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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1998
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13
15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File Number 0-24860
PIERCING PAGODA, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 23-1894725
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
3910 Adler Place, Bethlehem, PA 18017
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (610) 691-0437
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock (par value $.01 per share)
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [ X ] No [
]
Indicate by check mark if disclosure of delinquent filers pursuant to item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of Common Stock held by non-affiliates of the
Registrant on June 22, 1998 was approximately $130,911,803.
The number of shares outstanding of the Registrant's common stock is
6,068,570 (as of June 22, 1998).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement to be filed with the Commission
in connection with its 1998 Annual Meeting of Shareholders are
incorporated by reference into Part III of this Form 10-K.
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PIERCING PAGODA, INC.
TABLE OF CONTENTS
PAGE
PART I
Item 1. BUSINESS 3
Item 2. PROPERTIES 12
Item 3. LEGAL PROCEEDINGS 13
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 13
Item 4A. EXECUTIVE OFFICERS OF THE REGISTRANT 13
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS 15
Item 6. SELECTED FINANCIAL DATA 15
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 18
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES 25
ABOUT MARKET RISK
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA 26
Item 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE 47
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS
OF REGISTRANT 47
Item 11. EXECUTIVE COMPENSATION 47
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT 47
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 47
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K 48
<PAGE>
PART I
Item 1. 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 Annual Report
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 agreement
arrangement, the possible enactment of new legislation or
modification of existing 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, without
limitation: (i) 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 the Company's existing operations;
(ii) the Company's ability to successfully 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; (iii) fluctuations in quarterly
net sales, and, in particular, third quarter net sales; (iv)
fluctuations in gold prices; (v) competitive conditions; (vi)
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; and (vii)
the possibility of the enactment of legislation, or the
modification of existing or pending legislation, in jurisdictions
in which the Company operates, that would adversely affect the
Company's ear piercing or other activities.
General
Piercing Pagoda is the largest retailer of gold jewelry
through kiosk stores in the United States. At March 31, 1998, the
Company operated 789 stores in 43 states and Puerto Rico, including
762 kiosk stores and 27 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 170
square feet in size, typically carry approximately 3,800 SKUs,
require a low initial investment, can be opened quickly and are
easily accessible and visible within malls. During fiscal 1998, the
average price of a jewelry item sold by the Company was
approximately $25 and average comparable kiosk store net sales per
square foot were $1,731. The Company believes that its low price
points and focused merchandise selection differentiate it from
other mall-based jewelry retailers.
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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
3,800 SKUs. The average price of a jewelry item sold by the Company
in fiscal 1998 was approximately $25. Approximately 56% 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 completed a thorough
evaluation of its inventory management software needs in fiscal
1998 and determined that, with minor modification, its current
proprietary system can accommodate expected future growth for at
least the next two fiscal years. Accordingly, implementation of a
new inventory management system is not expected to begin until at
least fiscal 2000. The Company is presently in the process of
upgrading its financial accounting and reporting. A new Windows
NT-based client/server financial and accounting system has been
selected and is expected to be operational in the first quarter of
fiscal 1999. See "Management's Discussion and Analysis" for a
discussion of Year 2000 issues.
4
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Growth Strategy
Over the last three fiscal years the Company has sought to
increase its market share and mall penetration through a
combination of new store openings and stores acquired from third
parties. Of the 454 stores the Company has opened since the
beginning of fiscal 1996, 203 were acquired from independent third
parties through asset purchase arrangements. The Company believes
that acquiring locations from third parties can be a favorable
method of expanding its operations when the seller has a portfolio
of desirable store locations. Acquisitions completed over the last
three fiscal years include 67 locations acquired from Earring Tree
in fiscal 1996, 93 locations acquired from Gemstone Jewelry in
fiscal 1997 and 43 locations acquired from Silver & Gold Connection
in fiscal 1998.
Upon completing the purchase of store locations, the Company's
strategy to increase the net sales and profitability of the
acquired locations has been to convert the acquired stores to the
Company's format and implement the Company's merchandising
strategies. This has been accomplished by revising the merchandise
mix of the acquired stores and by retraining sales associates and
store management personnel to provide the same level of customer
service emphasized in the Company's other stores. The Company
believes that its ability to execute these strategies has been a
key element in the successful assimilation of these acquired stores
into the Company's operations.
In May 1998, the Company announced its largest acquisition of
approximately 107 locations from Sedgwick Sales, Inc., a
kiosk-based retailer of primarily gold-plated jewelry. The seller,
which operates under the names Golden Chain Gang, Golden Chain Gang
International, Grand Illusions and Sedgwick Gold International will
retain rights to these names. This acquisition will add 51 new
malls to the Company's portfolio as well as expanding its
operations into three new states. The Company believes it can
successfully apply its prior experience opening new stores and
integrating the previous acquisitions to this purchase. However,
there can be no assurance that the Company will be able to
successfully integrate these acquired stores and failure to do so
could have a material adverse effect on the Company's results of
operations and financial condition.
Opening new stores will continue to be an important part of
the Company's growth strategy. The Company plans to open
approximately 70 to 90 new stores in fiscal 1999 and 60 to 80 new
stores in fiscal 2000 (excluding any acquisitions) and to close
approximately 25 existing stores during that two-year period. 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. At March 31,
1998 there were 395 stores operating in malls where the Company
operated more than one location. 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
5
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when appropriate and relocating the kiosks to new locations. During
the past three fiscal years, the Company has closed 31 stores.
The Company's expansion may also include retail concepts and
locations other than the Company's standard kiosks in regional
malls. As of March 31, 1998, the Company operated 27 in-line
stores, most of which were acquired as part of the Earring Tree
acquisition. The Company continues to evaluate and develop its
in-line store concept. In fiscal 1998, the Company opened four
in-line stores and expects to open less than five in-line stores in
fiscal 1999. 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
opportunities if and when they are presented. During the 1997
holiday season, the Company operated 45 seasonal retail mall carts,
selling primarily silver jewelry under the name Silver Station or
Gold 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 94% 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 3,800 SKUs, approximately 70% of which have list
prices between $10 and $80, and during fiscal 1998 generated an
average jewelry item selling price of approximately $25. The
Company also offers a selection of non- jewelry items such as ear
care products and jewelry cleaners. Approximately 56% 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.
6
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During fiscal 1998, 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
Sales (1)
------------------------------------------------------------------
<S> <C>
Gold
Chains and bracelets 36%
Charms and rings 27
Earrings 24
Miscellaneous items 1
------------------------------------------------------------------
Total gold 88
Silver jewelry and other items 12
------------------------------------------------------------------
Total net store sales 100.0%
</TABLE>
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(1) Excludes $4.3 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. The Company
also utilizes promotional events such as "Buy Two Get One Free" and
"Buy One Get One at Half Off", in addition to other promotional
events and clearance sales. The Company intends to continue to
emphasize these promotions and to monitor them in order to assess
their relative success.
In addition to emphasizing lower prices, extensive selection,
789 nationwide locations 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 1998,
approximately 10% 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 1998,
7
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customers applied approximately $5.4 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 75% of all purchases are cash transactions (including
personal checks) with the remaining purchases being credit card
sales.
Stores
At March 31, 1998, the Company operated 789 stores in 43
states and Puerto Rico, including 762 kiosk stores and 27 in-line
stores, primarily under the names Piercing Pagoda, Plumb Gold and
Silver & Gold Connection. The Company's kiosk stores average
approximately 170 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 March 31, 1998, the Company operated stores in
573 malls, and operated more than one location in 180 of those
malls. Of the stores operated, 27 were in-line stores, most of
which were acquired from Earring Tree.
8
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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
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Number of stores:
Beginning of period 295 366 513 682
Opened/acquired:
Piercing Pagoda(1) 63 121 108 61
Plumb Gold(2) 14 34 66 24
Silver & Gold Connection(3)
-- -- -- 38
Other -- -- 2 --
------------------------------------------------------------------
Total opened(4) 77 155 176 123
------------------------------------------------------------------
Total closed(5) 6 8 7 16
------------------------------------------------------------------
Total at end of period 366 513 682 789
</TABLE>
------------------------------------------------------------------
(1) Includes 6 stores in fiscal 1995, 42 stores in fiscal 1996,
41 stores in fiscal 1997 and 10 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.
(2) Includes 7 stores in fiscal 1995, 24 stores in fiscal 1996,
55 stores in fiscal 1997 and 3 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.
(3) Includes 34 stores that were acquired and reopened under the
Silver & Gold Connection name.
(4) Includes 1 in-line store in fiscal 1995, 14 in-line stores in
fiscal 1996, 7 in-line stores in fiscal 1997 and 4 in-line
stores in fiscal 1998.
(5) Includes 1 store sold to the Florida Licensee in each of
fiscal 1995 and fiscal 1997, and 3 stores sold in fiscal
1998. See "Properties."
Store Operations
Store operations are divided into nine 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, 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 generally spend approximately one week, two to four times
per year,
9
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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 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 1998, the Company's
five largest suppliers accounted for approximately 38% of the
merchandise purchased by the Company. None of these vendors
accounted for more than 10% of the Company's merchandise purchases
during fiscal 1998. 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 inventory management and financial
and accounting 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.
10
<PAGE>
After a thorough review of its inventory management and
financial and accounting systems completed in fiscal 1998, the
Company concluded that its current proprietary inventory management
and replenishment system would, with minor modification, be
adequate to meet the Company's needs at least through fiscal 2000.
The Company has begun making the required modifications and is
currently running the modified system in parallel with its current
system. The modified inventory management and replenishment system
is expected to be fully in use by the third quarter of fiscal 1999.
The Company anticipates that subsequent to fiscal 2000 it will be
necessary to upgrade its inventory management software. It is
expected that new inventory management software will be modified to
replicate certain custom elements of the Company's existing system
and will utilize the SQL relational database and a Windows NT-based
client/server architecture. Additionally, the Company has begun
implementation of new financial and accounting systems. The new
financial and accounting software system utilizes 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. The
new financial and accounting systems are expected to be fully
implemented in the first quarter of fiscal 1999. See "Management's
Discussion and Analysis" for a discussion of Year 2000 issues.
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.
Employees
As of March 31, 1998, the Company had approximately 1,651
full-time and approximately 2,186 part-time employees. Of these,
201 were employed full-time and 25 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
1998 peak holiday season, the Company had 3,808 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," "Silver Station" and "Silver & Gold
Connection," 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." The Company is not otherwise
dependent on any patent, trademark, service mark or copyright.
11
<PAGE>
Government Regulation
The Company's ear piercing service is not regulated by
federal statute. Currently, Minnesota and Oregon are the only
states in which the Company operates that regulate ear piercing
activities. In Minnesota, legislation in a single municipality
imposes various restrictions upon ear piercing that make it
impractical for the Company to comply. Accordingly, the Company
does not perform ear piercing in the one location affected by the
regulation. 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 15 jurisdictions in which
legislation to regulate ear piercing establishments is pending,
including Ohio and Massachusetts where the Company currently
operates 52 stores and 29 stores, respectively. The proposed Ohio
legislation would require the use of germicidal wipes to sterilize
equipment used in the ear piercing process. The Company currently
plans to implement the use of germicidal wipes in all its locations
and expects to be in compliance with the Ohio legislation when and
if approved. 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.
Item 2. 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, 1998,
123 expire before March 31, 1999.
The Company also licenses the use of its store names and
concept to an independent store operator with 22 stores and three
retail mall carts 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 fiscal 1998, the Florida Licensee purchased a total
of three
12
<PAGE>
stores fromthe Company. In each of fiscal 1995 and fiscal 1997, the
Florida Licensee exercised its right to acquire one store from the
Company. Recently, the Florida Licensee has expressed interest in
acquiring additional stores from the Company. Of the 42 stores that
the Company currently operates in Florida, 2 were acquired from the
Florida Licensee. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
The Company owns a 73,000 square foot building in Bethlehem,
Pennsylvania that serves as its corporate headquarters and
distribution center. As a result of recent acquisitions, the
Company's distribution facilities are near capacity. Accordingly,
it has begun construction of an approximately 71,000 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 and should become operational in fiscal 1999.
Item 3. LEGAL PROCEEDINGS
Piercing Pagoda is not a party to any material 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.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders,
through a solicitation of proxies or otherwise, during the fourth
quarter of the fiscal year ended March 31, 1998.
Item 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information concerning
the executive officers of the Company as of March 31, 1998. All
executive officers serve at the discretion of the Board of
Directors of the Company.
------------------------------------------------------------------
Name Age Position with Company
------------------------------------------------------------------
Richard H. Penske 55 Chairman of the Board and Chief
Executive Officer
John F. Eureyecko 49 President, Chief Operating Officer,
Secretary and Director
Barry R. Clauser 44 Senior Vice President -- Merchandise
Operations
Sharon J. Zondag 43 Senior Vice President -- Store
Operations
Brandon R. Lehman 46 Treasurer
Lisa E. Sankovsky 37 Vice President -- Real Estate
Richard J. McKeon 40 Director of Management Information
Systems
Christopher J. 33 Corporate Controller
Barone
-----------------------------------------------------------------
13
<PAGE>
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.
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.
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.
14
<PAGE>
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company consummated the initial public offering of its
common stock on October 20, 1994, and its common stock is traded on
the Nasdaq National Market ("Nasdaq") under the symbol "PGDA".
The following table sets forth, for the fiscal quarters
indicated, the high and low sales prices per share for the
Company's common stock, as reported on Nasdaq, for the last two
fiscal years:
High Low
---------------
Fiscal year 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 year 1998
----------------
First Quarter $28.00 $24.00
Second Quarter $32.00 $24.88
Third Quarter $31.13 $23.75
Fourth Quarter $31.25 $27.00
As of June 22, 1998, there were approximately 128 holders of
record of the Company's common stock.
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.
However, 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 its 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
operating and financial condition of the Company, among other
factors, at the time such dividends are considered. The Company has
not paid any dividends since the beginning of fiscal 1996.
Item 6. SELECTED FINANCIAL DATA
The selected financial data for the five years ended March 31,
1998 is qualified by reference to and should be read in conjunction
with the Company's consolidated financial statements and notes
thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" appearing
elsewhere herein.
15
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Ended March 31,
---------------------------------------------------------
1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------
(In thousands, except per share and selected
operating data)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net Sales $ 222,128 $ 166,885 $ 121,581 $86,076 $ 68,922
Cost of goods sold and
occupancy expenses 119,328 92,308 67,440 48,069 37,961
(excluding depreciation on
kiosks)
- ---------------------------------------------------------------------------------------------
Gross Profit 102,800 74,577 54,141 38,007 30,961
Selling, general and
administrative expenses 82,916 60,845 43,887 30,007 25,122
(including depreciation on
kiosks)
Restricted stock compensation - - - - 390
bonus (1)
- ---------------------------------------------------------------------------------------------
Income from operations 19,884 13,732 10,254 8,000 5,449
Interest and other income 562 386 282 307 370
Interest expense 2,896 2,208 1,306 1,427 1,464
- ---------------------------------------------------------------------------------------------
Earnings before income taxes 17,550 11,910 9,230 6,880 4,355
Income taxes(2) 6,581 4,372 3,553 3,352 121
- ---------------------------------------------------------------------------------------------
Net income (2) $ 10,969 $ 7,538 $ 5,677 $3,528 $ 4,234
- ---------------------------------------------------------------------------------------------
Earnings Per Share Data:
Earnings per share:
Basic $ 1.88 $ 1.43 $ 1.08
Diluted $ 1.82 $ 1.40 $ 1.07
Weighted average shares
outstanding:
Basic 5,843 5,257 5,237
Diluted 6,041 5,389 5,325
Pro Forma Data:
Pro forma net income (2) $ 4,156 $ 2,624
Pro forma diluted earnings per
share (2) (3) $ 0.91 $ 0.67
Pro forma weighted average shares
outstanding (3) 4,558 3,895
Selected Operating Data:
Number of stores at beginning of
period 682 513 366 295 279
Stores added (net of closures
and sales) 107 169 147 71 16
- ---------------------------------------------------------------------------------------------
Stores at end of period 789 682 513 366 295
- ---------------------------------------------------------------------------------------------
Average jewelry units sold per
comparable store (rounded) (4) 11,800 12,000 11,600 10,800 9,500
Average comparable store net
sales (5) $ 295,000 $ 303,000 $ 295,000 $266,000 $241,000
Average comparable store
net sales per square foot (6) $ 1,630 $1,848 $ 1,821 $ 1,652 $ 1,544
Average comparable store square
footage (6 181 164 162 161 153
Percentage increase in
comparable store net sales (7) 3.0% 7.6% 12.4% 9.8% 13.8%
</TABLE>
<TABLE>
<CAPTION>
March 31,
---------------------------------------------------------
1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital $ 44,302 $ 40,649 $ 15,948 $ 13,556 $ 3,464
Inventory 53,149 43,109 25,390 15,128 12,413
Total assets 96,099 79,741 47,906 32,122 26,749
Current installments of
long-term debt 247 234 5,910 - 5,693
Long-term debt, less current
installments 9,742 26,690 2,350 - 10,628
Stockholders' equity 66,328 37,522 29,579 23,862 2,335
- ---------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE>
(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 year 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.
(3) Pro forma diluted earnings 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.
(4) Fiscal 1995, fiscal 1996 , fiscal 1997 and fiscal 1998 reflect
average jewelry units sold per comparable store based on 260,
283, 355 and 493 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
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 four fiscal years, the Company believes
comparable store data is a more meaningful measure of the 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, fiscal 1997 and fiscal 1998 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, 164 and 181 square feet, respectively.
Average net sales per square foot in fiscal 1994 is based on the
average net sales per store divided by 153, the approximate
average square footage for all stores during that year. Average
net sales per store in fiscal 1994 is based on the net sales,
less wholesale sales, divided by the average of the total
beginning and ending number of stores that year. Due to the
significant number of larger, new store openings in the latest
four fiscal years, the Company believes comparable store data is
a more meaningful measure of the 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.
17
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Net sales are comprised primarily of sales generated by stores
and, to a much lesser extent, wholesale sales (primarily to the
Florida Licensee). See "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:
Fiscal Year Ended
March 31,
------------------------------------------------------------------
1998 1997 1996
------------------------
Net sales 100.0% 100.0% 100.0%
Cost of goods sold and occupancy expenses
(excluding depreciation on kiosks) 53.7 55.3 55.5
------------------------------------------------------------------
Gross profit 46.3 44.7 44.5
Selling, general and administrative
expenses 37.3 36.5 36.1
(including depreciation on kiosks)
------------------------------------------------------------------
Income from operations 9.0 8.2 8.4
Interest and other income 0.2 0.2 0.2
Interest expense 1.3 1.3 1.1
------------------------------------------------------------------
Earnings before income taxes 7.9 7.1 7.6
Income taxes 3.0 2.6 2.9
------------------------------------------------------------------
Net income 4.9% 4.5% 4.7%
------------------------------------------------------------------
Comparison of Fiscal 1998 and Fiscal 1997
Net Sales
Net sales increased $55.2 million, or 33.1%, to $222.1 million
in fiscal 1998 from $166.9 million in fiscal 1997. This increase
was due primarily to net sales generated by new stores opened or
acquired by the Company and to a $4.3 million, or 3.0%, increase in
comparable store net sales. At March 31, 1998, the Company operated
789 stores compared to 682 stores at March 31, 1997. The average
jewelry units sold per comparable store decreased slightly, or
1.7%, to 11,800 in fiscal 1998 from 12,000 in fiscal 1997. This is
due in part to the 138 additional stores included in the comparable
store base in fiscal 1998 that generally had lower dollar and unit
sales volume than the Company's older comparable stores. The
average price per jewelry unit sold for all the Company's stores
increased slightly, or $0.05, to $24.53 in fiscal 1998 from $24.48
in fiscal 1997. Wholesale sales to the Florida Licensee increased
59.3% to $4.3 million in fiscal 1998 from $2.7 million in fiscal
1997 to support the increased retail sales of the Florida Licensee
including sales at three additional locations purchased from the
Company during fiscal 1998.
18
<PAGE>
Gross Profit
Gross profit increased $28.2 million, or 37.8%, to $102.8
million in fiscal 1998 from $74.6 million in fiscal 1997 while
gross profit margin increased to 46.3% in fiscal 1998 from 44.7% in
fiscal 1997. The gross profit margin improvement primarily reflects
lower costs of merchandise during the period, partially offset by
an increase in promotional events held by the Company during fiscal
1998 versus fiscal 1997. The gross profit margin improvement was
also reduced by increased rent and occupancy expense as a
percentage of net sales due to the 123 new and acquired stores
opened during the year and their lower initial sales volumes.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $22.0
million, or 36.1%, to $82.9 million in fiscal 1998 from $60.9
million in fiscal 1997. As a percentage of net sales, selling,
general and administrative expenses increased to 37.3% in fiscal
1998 from 36.5% in fiscal 1997. 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 50.0% to $5.4 million in fiscal 1998 from $3.6 million in
fiscal 1997. This was due primarily to capital expenditures for new
stores and the upgrading of kiosks in existing locations as well as
higher amortization expense for goodwill recorded in connection
with acquisitions in February 1997 and April 1997. A total of $6.4
million of goodwill was recorded in connection with these two
acquisitions and is being amortized over fifteen years.
Interest Expense
Interest expense increased $688,000, or 31.3%, to $2.9 million
in fiscal 1998 from $2.2 million in fiscal 1997, and as a
percentage of net sales was unchanged at 1.3% in fiscal 1998 and
1997. 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 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. These increases were partially offset by a lower average
interest rate on the revolving line of credit, which was in place
for all of fiscal 1998, and the use of the proceeds of a secondary
offering of the Company's common stock in June of 1997 to repay
debt incurred in connection with acquisitions.
Income Tax Expense
Income tax expense increased $2.2 million to $6.6 million in
fiscal 1998 from $4.4 million in fiscal 1997. As a percentage of
earnings before income taxes, income tax expense increased to 37.5%
in fiscal 1998 from 36.7% in fiscal 1997. The increase in income
tax expense is due to the increase in the Company's earnings before
income taxes. The higher effective income tax rate in 1998 resulted
from the effect of certain acquisition-related costs and other
charges for which there were no corresponding tax benefits.
Net Income
The Company's net income increased $3.5 million, or 46.7%, to
$11.0 million in fiscal 1998 from $7.5 million in fiscal 1997. The
Company believes that such increase resulted primarily from the
factors described above.
19
<PAGE>
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
since the end of the first quarter of fiscal 1997.
20
<PAGE>
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.
Net Income
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. The
Company believes that such increase resulted from the foregoing
factors, among other things.
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, bank borrowings and a
public offering of common stock that was completed in June 1997.
The Company had working capital of $44.3 million and $40.6 million
at the end of fiscal 1998 and fiscal 1997, respectively. See "--
Seasonality."
Net cash provided by operating activities was $14.9 million in
fiscal 1998 versus $460,000 in fiscal 1997. Net cash provided by
operating activities in fiscal 1998 and 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 investing activities was $17.0 million and
$17.1 million in fiscal 1998 and fiscal 1997, respectively. These
amounts reflect $9.1 million and $9.7 million of capital
expenditures related to new and acquired stores in fiscal 1998 and
fiscal 1997, respectively. Additionally, in fiscal 1998, the
Company paid $7.8 million for the acquisition of 43 locations from
Silver & Gold. In fiscal 1997, the Company paid $8.0 million for
the acquisition of 93 locations.
Net cash provided by financing activities was $721,000 in
fiscal 1998 and $18.9 million in fiscal 1997. These changes in net
cash provided by financing activities over the last two fiscal
years primarily reflect the Company's expansion and acquisition
activity during those periods. During fiscal 1997, cash provided by
financing activities primarily reflects an increase in the
Company's revolving line of credit. This increase was used to fund
store expansion, acquisitions and an increase in inventory to
provide merchandise for anticipated store openings and
acquisitions. Net cash provided by financing activities in fiscal
1998 reflects the proceeds of an offering of common stock completed
in July 1997, partially offset by a repayment of funds previously
borrowed under the Company's revolving line of credit.
The Company currently has an unsecured revolving line of
credit facility, which expires July 31, 2000, that provides for
maximum borrowings of $80 million through a combination of cash
advances (which may not exceed $50 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
21
<PAGE>
lender minus 100 basis points (7.5% at March 31, 1998) or (ii) a
rate based on overnight federal funds transactions with Federal
Reserve System members plus 50 basis points (6.5% at March 31,
1998); 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, 1998 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,
1998, the Company had $35.3 million available for cash borrowings
under this revolving credit facility. Letters of credit in the
amounts of approximately $37.2 million and approximately $31.8
million were issued at March 31, 1998 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; require the Company to maintain minimum
ratios of indebtedness to adjusted net income (as defined), current
assets to current liabilities and indebtedness to capitalization
(as defined); 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 that 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 that 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 1998 and 1997, average financing costs under the
consignment agreements were approximately 2.74% and 2.45% 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 70% of the gold content of its merchandise
under the consignment program. As of March 31, 1998, the amount of
gold consigned was 119,800 ounces with a value of $36.1 million and
88,300 ounces with a value of $30.7 million at March 31, 1997. The
consigned gold is not included in inventory on the
22
<PAGE>
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 1999
to total approximately $7.8 million, of which approximately $3.0
million is related primarily to the construction of new stores and
the renovation of existing stores and approximately $1.8 million is
related to the construction of a new warehouse and distribution
facility. The Company currently anticipates opening approximately
60 to 70 new stores in fiscal 1999 as well as approximately 107
locations acquired under an asset purchase agreement with Sedgwick
Sales, Inc. The purchase of these locations will require
approximately $3.0 million plus costs for conversion to the
Company's formats. The opening of 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. The Company believes that the expected net cash
provided by operating activities, its gold consignment program and
bank borrowings under its revolving line of credit facility will be
sufficient to fund the Company's currently anticipated capital and
liquidity needs.
23
<PAGE>
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). During the last two
fiscal years, the month of December, on average, has accounted for
approximately 25% of the Company's annual net sales and 99% 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.
24
<PAGE>
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 1998 Fiscal 1997
1st 2nd 3rd 4th 1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
--------------------------------------------------------------------------------------------------
(In thousands, except per share data)
Statement of Income
Data:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $42,873 $42,877 $89,915 $46,463 $30,244 $32,439 $66,339 $37,863
Gross profit(1) 18,107 18,778 45,231 20,684 12,781 13,716 31,880 16,200
Selling, general
and administrative
expenses(1) 17,854 18,445 26,672 19,945 12,421 13,477 18,477 16,470
Income (loss)
from operation 253 333 18,559 739 360 239 13,403 (270)
Net income (loss) (297) (153) 11,176 243 35 (105) 7,824 (216)
Diluted earnings
(loss) per share $(0.05) $(0.02) $ 1.80 $ 0.0 $ 0.01 $(0.02) $ 1.45 $(0.04)
Comparable Store
Net Sales Increase
(Decrease) 5.8% (1.4)% 2.9% 4.8% 5.6% 9.4% 9.1% 7.4%
As a Percentage of
Net Sales:
Gross profit(1) 42.2% 43.8% 50.3% 44.5% 42.3% 42.3% 48.1% 42.8%
Selling, general and
administrative
expenses(1) 41.6 43.0 29.7 42.9 41.1 41.5 27.9 43.5
Income (loss)
from operations 0.6 0.8 20.6 1.6 1.2 0.7 20.2 (0.7)
Net income (loss) (0.7) (0.4) 12.4 0.5 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.
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 and second and
fourth quarters of fiscal 1998 and 1997 have been adversely
affected by the integration and assimilation of 454 stores opened
or acquired over the last three fiscal years. 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.
24
<PAGE>
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.
Year 2000 Compliance
The Company is aware of "Year 2000" issues existing in the
programming code of some existing computer systems. The Company is
currently working to identify, correct or reprogram, and test its
systems for Year 2000 compliance. The Company expects its Year 2000
project to be completed on a timely basis. However, there can be no
assurance that the systems of other companies on which the
Company's systems also rely will be timely converted or that any
such failure to convert by another company would not have an
adverse effect on the Company's systems.
Recent Accounting Pronouncements
In fiscal 1998, the Company adopted SFAS No. 130 "Reporting
Comprehensive Income," which requires companies to report all
changes in equity during a period, except those resulting from
investments by owners or distributions to owners, in a financial
statement for the period in which they are recognized. The
components of comprehensive income include net income and all other
items of revenue, expenses, gains and losses that previously would
have been reported directly in equity under SFAS Nos. 52, 80, 87,
and 115. Because the Company has no other items of comprehensive
income other than net income, a separate financial statement is not
required and has not been presented.
In fiscal 1998, the Company adopted SFAS No. 131 "Disclosures
about Segments of an Enterprise and Related Information". This
statement requires that public business enterprises report certain
information about operating segments in complete sets of financial
statements of the enterprise and in condensed financial statements
of interim periods issued to shareholders. It also requires that
public business enterprises report certain information about their
products and services, geographic areas in which they operate, and
their major customers. The Company has evaluated the applicability
of SFAS No. 131 and concluded that it does not currently meet the
criteria for segment reporting as defined in the SFAS No. 131.
Accordingly, separate segment reporting has not been made.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Not applicable.
25
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
Independent Auditors' Report 27
Consolidated Balance Sheets at March 31, 1998 and 1997 28
Consolidated Statements of Income for the Years
ended March 31, 1998, 1997 and 1996 29
Consolidated Statements of Changes in Stockholders'
Equity for the Years ended March 31, 1998, 1997
and 1996 30
Consolidated Statements of Cash Flows for the Years
ended March 31, 1998, 1997 and 1996 31
Notes to Consolidated Financial Statements 33
26
<PAGE>
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, 1998 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, 1998. 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 audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Piercing Pagoda, Inc. and subsidiary as of March 31,
1998 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, 1998, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Allentown, Pennsylvania
May 8, 1998
27
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
PIERCING PAGODA, INC.
Consolidated Balance Sheets
March 31,
(In thousands, except share data)
-----------------------------------------------------------------
Assets 1998 1997
-----------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash $ 2,699 $ 4,119
Accounts receivable 1,454 2,233
Inventory 53,149 43,109
Deposits for inventory purchases 546 850
Prepaid expenses and other current 1,058 757
assets
Prepaid income taxes 215 1,494
Deferred income taxes 1,972 1,530
-----------------------------------------------------------------
Total current assets 61,093 54,092
-----------------------------------------------------------------
Property, fixtures and equipment, net 27,215 22,572
Other assets, net 7,791 3,077
-----------------------------------------------------------------
$ 96,099 $ 79,741
-----------------------------------------------------------------
Liabilities and Stockholders' Equity
-----------------------------------------------------------------
Current liabilities
Accounts payable $ 3,232 $ 3,668
Current installments of long-term debt
and revolving line of credit 247 234
Income taxes payable 889 -
Accrued expenses and other current 12,423 9,541
liabilities
----------------------------------------------------------------
Total current liabilities 16,791 13,443
----------------------------------------------------------------
Long-term debt, less current installments 9,742 26,690
Deferred income taxes 2,535 1,550
Other liabilities 703 536
-----------------------------------------------------------------
Total liabilities 29,771 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 6,058,411 and 5,273,994 shares
at March 31, 1998 and 1997, respectively. 61 53
Additional paid-in capital 40,417 22,588
Retained earnings 25,850 14,881
-----------------------------------------------------------------
Total stockholders' equity 66,328 37,522
-----------------------------------------------------------------
$ 96,099 $ 79,741
-----------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE>
<TABLE>
<CAPTION>
PIERCING PAGODA, INC.
Consolidated Statements of Income
Years ended March 31,
(In thousands, except per share data)
--------------------------------------------------------------------
1998 1997 1996
--------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 222,128 $166,885 $121,581
Cost of goods sold and occupancy
expenses 119,328 92,308 67,440
(excluding depreciation on kiosks)
--------------------------------------------------------------------
Gross profit 102,800 74,577 54,141
Selling, general and
administrative expenses 82,916 60,845 43,887
(including depreciation on kiosks)
--------------------------------------------------------------------
Income from operations 19,884 13,732 10,254
Interest and other income 562 386 282
Interest expense 2,896 2,208 1,306
--------------------------------------------------------------------
Earnings before income taxes 17,550 11,910 9,230
Income taxes 6,581 4,372 3,553
--------------------------------------------------------------------
Net income $ 10,969 $ 7,538 $ 5,677
--------------------------------------------------------------------
Basic earnings per share $ 1.88 $ 1.43 $ 1.08
--------------------------------------------------------------------
Diluted earnings per share $ 1.82 $ 1.40 $ 1.07
--------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE>
<TABLE>
<CAPTION>
PIERCING PAGODA, INC.
Consolidated Statements of Changes in Stockholders' Equity
Years ended March 31,
(In thousands, except number of shares)
-----------------------------------------------------------------------
Additional
Common stock paid-in Retained
Shares Amount capital earnings Total
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
Share transactions under
employee stock plans,
including tax benefit 36,917 - 648 - 648
Secondary public offering 747,500 8 17,181 - 17,189
Net income - - - 10,969 10,969
-----------------------------------------------------------------------
Balance - March 31, 1998 6,058,411 $ 61 $ 40,417 $ 25,850 $66,328
-----------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE>
<TABLE>
<CAPTION>
PIERCING PAGODA, INC.
Consolidated Statements of Cash Flows
Years ended March 31,
(In thousands)
------------------------------------------------------------------
1998 1997 1996
------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $10,969 $ 7,538 $ 5,677
Adjustments to reconcile net
income to net cash
provided by (used in) operating
activities:
Depreciation and amortization 5,402 3,636 2,639
Loss on disposal of property,
fixtures and equipment 141 93 49
Other changes in other assets (101) (97) (61)
Deferred income taxes 732 335 168
Changes in operating assets
and liabilities, net of effects
of acquisitions:
Accounts receivable 779 (1,428) 329
Inventory (7,673) (12,951) (10,262)
Deposits for inventory 304 (489) (11)
purchases
Prepaid expenses and other
current assets (301) (289) (23)
Prepaid income taxes 1,279 (514) (883)
Accounts payable (436) 1,857 558
Accrued expenses and other
current liabilities 2,882 2,697 2,488
Tax indemnification payable - - (1,530)
Income taxes payable 1019 - -
Other liabilities (133) 72 12
------------------------------------------------------------------
Net cash provided by (used in)
operating activities 14,863 460 (850)
------------------------------------------------------------------
Cash flows from investing activities:
Additions to property, fixtures (9,066) (9,724) (7,175)
and equipment
Payments for purchases of
businesses (7,980) (8,010) (1,150)
Proceeds from disposal of
property, fixtures and
equipment 67 22 -
Return of deposit with Internal
Revenue Service - - 797
Other changes in other assets, net (25) 574 (176)
------------------------------------------------------------------
Net cash used in investing
activities (17,004) (17,138) (7,704)
------------------------------------------------------------------
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
PIERCING PAGODA, INC.
Consolidated Statements of Cash Flows - Continued
Years ended March 31,
(In thousands)
-----------------------------------------------------------------
1998 1997 1996
-----------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from financing activities:
Repayments of long-term debt (235) (216) -
Revolving line of credit, net (16,700) 18,480 5,720
Proceeds from issuance of
long-term debt - 400 2,540
Debt issuance fees paid (51) (39) (157)
Proceeds from issuance of common
stock, net 17,189 - -
Net proceeds from the issuance
of stock under employee
share plans 518 308 40
Cash dividends paid - - (45)
-----------------------------------------------------------------
Net cash provided by financing
activities 721 18,933 8,098
-----------------------------------------------------------------
Net increase (decrease) in cash (1,420) 2,255 (456)
Cash at beginning of period 4,119 1,864 2,320
-----------------------------------------------------------------
Cash at end of period $ 2,699 $ 4,119 1,864
-----------------------------------------------------------------
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest $ 2,877 $ 2,100 $ 1,220
Income taxes, net $ 6,669 $ 4,551 $ 5,818
-----------------------------------------------------------------
</TABLE>
Supplemental disclosure of non-cash financing and investing
activities:
During each of the years ended March 31, 1998 and 1997, the
Company entered into noncompetition agreements for $300,000.
See accompanying notes to consolidated financial statements.
32
<PAGE>
PIERCING PAGODA, INC.
Notes to Consolidated Financial Statements (continued)
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
PIERCING PAGODA, INC.
Notes to Consolidated Financial Statements
March 31, 1998, 1997 and 1996
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
(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, Plumb
Gold and Silver & Gold Connection. At March 31, 1998, the Company
operated 789 stores, including 27 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 22 stores and three retail cart locations 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 14.
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.
33
<PAGE>
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.
In fiscal 1998, no vendors supplied more than 10% of total
merchandise purchased. In fiscal 1997, two vendors accounted for
approximately 11% and 10%, respectively, of total merchandise
purchased by the Company. No vendors supplied more than 10% of
purchases in fiscal 1996
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.
Depreciable lives are as follows:
Furniture and fixtures 3-10 years
Building and improvements 10-39 years
Kiosks 5-10 years
Computer equipment, software and
other equipment 5-7 years
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
$2,508,000, $1,890,000 and $1,338,000 in fiscal 1998, 1997 and
fiscal 1996, 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 undiscounted 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.
34
<PAGE>
Income Taxes
Income taxes are accounted for under the asset and liability
method. Deferred income tax assets and liabilities are recognized
for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and
their respective tax bases. Deferred income taxes are recorded at
the enacted rates expected to apply to taxable income in the
periods in which the 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.
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 Statement of Financial Accounting Standards
("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
During fiscal 1998, the Company adopted SFAS No. 128,
Earnings per Share. SFAS No. 128 requires the disclosure of basic
and diluted earnings per share on the face of the financial
statements. Basic earnings per share calculations are determined by
dividing the earnings available to common shareholders by the
weighted average number of shares of common stock outstanding
during the period. Diluted earnings per share are determined by
dividing earnings available to common shareholders by the weighted
average number of shares of common stock and dilutive common stock
equivalents outstanding. All prior period earnings per share
amounts have been restated to comply with the provisions of SFAS
No. 128.
35
<PAGE>
The following weighted average number of shares of common
stock were used in the calculations for earnings per share. The
diluted weighted average number of shares includes the net shares
that would be issued upon exercise of outstanding stock options,
using the treasury stock method (in thousands).
<TABLE>
<CAPTION>
Years ended March 31,
--------------------------
1998 1997 1996
------------------------------------------------------------------
<S> <C> <C> <C>
Basic 5,843 5,257 5,237
Diluted 6,041 5,389 5,325
------------------------------------------------------------------
</TABLE>
Recent Accounting Pronouncements
In fiscal 1998, the Company adopted SFAS No. 130 Reporting
Comprehensive Income, which requires companies to report all
changes in equity during a period, except those resulting from
investments by owners or distributions to owners, in a financial
statement for the period in which they are recognized. The
components of comprehensive income include net income and all other
items of revenue, expenses, gains and losses that previously would
have been reported directly in equity under SFAS Nos. 52, 80, 87,
and 115. Because the Company has no other items of comprehensive
income other than net income, a separate financial statement is not
required and has not been presented.
In fiscal 1998, the Company adopted SFAS No. 131 Disclosures
about Segments of an Enterprise and Related Information. This
statement requires that public business enterprises report certain
information about operating segments in complete sets of financial
statements of the enterprise and in condensed financial statements
of interim periods issued to shareholders. It also requires that
public business enterprises report certain information about their
products and services, geographic areas in which they operate, and
their major customers. The Company has evaluated the applicability
of SFAS No. 131 and concluded that it does not currently meet the
criteria for segment reporting as defined in the SFAS No. 131.
Accordingly, separate segment reporting has not been made.
(2) Common Stock Offering
On June 30, 1997, the Company completed a secondary offering
of 650,000 shares of its common stock. The transaction resulted in
net proceeds (after underwriting discounts, commissions and
offering expenses) to the Company of approximately $14.9 million
which was used to repay indebtedness under the Company's revolving
line of credit. Subsequently, in July 1997, the underwriters of the
offering exercised their option to purchase an additional 97,500
shares of stock from the Company resulting in additional net
proceeds of approximately $2.3 million.
(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, 1998,
1997 and 1996, the Company had consigned 119,800, 88,300 and 54,500
ounces of gold, respectively, with values of $36,060,000,
$30,749,000 and $21,601,000, 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
36
<PAGE>
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,
1998, 1997 and 1996 are consignment fees of $912,000, $620,000 and
$394,000, respectively, based on fee rates of approximately 2.74%,
2.45% and 2.31%, 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,
----------------------
1998 1997
------------------------------------------------------------------
<S> <C> <C>
Land $ 688 $ 688
Furniture and fixtures 3,881 3,054
Kiosks 24,043 19,832
Building and improvements 5,413 4,037
Computer equipment, software and other
equipment 9,326 7,396
------------------------------------------------------------------
43,351 35,007
Less accumulated depreciation and
amortization 16,136 12,435
------------------------------------------------------------------
$ 27,215 $ 22,572
------------------------------------------------------------------
</TABLE>
(5) Other Assets
Other assets are summarized as follows (in thousands):
<TABLE>
<CAPTION>
March 31,
---------------------
1998 1997
------------------------------------------------------------------
<S> <C> <C>
Goodwill (net of accumulated amortization
of $735 and $237 at March 31, 1998
and 1997, respectively) 6,296 1,907
Noncompetition agreements (net of
accumulated amortization of $125 and $10) 475 290
Deferred expenses, principally long-term
maintenance agreements 416 394
Cash surrender value of officers life
insurance 415 342
Other 189 144
------------------------------------------------------------------
$ 7,791 $ 3,077
------------------------------------------------------------------
</TABLE>
37
<PAGE>
In April 1997, the Company purchased substantially all the
operations of a company which operated retail jewelry kiosks under
the name Silver & Gold Connection for approximately $7.8 million.
The acquisition was accounted for as a purchase and the net assets
acquired and operations of these kiosks are included in the
Company's consolidated financial statements from the date of
acquisition. The cost in excess of the fair value of net assets
acquired of approximately $4.7 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 Silver & Gold
Connection 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.
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
cost in excess of the fair value of net assets acquired 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.
(6) Accrued expenses and other current liabilities
Accrued expenses and other current liabilities are summarized as
follows (in thousands):
<TABLE>
<CAPTION>
March 31,
---------------------
1998 1997
------------------------------------------------------------------
<S> <C> <C>
Accrued payroll, vacation and related taxes $ 5,230 $ 4,160
Sales tax payable 794 704
Accrued rents payable 938 1,091
Liability under jewelry club program 1,109 747
Liability under lifetime guarantee program 1,411 1,211
Other accrued expenses 2,941 1,628
------------------------------------------------------------------
$12,423 $ 9,541
------------------------------------------------------------------
</TABLE>
38
<PAGE>
(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,
--------------------
1998 1997
------------------------------------------------------------------
<S> <C> <C>
Revolving line of credit $ 7,500 $ 24,200
Industrial development authority financing 2,489 2,724
------------------------------------------------------------------
Total long-term debt 9,989 26,924
Less current installments 247 234
------------------------------------------------------------------
$ 9,742 $ 26,690
------------------------------------------------------------------
</TABLE>
The Company currently has an unsecured revolving line of
credit with its primary lender acting as agent for a syndicate of
banks. This facility, which expires July 31, 2000, provides for
maximum borrowings of $80 million through a combination of cash
advances (which may not exceed $50 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, 1998) and a rate based on the rates
charged on overnight federal funds transactions with Federal
Reserve System members plus 50 basis points (6.50% at March 31,
1998). 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, 1998 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, 1998, the Company
had $35.3 million available for cash borrowings under this
revolving credit facility. Letters of credit in the amounts of
$37,213,000 and $31,762,000 were issued at March 31, 1998 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 adjusted net income (as defined), current
assets to current liabilities and indebtedness to capitalization
(as defined); 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, 1998.
Borrowings under the revolving line of credit are summarized
as follows (in thousands):
<TABLE>
<CAPTION>
March 31,
-----------------------------
1998 1997 1996
---------------------------------------------------------------------
<S> <C> <C> <C>
Borrowings at year end $ 7,500 $ 24,200 $ 5,720
Interest rate on borrowings
at year end 6.80% 7.50% 7.50%
Maximum amount of borrowings
outstanding at any month end $33,400 $ 28,789 $ 20,360
Average aggregate borrowings during
the year $20,492 $ 14,823 $ 8,051
Weighted average interest rate
during the year 7.03% 7.50% 7.99%
---------------------------------------------------------------------
</TABLE>
39
<PAGE>
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 $2,447,000 at March
31, 1998 which is supported by a lien on the Company's corporate
headquarters and distribution center which has a net carrying value
of approximately $2.9 million at March 31, 1998. 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, 1998
(in thousands):
<TABLE>
<CAPTION>
Amount
------------------------------------------------------------------
<S> <C>
1998 $ 247
1999 262
2000 278
2001 295
2002 317
Subsequent to 2002 1,090
------------------------------------------------------------------
Total payments $ 2,489
------------------------------------------------------------------
</TABLE>
(8) Leases
The Company leases space primarily in shopping malls under
operating leases expiring in various years through fiscal 2007. 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 1998. Generally, the leases also contain provisions for
contingent rental payments of approximately 10% of gross sales in
excess of specified amounts.
40
<PAGE>
Minimum future rental payments as of March 31, 1998 under
non-cancelable operating leases having original terms in excess of
one year are as follows (in thousands):
<TABLE>
<CAPTION>
Amount
------------------------------------------------------------------
<S> <C>
1998 $ 19,803
1999 15,931
2000 10,135
2001 4,558
2002 1,672
Subsequent to 2002 975
------------------------------------------------------------------
Total rental payments $ 53,074
------------------------------------------------------------------
</TABLE>
A summary of minimum rent and contingent rent expense under
operating leases is as follows (in thousands):
<TABLE>
<CAPTION>
Years ended March 31,
----------------------------
1998 1997 1996
-------------------------------------------------------------------
<S> <C> <C> <C>
Minimum rentals $ 23,690 $ 17,292 $ 12,643
Contingent rentals 1,916 1,498 1,191
--------------------------------------------------------------------
Total rental expense $ 25,606 $ 18,790 $ 13,834
--------------------------------------------------------------------
</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 $500,000, $300,000 and $220,000 in
fiscal 1998, fiscal 1997 and fiscal 1996, 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
$212,000 in fiscal 1997, $181,000 in fiscal 1997, and $107,000 in
fiscal 1996. 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.
41
<PAGE>
(10) Income Taxes
Income taxes in the consolidated statements of income consists
of the following components (in thousands):
<TABLE>
<CAPTION>
Years ended March 31,
--------------------------
1998 1997 1996
------------------------------------------------------------------
Current tax expense:
<S> <C> <C> <C>
Federal $ 5,346 $ 3,703 $ 2,877
State 503 334 508
------------------------------------------------------------------
5,849 4,037 3,385
------------------------------------------------------------------
Deferred tax expense
Federal 570 251 133
State 162 84 35
------------------------------------------------------------------
732 335 168
------------------------------------------------------------------
$ 6,581 $ 4,372 $ 3,553
------------------------------------------------------------------
</TABLE>
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,
------------------
1998 1997
------------------------------------------------------------------
<S> <C> <C>
Deferred tax liabilities:
Excess of tax over book depreciation ($ 2,827 ($ 1,754)
Employee benefit plans (250) -
------------------------------------------------------------------
Total deferred tax liabilities (3,077) (1,754)
------------------------------------------------------------------
Deferred tax assets:
Inventory 382 129
Accrual for lifetime guarantee costs 563 484
Accrued vacation expense 468 381
Accrual for jewelry club costs 443 298
Accrued group insurance 226 117
Other 432 325
--------------------------------------------------------------------
Total deferred tax assets 2,514 1,734
Less valuation allowance - -
--------------------------------------------------------------------
Net deferred tax assets 2,514 1,734
--------------------------------------------------------------------
Net deferred tax liability ($ 563) ($ 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, 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, 1998.
42
<PAGE>
Income tax expense in 1998, 1997 and 1996 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,
-------------------------
1998 1997 1996
-------------------------------------------------------------------
<S> <C> <C> <C>
Tax expense at statutory rates $5,967 $ 4,049 $ 3,138
State income taxes, net of federal benefit 439 276 358
Non-deductible amortization of cost in
excess of net assets of acquired 39 6 -
business
Other 136 41 57
-------------------------------------------------------------------
$6,581 $ 4,372 $ 3,553
-------------------------------------------------------------------
</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 $13,000, $10,000 and
$14,000 in fiscal 1998, fiscal 1997, and fiscal 1996, respectively,
representing certain direct expenses and the estimated fair value
of providing administrative services, primarily allocations of
salary and overhead.
Included in accounts receivable at March 31, 1998 and 1997 are
$420,000 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.
(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 600,000. 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 period
of up to five years and are exercisable over a period determined by
the committee, but not longer than ten years.
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 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 changed to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
Years ended March 31,
---------------------
1998 1997 1996
------------------------------------------------------------------
<S> <C> <C> <C>
Net income:
As reported $ 10,969 $ 7,538 $ 5,677
Pro forma $ 10,243 $ 7,089 $ 5,614
Diluted earnings per share:
As reported $ 1.82 $ 1.40 $ 1.07
Pro forma $ 1.70 $ 1.32 $ 1.05
------------------------------------------------------------------
</TABLE>
43
<PAGE>
The per share weighted average fair value of stock options
granted during fiscal 1998, fiscal 1997 and fiscal 1996 was $15.84,
$13.84 and $10.50, 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>
1998 1997 1996
------------------------------------------------------------------
<S> <C> <C> <C>
Expected dividend yield 0.0% 0.0% 0.0%
Expected volatility 42.1 49.4 52.2
Risk-free interest rate 5.7 5.4 7.6
Expected life (in years) 9.0 9.6 9.5
------------------------------------------------------------------
</TABLE>
Pro forma net income reflects only options granted in 1998,
1997 and 1996. 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 option's vesting
period of up to five 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 Under Option
Price
------------------------------------------------------------------
<S> <C> <C>
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
Granted 26.17 149,500
Exercised 11.96 (27,600)
Canceled 18.83 (16,200)
------------------------------------------------------------------
Outstanding at March 31, 1998 17.97 500,450
------------------------------------------------------------------
Exercisable $ 12.66 204,950
------------------------------------------------------------------
</TABLE>
44
<PAGE>
The following table summarizes information concerning
currently outstanding and exercisable options:
<TABLE>
<CAPTION>
Exercise Price
---------------------------
$8.00 - $18.00 -
$10.625 $29.00
------------------------------------------------------------------
<S> <C> <C>
Options outstanding at 173,550 326,900
March 31, 1998
Weighted average remaining
contractual life (years) 6.25 8.94
Weighted average exercise
price $ 8.23 $23.15
Options exercisable at
March 31, 1998 132,250 72,700
Weighted average exercise
price $ 8.21 $ 20.75
------------------------------------------------------------------
</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
1998, 1997 and 1996, 9,317, 8,151 and 1,606 shares, respectively,
were issued under this plan.
(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
the same 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, 1998, the Company had commitments outstanding of
approximately $5.0 million. Of this amount, approximately $3.2
million was committed for the construction of new kiosks, in-line
stores or the renovation of existing stores as well as fixtures and
supplies for current and planned stores. Approximately $1.8 million
of total commitments reflect remaining costs for the construction
of a new warehouse and distribution center.
45
<PAGE>
Pursuant to the agreement between the Company and its
licensee, the licensee has the right to acquire, under certain
circumstances, the Company's 42 kiosk stores (at March 31, 1998)
operating in the state of Florida 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 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 1998 and 1997, the licensee exercised its right to
acquire three stores and one store, respectively, from the Company,
and as of March 31, 1998 has delivered written notice to the
Company of its intention to acquire five additional stores from the
Company in fiscal 1999.
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. Payments of $1,530,000
were made during fiscal 1996 under this agreement.
(15) Subsequent Event
On May 8, 1998, the Company entered into an agreement to
acquire approximately 107 retail kiosk stores from Sedgwick Sales,
Inc., a Nevada corporation. The total cost of the acquisition is
$3.0 million and includes the leases, kiosks and fixtures. Because
the seller's jewelry business is significantly different from the
Company's, there will be no inventory purchased or trademarks
acquired. Closing is expected to occur during June 1998.
46
<PAGE>
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The information required by this item (except for the
information regarding executive officers called for by Item 401 of
Regulation S-K which is included in Part I hereof as Item 4A in
accordance with General Instruction G(3)), is incorporated by
reference to the information set forth in the Company's definitive
Proxy Statement for its 1998 Annual Meeting of Stockholders to be
filed with the Securities and Exchange Commission within 120 days
following the end of the Company's fiscal year.
Item 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by
reference to the information set forth in the Company's definitive
Proxy Statement for its 1998 Annual Meeting of Stockholders to be
filed with the Securities and Exchange Commission within 120 days
following the end of the Company's fiscal year.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this item is incorporated by
reference to the information set forth in the Company's definitive
Proxy Statement for its 1998 Annual Meeting of Stockholders to be
filed with the Securities and Exchange Commission within 120 days
following the end of the Company's fiscal year.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by
reference to the information set forth in the Company's definitive
Proxy Statement for its 1998 Annual Meeting of Stockholders to be
filed with the Securities and Exchange Commission within 120 days
following the end of the Company's fiscal year.
47
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) Documents filed as part of this Report.
1. Financial Statements Page
Independent Auditors' Report 27
Consolidated Balance Sheets at March 31, 1998 and 1997 28
Consolidated Statements of Income for the Years ended
March 31, 1998, 1997 and 1996 29
Consolidated Statements of Changes in Stockholders'
Equity for the Years ended March 31, 1998, 1997 and 1996 30
Consolidated Statements of Cash Flows for the Years ended
March 31, 1998, 1997 and 1996 31
Notes to Consolidated Financial Statements 33
2. 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.
3. Exhibits
Exhibit
No.
2 See 10.40, 10.41 and 10.43.
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).
9 None
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).
48
<PAGE>
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).
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).
49
<PAGE>
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).
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).
50
<PAGE>
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).
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.
(incorporated by reference to Exhibit 10.41 to the Registrant's
Registration Statement on Form S-1 File No. 333-27213, initially
filed with the Securities and Exchange Commission on May 15,
1997).
51
<PAGE>
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 (incorporated by reference to Exhibit
10.42 to the Registrant's Registration Statement on Form S-1
File No. 333-27213, initially filed with the Securities and
Exchange Commission on May 15, 1997).
10.43 First Amendment to Syndicated Loan Agreement dated November,
21, 1997 between the Registrant and Summit Bank and CoreStates
bank, N.A. (incorporated by reference to Exhibit 10.43 to the
Registrant's Form 10-Q filed with the Securities and Exchange
Commission on February 12, 1998).
10.44 Replacement Revolving Note dated November 21, 1997 between the
Registrant and Summit Bank (incorporated by reference to
Exhibit 10.44 to the Registrant's Form 10-Q filed with the
Securities and Exchange Commission on February 12, 1998).
10.45 Replacement Revolving Note dated November 21, 1997 between the
Registrant and First Union (incorporated by reference to
Exhibit 10.45 to the Registrant's Form 10-Q filed with the
Securities and Exchange Commission on February 12, 1998).
10.46 Replacement Revolving Note dated November 21, 1997 between the
Registrant and CoreStates Bank, N.A. (incorporated by reference
to Exhibit 10.46 to the Registrant's Form 10-Q filed with the
Securities and Exchange Commission on February 12, 1998).
10.47 Seventh Amendment and Agreement to Consignment Agreement dated
October 2, 1997 Between Fleet Precious Metals, Inc. and the
Registrant. *
10.48 Asset Purchase Agreement dated May 8, 1998 between Piercing
Pagoda, Inc. and Sedgwick Sales, Inc., a Nevada corporation,
Donald M. Sedgwick, Gregory K. Stapley, The Sedgwick Family Trust
and the Beneficiary of the Trust. *
11 Not applicable.
12 Not applicable.
13 Not applicable.
16 Not applicable.
18 Not applicable.
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).
22 Not applicable.
23.1 Consent of KPMG Peat Marwick LLP, independent certified public
accountants.*
24 None.
27 Financial Data Schedule. *
27.1 Financial Data Schedule. *
* Filed herewith.
(b) Reports on Form 8-K
The Company did not file any Current Reports on Form 8-K
during the last quarter of fiscal 1998.
52
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized in the township of Hanover in the
Commonwealth of Pennsylvania on June 22, 1998.
PIERCING PAGODA, INC.
By: /s/ John F. Eureyecko
John F. Eureyecko
President and
Chief Operating Officer
53
<PAGE>
Pursuant to the requirements of the Securities and Exchange
Commission Act of 1934, this report has been signed by the
following persons on behalf of the registrant in the capacities and
dates indicated below.
Signature Title Date
/s/ Richard H. Penske June 22, 1998
Richard H. Penske Chief Executive Officer and
Chairman of the Board
(Principal Executive Officer)
/s/ John F. Eureyecko June 22, 1998
John F. Eureyecko Director, President and
Chief Operating Officer
(Principal Financial and
Accounting Officer)
/s/ Alan R. Hoefer June 22,1998
Alan R. Hoefer Director
/s/ Mark A. Randol June 22 1998
Mark A. Randol Director
54
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Exhibit Page No.
10.47 Seventh Amendment and Agreement to Consignment 56
Agreement dated October 2, 1997 Between Fleet
Precious Metals, Inc. and the Registrant.
10.48 Asset Purchase Agreement dated May 8, 1998 58
between Piercing Pagoda, Inc. and Sedgwick Sales, Inc.,
a Nevada corporation, Donald M. Sedgwick,
Gregory K. Stapley, The Sedgwick Family Trust and
the Beneficiary of the Trust.
23.1 Consent of KPMG Peat Marwick LLP, independent 72
certified public accountants.
55
<PAGE>
SEVENTH AMENDMENT AND AGREEMENT
TO
CONSIGNMENT AGREEMENT
THIS SEVENTH AMENDMENT AND AGREEMENT TO CONSIGNMENT AGREEMENT
is made as of the second day of October, 1997, by and between FLEET
PRECIOUS METALS INC., a Rhode Island corporation with its principal
offices at 111 Westminster Street, Providence, Rhode Island 02903 (the
"Consignor"), and PIERCING PAGODA, INC., a Delaware corporation, with its
principal office at 3910 Adler Place, Bethlehem, Pennsylvania 18017 and
with a mailing address of P.O. Box 25007, Lehigh Valley, Pennsylvania
18002-5007 (the "Customer").
WITNESSETH THAT:
WHEREAS, the Consignor and the Customer are parties to a
certain Consignment Agreement dated as of November 30, 1990, as
previously amended (as amended, the "Consignment Agreement") pursuant to
which the Consignor agreed to consign precious metals to the Customer for
use in its operations;
WHEREAS, the Consignor and the Customer desire to amend the
Consignment Agreement on the terms and conditions hereinafter contained;
NOW, THEREFORE, for value received, and for other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties hereto hereby agree as follows:
1. All capitalized terms used herein without definition shall
have the meanings assigned by the Consignment Agreement.
2. Effective the date hereof, the third sentence of Section
1(b) of the Consignment Agreement is amended to read in its entirety as
follows:
"It is understood that at no time shall the value of
commodities on consignment to the Customer exceed:
(i) the least of:
(x) Twenty-Two Million Dollars ($22,000,000); or
(y) the value (as determined pursuant to
Paragraph 2 hereof) of up to Fifty-Five Thousand
(55,000) troy ounces of gold; or
(z) an amount equal to one hundred percent (100%)
of the stated amount of the irrevocable standby letter
of credit (the "Letter of Credit") described in Section
12 hereof; or
(ii) such limit as the Consignor and the Customer may
agree upon from time to time as evidenced by an amendment in
substantially the form of Exhibit B attached hereto and made
a part hereof or in such other form as the Consignor shall
require (collectively, the "Consignment Limit")."
56
<PAGE>
3. All references to the "Consignment Agreement" in any
documents or agreements by and between the parties hereto, shall from and
after the effective date hereof refer to the Consignment Agreement, as
amended hereby, and all obligations of the Customer under the Consignment
Agreement, as amended hereby, shall be secured by and entitled to the
benefits of the Letter of Credit hereinabove referred to.
4. Except as amended hereby, the Consignment Agreement shall
remain in full force and effect and is in all respects hereby ratified
and affirmed.
5. The Customer covenants and agrees to pay all out-of-pocket
expenses, fees and charges incurred by the Consignor (including
reasonable fees and disbursements of outside counsel) in connection with
the preparation and implementation of this Seventh Amendment and
Agreement to Consignment Agreement.
IN WITNESS WHEREOF, the undersigned parties have caused this
Amendment to be executed by their duly authorized officers as of the date
first above written.
WITNESS: PIERCING PAGODA, INC.
By:____________________________
John Eureyecko
Executive Vice President
------------------------------
By:____________________________
(as to both) Brandon Lehman
Treasurer
FLEET PRECIOUS METALS INC.
By:____________________________
Title:
------------------------------
By:___________________________
(as to both) Title:
57
ASSET PURCHASE AGREEMENT
Asset Purchase Agreement, made this 8th day of May 1998, by
and among PIERCING PAGODA, INC., a Delaware corporation ("Buyer");
SEDGWICK SALES, INC., a Nevada corporation ("Seller"); DONALD M. SEDGWICK
("DMS"), GREGORY K. STAPLEY ("GKS"); THE SEDGWICK FAMILY TRUST (the
"Trust"); and the undersigned beneficiary of the Trust (the "Beneficiary"
and, collectively with the Trust, the "Shareholders"); provided that DMS
and GKS are signatories of this Agreement solely for purposes of agreeing
to enter into the Non-competition Agreement (as defined below) on the
terms set forth below and the Beneficiary shall only have liability
hereunder to the extent, if any, that she receives, directly or
indirectly, distributions of cash or other consideration from the Trust.
BACKGROUND
Seller operates approximately 157 retail kiosk stores under
the names Golden Chain Gang, Golden Chain International, Grand Illusions
and Sedgwick Solid Gold International (the "Names") which sell primarily
gold-plated jewelry (the "Business"). The Trust owns one hundred percent
(100%) of the outstanding capital stock of Seller. The Beneficiary is the
primary beneficiary of the Trust.
Buyer desires 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 Buyer,
and Buyer 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 following assets owned by Seller (the "Assets"):
(a) Seller's interest in the one hundred and seven
(107) existing or pending leases for Seller's kiosk stores listed in
Schedule 1(a) attached hereto, and the leases for any other locations as
to which an Additional Store Exercise is made pursuant to Section 4 below
(the "Stores"); and
(b) Store kiosks and any and all leasehold
improvements, fixtures, benches, point-of-sale registers, telephones,
credit authorization devices, stools, safes, security panels and existing
security systems at the Stores (all of which are being sold "as is, where
is" without warranty or representation except as specifically set forth
herein); except to the extent that Buyer in its discretion determines not
to acquire any such assets; provided that Seller must consent, such
consent not to be unreasonably withheld or delayed, to any decision by
Buyer not to acquire a Store kiosk; provided that Buyer's covenant to
dispose of such assets, including without limitation paying off or
otherwise eliminating Seller's obligations under the leases for the
Stores, at Buyer's sole cost and expense, shall be a permissible
condition to the granting of Seller's consent hereunder. As to any
pending Stores for which a kiosk has not yet been constructed, Buyer
shall be responsible for constructing, installing and paying for such
kiosk.
2. Excluded Assets. The Assets do not include cash,
receivables, prepaid rents, inventory, personal vehicles, home office
building and any other assets of Seller not identified in Section 1
above.
3. Assumption of Certain Liabilities. Subject to the terms
and conditions of this Agreement, Buyer shall assume and perform and pay
those liabilities and obligations of Seller accruing or arising on and
after the applicable Closing Date (as provided in Section 7 below): (i)
with respect to the Stores' utilities
58
<PAGE>
and merchant association dues and expenses and (ii) under the Stores'
leases. With the exception of the liabilities and obligations to be assumed
by Buyer pursuant to the preceding sentence and the other provisions of this
Agreement, Buyer 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 Buyer pursuant to this Section 3 shall be evidenced by a
lease assignment and assumption agreement setting forth such obligations, in
the form attached hereto as Exhibit "A" (the "Assignment and Assumption
Agreement"). All liabilities and obligations of Seller not assumed by Buyer
pursuant to this Section 3 shall hereinafter be referred to as the "Retained
Liabilities."
4. Purchase Price.
(a) The consideration paid or payable to Seller by Buyer in
exchange for the sale, transfer, assignment and delivery of the Assets,
(the "Purchase Price"), shall be Three Million Dollars ($3,000,000.00),
of which One Hundred Thousand Dollars ($100,000) was previously paid into
an escrow account (the "Escrow") by Buyer with CoreStates Bank, N.A. (the
"Escrow Agent") pursuant to the terms of an escrow agreement (the "Escrow
Agreement"), which amount shall be returned to Buyer if the Closing does
not occur unless the failure to close results from the breach of this
Agreement by Buyer; minus (A) any unpaid amounts due to landlords with
respect to the leases of the Stores arising prior to the Closing Date
(not including Buyer's share of any Administrative Fees as referred to in
section 17(n)); and (B) Fifteen Thousand Dollars ($15,000) per Store
lease not assigned to Buyer (excluding the first seven such non-assigned
Store leases) by December 31, 1998 on commercially reasonable terms,
provided that, notwithstanding anything contained in this Agreement to
the contrary, the adjustment pursuant to this clause (B) shall not exceed
Ninety Thousand Dollars ($90,000) in the aggregate (the adjustments
pursuant to the immediately preceding clauses (A) and (B) are
collectively referred to as the "Lease Assignment Adjustment"). Ninety
Thousand Dollars ($90,000) of the Purchase Price shall be paid on June 1,
1998 for the Initial Stores as provided in Section 7 below. With respect
to any Remaining Stores not acquired by Buyer hereunder, Seller shall use
its reasonable efforts to provide Buyer with an opportunity to negotiate
for the acquisition of such Remaining Stores that Seller or its licensed
operators desire to sell or close from time to time in the future.
(b) All funds due Seller under this Agreement or the Escrow
Agreement shall be paid by wire transfer to an account designated by
Seller, or by certified or bank treasurer's check drawn to the order of
Seller, as Seller directs.
(c) The total of One Hundred Thousand Dollars ($100,000)
remaining in Escrow after Closing shall secure Seller's obligations with
respect to the Lease Assignment Adjustment and with respect to the
payment of Administrative Fees to landlords pursuant to Section 17(n);
provided that, when all but thirteen (13) of the landlord consents have
been received, then the Escrow agent shall immediately release to Seller
Fifteen Thousand Dollars ($15,000) of the escrowed funds for each consent
received thereafter; provided further that, to the extent that the Escrow
is insufficient to pay to Buyer any amount owing on account of the Lease
Assignment Adjustment or such Administrative Fees, Seller and
Shareholders shall remain liable for the payment of such amount. Upon the
earlier of (i) the assignment of all but seven (7) Store leases and the
tender of Seller's share of all such Administrative Fees; or (ii)
December 31, 1998, the remaining amount in the Escrow shall be released
to Buyer and/or Seller in accordance with the foregoing. Seller and Buyer
shall issue joint instructions to the Escrow Agent to release to Seller
and/or Buyer, as applicable, the Escrow in accordance with this Section
4. If there is a dispute as to such instructions, such dispute shall be
resolved in accordance with Section 5.
(d) As detailed on Exhibit B, Seller currently intends to
dispose of approximately seventeen (17) of its current locations and to
sell approximately thirty-one (31) stores to licensed operators that
would operate gold-plated jewelry businesses using the Names or other
names selected by the licensed operators. Any of the thirty-one (31)
stores currently scheduled to be transferred to licensed operators in
accordance with the preceding sentence which are not ultimately
transferred to such licensed operators (the "Remaining Stores") shall be
disclosed to Buyer in writing by Seller (a (4(d) Notice") promptly upon
Seller's becoming aware that any such Remaining Store's sale to a
licensed operator is not likely to be completed. Buyer shall have the
right and option, at Buyer's sole election to be made by written notice
to Seller within ten (10) business days following Buyer's receipt of the
59
<PAGE>
applicable 4(d) Notice, to (i) acquire any of the Remaining Stores
specified by Buyer in such 4(d) Notice without the payment of any
additional consideration; provided that the total of the number of Stores
so specified plus the number of Stores on Schedule 1(a) does not exceed
one hundred ten (110); and (ii) purchase none, any or all of such
Remaining Stores without inventory from Seller at the price of Eighteen
Thousand Dollars ($18,000) each, payable in cash at Closing, with Buyer
accepting the kiosk and assuming the lease therefor as of the Closing;
provided that if, as a result of the timing of the applicable 4(d)
Notice, the purchase of the applicable Remaining Store cannot be
completed by the Closing Date, the purchase shall be completed as soon as
practicable thereafter. Buyer's election to acquire Remaining Stores
pursuant to 4(d)(i) or 4(d)(ii) shall be referred to as an Additional
Store Exercise.
5. Disputes. In the event there is a dispute as to any matter
arising under this Agreement, 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 Chicago,
Illinois 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 Buyer, and the fees and
expenses, if any, of such arbitrator shall be paid one-half by Seller and
one-half by Buyer. Nothing herein shall limit Buyer's right to seek
injunctive or other equitable relief in the event of a breach of the
non-competition agreement referred in Section 9.
6. Allocation of Assets, Liabilities and Purchase Price. The
Purchase Price shall be allocated among the Assets as set forth on the
Schedule attached hereto as Exhibit "C", provided that in the event of an
adjustment to the Purchase Price hereunder such adjustment shall be
applied prorata to the Assets itemized thereon. 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 transactions
provided for herein ("Closing") shall take place on July 1, 1998 (the
"Closing Date"); provided however that Buyer and Seller shall have shared
access to the Stores commencing at 12:01 a.m. on Monday, June 29, 1998
(the "Entry Date") through the Closing Date for the purpose of completing
Seller's closeout sales, cleaning, packing unsold merchandise, bringing
in Buyer's new merchandise and other pre-Closing transitional activities,
and Buyer shall be solely responsible for all employee wages, costs and
benefits from and after the Entry Date, including without limitation the
wages of all former employees of Seller who participate in such
activities, regardless of whether such individuals are acting for Buyer
or for Seller; provided that Buyer will provide reimbursement with
respect to, but will not include on its payroll, employees of Seller that
Buyer does not choose to hire; provided further that the Closing Date for
the purchase of the Stores at 114 Colonial Park, Harrisburg, PA; 81
Viewmont, Scranton, PA; and 410 Neshaminy, Bensalem, PA (collectively,
the "Initial Stores") shall be June 1, 1998. The aggregate purchase price
for the Initial Stores shall be Ninety Thousand Dollars ($90,000) payable
on June 1, 1998. Buyer and Seller shall cooperate with respect to closing
documentation for the Initial Stores which shall be substantially similar
to that contemplated by Sections 13 and 14 below.
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; provided, however, that Seller shall be
entitled to conduct such "inventory liquidation," or "change of
ownership" or similar promotions as Seller desires;
(ii) consult with Buyer with respect to Seller's new
leases, if any, and lease renewal issues.
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(iii) comply with all material provisions of the leases
for the Stores and applicable laws, rules and regulations.
(iv) promptly notify Buyer 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 Buyer
against Seller.
(v) forward to Buyer 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.
(vi) notify Buyer of any material adverse change to any
of the Stores or Assets.
(vii) from and after the Announcement Date agreed upon
by Buyer and Seller as set forth in Section 17(m) below, permit Buyer and
its representatives reasonable access to the Stores and Assets and all
records relating to them, during business hours and upon reasonable prior
written notice.
(viii) Seller shall mail, or otherwise provide for
payment of, by May 25, 1998, all rent and other charges relating to the
Stores due on or before June 1, 1998.
(ix) Seller shall provide to Buyer by June 17, 1998
(and by May 18, 1998 with respect to the Initial Stores): (A) reasonable
details relating to rent and other charges under the Store leases, and
(B) payroll information, including without limitation, W-4 forms and
social security numbers, relating to Store employees to the extent such
information is not included in Schedule 10(f).
(x) In the event Closing does not occur, Seller and
Shareholders shall be jointly liable to reimburse Buyer for any payments
made by Buyer on account of July 1998 Store rent and related charges
(other than with respect to the Initial Stores).
(b) Between the date of this Agreement and the Closing Date,
Seller shall not, without the consent of Buyer:
(i) except for assigning the leases for the Stores to
Buyer, 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, Stores or any of its current locations,
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 or as otherwise contemplated hereby.
9. Non-Competition Agreement. As partial consideration for
the Purchase Price, Seller, Shareholders, DMS and GKS shall execute
non-competition agreements in the form attached hereto as Exhibit "D".
10. Representations and Warranties of Seller. As a material
inducement to Buyer to enter into this Agreement and to close hereunder,
Seller makes the following representations and warranties to Buyer. In
those cases where the following warranties and representations refer to
"Seller's knowledge," this shall mean and be limited to the actual
personal knowledge of Donald M. Sedgwick and Gregory K. Stapley, as of
the date hereof, and shall not extend to the knowledge, express, implied
or imputed, of any other person or organization:
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(a) Corporate Status; Authority. Seller is a
corporation duly organized, validly existing and in good standing under
the laws of Nevada. 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 Buyer, constitutes the valid and binding
obligation of Seller, enforceable against 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 Buyer, 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 (all of the foregoing are
collectively referred to as "Liens"), 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.
Attached as Schedule 10(c) are copies of all mortgages, UCC statements
and any other documents evidencing Liens on the Assets (not including
statutory landlord s liens or liens or security interests created by the
Store leases which are not, to the best of Seller's knowledge, evidenced
by UCC-1 filings) and a list of all secured parties holding Liens (not
including statutory landlord s liens or liens or security interests
created by the Store leases which are not, to the best of Seller's
knowledge, evidenced by UCC-1 filings) on the Assets as of the date
hereof.
(d) Leases. To the best of Seller's knowledge, 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 the best of 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 the best of Seller's knowledge, any such other party is in
default or in arrears under the terms thereof. To the extent such are
contained in Seller's files, or are otherwise reasonably available to
Seller, Seller has delivered to Buyer true and correct copies of all the
Stores leases.
(e) Litigation. To the best of Seller's knowledge,
Seller is not a party to or threatened with any suit, action,
arbitration, administrative or other proceeding or any governmental
investigation with respect to the Assets, the Stores or any Employees
which would prevent the consummation of the transaction contemplated
hereby; however, as of the date of this Agreement Seller is aware of the
following claims:
(i) a suit by Sharen Langston, an employee of
Seller's Store No. 331 in Victorville, California, alleging liability by
Seller for injuries allegedly occurring in the course and scope of her
employment which would have been covered by Worker s Compensation
insurance but for an alleged lapse of Seller's coverage and the ensuing
bankruptcy of the carrier; and
(ii) a small-claims court suit by Shirley Hill,
customer of Seller's Store No. 308 in Mobile, Alabama, alleging defective
product, fraud and misrepresentation;
(iii) a claim by R. Guerra, alleged customer of
Seller's Store No. 204 in Harlingen, Texas, alleging defective product; and
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(iv) a claim by Carla Guess, customer of Bel Air
Mall in Mobile, Alabama alleging, inter alia, false imprisonment;
and Seller and Shareholders hereby agree to indemnify, defend and hold
Buyer harmless for, from and against the foregoing claims and any and all
such claims arising from the conduct of Seller's business at any of the
Stores prior to the Closing Date in accordance with the provisions of
Section 16 below.
(f) Employees. Attached as Schedule 10(f) is a list of
all Seller's Store employees (the "Employees") which identifies their
names, addresses, respective employment status (full-time, part-time,
leave of absence, etc.), and their respective gross rate of compensation,
two-year wage history, two-year bonus and incentive program history,
title, original date of hire and accrued unused vacation time, as
reflected in Seller's current records. There are no written employment
agreements, consulting or services agreements or severance agreements
with respect to the Employees to which the Seller is a party or by which
it is bound that will survive the Closing, and to the best of Seller's
knowledge no Employee or former employee of any Store claims the
existence of any such agreements, express or implied. There are no
policies or, to the best of Seller's knowledge, 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, except as set forth in Section 10(e) above.
(g) Attached as Schedule 10(g) are monthly sales
reports for each Store for each month beginning April 1995.
(h) 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 bound, any
judgment, decree, order or award of any court, governmental body or
arbitrator or any applicable law, rule or regulation; except that Buyer
and Seller mutually acknowledge that the transfer of the Stores without
prior landlord consent may, in some cases, constitute a default under the
leases for such Stores and entitle such landlords to pursue remedies as
provided in such leases.
(i) 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 Buyer. As a
material inducement to Seller to enter into this Agreement and to close
hereunder, Buyer makes the following representations, warranties, and
agreements to and with Seller:
(a) Corporate Status; Authority. 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. 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 Buyer. This Agreement has been duly
executed and delivered by Buyer and, assuming the due execution and
delivery of this Agreement by Seller, constitutes the valid and binding
obligation of Buyer, enforceable in accordance with its terms, except as
such enforceability 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 Buyer, enforceable against it in accordance with their
respective terms.
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(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 Buyer, 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 Buyer under, any agreement,
indenture or other instrument to which 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 Buyer any brokerage commission or
finder's fee in connection with this Agreement or the transaction
provided for herein, and Buyer hereby agrees to indemnify, defend and
hold Seller harmless for, from and against any and all claims to such a
fee or commission made by any person claiming by or through Buyer.
12. Survival of Representations and Warranties. All
representations and warranties of the parties hereto in this Agreement
shall survive Closing until January 31, 2000.
13. Closing Deliveries by Seller. On the Closing Date, Seller
shall deliver or cause to be delivered to Buyer the following:
(a) [Intentionally Deleted.]
(b) Non-Competition Agreements. Non-Competition
Agreements in the form of Exhibit "D", executed by Seller, the Shareholders,
DMS and GKS.
(c) Bill of Sale and General Assignment. A Bill of Sale
and General Assignment, in the form of Exhibit "E", executed by Seller,
transferring to Buyer good title to all of the personal property included
in the Assets.
(d) Store Lease Assignment. The Assignment and
Assumption Agreement for each Store lease in the form of Exhibit "A",
executed by Seller as to leases the assignment of which has not been
consented to by the landlord prior to Closing (the "Non-consented
Leases"), and a specific Assignment and Assumption Agreement with Lessor
Consent Agreement for each Store lease received by Seller in form
reasonably acceptable to Buyer, Seller and the applicable landlord on or
before the Closing Date which is executed by the landlord, Buyer and
Seller.
(e) Payoff Letter from Secured Lender. A payoff letter
from any party 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 capable of being
delivered in physical form shall be made available to Buyer at Seller's
locations.
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(j) Shareholder; Beneficiary. The Trust is the sole
shareholder of Seller. The Beneficiary is the primary beneficiary of the
Trust.
14. Closing Deliveries by Buyer. On the Closing Date, Buyer
shall deliver or cause to be delivered to Seller the following:
(a) [Intentionally Deleted.]
(b) Non-Competition Agreements. A Non-Competition
Agreements, in the form of Exhibit "D", executed by Buyer.
(c) Store Lease Assignment. The Assignment and
Assumption Agreement for each Non-consented Lease in the form of Exhibit
"A", executed by Buyer and a specific Assignment and Assumption Agreement
with Lessor Consent Agreement for each Store lease received by Seller or
Buyer on or before the Closing Date which is executed by the landlord,
Seller and Buyer.
(d) Certificates Confirming Approval of this Agreement.
Officer's Certificates of Buyer, certifying that all necessary corporate
action by Buyer has been taken to approve this Agreement and authorize
the consummation of the transactions contemplated hereby.
(e) Additional Sums. Any additional funds not
previously deposited under Section 4(a) or (b) which Escrow Agent
requests in order to close the Escrow.
15. Covenants Extending Beyond Closing.
(a) Further Assurances. Seller and Shareholders agree
to execute and/or obtain and deliver all such other instruments and take
all such other action as Buyer 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 Buyer 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) WARN Act Liability; Employees. Buyer intends, but
shall have no obligation, to hire most of Seller's Employees. Seller
shall provide Buyer with reasonable mutually agreeable access to Seller's
supervisory Employees. Seller shall indemnify Buyer for any WARN Act
liability
(c) Employee Benefits. Seller shall compensate all
Employees for vacations earned or accrued through June 28, 1998 (May 31,
1998 with respect to the Initial Stores) in accordance with Seller's
policies and shall provide all required COBRA notices. With respect to
Employees hired by Buyer 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, Buyer agrees to cover, or make
coverage available to, such Employees, spouses and/or dependents under
Buyer's existing health and dental benefit arrangements, under the same
terms as available to Buyer's other employees; provided, however, that
such individuals, to the extent practicable, 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.
(d) Gift Certificates; Store Credits; Coupons. For a
period of six (6) months following the Closing Date, Seller shall
reimburse Buyer for the amounts of any gift certificates, store credits
and coupons
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actually issued by Seller prior to Closing, if any, which gift certificates,
store credits and coupons were issued not more than one year prior to the
date of honor and which have been honored by Buyer, within ten (10) days
after Buyer has submitted proof that such gift certificates, store credits
and coupons have been honored.
(e) Lay-Away and Store Deposits; Repairs. For a period
of ninety (90) days following the Closing Date, Seller shall reimburse
Buyer for any verifiable lay-away deposits or special order deposits
accepted prior to Closing by any of the Stores which are honored by Buyer
during such period, within ten (10) days of Seller's receipt of proof
from Buyer that such lay-away deposits or special order deposits have
been honored by Buyer. Seller shall use its best efforts to return all
such deposits and complete repairs on or prior to the Closing and shall
be responsible for repairs submitted prior or subsequent to the Closing
Date. Seller shall provide to Buyer a telephone number at which Seller
may be contacted by its customers to resolve all issues relating to such
deposits and repairs.
(f) 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 Buyer will receive credit for such
deposits, Buyer promptly shall pay the amount of such security deposits
and construction deposits to Seller.
(g) Store Leases. Buyer shall assume the obligations
and liabilities of Seller under the Store leases, notwithstanding that
the landlord parties to such leases have not consented to the assignment
of such leases to Buyer as of the Closing Date. Seller shall pay all
amounts owed to landlords under the Store leases through the day prior to
the applicable Closing Date, excepting therefrom one-half of the amount
of any Administrative Fees as provided for in Section 17(n), and Buyer
shall pay all sums due from and after the applicable Closing Date. Buyer
and Seller shall use their best efforts to obtain landlord consents from
the remaining landlords on or before December 31, 1998. Buyer shall be
responsible for obtaining landlord consents, provided however that for a
period of six months after closing, for no separate consideration, Seller
shall provide reasonable assistance in obtaining lease assignments and
otherwise dealing with landlords on issues pertinent to such assignments
and consents. Seller shall also use its best efforts to cause its
licensed operators that desire to dispose of their locations to negotiate
first with Buyer prior to transferring such locations to any third
parties.
(h) Trust. The Trust shall not make any distributions
to or for the benefit of any beneficiary other than the Beneficiary
unless such other beneficiary agrees to be liable hereunder jointly and
severally with the Beneficiary, but only to the extent of any
distributions to or for the benefit of such other beneficiary from the
Trust. Such other beneficiary shall also be entitled to the limitations
on liability applicable to Shareholders set forth elsewhere in this
Agreement.
16. Indemnification by Seller, Shareholders and Buyer.
(a) Indemnification by Seller. Seller and Shareholders
shall jointly and severally defend, indemnify and hold Buyer and its
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
Seller and Shareholders 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(g).
(b) Indemnification by Buyer. Buyer shall defend,
indemnify and hold Seller and its officers, directors and shareholders
harmless from and against any Damages resulting from (i) any breach of
any representation or warranty made by Buyer in Section 11, (ii) any WARN
Act liability if more than the number of
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Employees (excluding Employees at Seller' headquarters office) that would
trigger such Act either are not offered employment by Buyer or are offered
employment by Buyer and are terminated by Buyer within sixty (60) days after
the Closing Date, (iii) the liabilities assumed pursuant to Section 3 and
(iv) the operation of 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 give rise
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 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 aggregate liability of Seller and
Shareholders under Section 16(a)(i) shall not exceed Three Million
Dollars ($3,000,000).
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(iii) 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.
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.
(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 Buyer to comply
with any obligation, covenant, agreement or condition contained herein
may be expressly waived in writing by Buyer in the case of any such
failure by Seller or by Seller in the case of any such failure by Buyer,
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 Sellers, Shareholders, DMS or GKS:
Sedgwick Sales, Inc.
1040 Calle Recodo
San Clemente, CA 92673
Attn: Donald M. Sedgwick, President
with a copy to:
Sedgwick Sales, Inc.
1040 Calle Recodo
San Clemente, CA 92673
Attn: Gregory K. Stapley, General Counsel
(ii) If to Buyer:
Piercing Pagoda, Inc.
3910 Adler Place
P.O. Box 25007
Lehigh Valley, PA 18002-5007
Attn: John F. Eureyecko, President
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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.
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. Buyer may assign any or all of its rights hereunder to any
affiliate of Buyer; provided, however, that Buyer 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, 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 the prior written consent of the
other, which either party may deny or delay in its sole, absolute and
unfettered discretion, neither Buyer nor Seller, nor any officer,
employee or other entity or person acting on their behalf, shall issue a
press release or otherwise discuss, disclose or publicize, formally or
informally, the execution of this Agreement or the pendency or
consummation of the transaction contemplated hereby prior to 3:00 p.m.
Eastern Daylight Time on May 18, 1998 (the "Announcement Time"); except
that (i) Seller shall have the right to earlier confidentially disclose
this Agreement and the transaction contemplated hereby to Sanwa Bank
California in accordance with the terms of certain credit facilities
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between Seller and said bank; (ii) Seller may disclose the transaction to
its regional managers and district managers on May 16, 1998 who will be
instructed not to discuss the acquisition prior to noon on May 18, 1998;
(iii) Seller may inform the balance of its employees on May 18, 1998
pursuant to materials that include a communique from Buyer; (iv) Buyer
may disclose the transaction to its regional managers and district
managers on May 18, 1998 who will be instructed not to discuss the
acquisition prior to noon on May 18, 1998; and (v) Buyer may issue a
press release and make statements to analysts disclosing the acquisition
on May 14, 1998 provided that such release and statements do not disclose
the name of Seller. 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, except as provided above, no such
announcement shall be made prior to the Announcement Time. The parties
shall also coordinate with respect to notices to Employees and landlords,
such notices to be made only from and after the Announcement Time.
(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 Buyer shall each be responsible for
one-half of the assignment, transfer, administrative or similar fees,
only if any, to be paid to landlords of the Stores in connection with the
assignment of the Stores' leases (herein "Administrative Fees").
[Signature Page Follows]
70
<PAGE>
IN WITNESS WHEREOF, the parties have caused this
Agreement to be executed and delivered as of the date first above
written.
PIERCING PAGODA, INC.
By:
John F. Eureyecko, President
SEDGWICK SALES, INC.
By:
Donald M. Sedgwick, President
Donald M. Sedgwick
Gregory K. Stapley
Virginia B. Sedgwick
71
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Piercing Pagoda, Inc.:
We consent to the incorporation by reference in the
Registration Statements (Nos. 33-85192 and 33-98288) on Form S-8 of
Piercing Pagoda, Inc. of our report dated May 8, 1998 relating to
the consolidated balance sheets of Piercing Pagoda, Inc. as of
March 31, 1998 and 1997, and 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, 1998, which
report is included in the March 31, 1998 Annual Report on Form 10-K
of Piercing Pagoda, Inc.
KPMG Peat Marwick LLP
Allentown, Pennsylvania
June 22, 1998
72
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0
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0
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