Percentage, as of such effective date. The LIBO
Rate shall be calculated on the basis of the number of days elapsed in a year of
360 days.
1.43 "LIBO Rate Reserve Percentage" means, for any LIBO Rate Loan for
any Interest Period applicable thereto, the daily average of the stated maximum
rate (expressed as a decimal) at which reserves (including any marginal,
supplemental, or emergency reserves) are required to be maintained by
Administrative Agent during such Interest Period under Federal Reserve
Regulation D against "Eurocurrency liabilities" (as such term is used in
Regulation D), but without benefit or credit proration, exemptions, or offsets
that might otherwise be available to any Lender from time to time under
Regulation D. Without limiting the effect of the foregoing, the LIBO Rate
Reserve Percentage shall reflect any other reserves required to be maintained by
Lenders against (i) any category of liabilities which includes deposits by
reference to which the rate for LIBO Rate Loans is to be determined; or (ii) any
category of extension of credit or other assets which include LIBO Rate Loans.
1.44 "Lien" means any interest of any kind or nature in property
securing an obligation owed to, or a claim of any kind or nature in property by,
a Person other than the owner of the Property, whether such interest is based on
the common law, statute, regulation or contract, and including, but not limited
to, a security interest or lien arising from a mortgage, encumbrance, pledge,
conditional sale or trust receipt, a lease, consignment or bailment for security
purposes, a trust, or an assignment.
1.45 "Line Limit" means Seventy-Five Million ($75,000,000.00) Dollars.
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1.46 "Loan" or "Loans" means, severally and collectively, the Revolving
Loans and the Swing Line Loans.
1.47 "Loan Documents" means this Agreement and the documents,
instruments and agreements executed in connection therewith.
1.48 "LOC Contribution" has the meaning set forth in Paragraph 2.4(E)
hereof.
1.49 "Mandatory Loan" has the meaning set forth in Paragraph 2.6(B)
hereof.
1.50 "Material Adverse Effect" means, at any time, a material adverse
effect on the business, properties, financial condition or results of operations
of Borrower, or the ability of Borrower to perform any material Obligation under
this Agreement or any related instrument, agreement or document.
1.51 "Net Income" means, at any time, the net income after taxes of
Borrower, as such would appear on a statement of earnings of Borrower prepared
in accordance with GAAP.
1.52 "Notes" means, collectively, the Revolving Loan Notes and the
Swing Line Note.
1.53 "Obligations" means the obligation of Borrower:
(A) To pay the principal of and interest on the Notes in
accordance with the terms of the Notes and the terms hereof and to satisfy and
pay all of its other Indebtedness, liabilities and obligations to Lenders,
whether hereunder or otherwise, whether now existing or hereafter incurred,
matured or unmatured, direct or contingent, joint or several, including any
extensions, modifications, renewals thereof and substitutions therefor;
(B) To repay to Lenders all amounts advanced by Lenders
hereunder or otherwise to or for the benefit of Borrower; and
(C) To pay all of (i) Lenders' expenses and costs in
connection with the preparation, negotiation and consummation of the
transactions described in this Agreement and all related instruments, agreements
and documents, including the reasonable fees and expenses of their counsel, (ii)
Administrative Agent's expenses and costs, including the reasonable fees and
expenses of its counsel, in connection with the administration, amendment or
modification of this Agreement and related instruments, agreements and
documents, and (iii) all Lenders' expenses and costs, including the fees and
expenses of their counsel, in connection with the enforcement of any of the
Obligations.
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1.54 "Participation" means a participation interest in the Loans and
the Loan Documents.
1.55 "Participating Lender" means any Person who shall have been
granted the right by any Lender to participate in the financing provided by such
Lender under this Agreement, and who shall have entered into a participation
agreement in form and substance satisfactory to such Lender.
1.56 "PBGC" means the Pension Benefit Guaranty Corporation and any
entity succeeding to any or all of its functions under ERISA.
1.57 "Permitted Liens" means:
(A) Liens for taxes, assessments or similar charges incurred
in the ordinary course of business that are not yet due and payable;
(B) Pledges or deposits made in the ordinary course of
business to secure payment of workmen's compensation, or to participate in any
fund in connection with workmen's compensation, unemployment insurance, old-age
pensions or other social security programs;
(C) Liens of mechanics, materialmen, warehousemen, carriers,
or other like liens, securing obligations incurred in the ordinary course of
Borrower's business that are not yet due and payable;
(D) Existing Liens set forth or described on Exhibit "C",
attached hereto and made a part hereof;
(E) The following, if the validity or amount thereof is being
contested in good faith by appropriate and lawful proceedings, and no action has
been taken to levy or execute thereon, or any such action taken has been stayed
within ten (10) days of the date of commencement of such action, and so long as
they do not, in the aggregate, materially detract from the value of the property
of Borrower, or materially impair the use thereof in the operation of its
business;
(1) Claims or Liens for taxes, assessments or charges
due and payable and subject to interest or penalty;
(2) Claims, Liens and encumbrances upon, and defects
of title to, real or personal property, including any attachment of
personal or real property or other legal process prior to adjudication
of a dispute on the merits;
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(3) Claims or Liens of mechanics, materialmen,
warehousemen, carriers, or other like liens;
(4) Adverse judgments on appeal;
(F) Inchoate Liens of landlords obtained in the ordinary
course of business; and
(G) Purchase money Liens granted to the vendor or Person
financing the vendor of assets so long as the Lien granted is limited to the
specific assets so acquired and the debt secured by the Lien is the unpaid
balance of the acquisition cost of the specific assets on which the Lien is
granted, and the transaction does not otherwise violate any other provisions of
this Agreement.
1.58 "Person" means any individual, corporation, limited liability
company, partnership, association, joint-stock company, trust, unincorporated
organization, joint venture, court or government or political subdivision or
agency thereof.
1.59 "Prime Rate" means that variable, per annum rate of interest
(which is not necessarily the lowest rate of interest charged by CoreStates to
any particular class or category of customers of CoreStates) periodically
announced by CoreStates and designated as CoreStates's "Prime Rate", as such
rate may change from time to time, without notice to Borrower or any obligor for
the Obligations.
1.60 "Pro Rata Share" means, with respect to a Lender, a fraction
(expressed as a percentage), the numerator of which is the amount of such
Lender's Commitment and the denominator of which is the sum of Commitments of
all of the Lenders.
1.61 "Rates" means the rate(s) of interest specified in Paragraph 2.7
hereof.
1.62 "Records" means correspondence, memoranda, tapes, discs, papers,
books and other documents, or transcribed information of any type, whether
expressed in ordinary or machine language.
1.63 "Required Lenders" means, at any time, Lenders holding Pro Rata
Shares aggregating at least sixty-six and two-thirds (66 2/3%) percent at such
time; provided, however, that (i) at any time when there are less than three (3)
Lenders, Required Lenders shall mean all of the Lenders, and (ii) at any time
when there are more than two (2) Lenders and one (1) Lender holds a Pro Rata
Share in excess of sixty-six and two-thirds (66 2/3%) percent, Required Lenders
shall mean such Lender and any other Lender holding a Pro Rata Share of twenty
(20%) percent or more.
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1.64 "Revolving Loan(s)" means, severally and collectively, the loans,
advances and extensions of credit which may be made by Lenders to or for the
benefit of Borrower pursuant to Paragraphs 2.3 and 2.4 hereof.
1.65 "Revolving Loan Note" means a note executed by Borrower and
delivered to each Lender in the form of Exhibit "D" attached hereto.
1.66 "Revolving Loan Termination Date" means July 31, 2000, unless such
date is extended by Lenders and evidenced by a confirming written notice to
Borrower.
1.67 "SEC" means the U.S. Securities and Exchange Commission.
1.68 "Stockholders' Equity" means, at any time, the aggregate of
Subordinated Indebtedness plus the sum of the following accounts set forth in a
consolidated balance sheet of Borrower and its Subsidiary prepared in accordance
with GAAP: (i) the par or stated value of all outstanding capital stock; (ii)
capital surplus; and (iii) retained earnings.
1.69 "Subordinated Indebtedness" means all Indebtedness incurred at any
time by Borrower, the repayment of which is subordinated to the Loans in form
and manner reasonably satisfactory to Administrative Agent.
1.70 "Subsidiaries" means with respect to any party, any entity, the
majority of whose voting stock (or any class of stock having the power to elect
directors) is owned directly or indirectly by such party. EARS, Inc. ("EARS"), a
Delaware corporation having its chief executive office at 900 Market Street,
Suite 200, Wilmington, Delaware 19801, is the only Subsidiary of Borrower.
1.71 "Surety Agreement" has the meaning set forth in Paragraph 3.1(H)
hereof.
1.72 "Swing Line Advances" means Cash advances under the Swing Line
Commitment made by the Swing Line Lender to Borrower pursuant to Paragraph 2.6.
1.73 "Swing Line Commitment" means Five Million ($5,000,000.00)
Dollars.
1.74 "Swing Line Lender" means CoreStates, in its capacity as such, and
its permitted successors and assigns in such capacity.
1.75 "Swing Line Note" means a note executed by Borrower and delivered
to Swing Line Lender.
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1.76 "Unused Line Fee" has the meaning set forth in Paragraph 2.9
hereof.
SECTION 2. THE LOANS.
2.1 Disbursement and Use of the Loans. Administrative Agent will credit
the proceeds of the Loans to Borrower's deposit accounts maintained with the
Lenders, as designated in writing by Borrower, and Borrower shall use the
proceeds of the Loans for working capital purposes in the ordinary course of its
business, permitted capital expenditures and general corporate purposes.
2.2 The Revolving Loan. Subject to the terms hereof and until the
earlier of (i) the occurrence of an Event of Default (which is not waived in
writing by Lenders or cured in accordance with this Agreement) or (ii) the
Revolving Loan Termination Date, each Lender severally agrees to make Revolving
Loans to Borrower as Borrower may request up to the lesser of such Lender's Pro
Rata Share of the aggregate of all Lenders' Commitments or such Lenders'
Commitment, the aggregate of which shall not exceed (when added to the Letter of
Credit Exposure) the Line Limit; provided, however, that notwithstanding
anything to the contrary set forth herein or in any related instrument,
agreement or document, cash advances under the Revolving Loan shall not exceed,
in the aggregate, the Cash Advance Sublimit and Letter of Credit Exposure shall
not exceed, in the aggregate, the Letter of Credit Sublimit.
2.3 Advances.
(A) All requests for LIBO Rate Loans hereunder shall be in
minimum amounts of One Million ($1,000,000.00) Dollars, and in increments of
Five Hundred Thousand ($500,000.00) Dollars, and all requests for Base Rate
Loans hereunder shall be in minimum amounts of Five Hundred Thousand
($500,000.00) Dollars, and in increments of One Thousand ($1,000.00) Dollars.
(B) Borrower shall give Administrative Agent telephonic
(promptly confirmed in writing) notice not later than eleven o'clock (11:00
a.m.) on the date of each requested Base Rate Loan, specifying the date, amount
and purpose thereof. The written confirmation of such notice shall be in the
form of the Advance Request Form, and shall be certified by the President,
Treasurer or Controller of Borrower.
(C) Borrower shall give Administrative Agent at least three
(3) Business Days' prior written notice not later than eleven o'clock (11:00)
a.m. on the date of each request for a LIBO Rate Loan, specifying the date,
amount and purpose thereof. Such notice shall be in the form of the Advance
Request Form, and shall be certified by the President, Treasurer or Controller
of Borrower.
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(D) (i) Upon receiving a request for an advance in accordance
with subparagraph (B) or (C) above, Administrative Agent shall request (x) in
the event of a request for a Base Rate Loan, by notice to each Lender not later
than noon on the date of Administrative Agent's receipt of such request, or (y)
in the event of a request for a LIBO Rate Loan, by three (3) Business Days'
notice to Lenders, in either case specifying that each Lender advance funds to
Administrative Agent so that each Lender participates in the requested advance
to the extent of its Pro Rata Share of the Revolving Loan. Each Lender shall
advance its applicable Pro Rata Share of the requested advance to Administrative
Agent by delivering federal funds immediately available at Administrative
Agent's offices in Philadelphia, Pennsylvania prior to (xx) one o'clock (1:00
p.m.) on the date of the request for a Base Rate Loan or on the date of the LIBO
Rate Loan. Subject to the satisfaction of the terms and conditions hereof,
Administrative Agent shall make the requested advance available to the Borrower
by crediting such amount to Borrower's deposit account(s) with Lenders not later
than two o'clock (2:00) p.m. on the day of the requested advance; provided,
however, that in the event Administrative Agent does not receive in a timely
fashion a Lender's share of the requested advance as provided above,
Administrative Agent shall not be obligated to advance such Lender's share.
(ii) Unless Administrative Agent shall have been
notified by a Lender prior to the date such Lender's share of any such advance
is to be made by such Lender that such Lender does not intend to make its share
of such requested advance available to Administrative Agent, Administrative
Agent may assume that such Lender has made such proceeds available to
Administrative Agent on such date, and Administrative Agent may, in reliance
upon such assumption (but without obligation), make available to the Borrower a
corresponding amount. If such corresponding amount is not in fact made available
to Administrative Agent by such Lender on the date the advance is made,
Administrative Agent shall be entitled to recover such amount on demand from
such Lender (or, if such Lender fails to pay such amount forthwith upon such
demand, from Borrower), together with interest thereon in respect of each day
during the period commencing on the date such amount was made available to the
Borrower and ending on (but excluding) the date Administrative Agent recovers
such amount at a rate per annum, equal to the Federal Funds Rate.
(E) Each request for an advance pursuant to this Paragraph 2.3
shall be irrevocable and binding on Borrower.
2.4 Letters of Credit.
(A) Subject to the terms hereof including, without limitation,
the terms and conditions applicable to the making of cash advances hereunder
(but not the provision relating to the Cash Advance Sublimit), Lenders agree
that, from time to time, Administrative Agent will, on behalf of each Lender
(according to such Lender's Pro Rata Share), issue Letters of Credit for the
account of Borrower up to the Letter of Credit Sublimit to be used by Borrower
to support
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such gold consignment (and other precious metal) lines of credit to be obtained
by Borrower on such terms and conditions as are approved in writing by Agents,
and for other working capital purposes in the ordinary course of Borrower's
business and for general corporate purposes, provided, however, that without the
prior written consent of Lenders, the aggregate face amount of Letters of Credit
for other than to support gold consignment (and other precious metal) lines of
credit, that is, for other working capital purposes and for general corporate
purposes, shall be limited to Three Million ($3,000,000.00) Dollars. Each Letter
of Credit shall have a tenor of not more than one (1) year, but shall, in any
event have an expiry date on or before the Revolving Loan Termination Date
regardless of the date on which it is issued. At the option of Borrower, said
Letters of Credit may, on two (2) Business Days' prior written notice to
Administrative Agent, be amended, renewed or reissued for additional periods or
amounts or other terms in Administrative Agent's discretion, so long as Borrower
gives Administrative Agent reasonable notice of Borrower's intention to have the
Letters of Credit renewed or reissued and provided that the Revolving Loan
Termination Date has, if required, been extended by Lenders and no Default or
Event of Default has occurred and is then continuing. Prior to the issuance of
any Letter of Credit, Borrower will, upon request by Administrative Agent,
execute and deliver to Administrative Agent the Administrative Agent's standard
letter of credit agreement(s).
(B) Without limiting any rights Lenders may have upon payment
of any draft issued under or purporting to have been issued under any Letter of
Credit, each amount paid by Administrative Agent on account of any draft issued
under or purporting to have been issued under any Letter of Credit shall be
deemed a cash advance under the Revolving Loan in an amount equal to the amount
paid on account of such drafts, and the principal amount of the Revolving Loan
then outstanding shall be increased, and the Letter of Credit Exposure shall be
decreased, by such amount.
(C) The aggregate of (i) the Letter of Credit Exposure, and
(ii) the outstanding principal balance of the Revolving Loan, shall not, at any
time, exceed the Line Limit.
(D) On the fifteenth (15th) day of the month following the end
of each fiscal quarter in each fiscal year of Borrower, in arrears, Borrower
agrees to pay to Administrative Agent (for the sole account of Administrative
Agent), a "facing" fee equal to one-tenth (1/10%) percent per annum of the face
amount of any Letter of Credit, and issuance fees to Administrative Agent (for
the account of each Lender in accordance with its Pro Rata Share) equal to
three-quarters (3/4%) percent per annum of the face amount of Letters of Credit.
The facing fee and the issuance fee referred to in this Subparagraph shall be
calculated daily, for the actual number of days elapsed, on the basis of a year
of three hundred sixty (360) days. In addition, as billed by Administrative
Agent, Borrower agrees to pay to Administrative Agent its additional, standard
letter of credit fees for advice, amendment, confirmation, transfer and other
similar letter of credit activity, as such fees are in effect from time to time.
The foregoing fees shall be deemed part of the Obligations.
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(E) With respect to each Letter of Credit issued hereunder,
each Lender agrees that it is irrevocably obligated to pay to Administrative
Agent, for each such Letter of Credit, such Lender's Pro Rata Share of each and
every payment made or to be made by Administrative Agent under such Letter of
Credit (each such payment to be made, a "LOC Contribution"). Each Lender's LOC
Contribution shall be due from such Lender immediately upon, and in any event no
later than the same day as, receipt of written notice (which may be sent by
telex) from Administrative Agent that (i) it has made a payment or (ii) a draft
has been presented purporting to be drawn on a Letter of Credit issued
hereunder. Such payment shall be made at Administrative Agent's offices in
Philadelphia Pennsylvania in immediately available federal funds.
(F) The obligation of each Lender to make its LOC Contribution
hereunder is absolute, continuing and unconditional, and Administrative Agent
shall not be required first to make demand upon or proceed against Borrower or
any guarantor or surety, or any others liable with respect to the applicable
Letter of Credit. LOC Contributions shall be made without regard to termination
of this Agreement or the Commitment, the existence of a Default or an Event of
Default, the acceleration of the Obligations or any other event or circumstance.
(G) Borrower further agrees to execute and deliver to
Administrative Agent any and all instruments, agreements and documents
reasonably required by Agents in connection with the issuance by Administrative
Agent of Letters of Credit.
2.5 Revolving Loan Notes. Contemporaneously herewith, to evidence the
Obligations of Borrower to repay the Revolving Loan, Borrower shall execute and
deliver to each Lender a Revolving Loan Note, in the principal amount of each
Lender's Commitment.
2.6 Swing Line Commitment. Subject to satisfaction of all conditions
precedent to the establishment of the Revolving Loan, Swing Line Lender hereby
agrees to make Swing Line Advances to or for the benefit of Borrower up to the
Swing Line Commitment under the terms and subject to the conditions set forth in
this Paragraph:
(A) Swing Line Advances (i) may be made at any time and from
time to time on and after the date of this Agreement and prior to the Revolving
Loan Termination Date, provided that any request for a Swing Line Advance must
be made by 2:00 p.m. on the date such Swing Line Advance is required, (ii) may
be made only as cash advances which shall accrue interest at the Prime Rate
(and, after the occurrence and during the continuance of any Event of Default,
at the Default Rate) and shall not be entitled to be converted into LIBO Rate
Loans, (iii) shall not be made if the aggregate principal amount of Swing Line
Advances and Swing Line Lender's Pro Rata Share of all other Obligations then
outstanding, after giving effect to any requested Swing Line Advance, would
exceed Swing Line Lender's Pro Rata Share or Commitment, or the aggregate of the
principal amount of Swing Line Advances, after giving
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effect to any requested Swing Line Advance, and all other Obligations, would
exceed the Cash Advance Sublimit or the Line Limit;
(B) Swing Line Lender shall, so long as and to the extent that
amounts are available to be borrowed under the Line Limit (whether or not any
conditions precedent thereto can be or are met), require each other Lender, and
each other Lender hereby agrees, subject to this Subparagraph 2.6(B), on such
date (which shall be a Business Day) as designated by Swing Line Lender in
writing to Borrower and the other Lenders, to make a Base Rate Loan in an amount
equal to such Lender's Pro Rata Percentage of the greater of the minimum amount
required to be borrowed for Base Rate Loans or the amount of Swing Line Advances
(rounded up to the nearest thousand dollars) specified in such notice (each a
"Mandatory Loan"). If Base Rate Loans are made by Lenders other than the Swing
Line Lender under the immediately preceding sentence, each such Lender shall
make the amount of its Revolving Loan available to the Administrative Agent, in
same day funds, at the Administrative Agent's Philadelphia, Pennsylvania office,
not later than 12:00 noon (Philadelphia time) on the Business Day next
succeeding the date such notice is given. The conversion of Swing Line Advances
to Base Rate Loans will not require the Borrower to comply with the conditions
precedent set forth in Section 2 hereof or the notice requirements of Paragraph
2.3 hereof or require any other action on the part of Borrower. The proceeds of
such Base Rate Loans shall be immediately delivered to Swing Line Lender (and
not to Borrower) and applied to repay the outstanding Swing Line Advances. On
the day such Base Rate Loans are made, Swing Line Lender's Pro Rata Share of
Swing Line Advances shall be deemed to be paid with the proceeds of a Base Rate
Loan made by the Swing Line Lender and such portion of the Swing Line Advances
deemed to be so paid shall no longer be outstanding as Swing Line Advances,
shall no longer be due under the Swing Line Note and shall be due under the
Revolving Loan Note issued to the Swing Line Lender. If any portion of any such
amount paid to the Swing Line Lender should be recovered by or on behalf of
Borrower from the Swing Line Lender in bankruptcy, by assignment for the benefit
of creditors or otherwise, the loss of the amount so recovered shall be ratably
shared among all Lenders in the manner contemplated by Paragraph 7.7 hereof.
Each Lender's obligation to make any Mandatory Loan referred to in this
paragraph shall be absolute and unconditional and shall not be affected by any
circumstance, including, without limitation, (i) any setoff, counterclaim,
recoupment, defense or other right which such Lender may have against Swing Line
Lender, Borrower or any other Person for any reason whatsoever; (ii) the
occurrence or continuance of a Default or an Event of Default; (iii) the
occurrence of any Material Adverse Effect; (iv) any breach of this Agreement or
any of the other Loan Documents by Borrower or any of its Subsidiaries or any
other Lender; or (v) any other circumstance, happening or event whatsoever,
whether or not similar to any of the foregoing;
(C) In the event that any Mandatory Loan cannot for any reason
be made on the date otherwise required above (including, without limitation, as
a result of the commencement of a proceeding under the Bankruptcy Code with
respect to Borrower), then each
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Lender hereby agrees that it shall forthwith purchase (as of the date the
Mandatory Loan would otherwise have been made, adjusted for any principal
payments received by the Swing Line Lender relating to the Swing Line Advance
from Borrower on or after such date and prior to such purchase) from the Swing
Line Lender, such participations in the outstanding Swing Line Advances as shall
be necessary to cause such Lenders to share in such Swing Line Advances ratably
based upon their respective Pro Rata Shares; provided, however, that (x) all
interest payable on the Swing Line Advances shall be for the account of the
Swing Line Lender until the date as of which the respective participation
required to be purchased is paid and, to the extent attributable to the
purchased participation, shall be payable to the participant from and after such
date and (y) at the time any purchase of participations pursuant to this
sentence is actually made, the purchasing Lender shall be required to pay Swing
Line Lender interest on the principal amount of the participation purchased for
each day from and including the day upon which the Mandatory Loan would
otherwise have occurred to but excluding the date of payment for such
participation, at a rate per annum equal to (I) the overnight Federal Funds Rate
for the first three (3) days and (II) at the Base Rate for each day thereafter;
and
(D) A copy of each notice given by Swing Line Lender to
Lenders pursuant to this Subparagraph 2.6 shall be promptly delivered by Swing
Line Lender to Administrative Agent and Borrower. Upon the making of a Base Rate
Loan by a Lender pursuant to Subparagraph 2.3, the amount so funded shall become
due under such Lender's Revolving Loan Note and shall no longer be owed under
the Swing Line Note.
2.7 Prepayments of Base Rate Loans. On notice to Administrative Agent
by 11:00 a.m. on the day of the prepayment, which notice may be telephonic, but
shall be promptly confirmed in writing on the remittance form attached hereto as
Exhibit "2.7", Borrower may, at its option, prepay Base Rate Loans, in whole or
in part at any time and from time to time, without premium, provided that each
partial payment shall be in the minimum principal amount of Five Hundred
($500,000.00) Dollars or, if greater, in increments of One Thousand ($1,000.00)
Dollars.
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2.8 Interest Rates and Payments of Interest.
(A) Except as provided in the next sentence of this
Subparagraph 2.8(A), interest on the outstanding principal balance of the
Revolving Loan shall accrue and be payable at a per annum rate equal to Base
Rate. Upon receipt by Administrative Agent of at least three (3) Business Days'
written, telegraphic or telephonic notice (with any such telephonic notice to be
promptly confirmed in writing) from Borrower, which notice Borrower hereby
agrees shall be irrevocable, Borrower may elect to have all or any portion of
the then-outstanding principal balance of the Revolving Loan (in an amount not
less than One Million ($1,000,000.00) Dollars, and increments of not less than
Five Hundred Thousand ($500,000.00) Dollars) bear, or continue to bear, interest
during the Interest Period designated by Borrower in such notice at a fixed per
annum rate equal to the LIBO Rate plus one hundred ten (110) basis points. In no
event shall there be more than five (5) Interest Periods at any one time
outstanding with respect to the Obligations. If, at the conclusion of any
Interest Period, Borrower has not elected to have all or any portion of the
outstanding principal Obligations continue to bear interest at a Rate based on
the LIBO Rate, such outstanding Obligations shall bear interest at the Base
Rate.
(B) If, at any time and from time to time:
(1) Administrative Agent shall determine that, by
reason of any circumstances affecting the London Interbank Eurodollar
market, adequate means do not exist for Administrative Agent to readily
ascertain a LIBO Rate to be applicable to the specified portion of the
outstanding Obligations evidenced by the Revolving Loan Notes; or
(2) Lenders (or any of them) shall incur increased
costs or reductions in the amounts received or receivable with respect
to any LIBO Rate Loan, or portion thereof, because of any change since
the date hereof in any applicable Law, order, guideline or request
(whether or not having the force of law), or in the interpretation or
administration thereof and including the introduction of any new Law,
order, guideline or request including, without limitation: (x) a change
in the basis of taxation or payments to any Lender of the principal or
interest on the Loans or any other amounts payable hereunder (except
for changes in the rate of tax on, or determined in reference to, the
net income or profits of a Lender pursuant to the Laws of the
jurisdiction in which it is organized or in which its principal office
or applicable lending office is located or any subdivision thereto or
therein); or (y) a change in official reserve requirements; or (z)
other circumstances since the date hereof affecting Lenders or the
London Interbank Eurodollar market or the position of any Lenders in
such market; or
(3) The making or continuance of any LIBO Rate Loan
becomes (x) unlawful by any Law or order, (y) impossible by compliance
by any Lenders in good
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faith with any governmental requirement or request (whether or not
having force of law), or (z) impracticable as a result of a contingency
occurring after the date hereof which materially and adversely affects
the London Interbank Eurodollar market;
Administrative Agent shall give notice of such determination by
telephone to Borrower. Thereafter:
(x) In the case of clause (B)(1) above,
Administrative Agent shall not be obligated to honor Borrower's request
that all or any portion of such outstanding principal Obligations bear
interest at a Rate based on the LIBO Rate. Borrower shall nevertheless
have the right at any time thereafter to submit another request that
all or any portion of the outstanding Obligations evidenced by the
Notes accrue interest at a Rate based on the LIBO Rate;
(y) In the case of clause (B)(2) above, Borrower
shall pay to Administrative Agent, upon written demand therefor, such
additional amounts (in the form of an increased Rate, as Administrative
Agent may determine in its sole discretion) as shall be required to
compensate Lenders for such increased costs or reductions in amounts
received or receivable hereunder. A written notice as to the additional
amounts owed to Lenders submitted to Borrower showing the basis for the
calculation thereof, absent manifest error, shall be presumptively
binding on Borrower; and
(z) In the case of clause (B)(3) above, Borrower
shall be deemed to have requested that Lenders convert all LIBO Rate
Loans into Base Rate Loans.
(C) Without limiting the generality of the foregoing or any
other provision of this Agreement, Borrower shall compensate Lenders, upon
written request by Administrative Agent, for all losses, expenses and
liabilities (including, without limitation, any interest paid by Lenders to
lenders of funds borrowed by Lenders to make or carry LIBO Rate Loans and any
loss sustained by Lenders in connection with the redeployment of such funds, but
excluding any loss of margin) which Lenders may sustain with respect to such
LIBO Rate Loans:
(1) If, for any reason other than a default or error
by Lenders, a borrowing of any LIBO Rate Loan does not occur on a date
specified therefor by Borrower or a successive Interest Period does not
commence after notice thereof is given by Borrower; or
(2) If any prepayment or repayment or conversion of
any LIBO Rate Loan occurs on a date which is not the last day of the
applicable Interest Period; or
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(3) As a consequence of any failure by Borrower to
repay such LIBO Rate Loan when required by the terms of this Agreement;
It being understood that such compensation shall be equal to the amount
of interest which would have accrued on the amount of principal
prepaid, not repaid, converted or not borrowed for the period from the
date of such prepayment, repayment, conversion or failure to borrow or
repay to the last day of the then current Interest Period for the
relevant LIBO Rate Loan (or, in the case of a failure to borrow, the
Interest Period for such LIBO Rate Loan which would have commenced on
the date of such failure to borrower) at the applicable rate of
interest for such LIBO Rate Loan minus any amount which Lenders, in its
sole and absolute discretion, determines is realizable upon
redeployment of such funds.
(D) Notwithstanding anything to the contrary set forth in
Paragraph 2.6 of the Agreement, upon the occurrence of an Event of Default, at
Administrative Agent's option, but no later than the end of the applicable
Interest Period(s), all LIBO Rate Loans shall be converted to Base Rate Loans.
(E) Interest on the outstanding principal balance of the Swing
Line Commitment shall accrue at the variable per annum rate equal to the Prime
Rate.
(F) After the occurrence and during the continuance of an
Event of Default, interest on the outstanding principal balance of the Loans
shall accrue and be payable, on demand, at the Default Rate.
(G) Each time the Federal Funds Rate or the Prime Rate shall
change, the Base Rate, if applicable (or its corresponding Default Rate, if
applicable) and the Rate applicable to the Swing Line Commitment shall change
contemporaneously with such change. Interest accrued on Base Rate Loans or Swing
Line Loans shall be due and payable monthly, in arrears, on the fifteenth (15th)
day of each month, commencing on the fifteenth (15th) day of the month following
Closing. Interest accrued on LIBO Rate Loans shall be due and payable, in
arrears, on the last day of the Interest Period for such LIBO Rate Loan and,
with respect to LIBO Rate Loans for which a six (6) month Interest Period has
been selected, on the ninetieth (90th) day of such Interest Period, and on the
last day of such Interest Period.
(H) If, at any time, any of the Rates or the Default Rate
shall be finally determined by any Court of competent jurisdiction, governmental
agency or tribunal to exceed the maximum rate of interest permitted by any
applicable Laws, then, for such time as such Rate(s) would be deemed excessive,
application thereof shall be suspended and there shall be charged in lieu
thereof the maximum rate of interest permissible under such laws.
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2.9 Unused Line Fee. As part of the Obligations, Borrower shall pay to
Administrative Agent (for the account of Lenders in accordance with their
respective Pro Rata Shares), on the first day of each quarter (in respect of the
prior quarter's Revolving Loan activity) in each fiscal year of Borrower, an
unused line fee (the "Unused Line Fee") computed at the per annum rate equal to
1/8th of 1% of the average daily amount by which the Line Limit exceeds
outstanding cash advances and Letter of Credit Exposure under the Revolving Loan
from and after the date of this Agreement. The Unused Line Fee shall be
calculated daily, for the actual number of days elapsed, on the basis of a year
of three hundred sixty (360) days.
2.10 Reduction of Commitments. Borrower may, upon three (3) Business
Days' written, irrevocable notice to Administrative Agent, ratably (based on the
Lenders' respective Pro Rata Shares) reduce the Commitments of the Lenders from
time to time by an aggregate amount of at least One Million ($1,000,000.00)
Dollars so long as, immediately after such reduction (i) the aggregate
outstanding Obligations shall not exceed the Line Limit (after giving effect to
the requested reduction in each Lender's Commitment) and (ii) for each Lender,
the outstanding Obligations owing such Lender do not exceed the amount of such
Lender's Commitment.
2.11 Payment to Lenders; Charge to Accounts.
(A) All payments of interest on and principal of the Loans,
all fees and all other sums payable to Lenders hereunder shall be paid directly
to Administrative Agent (for the account of all Lenders in accordance with their
respective Pro Rata Shares) in immediately available funds, in such currency of
the United States of America as is, at the time of payment, legal tender for the
payment of public and private debts. Administrative Agent shall send Borrower
statements of all amounts due hereunder for interest, principal and fees, which
statements shall be considered correct and presumptively binding on Borrower
unless Borrower notifies Administrative Agent to the contrary within thirty (30)
days of its receipt of any statement which it deems to be incorrect.
(B) Borrower hereby authorizes any Agent (on behalf of all
Lenders) to charge principal, interest, charges, taxes, expenses and all other
amounts payable by Borrower hereunder to any deposit or other account of any
nature including, without limitation, any certificate of deposit of Borrower
maintained with such Agent; provided, however, that while such charges for
principal and interest shall be without notice or demand, any other charges
shall be after five (5) days notice to Borrower and demand for payment.
2.12 Capital Adequacy. If any future law, governmental rule,
regulation, policy, guideline, directive or similar requirement (whether or not
having the force of law) imposes, modifies, or deems applicable any capital
adequacy, capital maintenance or similar requirement which affects the manner in
which a Lender allocates capital resources to its commitments (including its
Commitment hereunder), and as a result thereof, in the opinion of such Lender,
the
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rate of return on such Lender's capital with regard to the Revolving Loan is
reduced to a level below that which that Lender could have achieved but for such
circumstances, then in such case and upon notice from such Lender to Borrower,
from time to time, Borrower shall pay such Lender such additional amount or
amounts as shall compensate such Lender for such reduction in that Lender's rate
of return. Such notice shall contain the statement of such Lender with regard to
any such amount or amount which shall, in the absence of manifest error, be
presumptively binding upon Borrower. In determining such amount, such Lender may
use any reasonable method of averaging and attribution that it deems applicable.
SECTION 3. CONDITIONS PRECEDENT.
The obligations of Lenders to enter into this Agreement, are subject to
the following conditions precedent (all instruments, agreements and documents to
be in form and substance satisfactory to Lenders and their counsel):
3.1 Documents Required for the Closing. Borrower shall have either duly
executed and/or delivered to Administrative Agent the following:
(A) The Revolving Loan Notes;
(B) The Swing Line Note;
(C) A certified (as of the date of the Closing) copy of
resolutions of Borrower's board of directors authorizing the execution, delivery
and performance of this Agreement, the Notes and each other document to be
delivered pursuant hereto;
(D) A certified (as of the date of the Closing) copy of
Borrower's by-laws;
(E) A certificate (dated the date of the Closing) of
Borrower's corporate secretary as to the incumbency and signatures of the
officers of Borrower signing this Agreement, the Notes and each other document
to be delivered pursuant hereto;
(F) A copy, certified as of the most recent date practicable
by the Secretary of the State of Delaware, of Borrower's certificate of
incorporation, together with a certificate (dated the date of the Closing) of
Borrower's corporate secretary to the effect that such certificate of
incorporation has not been amended since the date of the aforesaid
certification;
(G) Certificates, as of the most recent dates practicable, of
the Secretary of State of Delaware, the Secretary of the Commonwealth of
Pennsylvania and the department of revenue or taxation of such states, as to the
good standing of Borrower;
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(H) A Surety Agreement (the "Surety Agreement") pursuant to
which EARS shall guarantee, as a surety, the Obligations;
(I) A certified (as of the date of the Closing) copy of
resolutions of EARS' board of directors authorizing the execution, delivery and
performance of the Surety Agreement and each other document to be delivered by
EARS pursuant hereto or thereto;
(J) A certified (as of the date of the Closing) copy of EARS'
by-laws;
(K) A certificate (dated the date of the Closing) of EARS'
corporate secretary as to the incumbency and signatures of the officers of EARS
signing the Surety Agreement and each other document to be delivered by EARS
pursuant hereto or thereto;
(L) A copy, certified as of the most recent date practicable
by the Secretary of the State of Delaware, of EARS' certificate of
incorporation, together with a certificate (dated the date of the Closing) of
EARS' corporate secretary to the effect that such certificate of incorporation
has not been amended since the date of the aforesaid certification;
(M) A written opinion of counsel to Borrower and EARS, dated
the date of the Closing and addressed to Lenders;
(N) A certificate, dated the date of the Closing, signed by
the President or Treasurer of Borrower and to the effect that:
(1) The representations and warranties set forth
within Section 5 are true as of the date of the Closing; and
(2) No Default or Event of Default has occurred as of
such date; and
(O) Copies of all Consignment Agreements and any amendments
thereto; and
(P) Copies of all documents evidencing the terms and
conditions of any Indebtedness specified as Subordinated Indebtedness.
3.2 Continuing Representations.
(A) Each request for a disbursement under the Revolving Loan
or for the issuance of the Letter of Credit shall constitute a representation by
Borrower to the effect that:
(1) As of the date thereof, no Default or Event of
Default has occurred and is continuing; and
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(2) No Material Adverse Effect shall have occurred
since Closing.
3.3 Certain Events. At the times of the Closing, and each subsequent
disbursement under the Revolving Loan or the issuance of a Letter of Credit:
(A) No Default or Event of Default shall have occurred and be
continuing; and
(B) No Material Adverse Effect shall have occurred since
Closing.
SECTION 4. REPRESENTATIONS AND WARRANTIES.
4.1 Corporate Existence, etc. To induce Lenders to enter into this
Agreement, Borrower represents and warrants to Lenders as follows:
(A) Borrower is a corporation duly organized validly existing
and in good standing under the Laws of the State of Delaware; Borrower has the
lawful power to own its properties and to engage in the business it conducts,
and is duly qualified and in good standing as a foreign corporation in the
Commonwealth of Pennsylvania and such other jurisdictions wherein the nature of
the business transacted by it or property owned by it makes such qualification
necessary, except where the failure to so duly qualify would not have a Material
Adverse Effect; the addresses of all places of business of Borrower are as set
forth on Exhibit 4.1(A) attached hereto; and Borrower has not changed its name,
been the surviving corporation in a merger, acquired any business (other than
the business of a former subsidiary and of substantially all of the operations
and Inventory of Gemstone Jewelry and Weaver's Gems and Minerals) for cash
consideration in excess of One Million ($1,000,000.00) Dollars, or changed its
principal executive office within five (5) years and one (1) month prior to the
date hereof;
(B) Borrower is not in default under any Consignment Agreement
or with respect to any of its other existing Indebtedness for borrowed money,
and the making and performance of this Agreement and the Notes will not
(immediately, with the passage of time, or with the giving of notice and the
passage of time):
(1) Violate the charter or by-law provisions of
Borrower or, in any material respect, violate any laws or result in a
default under any material contract, agreement or instrument to which
Borrower is a party or by which Borrower or its property is bound; or
(2) Result in the creation or imposition of any
security interest in, or lien or encumbrance upon, any of the assets of
Borrower;
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(C) Borrower has the power and authority to enter into and
perform this Agreement and the Notes and to incur the Obligations herein and
therein provided for and has taken all proper and necessary corporate action to
authorize the execution, delivery and performance of this Agreement and the
Notes;
(D) This Agreement is, and the Notes when delivered will be,
valid, binding and enforceable in accordance with their respective terms, except
as such enforceability may be limited by applicable bankruptcy, reorganization,
insolvency or other similar laws affecting the enforcement of creditors' rights
in general; provided, however, that such laws will not materially interfere with
the practical realization of the benefits intended to be provided by this
Agreement, the Notes and related instruments, agreements and documents;
(E) Except as disclosed in Exhibit 4.1(E), attached hereto and
made a part hereof, there is no pending order, notice, claim, litigation,
proceeding or investigation against or affecting Borrower, not covered by
insurance, that would involve the payment of One Hundred Thousand ($100,000.00)
Dollars or more if adversely determined;
(F) Borrower has good and marketable title to all of its
properties and assets, subject to no security interest, encumbrance or lien, or
the claim of any third Person, except for Permitted Liens;
(G) The Financial Statements, including any related schedules
and notes appended thereto, have been prepared in accordance with GAAP (subject,
in the case of interim Financial Statements, to year-end audit adjustments and
any inconsistencies from GAAP explained therein) and fully and fairly present
the financial condition of Borrower at the dates thereof and the results of
operations for the periods covered thereby, and there has been no material
adverse changes in the financial condition or business or Borrower from the date
of the most recent Financial Statement submitted by Borrower to Lenders, to the
date hereof;
(H) As of the date of its most recent financial statement,
Borrower had no material Indebtedness of any nature, including, without
limitation, liabilities for taxes and any interest or penalties relating
thereto, except to the extent reflected (in a footnote or otherwise) and
reserved against in the most recent financial statements or as disclosed in or
permitted by this Agreement; Borrower does not know and has no reasonable ground
to know of any basis for the assertion against it as of its most recent
Financial Statement of any material Indebtedness of any nature not fully
reflected and reserved against in the its most recent Financial Statement;
(I) Except as otherwise permitted by the provisions hereof,
Borrower has filed or caused to be filed all federal, state and local tax
returns and other reports it is required by Laws to file prior to the date
hereof and which are material to the conduct of business, and has paid or caused
to be paid all taxes, assessments and other governmental charges that are due
and
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payable prior to the date hereof, and has made adequate provision for the
payment of such taxes, assessments or other charges accruing but not yet
payable; Borrower has no knowledge of any deficiency or additional assessment in
a materially important amount in connection with any taxes, assessments or
charges not provided for on its books;
(J) Except where the failure of Borrower to comply as follows
would not have a Material Adverse Effect, Borrower has complied with all
applicable Law with respect to: (1) any restrictions, specifications or other
requirements pertaining to products that Borrower manufactures and sells or to
the services it performs; (2) the conduct of its business operations; and (3)
the use, maintenance and operation of the real and personal properties owned or
leased by it in the operation of its business;
(K) No representation or warranty by Borrower contained herein
or in any certificate or other document furnished by Borrower pursuant hereto
contains any untrue statement of material fact or omits to state a material fact
necessary to make such representation or warranty not misleading in light of the
circumstances under which it was made;
(L) 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 Agreement or the
Notes or the undertaking or performance of any Obligation hereunder or
thereunder;
(M) Borrower has not made any agreement or taken any action
which may cause anyone to become entitled to a commission or finder's fee as a
result of the making of the Loans;
(N) Each Employee Benefit Plan is in compliance in all
material respects with the presently applicable provisions of ERISA and the
Internal Revenue Code. No steps have been taken to terminate any Employee
Benefit Plan, and no contribution failure has occurred with respect to any
Employee Benefit Plan sufficient to give rise to a lien under Section 302(f) of
ERISA. No condition exists or event or transaction has occurred with respect to
any Employee Benefit Plan which might result in the incurrence by Borrower or
any member of the Controlled Group of any material liability, fine or penalty.
Neither Borrower nor any member of the Controlled Group has contingent liability
with respect to any post-retirement benefit under any Employee Benefit Plan,
other than liability for continuation coverage described in Part 6 of Title I of
ERISA. Neither Borrower nor any member of the Controlled Group currently or in
the past has been a party to a "multiemployer plan" within the meaning of
Section 4001(1)(3) of ERISA;
(O) Borrower is and will continue to be the absolute owner or
all Inventory free and clear of all Liens, other than as may be subject to a
gold consignment arrangement; Borrower shall use and sell its Inventory only in
the ordinary course of Borrower's business
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(which shall include the sale of Inventory to any of Borrower's existing and
future licensees in a manner and in volume consistent with historic levels and
other wholesale sales in amounts not material) and consistent with the terms of
this Agreement; and
(P) Borrower does not have any obligations owing whether
direct, indirect, absolute or contingent to any shareholder, director, officer
or executive of Borrower other than ordinary payroll which may be due.
4.2 Survival. All of the representations and warranties set forth in
this Paragraph 5 shall survive until all Obligations are satisfied in full.
SECTION 5. BORROWER'S COVENANTS.
5.1 Affirmative Covenants. Borrower does hereby covenant and agree with
Lenders that, so long as any of the Obligations remain unsatisfied, it will
comply, and it will cause its Subsidiaries to comply, with the following
covenants:
(A) Borrower will use the proceeds of the Loans for the
purposes set forth herein, and will furnish Administrative Agent such evidence
as Administrative Agent may reasonably require with respect to such use;
(B) Borrower will furnish to (or cause to be furnished to)
Administrative Agent:
(1) Within ninety (90) days after the close of each
fiscal year occurring after the date of this Agreement: audited
financial statements, prepared on a consolidated basis, together with
an unqualified opinion, prepared by an independent certified public
accountant selected by Borrower and acceptable to Administrative Agent,
and certified by such accountants to have been prepared in accordance
with GAAP and in a format comparable to prior years' statements, except
for any inconsistencies explained in such certificate, which financial
statements shall be accompanied by all management letters to Borrower
prepared by Borrower's independent certified public accountants;
(2) Within forty-five (45) days after the close of
the first three fiscal quarters in each fiscal year of Borrower:
financial statements for such fiscal quarter, internally prepared on a
consolidated basis, in accordance with GAAP, subject to year-end
adjustments;
(3) Such data and information (financial or
otherwise) as Agents may request with respect to any Consignment
Agreement and the consignment of gold thereunder including, without
limitation, written quarterly reports (to be delivered concurrently
with delivery to Administrative Agent of Borrower's reports to
furnished on
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SEC Form 10Q or, for the fourth quarter, with delivery to
Administrative Agent of Borrower's annual audited financial statements)
of the amount of gold consigned, the consignor of such gold, the fair
market value of consigned gold, determined in accordance with the terms
of any Consignment Agreement between Borrower and beneficiaries of
Letters of Credit, for each day during the preceding month and a
certification that all such consigned gold is "fine" gold;
(4) Promptly after the sending or making available or
filing of the same, copies of all reports, proxy statements and
financial statements that Borrower sends or makes available to its
stockholders and all registration statements and reports that Borrower
files with the or any successor Person including, without limitation,
reports furnished on SEC Forms 10K and 10Q;
(5) Within one hundred (100) days after the close of
each fiscal year occurring after the date of this Agreement, an annual
budget for Borrower for the next fiscal year, detailed on a quarterly
basis, including, without limitation, Borrower's projected balance
sheets, income statements and schedule of Capital Expenditures,
together with all assumptions on which such budget and projection have
been prepared;
(6) Within forty-five (45) days after the end of each
of the first three fiscal quarters of Borrower, and within ninety (90)
days after the end of each fiscal year of Borrower, a certificate
signed by the President or Treasurer of Borrower, evidencing and
certifying the compliance by Borrower with all financial covenants set
forth in Section 5.3 hereof;
(C) Borrower will maintain its Assets in good condition and
repair (normal wear and tear excepted), and will pay and discharge or cause to
be paid and discharged when due, the costs of repairs to or maintenance of the
same, and will pay or cause to be paid all rental or mortgage payments due on
such real estate. Borrower hereby agrees that, in the event it fails to pay or
cause to be paid any such payment, Administrative Agent may do so after notice
to Borrower and be reimbursed by Borrower therefor;
(D) Borrower will maintain public liability insurance and fire
(flood, if applicable) and extended coverage insurance on the Assets owned by
it, all in such amounts as is consistent with industry practices and with such
insurers as may be satisfactory to Administrative Agent. Lenders acknowledge the
Borrower is, and agree that Borrower may be, self-insured for fire and theft at
its retail locations. Borrower will furnish to Administrative Agent such
evidence of insurance as Administrative Agent may require. Borrower hereby
agrees that, in the event it fails to pay or cause to be paid the premium on any
such insurance, Administrative Agent may do so and be reimbursed by Borrower
therefor;
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(E) Collect its Accounts and sell its Inventory only in the
ordinary course of business (which shall include the sale of Inventory to any of
Borrower's existing licensees);
(F) Give prompt notice to Agents of the institution of other
suit or any administrative proceeding against it that might materially and
adversely affect its operations, financial condition, property or business and,
on a quarterly basis, within fifteen (15) days of the end of each calendar
quarter, notice of any litigation in which it is a party where the amount at
issue may exceed One Hundred Thousand ($100,000.00) Dollars;
(G) Borrower will pay or cause to be paid when due, all taxes,
assessments and charges or levies imposed upon Borrower or on any of its
property or which it is required to withhold and pay over, except where
contested in good faith by appropriate proceedings with adequate reserves
therefor having been set aside on their books. Borrower shall, however, pay or
cause to be paid all such taxes, assessments, charges or levies forthwith
whenever foreclosure on any Lien that attaches (or security therefor) appears
imminent;
(H) Borrower will take all necessary steps to preserve its
corporate existence and franchises, except where the failure to do so will not
have a Material Adverse Effect, and Borrower will comply with all material
agreements to which it is subject and with all present and future Laws
applicable to it in the operation of its business including, if applicable and
without limitation, the Environmental Laws, except where the failure to so
comply would not have a Material Adverse Effect;
(I) Within five (5) days of Administrative Agent's request
therefor, Borrower will furnish Administrative Agent with copies of federal
income tax returns filed by Borrower;
(J) Borrower will pay when due (or within applicable grace
periods) all Indebtedness due third Persons, except when the amount thereof is
being contested in good faith, by appropriate proceedings and with adequate
reserves therefor being set aside on the books of Borrower. If Borrower shall be
in default in the payment of any principal (or installment thereof) of, or
interest on, any such Indebtedness aggregating in excess of One Hundred Thousand
($100,000.00) Dollars, Administrative Agent shall have the right, in its
discretion, to pay such interest or principal for the account of Borrower as
part of the Revolving Loan and be reimbursed by Borrower therefor on demand;
(K) Borrower will notify Agents immediately if it becomes
aware of the occurrence of any Default or Event of Default or of the failure of
Borrower to observe any of its undertakings hereunder;
(L) Borrower will maintain its primary deposit accounts with a
Lender or Lenders;
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(M) Borrower shall give prompt notice to Administrative Agent
of any change in the location of its chief executive office and, on a quarterly
basis (within forty-five (45) days of the end of each quarter for the first
three quarters in each fiscal year of Borrower, and within ninety (90) days of
the end of each fiscal year of Borrower for the fourth quarter of each fiscal
year), Borrower will notify Administrative Agent of any change in the location
of any of its other places of business or of the establishment of any new, or
the discontinuance of any existing, places of business;
(N) Keep complete and accurate Records (including all books of
original and final entry, computer programs, software, stored material and data
banks associated with or arising out of its business, operations and/or record
keeping). Borrower shall permit Agents, their officers, employees, designees and
agents designated by Agents, to have access to, audit, inspect, and make copies
of or extracts from all of Borrower's books and Records including, without
limitation, all journals, orders, receipts and correspondence and any other
books and Records pertaining to Borrower's business which Agents may request and
shall cause all Persons, including computer service bureaus, bookkeeping
services, accountants, auditors and the like, to make all such books and Records
in their possession available to Agents, their officers, employees, designees
and agents, and in the Event of Default and if deemed necessary by Agents, in
Agents' sole discretion, Agents may remove them from Borrower's place of
business or any other place where the same may be found for the purposes of
examining, auditing or reproducing the same. Any books or Records so removed by
Agents shall be returned by Agents as soon as Agents shall have completed their
inspection, audit or reproduction thereof. Absent the existence of any Default
or Event of Default, access to Borrower's books and records, and the rights of
inspection as set forth in this Subparagraph, shall be on reasonable notice to
Borrower; after the occurrence and during the continuance of any Default or
Event of Default, such access and inspection rights shall be without hindrance
or delay, at such times as Agents deem appropriate and without prior notice to
Borrower;
(O) Agents and their agents and representatives shall have the
right upon demand now and at any time or times hereafter during Borrower's usual
business hours to inspect and examine Inventory, and Records and to check and
test the same as to quality, quantity, value and condition. After the occurrence
and during the continuance of any Default or Event of Default, Borrower shall
reimburse Agents, promptly, after demand, for all of their reasonable costs and
expenses in connection with the exercise of its audit and inspection rights
hereunder;
(P) Borrower will, to the extent applicable: (a) make all
contributions to, and payments from, the Employee Benefit Plans when they are
required to be made in accordance with the Employee Benefit Plans and, when
applicable, Section 302 of ERISA; (b) furnish Administrative Agent, promptly
after the filing of the same, with copies of all reports or other statements
filed with the United States Department of Labor, the PBGC or the IRS with
respect
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to all such Employee Benefit Plans, or which Borrower, or any member of a
Controlled Group, may receive from the United States Department of Labor, the
IRS or the PBGC, with respect to all such Employee Benefit Plans, and (c)
promptly advise Administrative Agent of the occurrence of any "reportable event"
as defined in Section 4043 of ERISA or "prohibited transaction" as defined in
Section 406 of ERISA, with respect to any such Employee Benefit Plan(s) and the
action it proposes with respect thereto; and
(Q) A1l Inventory is now and shall hereafter be owned by
Borrower, free from all Liens, except for the interests of any gold consignors
who are beneficiaries of Letters of Credit and holders of Permitted Liens.
(R) Within sixty (60) days after the date hereof, Borrower
shall deliver to Administrative Agent pro forma financial statements for
Borrower reflecting the consummation of the proposed acquisition by Borrower of
certain assets of Gold and Silver, Inc. Without limiting the generality of the
immediately preceding sentence, Borrower shall promptly provide to
Administrative Agent such information as Administrative Agent or any Lender may
reasonably request with respect to Borrower's acquisition of the assets of Gold
and Silver, Inc.
5.2 Negative Covenants. Without the prior written consent of
Administrative Agent, Borrower will not:
(A) Change its name, enter into any merger (unless Borrower is
the surviving entity in any such merger) or consolidation;
(B) Sell, transfer, lease or otherwise dispose of all or
(except in the ordinary course of business which shall include transactions with
licensees and wholesales sales in amounts not material so long as those
transactions are not materially different in nature from prior ordinary and
regular transactions with existing licensees) any material part of its Assets;
(C) Mortgage, pledge, grant or permit to exist a Lien upon any
of its Assets of any kind, real or personal, tangible or intangible, now owned
or hereafter acquired, except for Permitted Liens, or sign or file, or permit to
be signed or filed, under the Uniform Commercial Code of any jurisdiction, any
financing statement which names Borrower as debtor, or sign, or permit to be
signed, any security agreement authorizing any secured party thereunder to file
any such financing statement; without limiting the generality of any of the
foregoing, Borrower shall not sign, execute or agree to any agreement or
negative pledge, except in favor of Lenders, whereby Borrower agrees not to
mortgage, pledge, grant or permit to exist a security interest in or lien upon
any of its assets of any kind, real or personal, tangible or intangible, now
owned or hereafter acquired;
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(D) Become liable, directly or indirectly, as guarantor,
surety, endorser or otherwise for any obligation of any other person, except for
endorsement of commercial paper for deposit or collection in the ordinary course
of business;
(E) Incur, create, assume or permit to exist any Indebtedness
except (i) the Obligations, (ii) existing indebtedness set forth in the
Financial Statements, (iii) trade indebtedness incurred in the ordinary course
of business (iv) contingent Indebtedness permitted by this Agreement and (v)
Indebtedness secured by Permitted Liens;
(F) Acquire (in one transaction or in a series of
transactions) stock in, or all or substantially all of the assets of, any Person
engaged primarily in any business or business activity other than the business
currently conducted by Borrower and the business activities reasonably
incidental thereto and, make any such acquisition(s) for assets or stock having
a value in excess of Three Million ($3,000,000.00) Dollars in the aggregate;
provided, however, Lenders hereby waive the aforementioned Three Million
($3,000,000.00) Dollar threshold with respect to Borrower's proposed acquisition
of certain assets of Gold and Silver, Inc. Borrower has represented to Lenders
that the purchase price for such acquisition will be approximately Eight Million
($8,000,000.00) Dollars;
(G) Declare or pay any dividends, or make any other payment or
distribution on account of its capital stock if at the time of such declaration,
payment or distribution there exists any Default or Event of Default, so long as
such declaration, payment or distribution is not in violation of applicable Law
and the making of the same will not constitute any Default or Event of Default;
(H) Redeem, purchase or retire any of its capital stock,
except pursuant to the Piercing Pagoda, Inc. Employee Stock Purchase Plan absent
the existence of any Default or Event of Default;
(I) Prepay any Subordinated Indebtedness;
(J) Enter into a sale-leaseback transaction;
(K) Furnish to any Lender (or Agent) any certificate or other
document that contains any untrue statement of material fact or that omits to
state a material fact necessary to make it not misleading in light of the
circumstances under which it was furnished; or
(L) Directly or indirectly apply any part of the proceeds of
the Loans to the purchasing or carrying of any "margin stock" within the meaning
of Regulation U of the Board of Governors of the Federal Reserve System, or any
regulations, interpretations or rulings thereunder.
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5.3 Financial Covenants.
(A) Borrower's ratio of Average Four Quarter Maximum Funded
Debt to the rolling aggregate four quarters EBIDTA shall not be greater than as
set forth below as of each date set forth opposite such ratio:
Date Ratio
---- -----
03/31/97 3.75 to 1.00
06/30/97 4.00 to 1.00
09/30/97 4.00 to 1.00
12/31/97 4.00 to 1.00
03/31/98 3.75 to 1.00
06/30/98 3.75 to 1.00
09/30/98 3.75 to 1.00
12/31/98 3.75 to 1.00
03/31/99 3.65 to 1.00
06/30/99 3.65 to 1.00
09/30/99 3.65 to 1.00
12/31/99 3.65 to 1.00
03/31/00 3.65 to 1.00
(B) Borrower's Current Ratio shall not be less than as set
forth below as of each date set forth opposite such ratio:
Date Ratio
---- -----
03/31/97 1.05 to 1.00
06/30/97 1.05 to 1.00
09/30/97 1.05 to 1.00
12/31/97 1.25 to 1.00
03/31/98 1.25 to 1.00
06/30/98 1.20 to 1.00
09/30/98 1.15 to 1.00
12/31/98 1.35 to 1.00
03/31/99 1.30 to 1.00
06/30/99 1.30 to 1.00
09/30/99 1.25 to 1.00
12/31/99 1.40 to 1.00
03/31/00 1.40 to 1.00
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(C) Borrower's ratio of Funded Debt to Capitalization shall
not be greater than as set forth below as of each date set forth opposite such
ratio:
Date Ratio
---- -----
03/31/97 0.70 to 1.00
06/30/97 0.70 to 1.00
09/30/97 0.75 to 1.00
12/31/97 0.55 to 1.00
03/31/98 0.65 to 1.00
06/30/98 0.65 to 1.00
09/30/98 0.70 to 1.00
12/31/98 0.55 to 1.00
03/31/99 0.65 to 1.00
06/30/99 0.65 to 1.00
09/30/99 0.65 to 1.00
12/31/99 0.55 to 1.00
03/31/00 0.55 to 1.00
SECTION 6. DEFAULT.
6.1 Events of Default. The occurrence of any one or more of the
following events shall constitute an Event of Default hereunder:
(A) Borrower shall fail to pay when due any installment of
principal or interest payable hereunder or any Obligation and such failure shall
continue for a period of three (3) Business Days from the date Administrative
Agent furnishes notice of default to Borrower;
(B) Borrower shall fail to perform, comply with or observe any
term, covenant (including any financial covenant) Obligation contained in this
Agreement or under any other agreement between Borrower and Lenders, or any of
them, and such failure shall continue for thirty (30) calendar days or, if such
failure is curable, but cannot be cured within thirty (30) days, within such
longer period of time as may be reasonably necessary to cure such default,
provided Borrower is diligently pursuing same to completion, after: (1) notice
of such failure is received by Borrower; or (2) Administrative Agent is notified
of such failure or should have been so notified pursuant to the provisions of
Paragraph 5.1(K), whichever is earlier. Borrower acknowledges that,
notwithstanding the foregoing, with respect to a violation of any of the
covenants set forth at Subparagraph 5.1(B) of this Agreement, Borrower shall
have a ten (10) day grace period within which to cure any such violation, and no
cure period shall be available for any violation of any of the covenants set
forth at Paragraphs 5.2 and 5.3 of this Agreement;
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(C) Borrower shall fail to pay any Indebtedness in excess of
One Hundred Thousand ($100,000.00) Dollars due any third Persons and such
failure shall continue beyond any applicable grace period, or Borrower shall
suffer to exist any other event of default under any agreement binding Borrower,
if any such other event of default could have a Material Adverse Effect;
(D) Any financial statement, representation, warranty,
statement or certificate made or furnished by Borrower to Administrative Agent
or any Lender in connection with this Agreement, or as inducement to Lenders to
enter into this Agreement, or in any separate statement or document to be
delivered hereunder to Lenders, shall be materially false, incorrect, or
incomplete when made;
(E) Borrower shall admit its inability to pay its debts as
they mature, or shall make an assignment for the benefit of its or any of its
creditors;
(F) The commencement of any action for the dissolution or
liquidation of Borrower, or the commencement of any proceeding to avoid any
transaction entered into by Borrower, or the commencement of any case or
proceeding for reorganization or liquidation of Borrower's debts under the
Bankruptcy Code or any other state or federal law now or hereafter enacted for
the relief of debtors, whether instituted by or against Borrower; provided,
however, that Borrower shall have sixty (60) days to obtain the dismissal or
discharge of involuntary proceedings filed against it, it being understood that
during such sixty (60) day period, Lenders shall not be obligated to make any
loans, advances or extensions of credit hereunder, and Administrative Agent (on
behalf of all Lenders) will seek adequate protection in any bankruptcy
proceeding;
(G) A receiver or trustee shall be appointed for Borrower or
for any substantial part of its assets, or any proceedings shall be instituted
for the dissolution or the full or partial liquidation of Borrower, or Borrower
shall discontinue business or materially change the nature of its business;
provided, however, that Borrower shall have thirty (30) days to obtain the
discharge of any such receiver or trustee or proceedings, it being understood
that during such thirty (30) day period, Lender shall not be obligated to make
any loans, advances or extensions of credit hereunder;
(H) Borrower shall suffer final judgments for payment of money
aggregating in excess of One Hundred Thousand ($100,000.00) Dollars and shall
not discharge the same within a period of thirty (30) days unless, pending
further proceedings, execution has not been commenced or if commenced has been
effectively stayed;
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(I) A judgment creditor of Borrower with a claim in excess of
One Hundred Thousand ($100,000.00) Dollars shall obtain possession of any of the
Assets of Borrower by any means, including, but without limitation, levy,
distraint, replevin or self-help;
(J) The occurrence of one or more of the following: (a) the
institution of any steps by Borrower, any member of its Controlled Group, the
PBGC or any other Person to terminate an Employee Benefit Plan if, as a result
of such termination, such Borrower or any such member could be required to make
a contribution to an Employee Benefit Plan, or could reasonably expect to incur
a liability or obligation to such Employee Benefit Plan; or (b) a contribution
failure occurs with respect to an Employee Benefit Plan sufficient to give rise
to a lien under Section 302(f) of ERISA;
(K) Any obligee of Subordinated Indebtedness shall fail to
comply with the subordination provisions of the instruments evidencing such
Subordinated Indebtedness;
(L) The payment by Administrative Agent on account of drafts
aggregating in excess of One Hundred Thousand ($100,000.00) Dollars issued under
or purporting to have been issued under any Letter of Credit to support
Consignment Agreements; and
(M) The validity or enforceability of this Agreement or the
Note shall be contested by Borrower or any stockholder of Borrower, or Borrower
shall deny that it has any or further liability or obligation hereunder or
thereunder.
6.2 Rights and Remedies on Default.
(A) In addition to all other rights, options and remedies
granted or available to Administrative Agent or other Lenders under this
Agreement or the other Loan Documents, or otherwise available at law or in
equity, Administrative Agent may, in its discretion, and Required Lender shall
have the right to cause Administrative Agent (by written notice to
Administrative Agent), to withhold or cease making any loans, advances or
extensions of credit under the Revolving Loan, upon or at any time after the
occurrence and during the continuance of an Event of Default.
(B) In addition to all other rights, options and remedies
granted or available to Administrative Agent under this Agreement or the other
Loan Documents, Administrative Agent may, in its discretion, and Required Lender
shall have the right cause Administrative Agent (by written notice to
Administrative Agent), upon or at any time after the occurrence and during the
continuance of an Event of Default terminate the Revolving Loan and declare the
Obligations immediately due and payable, all without demand, notice, presentment
or protest or further action of any kind (it being understood, acknowledged and
agreed that the occurrence of any of
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the Events of Default set forth in 6.1(E), (F) or (G) shall automatically cause
an acceleration of the Obligations).
6.3 Set-Off.
(A) If any bank account of Borrower or EARS with
Administrative Agent or any other Lender or any participant of a Lender is
attached or otherwise liened or levied upon by any third Person, Administrative
Agent or such other Lender (and such participant) shall have and be deemed to
have, without notice to Borrower or EARS, the immediate right of set-off and may
apply the funds or amount thus set-off against any of the Obligations.
(B) In addition to the rights set forth at Subparagraph 6.3(A)
above, if an Event of Default shall have occurred and be continuing and the
Obligations become due and payable, each Lender (and any participant of any
Lender to the extent permitted by applicable Law) is hereby authorized at any
time and from time to time, to the fullest extent permitted by applicable Law,
to set off and apply any and all deposits (general or special, time or demand,
provisional or final) at any time held, and any other debt at any time owing by
such Lender to or for the credit or the account of Borrower against any of and
all of the Obligations, irrespective of whether such Lender shall have made any
demand hereunder and although such Obligations may be unmatured. The rights of
each Lender under this Subparagraph are in addition to other rights and remedies
(including other rights of setoff) that such Lender has or may have.
6.4 Lien on Inventory of Borrower. Without in any way limiting any
rights or remedies which may be available to Administrative Agent or any other
Lender upon the occurrence of any Default or Event of Default including, without
limitation, an Event of Default arising by virtue of the payment on account of
any Letter of Credit supporting a Consignment Agreement, Borrower acknowledges
and agrees that upon the payment by Administrative Agent of any draft drawn on a
Letter of Credit, Borrower shall grant to Administrative Agent (for the ratable
benefit of all Lenders and as a collateral agent) a Lien on all existing and
future Inventory of Borrower, wherever located, and the Cash and Noncash
Proceeds thereof, and shall promptly upon demand execute and/or deliver such
instruments, agreements and documents (including, without limitation, security
agreements and UCC-1 financing statements) as Administrative Agent may require
to receive a perfected Lien on such Inventory and Proceeds. Borrower shall pay,
on demand, all costs and expenses in connection with the granting to
Administrative Agent of a Lien on its Inventory and Proceeds, and the perfection
of such Lien.
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SECTION 7. AGENTS.
As between Administrative Agent and each Agent, on one hand, and
Lenders, on the other hand, Administrative Agent, Agent and each Lender, who are
now or shall become parties to this Agreement, agree as follows (with the
consent and approval of Borrower):
7.1 Appointment and Authorization. Each Lender, and each subsequent
holder of a Revolving Loan Note by its acceptance thereof, hereby irrevocably
appoints and authorizes Agents and Administrative Agent to take such action on
its behalf and to exercise such powers under this Agreement as are respectively
delegated to Agents and Administrative Agent by the terms hereof, together with
such powers as are reasonably incidental thereto. Subject to the provisions of
this Agreement, Agents and Administrative Agent will handle all transactions
relating to the Loans, Letters of Credit and all other Obligations, including,
without limitation, all transactions with respect to this Agreement, the Loan
Documents and all related documents in accordance with its and their usual
banking practices. Borrower is hereby authorized by Lenders to deal with Agents
and Administrative Agent in all transactions which affect Lenders under this
Agreement and the Loan Documents. The rights, privileges and remedies
respectively, accorded to Agents and Administrative Agent hereunder shall be
exercised by Agents and Administrative Agent on behalf of all Lenders.
7.2 General Immunity. In performing their respective duties as Agents
and Administrative Agent hereunder, Agents and Administrative Agent will take
the same care as they take in connection with loans in which they alone are
interested. However, neither Agents nor any of their directors, officers, agents
or employees shall be liable for any action taken or omitted to be taken by them
hereunder or in connection herewith except to the extent any such action or
omission results from their own gross negligence or willful misconduct unless
such action was taken or omitted to be taken by Agents at the direction of
Required Lenders.
7.3 Consultation with Counsel. Administrative Agent may consult with
legal counsel and any other professional advisors or consultants deemed
necessary or appropriate and selected by Agents and Administrative Agent and
shall not be liable for any action taken or suffered in good faith by it in
accordance with the advice of such counsel.
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7.4 Documents. Agents and Administrative Agent shall not be under a
duty to examine into or pass upon the effectiveness, genuineness or validity of
this Agreement or any of the Revolving Credit Notes or any other instrument or
document furnished pursuant hereto or in connection herewith, and Agents and
Administrative Agent shall be entitled to assume that the same are valid,
effective and genuine and what they purport to be. In addition, Agents and
Administrative Agent shall not be liable for failing to make any inquiry
concerning the accuracy, performance or observance of any of the terms,
provisions or conditions of such instrument or document. Agents shall promptly
furnish to Lenders copies of all notices and financial statements received from
Borrower hereunder.
7.5 Rights as a Lender. With respect to their applicable Pro Rata
Share, Agents and Administrative Agent shall have the same rights and powers
hereunder as any other Lender and may exercise the same as though they were not
Agents Administrative Agent, and the term "Lender" or "Lenders" shall, unless
the context otherwise indicates, include Agents and Administrative Agent in
their individual capacity. Subject to the provisions of this Agreement, Agents
and Administrative Agent may accept deposits from, lend money to and generally
engage in any kind of banking or trust business with Borrower and its Affiliates
as if they were not Agents or Administrative Agent.
7.6 Responsibility of Agents and Administrative Agent. It is expressly
understood and agreed that the obligations of Agents and Administrative Agent
hereunder are only those expressly set forth in this Agreement and no others.
Administrative Agent shall be entitled to assume that no Default or Event of
Default, has occurred and is continuing, unless Administrative Agent has actual
knowledge of such fact. Except to the extent Administrative Agent is required by
Lenders pursuant to the express terms hereof to take a specific action,
Administrative Agent shall be entitled to use its discretion with respect to
exercising or refraining from exercising any rights which may be vested in it
by, or with respect to taking or refraining from taking any action or actions
that it may be able to take under or in respect of, this Agreement and the Loan
Documents. Administrative Agent shall incur no liability under or in respect of
this Agreement and the Loan Documents by acting upon any notice, consent,
certificate, warranty or other paper or instrument believed by it to be genuine
or authentic or to be signed by the proper party or parties, or with respect to
anything that it may do or refrain from doing in the reasonable exercise of its
judgment, or that may seem to it to be necessary or desirable under the
circumstances. It is agreed among Administrative Agent and Lenders that
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Administrative Agent shall have no responsibility to carry out audits or
otherwise examine the books and records or properties of Borrower, except as
Administrative Agent in its sole discretion deems appropriate or, after the
occurrence and during the continuance of any Event of Default, as required by
Required Lenders. The relationship between Administrative Agent and each Lender
is and shall be that of Administrative Agent and principal only and nothing
herein shall be construed to constitute Administrative Agent a joint venturer
with any Lender, a trustee or fiduciary for any Lenders or for the holder of a
participation therein nor impose on Administrative Agent duties and obligations
other than tose set forth herein.
7.7 Collections and Disbursements.
(A) Administrative Agent will have the right to collect and
receive all payments of the Obligations, and to collect and receive all fees,
charges or other amounts due under this Agreement and the Loan Documents, and
Administrative Agent will promptly remit to each Lender, according to its
applicable Pro Rata Share, all such payments actually received by Administrative
Agent (subject to any required clearance procedures) in accordance with the
settlement procedures established by Administrative Agent from time to time.
(B) If any such payment received by Administrative Agent is
rescinded or otherwise required to be returned for any reason at any time,
whether before or after termination of this Agreement and the Loan Documents,
each Lender will, upon written notice from Administrative Agent, promptly pay
over to Administrative Agent its Pro Rata Share of the amount so rescinded or
returned, together with interest and other fees thereon if also required to be
rescinded or returned.
(C) All payments by Administrative Agent and Lenders to each
other hereunder shall be in immediately available funds. Administrative Agent
will at all times maintain proper books of account and records reflecting the
interest of each Lender in the Loans, in a manner customary to Administrative
Agent's keeping of such records, which books and records shall be available for
inspection by each Lender at reasonable times during normal business hours, at
such Lender's sole expense. Administrative Agent may treat the payee of any
Revolving Credit Note as the holder thereof until written notice of the transfer
thereof shall have been received by Administrative Agent. In the event that any
Lender shall receive any payments in reduction of the Loans in an
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amount greater than its applicable Pro Rata Share in respect of indebtedness to
Lenders evidenced hereby (including, without limitation amounts obtained by
reason of setoffs), such Lender shall hold such excess in trust for
Administrative Agent (on behalf of all other Lenders) and shall promptly remit
to Administrative Agent such excess amount so that the amounts received by each
Lender hereunder shall at all times be in accordance with its applicable Pro
Rata Share. To the extent necessary for each Lender's actual percentage of all
outstanding Loans to equal its applicable Pro Rata Share, the Lender having a
greater share of any payment(s) than its applicable Pro Rata Share shall acquire
a participation in the applicable Pro Rata Share of the other Lenders as
determined by Administrative Agent.
7.8 Indemnification. Lenders hereby each indemnify Agents,
Administrative Agent, its and their shareholders, officers, directors, agents,
attorneys and employees ratably according to the respective amounts of each
Lender's Pro Rata Share, from and against any and all liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs, expenses or
disbursements of any kind or nature whatsoever that may be imposed on, incurred
by or asserted against Agents or Administrative Agent (or any such party) in any
way relating to or arising out of this Agreement, or any other Loan Document,
any of the transactions described or contemplated herein or any action taken or
omitted by Agents or Administrative Agent (or any such party) under or related
to this Agreement or the Loans, provided that no Lender shall be liable for any
portion of such liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs, expenses or disbursements resulting solely from Agents
or Administrative Agent's gross negligence or willful misconduct unless such
action was taken or omitted to be taken by Agents or Administrative Agent at the
direction of Required Lenders. Administrative Agent shall have the right to
deduct, from any amounts to be paid by Administrative Agent to any Lender
hereunder, any amounts owing to Administrative Agent by such Lender by virtue of
this Section.
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<PAGE> 42
7.9 Expenses.
(A) All reasonable out-of-pocket expenses incurred by Agents
or Administrative Agent and not reimbursed on demand by Borrower, in connection
with the analysis, negotiation, preparation, consummation, creation, amendment,
administration, termination work-out, forbearance and enforcement of the Loans
(including, without limitation, audit expenses, counsel, consultant and expert
fees and expenditures to protect, preserve and defend Administrative Agent's and
each Lender's rights and interest under the Loan Documents), shall be shared and
paid on demand by Lenders pro rata based on their applicable Pro Rata Share.
(B) Administrative Agent may deduct from payments or
distributions to be made to Lenders such funds as may be necessary to pay or
reimburse Administrative Agent for such costs or expenses.
7.10 No Reliance. By execution of or joining in this Agreement, each
Lender acknowledges that it has entered into this Agreement and the other Loan
Documents solely upon its own independent investigation and is not relying upon
any information supplied by or any representations made by Agents or
Administrative Agent. Each Lender has analyzed and considered all tax and credit
implications of such transactions. Each Lender shall continue to make its own
analysis and evaluation of Borrower. Agents and Administrative Agent make no
representations or warranties and assume no responsibility with respect to the
financial condition of Borrower, the accuracy, sufficiency or currency of any
information concerning the financial condition, prospects or results of
operations of Borrower; or the sufficiency authenticity, legal effect, validity
or enforceability of the Loan Documents. Agents and Administrative Agent assume
no responsibility or liability with respect to the collectibility of the
Obligations or the performance by Borrower of any obligation under the Loan
Documents.
7.11 Reporting. During the term of this Agreement, Administrative Agent
will promptly furnish each Lender with copies of all financial statements of
Borrower to be delivered or obtained hereunder and such other financial
statements and reports and other information as any Lender may reasonably
request. Administrative Agent will immediately notify Lenders when it receives
actual knowledge of any Event of Default under the Loan Documents.
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<PAGE> 43
7.12 Removal of Administrative Agent. Administrative Agent may resign
at any time upon giving thirty (30) days prior written notice thereof to Lenders
and Borrower and Administrative Agent may be removed as Administrative Agent
hereunder upon the written consent of all Lenders exclusive of Administrative
Agent upon the following: (a) final determination by a court of competent
jurisdiction of gross negligence or willful misconduct by Administrative Agent
in the performance of Administrative Agent's duties or responsibilities under
this Agreement; or (b) if a receiver, trustee or conservator is appointed for
Administrative Agent or any state or federal regulatory authority assumes
management or control of Administrative Agent or if, under applicable law, the
administrative or discretionary duties and responsibilities of Administrative
Agent hereunder become controlled by or subject to the approval of any state or
federal regulatory authority. Upon any resignation or permitted removal of
Administrative Agent, Lenders (exclusive of Administrative Agent) shall have the
right to appoint a successor Administrative Agent by majority vote of the other
Lenders (based upon the Pro Rata Shares of the other Lenders). Upon the
acceptance of the appointment as a successor Administrative Agent hereunder by
such successor Administrative Agent, such successor Administrative Agent shall
thereupon succeed to and become vested with all rights, powers, obligations and
duties of the retiring Administrative Agent and the retiring Administrative
Agent shall be discharged from its duties and obligations hereunder.
7.13 Action on Instructions of Lenders. With respect to any provision
of this Agreement, or any issue arising thereunder, concerning which
Administrative Agent is authorized to act or withhold action by direction of
Lenders (or, if applicable, Required Lenders), Administrative Agent shall in all
cases be fully protected in so acting, or in so refraining from acting,
hereunder in accordance with written instructions signed by Lenders (or, if
applicable, Required Lenders). Such instructions and any action taken or
failure to act pursuant thereto shall be binding on all Lenders and on all
holders of the Revolving Credit Notes.
7.14 Several Obligations. The obligation of each Lender is several, and
neither Administrative Agent nor any other Lender shall be responsible for the
obligation and commitment of any other Lender.
42
<PAGE> 44
7.15 Consent of Lenders.
(A) Except as expressly provided herein, Administrative
Agent shall have the sole and exclusive right to service, administer and monitor
the Loans and the Loan Documents, including, without limitation, the right to
exercise all rights, remedies, privileges and options under the Loan Documents,
including, without limitation, the credit judgment with respect to the making of
Advances and the determination as to the basis on which and extent to which
Advances may be made.
(B) Notwithstanding anything to the contrary contained in
Subparagraph 7.15(A) above, Administrative Agent shall not without the prior
written consent of all Lenders: (i) extend any payment date under the Revolving
Loan Notes or extend the Revolving Loan Termination Date, (ii) reduce any
interest rate applicable to the Loans, (iii) waive any condition precedent to an
advance, (iv) amend the definition of Required Lenders, (v) increase the Line
Limit, the Cash Sublimit or the Letter of Credit Sublimit, (vi) release any
collateral security for the Obligations or (vii) amend this Subparagraph
7.15(B).
(C) Notwithstanding anything to the contrary contained in
Subparagraphs 7.15(A) and (B) above, Administrative Agent shall not, without the
prior written consent of the Required Lenders, amend or waive compliance with
any financial covenant set forth in Paragraph 5.3 of this Agreement.
(D) After an acceleration of the Obligations, Administrative
Agent shall have the sole and exclusive right, after consultation (to the extent
reasonably practicable under the circumstances) with all Lenders and, unless
otherwise directed by Required Lenders, to exercise or refrain from exercising
any and all right, remedies, privileges and options under the Loan Documents and
available at law or in equity to protect the rights of Lenders and collect the
Obligations, including, without limitation, instituting and pursuing all legal
actions brought against Borrower or to collect the obligations, or defending any
and all actions brought by Borrower or other Person; or incurring expenses or
otherwise making expenditures to protect the Loans or Lenders' rights or
remedies.
(E) To the extent Administrative Agent is required to obtain
or otherwise elects to seek the consent of Lenders to an action Administrative
Agent desires to take, if any Lender fails to notify Administrative Agent, in
writing, of its consent or dissent to any request of Administrative Agent
43
<PAGE> 45
hereunder within seven (7) Business Days of such Lender's receipt of such
request, such Lender shall be deemed to have given its consent thereto.
7.16 Participations and Assignments. Borrower and each Lender hereby
acknowledge and agree that any Lender may at any time: (a) grant Participations
in up to forty-nine (49%) percent of such Lender's Pro Rata Share to any other
lending office of such Lender or to any other bank, lending institution or other
entity which the granting Lender reasonably determines has the requisite
sophistication to evaluate the merits and risks of investments in
Participations; provided, however, that: (i) all amounts payable by Borrower to
each Lender hereunder shall be determined as if such Lender had not granted such
Participation; and (ii) any agreement pursuant to which any Lender may grant a
Participation: (A) shall provide that such Lender shall retain the sole right
and responsibility to enforce the obligations of Borrower hereunder including,
without limitation, the right to approve any amendment, modification or waiver
of any provisions of this Agreement; (B) such participation agreement may
provide that such Lender will not agree to any modification, amendment or waiver
of this Agreement without the consent of the participant if such amendment,
modification or waiver would reduce the principal of or rate of interest on the
Loans, increase the Line Amount, or postpone the date fixed for any scheduled
payment of principal of or interest on the Loans; and (C) shall not relieve such
Lender from its obligations, which shall remain absolute, to make Advances
hereunder; and (b) assign, pursuant to an Assignment and Acceptance (i) all or
any percent of its Pro Rata Share or any right, title and interest therein or in
and to this Agreement to a Lender or any affiliate of a Lender; or (ii) up to
forty-nine (49%) percent of its Pro Rata Share and any right, title and interest
therein and in and to this Agreement to a third party, with the prior written
consent of Administrative Agent which consent shall not be unreasonably
withheld, in the case of clause (b)(i) or (ii) together with the payment to
Administrative Agent of a Two Thousand Five Hundred ($2,500.00) Dollar transfer
fee. Upon the execution by the assignor and assignee of the Assignment, and
delivery to Administrative Agent of the Assignment for acceptance, the assigning
Lender shall, to the extent provided in the Assignment, be released from its
obligations under this Agreement and the assignee thereunder shall be a party
hereto and, to the extent provided in such Assignment have the rights and
obligations of a Lender hereunder.
SECTION 8. MISCELLANEOUS.
8.1 Construction. The provisions of this Agreement shall be in addition
to those of any guaranty, pledge or security agreement, note or other evidence
of liability held by Lenders,
44
<PAGE> 46
all of which shall be construed as complementary to each other. Nothing herein
contained shall prevent Lenders from enforcing any or all other notes, guaranty,
pledge or security agreements in accordance with their respective terms.
8.2 Further Assurance. From time to time, Borrower will execute and
deliver to Administrative Agent such additional documents and will provide such
additional information as Administrative Agent may reasonably require to carry
out the terms of this Agreement and be informed of Borrower's status and
affairs. From time to time, upon the reasonable request of Borrower,
Administrative Agent shall execute and deliver to Borrower such instruments,
agreements and documents as may be presented to Administrative Agent by Borrower
to effectuate the release of liens on and security interests in and to the
Existing Collateral and any stock of Borrower pledged to Administrative Agent by
any Person. The cost of preparation and recordation of any such instruments,
agreements and documents shall be borne by Borrower.
8.3 Enforcement and Waiver by Lenders. Lenders shall have the right at
all times to enforce the provisions of this Agreement and the Note in strict
accordance with the terms hereof and thereof, notwithstanding any conduct or
custom on the part of Lenders in refraining from so doing at any time or times.
The failure of Lenders at any time or times to enforce its rights under such
provisions, strictly in accordance with the same, shall not be construed as
having created a custom in any way or manner contrary to specific provisions of
this Agreement or as having in any way or manner modified or waived the same.
All rights and remedies of Lenders are cumulative and concurrent and the
exercise of one right or remedy shall not be deemed a waiver or release of any
other right or remedy.
8.4 Expenses of Lenders. Borrower will pay all expenses of the Lenders,
including the reasonable fees and expenses of legal counsel for Lenders, in
connection with the preparation, negotiation and consummation of the
transactions described in this Agreement. Borrower will pay all expenses of the
Administrative Agent, including the reasonable fees and expense of legal counsel
for Administrative Agent, incurred in connection with the administration,
amendment or modification of this Agreement and the other Loan Documents, and
Borrower will pay all expenses of all Lenders, including the reasonable fees and
expenses of legal counsel for Lenders, incurred in connection with the
enforcement of this Agreement, the Obligations and the collection or attempted
collection of the Notes.
8.5 Notices. Any notices or consents required or permitted by this
Agreement shall be in writing and shall be deemed delivered if delivered in
person or if sent by certified mail, postage prepaid, return receipt requested,
or telegraph, as follows, unless such address is changed by written notice
hereunder:
(A) If to Borrower:
45
<PAGE> 47
Piercing Pagoda, Inc.
3910 Adler Place, P. O. Box 25007
Lehigh Valley, Pennsylvania 18002-5007
Attn: John F. Eureyecko, President
With a copy to:
Wolf, Block, Schorr & Solis-Cohen
Packard Building
15th and Chestnut Streets, 12th Floor
Philadelphia, Pennsylvania 19102-2678
Attn: Jason M. Shargel, Esquire
(B) If to Lenders:
CoreStates Bank, N.A., as Agent and
Administrative Agent
600 Penn Street
FC6--94--3--140
P.O. Box 1102
Reading, Pennsylvania 19603
Attn: Paul D. Cohn, Vice President; and
Summit Bank, as Agent
One Bethlehem Plaza
Bethlehem, Pennsylvania 18018
Attn: Ammon J. Baus, Vice President
With a Copy to:
Klehr, Harrison, Harvey, Branzburg & Ellers
1401 Walnut Street
Philadelphia, Pennsylvania 19102
Attn: Richard S. Roisman, Esquire
8.6 Waiver and Release by Borrower. To the maximum extent permitted by
applicable Laws, Borrower:
(A) Waives: (1) protest of all commercial paper at any time
held by Lenders on which Borrower is any way liable; and (2) notice and
opportunity to be heard, after acceleration in the manner provided in Paragraph
6.2 hereof, before exercise by Lenders of the remedies of self-help, setoff, or
of other summary procedures permitted by any applicable Laws
46
<PAGE> 48
or by any agreement with Borrower, and, except where required hereby or by any
applicable Laws, notice of any other action taken by Lenders; and
(B) Releases Lenders and its officers, attorneys agents and
employees from all claims for loss or damage caused by any act or omission on
the part of any of them except for gross negligence or willful misconduct.
8.7 WARRANT OF ATTORNEY. BORROWER HEREBY AUTHORIZES AND EMPOWERS ANY
ATTORNEY OF ANY COURT OF RECORD UPON THE OCCURRENCE OF ANY EVENT OF DEFAULT TO
APPEAR FOR AND CONFESS JUDGMENT AGAINST BORROWER WITHOUT PRIOR NOTICE TO
BORROWER OR PRIOR OPPORTUNITY TO BE HEARD:
(A) IN ANY ACTION OR REPLEVIN INSTITUTED BY LENDERS TO OBTAIN
POSSESSION OF ANY COLLATERAL SECURITY FOR THE OBLIGATIONS; OR
(B) FOR SUCH SUMS AS SHALL HAVE BECOME DUE UNDER THIS
AGREEMENT OR ANY REVOLVING LOAN NOTE AND ALL OTHER OBLIGATIONS OF BORROWER TO
LENDERS; IN EITHER CASE WITH OR WITHOUT DECLARATION, WITH COSTS OF SUIT AND
RELEASE OF ERROR, WITHOUT STAY OF EXECUTION AND WITH FIVE PERCENT (5%) ADDED FOR
COLLECTION FEES, BUT IN ANY EVENT NOT LESS THAN FIVE THOUSAND ($5,000.00)
DOLLARS; AND ALSO WAIVES THE RIGHT OF INQUISITION ON ANY REAL ESTATE LEVIED
UPON, VOLUNTARILY CONDEMNS THE SAME, AUTHORIZES THE PROTHONOTARY OR CLERK TO
ENTER UPON THE WRIT OF EXECUTION SAID VOLUNTARY CONDEMNATION AND AGREES THAT
SAID REAL ESTATE MAY BE SOLD ON A WRIT OF EXECUTION; AND ALSO WAIVES AND
RELEASES ALL RELIEF FROM ANY AND ALL APPRAISEMENT, STAY OR EXEMPTION LAW OF ANY
STATE NOW IN FORCE OR HEREAFTER ENACTED. IF A COPY OF THIS AGREEMENT, VERIFIED
BY AFFIDAVIT OF LENDERS OR SOMEONE ON BEHALF OF LENDERS, SHALL HAVE BEEN FILED
IN SUCH ACTION, IT SHALL NOT BE NECESSARY TO FILE THE ORIGINAL AGREEMENT AS A
WARRANT OF ATTORNEY. THE AUTHORITY AND POWER TO APPEAR FOR AND ENTER JUDGMENT
AGAINST BORROWER SHALL NOT BE EXHAUSTED BY ONE OR MORE EXERCISES THEREOF, OR BY
ANY IMPERFECT EXERCISE THEREOF, AND SHALL NOT BE EXTINGUISHED BY AND JUDGMENT
ENTERED PURSUANT THERETO; THE AUTHORITY AND POWER MAY BE EXERCISED ON ONE OR
MORE OCCASIONS, FROM TIME TO TIME, IN THE SAME OR DIFFERENT JURISDICTIONS, AS
OFTEN AS LENDERS SHALL DEEM NECESSARY OR DESIRABLE, FOR ALL OF WHICH THIS
AGREEMENT SHALL BE A SUFFICIENT WARRANT.
8.8 Applicable Law. The substantive Laws of the Commonwealth of
Pennsylvania shall govern the construction of this Agreement and the rights and
remedies of the parties hereto.
8.9 Binding Effect, Assignment and Entire Agreement. This Agreement
shall inure to the benefit of, and shall be binding upon, the respective
successors and permitted assigns of the parties hereto. Borrower has no right to
assign any of its rights or Obligations hereunder without the prior written
consent of Lenders. This Agreement, and the documents executed and delivered
pursuant hereto, constitute the entire agreement between the parties, and may be
amended only by a writing signed on behalf of each party.
47
<PAGE> 49
8.10 Severability. If any provision of this Agreement shall be held
invalid under any applicable laws, such invalidity shall not affect any other
provision of this Agreement that can be given effect without the invalid
provision, and, to this end, the provisions hereof are severable.
8.11 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute but one and the same instrument.
8.12 Seal. This Agreement is intended to take effect as an instrument
under seal.
8.13 Waiver of Jury Trial. Borrower hereby irrevocably waives trial by
jury and any right thereto, and consents to the jurisdiction of the courts of
Lehigh County, Pennsylvania, and agrees not to raise any objection to such
jurisdiction, or to the laying of the venue in such commonwealth, and further
agrees that service of process may be duly effected upon Borrower by personal
delivery, certified mail, return receipt requested, or nationally recognized
overnight courier service, to the address set forth in Paragraph 8.5 hereof or
the last address for Borrower reflected on the records of Administrative Agent.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the day and year first above written.
ATTEST: PIERCING PAGODA, INC.
By:_____________________________ By:______________________________
Name: John F. Eureyecko,
Title: President
[Corporate Seal]
Commitment: $25,000,000.00 SUMMIT BANK, for itself and as Agent
for the Lenders
By:______________________________
Ammon J. Baus,
Vice President
48
<PAGE> 50
Commitment: $35,000,000.00 CORESTATES BANK, N.A., for itself and
as Agent and Administrative Agent for the
Lenders
By:___________________________________
Paul D. Cohn,
Vice President
Commitment: $15,000,000.00 FIRST UNION NATIONAL BANK
By:___________________________________
Lewis C. Cyr,
Assistant Vice President
49
<PAGE> 1
EXHIBIT 11
Exhibit 11 - Statement Re: Computation of earnings per share
<TABLE>
<CAPTION>
Fiscal Year Ended March 31,
---------------------------------
(In thousands, except per share data) 1995 1996 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted average shares outstanding 4,507 5,237 5,257
Net effect of dilutive stock options,
based on the treasury stock method 51 88 132
- --------------------------------------------------------------------------------
Total shares used in computation 4,558(1) 5,325 5,389
================================================================================
Net income $4,156(1) $5,677 $7,538
================================================================================
Net income per share $ 0.91(1) $ 1.07 $ 1.40
================================================================================
</TABLE>
(1) Reflects pro forma weighted average shares outstanding,
pro forma net income and pro forma net income per share.
<PAGE> 1
Exhibit 23.1
[KPMG PEAT MARWICK LLP LETTERHEAD]
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Piercing Pagoda, Inc.:
We consent to the use of our report included herein and to the references to our
firm under the headings "Selected Financial and Operating Data" and "Experts" in
the prospectus.
Allentown, Pennsylvania KPMG Peat Marwick LLP
May 14, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 4,119
<SECURITIES> 0
<RECEIVABLES> 2,233
<ALLOWANCES> 0
<INVENTORY> 43,109
<CURRENT-ASSETS> 54,092
<PP&E> 35,007
<DEPRECIATION> 12,435
<TOTAL-ASSETS> 79,741
<CURRENT-LIABILITIES> 13,443
<BONDS> 26,924
0
0
<COMMON> 53
<OTHER-SE> 37,469
<TOTAL-LIABILITY-AND-EQUITY> 79,741
<SALES> 166,885
<TOTAL-REVENUES> 166,885
<CGS> 92,308
<TOTAL-COSTS> 92,308
<OTHER-EXPENSES> 60,845
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,208
<INCOME-PRETAX> 11,910
<INCOME-TAX> 4,372
<INCOME-CONTINUING> 7,538
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,538
<EPS-PRIMARY> 1.40
<EPS-DILUTED> 1.40
</TABLE>
